Result Analysis: Rental income remained resilient
Hongkong Land’s FY21 underlying profit was broadly stable at US$966m, 4% below our forecast because of smaller-than-expected growth in development income. The increase in development profit from China was largely offset by higher net financing cost. Final DPS stayed flat at US$0.16, taking the full-year DPS to US$0.22.
Gross rental receipts rose by a marginal 1% to US$947m with increased retail income being offset by lower office revenue. Central office portfolio continued to suffer from negative reversionary growth. Average passing rents fell 2.5% y-o-y to HK$117psf in 2021. However, with modest recovery in leasing demand from legal firms, wealth management and asset management companies towards the year-end, office vacancy of its Central portfolio improved to 5.2% from Jun-21’s 6.4%. On a committed basis, the vacancy was lower at 4.9% (Jun-21: 5.5%). In 2022, 18% of leases are scheduled for expiry or rent review with expiring rents high at HK$130psf. As such, negative reversionary growth should persist.
Central retail portfolio remained effectively fully let. With reduced rental relief due to improving domestic consumption after the relaxation of social distancing protocols, average retail rents recovered to HK$190psf from FY20’s HK$164psf. Nonetheless, base rental reversion remained negative during the year.
Singapore office portfolio benefitted from favourable rental growth upon renewals and new lettings. Average office rents rose to S$10.3psf from 2020’s S$9.9psf. As of Dec-21, the portfolio vacancy remained low at 2.9% on a committed basis (Jun-21: .2.1%).
WF Central in Beijing witnessed higher tenants’ sales and footfall in 2021 on the back of strong luxury retail market sentiment. This led to increased rental contributions from this luxury retail mall.
Operating profit from property development increased 23% due to higher contributions from China as a result of more residential sales completions. Despite weak market sentiment in 2H21, Hongkong Land attained attributable contracted sales of US$2.65bn in China in 2021, up 24% y-o-y. In Dec-21, sold but unrecognised contracted sales reached US$2.85bn, of which 62% will be booked in FY22. This points to visible development earnings stream in the years ahead.
In Singapore, the company’s contracted sales in attributable terms fell 48% to US$328m in 2021 as 2020 sales was boosted by the contributions from Parc Esta. Sold but unrecognized sales reached US$362m in Dec-21. Parc Esta, scheduled for completion in 2022, has been fully pre-sold.
Since Hongkong Land announced its US$500m share buyback plan in Sep-21, the company has repurchased 50.5m shares from the market for US$272m in total up to Feb-22. The company could still buy back US$228m worth of shares before the year-end.
In Apr-21, Hongkong Land launched a new shopping mall in Chongqing with a net leasable area of 72,000sm under a new lifestyle retail brand ” The Ring”. Besides, the company has three other luxury retail malls and six premium lifestyle retail malls under development in China which altogether offer attributable net leasable area of 259,000sm upon scheduled completion in 2023-26. By then, Hongkong Land would boast a retail property portfolio of 425,000sm in attributable net leasable area terms.
Taking advantage of reduced competition in land market led by tightened credit conditions, Hongkong Land acquired eight sites, primarily for residential use, in China, with developable area of 977,000sm in 2021. They include three in Chengdu, two in each of Chongqing and Wuhan and one in Nanjing. In Singapore, following the acquisition of two joint venture sites for residential use in 2021, the company acquired a 49% interest in another residential site in Feb-22.
Due to land bank replenishment in China and share buyback, the company’s net debt increased to US$5.1bn in Dec-21 from Jun-21’s US$4.3bn. This put its gearing at 15% which remains comfortable. Even allowing for capital outlay for continued share repurchase, there is room for the company to gear up for more land acquisitions to drive its earnings growth.
Meanwhile, the stock is trading at a 53% discount to our appraised current NAV, against its 10-year average of 41%. Ongoing share repurchase should help support its share price and sustain its outperformance. Maintain BUY with US$6.61 TP. This is premised on target discount of 45% to our Dec-22 NAV estimate.