EUR 850.00 For Business Accounts Only

Morningstar | 00012 Updated Forecasts and Estimates from 27 Dec 2018

For interim 2018, Henderson Land Development, or HLD, reported underlying profit of HKD 13.9 billion, up 52% year on year. Underlying EPS amounted to HKD 3.15, versus HKD 2.07 a year ago on a restated basis and adjusted for bonus issue. However, the underlying profit included disposal gains of several investment properties. Stripping out those, underlying profit amounted to HKD 8.2 billion, up 54% on a like-for-like basis. This is about 53% of our full-year estimate. HLD declared an interim dividend of HKD 0.50 per share, up 4% year on year. The interim results were a slight beat with improving development properties and investment properties. We maintain our fair value estimate of HKD 48, and the company's no-moat rating is unchanged.

On the property development side, attributable operating earnings totaled HKD 4 billion, up 71% year on year, while the top line was only slightly higher. The increase was attributed to much improved margin in Hong Kong, driven by the still-strong property market as well a gain from the disposal of a development project in Tuen Mun. In terms of contracted sales, the company recorded sales of HKD 19 billion, up 43% from a year ago. We expect the pace to continue due to large amount of project inventories, barring a drastic slowdown in the physical market. At the end of the period, the company has HKD 15 billion proceeds in sold but not booked, up slightly from year-end. In China, booking of development properties was down 20%, but margin continued to recover leading to higher income. Contracted sales were HKD 2.2 billion and 1.7 million square feet, down nearly 60% from a year ago.

The investment property side was broadly stable, registering operating earnings of HKD 3.5 billion, up 7% year on year. In Hong Kong, top line turnover grew 6% with steady margin as the citywide retail recovered. The company’s rental portfolio should maintain positive rental reversion for the full year.

In China, the top line was up 14%, attributed to moderate rental income growth and currency appreciation during the period. Operating margin remained steady at 79%.
Strategically, the company continued to rationalize its disparate investment property portfolio. During the period, the company sold a newly constructed office building in North Point at a record price for the area. The estimate gross cap rate was 2.6% to 3.2%, netting the company a gain of HKD 5.6 billion. The company also disclosed that it has signed an agreement to dispose its 50% interest in a new retail building in TST. As we noted before, unlike other large Hong Kong landlords, HLD's investment properties are spread across sector, location, and grade, affording many opportunities for disposals. The company seemed to be redeploying capital into a few high value core assets, but it is increasingly difficult to find higher yield projects in Hong Kong.

The dividend payout ratio was lower at 16% based on underlying profit. If excluding gains from disposals, the dividend payout ratio was 30%, still low compared with 35% to 40% in the past few years. Net gearing rose a bit to 23% at the end of the period, compared with 19% at the end of 2017. This is expected given the acquisition of two large residential sites in Kai Tak for HKD 16 billion. The acquisition was unusual for the company as it mostly relied on redevelopment projects to replenish its land bank in Hong Kong. We expect the gearing to be steady at the current level.