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Morningstar | HLD Results Miss on Lower Booking, but Strong Pipeline and Continued Asset Disposal in Near Term

Henderson Land Development reported underlying profit of HKD 19.8 billion for 2018, up slightly year on year. Underlying EPS amounted to HKD 4.49 versus HKD 4.43 on a share-adjusted basis a year ago. The underlying profit included disposal gains and a cumulative fair value change of derecognized investment properties. Stripping out those, underlying profit was around HKD 13 billion, up slightly from a year ago and 10% lower than our estimate. HLD declared a full-year dividend of HKD 1.80 per share, up 5% year on year. The full-year results were a miss, mainly attributed to lower-than-expected booking in Hong Kong. Asset disposal will be a key earnings driver going forward. Progress on management succession is positive. At this point, we maintain our no-moat rating and our fair value estimate.

On the property development side, attributable operating earnings totaled HKD 6.7 billion, up 4% from a year ago. In Hong Kong, while the top line was down, margins improved from 31% to 37%. A project disposal accounted for most of earnings. In terms of contracted sales (excluding proceeds from project disposals), the company recorded sales of HKD 13 billion in Hong Kong, up slightly from a year ago. Urban redevelopment projects remain the bulk of the company’s project pipeline, totaling gross floor area of 4.4 million square feet. This is supplemented by GFA of 1.2 million square feet of projects in the Kai Tak development area and GFA of 0.8 million square feet through farmland conversion.

In China, while the development property top line was down, attributable operating earnings grew to HKD 3 billion as margin increased from 24% to 47% on account of project mix. During the year, contracted sales totaled HKD 5.4 billion, down 34% from a year ago.

The investment property side was broadly stable, registering operating earnings of HKD 7 billion, up 6% year on year. In Hong Kong, top-line turnover grew 5% with margin down slightly. The company’s rental portfolio appeared to be resilient and maintained positive rental reversion during the period. Rental income was up near 6% at IFC, the company’s tourist-driven flagship retail asset. IFC offices saw 10% rental reversion during the year, but growth should be slower ahead, given the high base. In China, the top line and earnings were both up 7% year on year, partially boosted by currency appreciation.

Strategically, the company will continue to rationalize its disparate investment property portfolio. Management said it continues to see strong interest for its mature assets and property disposal will be an ongoing initiative. During the period, the company completed the disposal of an office building at North Point. It also disposed of equity interest in a commercial project in Kowloon. Disposal proceeds totaled HKD 13 billion. Continuing the capital recycling theme, the company deployed the capital into three lots in the Kai Tak development area, two of which it acquired from HNA and one through government tender as part of a consortium.

The dividend payout was 40%, slightly higher than a year ago. Given the variability of disposal proceeds, management will focus on a steady increase of the dividend amount based on recurrent income. Net gearing was 22% at the end of the period, up from 18% at the end of 2017.

The management brought some clarity to the succession plan as chairman Lee Shau Kee announced that he will probably step down after the upcoming annual general meeting and appointing his two sons as joint chairmen.