Upsized buybacks in earnings dip
- HKL’s 1H22 EPS was up 10% yoy, thanks to China DP booking, though it warned that FY22F underlying profit would be “significantly lower” than FY21.
- Central office portfolio sees above-average occupancy at end-Jun 22 despite negative rental reversions.
- Given its stringent criteria for a potential JV partner, we think its risk arising from liquidity problems from a JV partner should be quite small.
- Reiterate Add with an unchanged TP of US$6.1. Upsized share buyback programme provides downside cushion to share price.
1H22 EPS up 10% yoy; guiding for a yoy decline in FY22F profit
HKL’s underlying profit in 1H22 was up 8% yoy to US$425m (43% of FY22F); EPS was up 10% yoy to US$0.1867, thanks to its initial US$500m buyback programme. Interim DPS was flat yoy at US$0.06. However, management has guided that its FY22F underlying profit would be “significantly lower than the prior year”, primarily due to delayed completion of its development property (DP) projects in China.
Above-average office occupancy in Central
HK Central office portfolio sees signs of stabilisation in vacancies at 5.4% at end-Jun 22, much lower than Central Grade A office average of 7.9% (source: JLL). Its negative rental reversion could continue in 2H22F, but the magnitude should narrow towards FY23F. On the other hand, Singapore (SG) office space benefitted from positive rental reversion and declining vacancy of 3% (on a committed basis) at end-Jun 22.
Decline in DP sales in China
HKL’s DP sales in China were down 69% yoy to US$419m on the back of lockdown measures and weaker sentiment for residential sales. Unbooked attributable sales amounted to US$2.4bn at end-Jun 21; 39% of the balance will be recognised in 2H22F. Meanwhile, it slowed its land acquisitions 1H22 in view of uncertainties in the global economy, and has acquired only one parcel in China and another parcel in SG.
We think its JV project risk in China is manageable
As for its JV projects in China (50% of US$9.6bn BV of investments in JV & associates), management is unaware of any liquidity issues for its JV partners, saying that the majority of cashflow risk of a JV project is removed after the land premium is settled. In our view, based on HKL’s history of being selective in choosing its JV partners (e.g., Longfor, CM Shekou, CIFI), HKL’s risk in relation to JV projects should be quite small.
Reiterate Add with an unchanged TP of US$6.1
We cut FY22-24F EPS by 1-10%, factoring in delayed DP sales booking and lower rental growth in HK/China, partially offset by upsized share buyback programme (p.2). Our TP for HKL is unchanged at US$6.1, still based on a 40% discount to NAV. Reiterate Add; its share repurchase in an earnings dip provides downside cushion to share price. Key risks to our Add call include prolonged lockdown measures in China, leading to weaker performance of China DP and IP. Positive rental reversion of its IP is a re-rating catalyst.