Contracted sales growth and increased dividend partly make up for earningsdecline. Riding on the transaction recovery in both the HK and China markets,Henderson's 1H contracted sales were up 34% y-o-y to HKD11.8bn. 1H16 core profitwas down 12% to HKD4.78bn as property sales fell 23% y-o-y, but much of this is atiming issue in our view. Net rental income saw steady growth of 4% y-o-y, of whichIFC has 3.8% y-o-y gross rental growth. The company declared an interim DPS ofHKD0.42, up 11% y-o-y, representing a payout ratio of 32%, up from 25% in 1H15.
　　Despite the decline in interim core earnings, management expressed that they haveconfidence on growing earnings, and the increase in payout ratio is consistent withtheir intent to bring payout back towards the long-term average of c40%. We see thedividend step up and major shareholder's continuing to increase its stake as strongendorsement for the company that has somewhat lagged peers in share priceperformance YTD.
　　Positive on its unique landbank offer. HLD has been steadily building up itssellable resources. In 2H16, it has 1.72m sq ft sellable resources, up from 1.46m sq ftfor 2016e announced during the 2015 results. We continue to believe Henderson'sniche in urban site amalgamation is a unique offer that differentiates and at the sametime helps preserve margin even at times of market uncertainty. The companycurrently has 45 urban redevelopment projects with over 80% ownership acquired atan estimated cost of HKD6,500psf. While not much has changed on the agriculturalland conversion front thus far, management continue to believe that the in situ landexchange in Fanling and Kwu Tung North will happen this year.
　　Rental portfolio remains resilient. Office rental was supported by mainlandcompanies seeking high quality office space. During the period, HLD has beenconducting phased renovation in some of its office buildings and retail malls as partof the asset enhancement effort. The investment property portfolio in China continuedto see growth in net rental income while gross rental has stagnated as vacancieshave emerged in the World Financial Centre in Beijing which they will address.
　　Maintain Buy with TP of HKD63, based on unchanged target discount of 30% （inline with the historical mean since 1991） to our unchanged fair value NAV of HKD90.
　　Downside risk includes sales volume and ASP disappointment as a result of aweaker-than-expected physical market, adverse housing policies in HK and China,weaker than expected macroeconomic conditions.