Hongkong Land, which has spent some US$600 million share buybacks since Sept 2021, has moderated the pace of share repurchases this year.
In its June 28 note, DBS says that Hongkong Land is evaluating “potential investment opportunities” including “one of which is significant in scale”.
“If proceeding with this significant investment, the company should further moderate or suspend the share buyback to maintain a strong balance sheet,” says DBS.
Meanwhile, with its heavy exposure to the property markets of China and Hong Kong, the company is seen to operate in a challenging market. Nonetheless, DBS Group Research believes that the company is resilient enough.
In a note on June 28, DBS has kept its “buy” call and $5.33 target price on the stock, as it flags the 66% discount to its assessed current net asset value, which is more than 1.5 standard deviations below its 10-year average, and giving an estimated FY2023 yield of 5.5%.
DBS believes that the current low valuation should lend support to its share price. “Despite the challenging Central office market, Hongkong Land should fare better than its peers,” says DBS, noting that leasing enquiries have shown some signs of tapering off by end of the current quarter.
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The physical vacancy rate at Hongkong Land’s Hong Kong office portfolio should rise slightly but yet outperform the overall Central office market, thanks to the continued “flight to quality” trend.
Nonetheless, rental reversions are expected to remain in negative territory in 2023. With declining expiring rents, rental reversions should become less negative or even turn neutral in 2024, says DBS.
DBS also believes that the company will benefit from continued improvement in Hong Kong's inbound tourism. In 2QFY2023, tenant sales at its Hong Kong retail portfolio further gained momentum and came close to the pre-pandemic level.
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The portfolio remains fully let, with average retail passing rent is expected to rise from 1HFY2022’s HK$168psf and FY2022’s HK$177psf, primarily due to the absence of rental concessions and higher turnover rents in 1HFY23.
In Singapore, there’s some slight moderation in office demand, but overall demand has “stayed solid”. This should underpin positive rental reversions for Hongkong Land’s Singapore office portfolio, which includes stakes in the Marina Bay Financial Centre and One Raffles Link, says DBS.
The picture in mainland China, for now, is mixed.
The residential segment, thanks to strong market positioning, has allowed Hongkong Land’s project sales to outperform its peers.
The residential portion of the sizeable West Bund mixed-use development in Shanghai is scheduled for sale and completion in 2HFY2023. With a gross floor area of 24,000sqm, a complete sale should generate more than RMB3 billion, with profit booking expected in FY2024.
In any case, the company has become more “cautious” and “selective” in land banking in China. This first half of the year, the company refrained from buying any land.
Instead, it bought additional stakes in Yue City in Nanjing from joint venture partner Country Garden, and Dreamland in Wuhan from Zall Group
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According to DBS, the stakes were bought from both debt-laden partners “at a significant discount” to book costs. This should result in a one-off accounting gain for Hongkong Land in 1H23.
DBS estimates that the planned completion of Hongkong Land’s projects in China is skewed towards 4QFY2023, which might lead to the current 1HFY2023 earnings to fall short.
Nonetheless, it should see moderate growth in underlying earnings for full-year FY2023, backed by increased residential sales earnings and resilient rental contributions.
In Singapore, Hongkong Land is largely exposed to the local residential market via its subsidiary MCL Land. DBS notes that despite the recent spate of cooling measures, the impact is not significant as the projects are targeted largely at locals, not foreigners.
Hongkong Land closed at US$3.97 on June 28, down 1.49% for the day, and down 14.4% year to date.
