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Morningstar | Full-Year Results a Slight Beat, Evolving Risk Profile Because of More Development Properties

Hongkong Land achieved underlying 2018 earnings of $1.04 billion, up 9% year on year. The results are slightly better than our estimate of $1.02 billion. The company announced a full-year dividend of $0.22 per share, up 10% from a year ago. The dividend increase was large, but as expected with the dividend payout ratio near 50%, similar to last year. Management reiterated that the company will not aim to hike its dividend aggressively, given the available investment opportunities around the region. During the year, the company entered 12 new development projects in China, Singapore, and Indonesia and Thailand, signaling quicker asset turn and higher earnings growth, but leading to a higher risk profile due to higher contributions from development properties going forward. We rolled our model forward, resulting in an increase in our fair value estimate to $8.40 per share from $7.90 per share previously. We maintain the company’s narrow moat and stable moat trend ratings.

For investment properties, the company’s main portfolio in Hong Kong saw continued positive reversion across both office and retail segments, resulting in average net rent growth of 4.6% and 4% for the year. The Singapore office portfolio saw gross rents up 1% after reaching a trough in 2017. Beyond the mature core portfolio in Hong Kong and Singapore, the company’s WF Central’s retail portion in Beijing reached 88% occupancy by the end of 2018. The hotel component is still under construction, with a targeted opening date of March 2019.

For development properties in China, contract sales were $1.6 billion during the year, 40% higher than a year ago. Recognized revenue was down slightly to $1.2 billion, resulting in sold but not booked amount up to $1.4 billion.

During the year, the company was very active in new development project acquisitions. In mainland China, the company acquired six new development projects. Management viewed the development projects as opportunistic. About a third of the development projects in China are classified as medium-term lease assets. These are commercial assets that the company will develop and manage until stable before disposal. This leverages the company’s expertise in commercial asset management and strikes a compromise between asset turn and margin.

Net gearing rose higher to 9% at year-end. The gearing is likely to move higher given the spate of new investments made over the past two years. Management stated it does not have a gearing target, but rather it will focus on interest cover, as net gearing is affected by asset price revaluation. Management also stated that it does have a specific plan for capital management beyond opportunistic share repurchases, as it believes it can generate better returns through real estate projects. Despite the large undertaking in development projects, management guided rental assets will remain the core earnings contributors with development property earnings capped at less than 40%.