Morgan Stanley Research analysts Praveen Choudhary and Jeffrey Mak have downgraded their call on Hongkong Land to “equal-weight” from “overweight” previously amid a weak Hong Kong office outlook.
Despite buyback support from management, the analysts have also lowered their target price to US$3.80 ($5.05) from US$5.90 before. Hongkong Land extended its buyback programme till the end of 2023. It has a total capital return of around 10%.
“We are cautious on Hong Kong office and expect rents to drop 5% in 2024, even though Hongkong Land has higher occupancy than peers,” say the analysts in their Jan 4 report on the Hong Kong property sector.
The sector saw physical market momentum soften in the 2H2023 due to higher rates and a weak macroenvironment. This is likely to continue in 2024, the analysts write.
“We expect residential prices, retail rent and office rent to be -10%/+3%/-5% in 2024. We expand our target net asset value (NAV) discount,” they add.
The analysts’ target price of US$3.80 is from a sum-of-the-parts (SOTP) analysis and represents a 65% discount to their base case forward NAV estimate.
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“Office spot rents drop 5% y-o-y while retail spot rents rise 3% in 2024. Chinese residential prices/retail and office spot rents are flat in 2024. Stock trades at 65% discount to NAV, 1 standard deviation (s.d.) wider than the historical average since 2011,” they explain.
In the event of a bear case, where there is an economic recession with correction in asset markets, the analysts’ target price falls to US$3, or a 70% discount to its bear case forward NAV estimate.
In this instance, the analysts “assume Hong Kong central office and retail spot rents fall 20% in 2024, while both Chinese residential prices and commercial property values drop 5% in 2024. Discount to NAV widens to 70%, [some] 1.5 s.d. wider than the historical average since 2011.”
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On the other hand, a bull case will see the analysts’ target price lifted to US$7 or a 40% discount to their bull case forward NAV estimate. A bull case occurs when there is strong economic recovery.
Under this scenario, the analysts foresee Hong Kong central office and retail spot rents growing by 5% and 15% respectively in 2024. Chinese residential prices and commercial property value are expected to rise by 5%.
“Target discount to NAV is 40%, in-line with the historical average since 2011,” say the analysts.
In the FY2023 ended Dec 31, 2023, the analysts are expecting Hongkong Land to report sales revenue of US$1.81 billion, net income of US$751 million and earnings per share (EPS) of 34 US cents.
As at 3.35pm, shares in Hongkong Land are trading 1 US cent higher or 0.29% up at US$3.45.
