CGS International analysts Raymond Cheng, Will Chu and Steven Mak have kept their “hold” call on Hongkong Land while lowering their target price to US$3.30 ($4.02) from US$3.60 previously, following a challenging near-term outlook.
In their July 17 note, the analysts estimate a higher impairment provision for the group’s China development properties (DP) business in FY2024, resulting from softer average selling price for property sales.
Currently, Hongkong Land expects impairment provisions of up to US$0.3 billion in 1HFY2024 for its China DP, which would “wipe out” almost all of its underlying net profit in the same period.
“With softer average selling price for DP sales compared with FY2023, we estimate its total provisions for China DP to be US$0.35 billion in FY2024 (US$0.9bn in FY2023),” write the analysts.
That said, they also note that residential sales of the group’s West Bund project appear solid, with the first batch of 80 units sold out three hours after their launch.
This could drive Hongkong Land’s FY2024 DP contracted sales in China, which have since dropped by 36% y-o-y in 1QFY2024, in the analysts’ view.
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As of last month, the group has announced a strategic investment spanning three years to upgrade the retail portion of Landmark, its flagship commercial complex in Hong Kong.
The investment carries a US$1 billion budget to be shared by the group and its anchor luxury brand tenants, at 40% and 60% respectively.
The latter has committed to 220,000 sq ft of retail space post upgrade and will still be in operation amidst upgrade works.
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To the analysts, this project is set to have a trivial impact on the group’s net gearing, which stood at 17% as at end-2023, due to Hongkong Land’s ability to commit to the capital for the upgrade with its operating cash flow from investment properties in Hong Kong.
Despite this, the team of analysts remain cautious towards the group’s Hong Kong retail and office rental in 2H2024.
This follows Hong Kong's weaker luxury retail sales, with the sales of valuable items falling by 10.6% y-o-y in 5M2024, according to HongKong government statistics.
Overall Central office vacancy also remains high at 12% as at end-May 2024, according to real estate agency JLL, leading to negative rental reversion at the group’s office portfolio.
As such, the analysts estimate a 2% y-o-y decline in Hong Kong Land’s rental income from their Hongkong investment properties portfolio in FY2024.
Overall, the analysts have cut their FY2024 - FY2026 earnings per share by 6%-54%.
Their reduced target price is based on a 70% discount to net asset value (NAV) of US$10.90, accounting for a more cautious view on the group’s exposure to Hong Kong office rental China DP, which the analysts believe could put its profitability “under pressure”
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Upside risks identified by the analysts include stronger-than-expected tenant sales in Hong Kong and China retail, and an increase in dividend per share.
Meanwhile, weaker-than-expected rental reversion and higher vacancy at the group’s Hong Kong office portfolio are downside risks.
As at 11.13am, shares in Hongkong Land are trading at 4 cents lower or down 1.16% at US$3.40.
