Company Update: Decent gains on divestment of Harbour East
Henderson Land agreed to sell Harbour East in North Point to Li Ning for HK$2.21bn or HK$15,333psf in Dec-23. Completed in 2019, Harbour East was redeveloped from Newton Hotel Hong Kong. With GFA of 144,000sf, this 22-storey office building is a three-minute walk from Fortress Hill MTR Station. In 2022, Harbour East generated total income of HK$49.5m with average occupancy of c.60%. Based on the disposal price and assuming the property is fully leased, we estimate gross exit yield to be 3.7% which sounds attractive taking into account the prevailing high interest rate. Our analysis suggests this divestment would produce handsome gains of c.HK$1.4bn to Henderson Land.
After Henderson Land failed to agree on the land premium for the three remaining plots in Fanling North NDA, the government decided to resume these plots of agricultural land with cash compensation. These three plots have combined site area 0.73msf, of which 0.61msf is attributable to Henderson Land. Moreover, the company has another 0.77msf of land in Fanling North/Kwu Tung North which is anticipated to be resumed by the government. Based on the latest ex-gratia compensation rate, Henderson Land should receive >HK$1.7bn cash compensation from the government upon the resumption of this 1.38msf agricultural land with HK$1.4bn pre-tax profit. The government is expediting land resumption in the Northern Metropolis. It plans to resume >700 ha of private land between FY23/24 and FY27/28, up from 140ha in the past five financial years. This should enable Henderson Land to unlock the hidden value of its sizeable agricultural land reserve. The company boasts 6.57msf in Hung Shui Kiu/Ha Tsuen NDA. Assuming 50% is resumed by the government, Henderson Land should receive good cash flow with strong sales earnings expected to boost its bottom-line.
The stock is trading at 65% discount to our appraised current NAV. Valuation is inexpensive from the historical perspective. Non-core asset disposals and the government’s resumption of farmland not only brings in solid cash flow to improve its financial strength but also gives a boost to its bottom-line earnings. Based on target discount of 60% to our Dec-24 NAV estimate, we derive our TP at HK$24.7 and maintain our BUY call.
