Company Update: Optimising asset and earnings quality
In 2H21, Henderson Land was in expansion mode. The company first secured the redevelopment right of the URA’s Bailey Street/Wing Kwong Street project in To Kwa Wan with a winning bid of HK$8.19bn in Sep 21. This translated into an accommodation value of HK$11,414psf. Recently, Henderson Land sold a 25% stake in this redevelopment to each of Hysan Development and Empire Group.
The Bailey Street/Wing Kwong Street redevelopment is an 8 to 10-minute walk from both To Kwa Wan MTR Station and Ho Man Tin MTR Station. It will offer a total GFA of 0.72msf including 0.6msf for residential use and 0.12msf for retail purposes. About 1,150 units will be built. If sales proceeds exceed HK$14.8bn, the URA will share 20%-50% of the excess revenue. The retail arcade will be held on rent for 10 years after project completion. And Henderson Land and the URA are entitled to 70% and 30% of its rental income respectively.
Including construction and financing costs, we estimate the total development cost at HK$19,500psf for the residential portion. We believe the project can achieve an ASP of HK$24,000-25,000psf in the future.
Henderson Land has accumulated strong development experience and understanding of the market in To Kwa Wan through undertaking old building redevelopments in the area in the past. In addition to the newly completed The Vantage, Henderson Land also developed Axis and The Zutten in the area.
In Nov-21, Henderson Land secured the sizeable Central waterfront commercial site for HK$50.8bn through a “two-envelope” tender. This makes it the most expensive land deal ever in Hong Kong. The accommodation value works out to HK$31,462psf.
The harbourfront site is adjacent to the Two International Finance Centre. Henderson Land intends to construct three buildings with a total GFA of 1.61msf. This sizeable project will be developed in two phases. The first phase, comprising 0.27msf of office space and 0.34msf of retail area, is scheduled for completion in 2027. Targeted for completion in 2032, the second phase will include 0.39msf of office space and 0.60msf for retail use. In addition, Henderson Land is required to build 0.23msf of government facilities. A platform, The Horizon Park, will be built at the roof level to connect the three buildings. In addition, the site will be linked with the Central business cluster and the MTR station.
Including the construction and financing costs, we estimate the total development cost at HK$44,000psf. We forecast that this commercial development, when fully let, will generate rental income of HK$2.3bn p.a., representing about 35% of the company’s pre-tax rental earnings in FY20. The initial rental yield is estimated at 3.3%.
Upon project completion, Henderson Land will boast an office/retail portfolio of c.3.1msf in attributable GFA in Central. This will make it the second-largest commercial landlord in Central.
Following this site purchase and stake disposal of the To Kwa Wan redevelopment, we estimate the company’s gearing to rise to c.37%. We do not rule out the possibility of the company bringing in project partners for the Central harbourfront commercial project to diversify the investment risk and restore financial strength. When opportunity knocks, Henderson Land may further offload its non-core property assets to improve its balance sheet.
The company has been optimising its asset portfolio by adding prime development sites on the one hand and selling non-core rental properties on the other. This should lead to improving asset and earnings quality over the long term.
The stock is trading 54% below our current assessed NAV, against its 10-year average discount of 46%. Portfolio expansion in Hong Kong and China should bolster the company’s recurrent income significantly, leading to better earnings quality over the long term. Based on a target discount of 50% to our Dec-22 NAV estimate, we derive our TP of HK$40.00 and a BUY rating.