More involvement in China DP and IP
? HKL reported flattish underlying profit in FY21 with flattish DPS. Base rent reversions in HK IP will likely remain negative with rent relief in FY22F.
? It expects more China DP booking with increased unbooked DP sales; it will complete 1.1m sq m of China IP through FY26F to strengthen its IP revenue.
? Reiterate Add with a lower TP of US$6.1. Its ongoing share buyback provides support to share price and potentially improves FY22F EPS by another 2%.
Flattish FY21 underlying profit
HKL’s underlying profit in FY21 was flat yoy at US$966m, 3% below our estimate. Its higher development property (DP) EBIT was largely offset by higher financing charges and tax provisions. DPS was flat yoy at US$0.22 (53% payout).
To see mildly negative base rent reversion in HK portfolio
Its HK office reported negative rental reversion with average monthly rent declining by 2.5% to HK$117/sf at end-2021. Office vacancy narrowed by 1.1% pt yoy to 5.2% at end-2021, as capable tenants filled space in prime locations in Central (overall Grade A Central office vacancy was 8% at end-2021). HK retail portfolio remained almost fully occupied and saw a 30% yoy increase in tenant sales in FY21, with negative base rent reversions. In view of the fifth wave of Covid-19 outbreak in HK with food and beverage (F&B) tenants suffering the most, we expect mildly negative base rent reversions for both of its office and retail portfolios in FY22F.
Expect more China DP booking, with lower gross margins
Its attributable contracted sales in China increased by 24% yoy in FY21 to US$2.6bn, with attributable unbooked sales of US$2.9bn (end-2021) that will secure its DP revenue in FY22-23F. Its gross margin from China DP booking was down by 8% pt yoy in FY21 to 28%; management expects further downside to low 20s in the near future as its vintage land bank depletes and as plots acquired in recent years carry higher land costs.
Active landbanking amid weak property markets
In contrast to Chinese developers’ conservativeness, HKL sped up land-banking in China and acquired nine DP projects in FY21. Including West Bund project in Shanghai, it had 12 investment properties (IP) projects (planned GFA: 1.1m sq m) in China to be completed in phases in FY23-26F, which will help build a stronger recurring income base. Meanwhile, its application for scaling up plot ratios for a farmland site in Shek Wu Wai is still under HK Government’s review (more in Figure 2).
Reiterate Add with a lower TP of US$6.1
We cut FY22F/23F EPS by 5%/6% due to the new round of retail rent relief and slower recovery of office rents in HK and Singapore. Our TP for HKL is lowered to US$6.1, still based on a 40% discount to NAV, as we also trim its NAV/share by 3% to US$10.2. Reiterate Add; the ongoing recentralisation trend and its share repurchase support its share price. Potential re-rating catalysts are stronger-than-expected rental reversions in HK and upsizing of share buyback programme, while prolonged border closure in HK is a
key downside risk.