Morningstar equity analyst Xavier Lee is keeping his “three star” rating on Hongkong Land Holdings H78 with an unchanged fair value estimate of US$3.86 ($5.12) after the group released its strategy update on Oct 29.
The analyst views Hongkong Land’s update, which will focus on ultra-premium integrated commercial assets for recurring rental income while pivoting away from the sale of development properties, as “positive” for the long term.
He also likes the group’s aim to grow its assets under management (AUM) to US$100 billion by 2035 with the help of third-party capital.
“This should create a regular management fee income stream,” he writes in his Oct 30 report. “Management expects these measures to help the company increase its returns on invested capital and double its profit before interest and tax, as well as dividends, by 2035.”
However, in the shorter term, Lee sees Hongkong Land’s near-term earnings to remain “volatile” as the company has to balance between exiting its development property business, the sale of its investment properties, as well as the organic growth of its fund and REIT management platform.
“In our view, execution is key for the company, and we note that some of Hongkong Land’s peers have had limited success in shifting toward being a real estate manager to create a recurrent fee income stream,” he says.
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“On this front, we are mildly optimistic on Hongkong Land's execution, given chief executive officer Michael Smith's background as an investment banker who had been involved in a number of REIT listings and his track record at Mapletree Investment, where he deployed US$20 billion of capital between 2017 and 2021 and syndicated 90% of it into private funds and REITs,” he adds.
In its announcement, Hongkong Land indicated that Hong Kong, Shanghai and Singapore will remain its key markets and its management will look at opportunities to develop ultra-premium commercial projects in central business districts of premium gateway cities such as Tokyo and Sydney.
“In our view, competition may be more intense outside of Hong Kong and Singapore, where land supply is less constrained,” says Lee.
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He also notes that the group intends to fund its expansion through capital recycling, including unlocking US$6 billion from the winding down of its development properties business and US$4 billion from the recycling of selected investment properties assets.
“We think the first phase of recycling will likely focus on clearing its residential inventory in the build-to-sell business. We expect market conditions for fundraising, acquisitions, and divestment to improve from 2026, driven by lower interest rates,” Lee writes.
“This should support the group's capital recycling plans and setting up its own fund and REIT management platform. While the company could potentially spin off its mainland China assets into a C-REIT, we would expect the listing exercise to take [a] longer time than the Hong Kong- and Singapore-listed REITs, given the lengthy regulatory approval process in China.”
At this point, Lee has kept his forecasts mostly unchanged, although the analyst has increased his dividend per share (DPS) forecast for FY2024 to 23 US cents from 22 US cents in line with Hongkong Land’s management’s guidance. The group previously guided for mid-single-digit annual dividend growth.
Lee’s current fair value estimate represents a downside of 18.7% from Hongkong Land’s last-closed share price of US$4.75 on Nov 7; the group’s shares rose by some 11% after its announcement. As such, he believes investors should wait for a “better entry price” given the execution risk.
