Analysts at DBS Group Research, CGS International (CGSI) and Morningstar have trimmed their target prices and fair value estimates on Hongkong Land to US$3.88 ($5.13), US$3.21 and US$3.86 respectively following the company’s 1HFY2024 ended June results release.
While the negative trends within Hongkong Land’s first-half results were in line with Morningstar’s expectations, the performance of the Mainland China business is weaker than expected, analyst Xavier Lee notes.
“Rental income declined 3% y-o-y as the Hong Kong office portfolio continues to see pressure from market oversupply, while the Hong Kong Landmark retail portfolio suffers from outbound tourism in Hong Kong. For the mainland China business, the development properties segment suffers from low margins as buyers’ sentiment remains lacklustre,” he adds.
Morningstar expects continued pricing pressure for Hongkong Land’s Mainland China development properties as the company prioritises clearing inventory.
Consequently, the analyst has lowered its development properties average selling price and margin assumptions, aside from adjusting his model to factor in the temporary disruption from the renovation works in Landmark. Gradual improvement in average rents from 2025, however, was assumed as revocation works complete in phases.
Meanwhile, DBS analysts Jeff Yau, Percy Leung and Cherie Wong are keeping “buy” on Hongkong Land, noting that the company is currently reviewing its overall business strategies as well as commercial priorities, which is expected to be completed before end-2024.
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They note that in the past three months, Hongkong Land’s share price has been largely stable, outperforming other Hong Kong landlords. Meanwhile, the stock is trading at 70% discount to DBS’s appraised current net asset value, about 1.5 standard deviation below its 10-year average discount of 50%.
“Estimated dividend yield for FY2024 stands at 6.8%. Current stock valuation is cheap even allowing for lingering headwinds in the Hong Kong office sector,” the analysts add.
All eyes are currently on the strategic review — any new initiative that could unlock the asset value for shareholders should be positive for share price, DBS highlights.
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CGSI analysts Raymond Cheng, Will Chu and Steven Mak thinks the strategic review may include major capital expenditure for the company’s investment properties, a majority of which are over 30 years old. It also may include restricted appetite for China development properties projects as well as an expansion of project investment in Asean states such as Singapore.
The company could also reveal a revision of dividend policy that may be tied to its profit from investment properties and hotels in the future, aside from conditions and budgets for share buybacks. The CGSI analysts are keeping "hold" on Hongkong Land, noting that the company's exposure to Hong Kong offices and China development properties is a challenge to its near-term rerating.
Meanwhile, Morningstar believes that weakness across offices and luxury retail in Hong Kong and Mainland China could continue to weigh on Hongkong Land’s share price in the near to medium term. That said, the analysts think the current price at a 17% discount to its valuation is attractive for investors willing to look beyond the industry downturn.
As at 3.51pm, shares in Hongkong Land are trading 6 US cents higher or 1.86% up at US$3.27.
