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Morningstar | Hongkong Land Holdings: Lower Office Vacancy Rate in Hong Kong Should Support Full-Year Earnings

Hongkong Land Holdings reported third-quarter operating data slightly better than our expectation. In Hong Kong, the office portfolio’s vacancy declined to 0.8% at quarter-end, compared with 1.9% and 1.4% at interim 2018 and year-end 2017, respectively. This is reflective of a very tight office market in the city’s central business district. The company indicated positive rental reversions but without details. The retail portfolio also saw small positive rental reversion. As the Hong Kong office portfolio is the biggest contributor to earnings, the lower vacancy rate is a positive. The company’s shares retreated 15% over the past three months and are now trading at 14 times 2018 projected earnings. We maintain our fair value estimate of USD 7.90 per share, along with the company's narrow moat and stable moat trend ratings. We believe the shares are now attractively priced.

The Singapore office saw positive rental reversions during the quarter, reversing the softening trend seen during the first half. While the vacancy rate moved up to 2.8%, from 0.1% and 0.3% at interim 2018 and year-end 2017, respectively, the company expects the vacancy rate to normalize as several tenants will take up committed space before year-end. In China, the company indicated the ramping up of WF Central in Beijing is performing as expected, and it should provide a small boost to rental revenue for the full year. For development properties in China, contract sales for the quarter were lower due to timing of project launches. Year to September, contract sales totaled USD 804 million, 10% lower compared with a year ago. Contract sales in Singapore may be softer due to recently introduced cooling measures. Net gearing was 10% at the end of the quarter, a small increase as expected due to payment for several project acquisitions. We expect gearing to be slightly above 10% at year-end.