CGS International analysts Raymond Cheng, Will Chu and Steven Mak have kept their "hold" call and US$3.60 target price on Hongkong Land Holdings H78 , even after the developer reported a loss of US$582.3 million for FY2023, from earnings of US$202.7 million in the year earlier.
The red ink was largely due to a write-down of its portfolio of its Hong Kong office investment properties. Underlying profit, a more accurate indication of the operations, was down 5% to US$734 million for the year ended Dec 31 2023 over the preceding FY2022, 12% above what the CGS team was projecting.
While Hongkong Land's portfolio of Hong Kong office properties suffered from lower rent, it was offset by better performance of the retail and Singapore office portfolio.
At the end of its previous share buyback programme, Hongkong Land spent a total of US$627 million to buy back 5.5% of its outstanding shares. It had earlier earmarked up to US$1 billion for this exercise.
According to the CGS analysts, management expects share buybacks, if any, to be conducted on an opportunistic basis and will prioritise it along with new investments and dividend growth.
The CGS analysts, following a revision of development properties' sales booking schedule and growth assumptions of investment properties, have raised their FY2024 and FY2025 earnings per share projection by 8 - 10% and NAV by 1% to US$10.30. Their unchanged target price of US$3.60 is pegged to a 65% discount to the NAV.
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"We think a near-term share price re-rating is unlikely unless there is a turnaround in gross profit margins for its development property sales and rental reversion in its Hong Kong investment properties," the analysts state, as they maintain their "hold" call.
For them, key downside risks include higher interest expense and higher Hong Kong office vacancy whereas upside risks are higher-than-expected sales and rental reversion for its projects and properties.
Jeff Yau, Percy Leung and Cherie Wong of DBS Group Research are more optimistic. They kept their “buy” call on this counter, as they see Hongkong Land, a major office landlord in core Central, benefitting from the continuing “flight to quality” trend and a company with “strong embedded value”.
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"With a proactive lease management strategy, the company is in a better position to weather the challenges in the office market. This, coupled with the post-pandemic recovery of its luxury retail portfolio, should enhance the resilience of rental earnings," state the analysts in their March 8 note.
They point out that the improvement in contributions from its luxury retail and Singapore office portfolios has more than offset the shortfall from its Central office portfolio which has been dragged by negative rental reversion and higher vacancy rates.
"In the long term, the mega-sized West Bund mixed-use development in Shanghai should play a key role in driving earnings ahead," the DBS analysts suggest.
Yau, Leung and Wong agree that the prolonged office sector headwinds in Hong Kong continue to weigh on sentiment towards the stock. However, they believe that Hongkong Land's low valuation, at 72% discount to their appraised NAV, which is below its ten-year average of 48%, should support its share price.
Their target price of US$3.98 is based on a target discount of 65% to their Dec-2024 NAV estimate of US$11.20. Furthermore, Hongkong Land has maintained FY2023 dividend at a total of 22 US cents, translating into a yield of 7%.
