Hongkong Land kept at 'add' on Mainland demand and limited supply

"Maintain 'Add', with a target price of US$9.10," says analyst Lung Siu Fung in a Thursday report.

In FY17, Hongkong Land's core profit rose 14% y-o-y to US$970 million ($1.28 billion), missing CIMB's expectations by 5%, mainly due to higher SG&A (Selling, General and Administrative Expenses) expenses and tax.

A final dividend of US$0.14 was declared, 8% higher y-o-y. Full-year dividend amounted to US$0.2, implying a 3% dividend yield.

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Central office, accounting for over 70% of Hongkong Land's revenue, was buoyant on the back of limited supply and strong demand, especially from mainland corporates.

Vacancy further declined to 1.4% as at Dec 17 from 2.2% at Dec 16.

Average rent rose 5% to HK$108/sf/mth in FY17.

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Central retail, accounting for over 25% of Hongkong Land's revenue, recovered steadily in FY17, on the back of slightly improved market sentiment in 2H17.

Base rent reversions were largely flattish. Turnover rent declined 15% to US$8.8 million.

Having said that, average rent rose slightly to HK$224/sf/mth in FY17 from HK$218/sf/mth in FY16.

Contracted sales in China stayed flat at US$1.1 billion in FY17, slightly affected by the tightening policies on launches in 2H17.

Attributable revenue doubled to US$1.3 billion in FY17 due to more completions. Net order book largely stayed flat y-o-y at US$1 billion as at Dec 17.

In FY17, Hongkong Land was proactive in land banking. It acquired five sites in Nanjing, Wuhan, Hangzhou and Chongqing, with total GFA of 0.9 million sqm.

"We estimate that total development cost could exceed RMB 30 billion," says Lung.

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HKL is trading attractively at a 52% discount to NAV versus peers Swire Prop (38%) and Champion REIT (37%).

"We maintain our Add rating with a target price of US$9.10 based on a 35% discount to NAV," adds Lung.

As at 2.56pm, shares in Hongkong Land are trading 17 cents higher at $6.93 or 15 times FY18 earnings.