Reiterating Buy on NAV realization via faster/easier farmland conversion ahead
We expect Henderson Land to be a key beneficiary of the government’s effortto increase housing supply through new-town development/farmlandconversion. With recent approval of the Ma Shi Po farmland being a primeexample, we anticipate faster and easier execution of farmland conversion willtranslate into a higher probability of NAV realization for HLD. Meanwhile, withsellers’ holding power being stronger in periods of low interest rate/ampleliquidity, we believe that the pace of price/rental decline in Hong Kong will bemore moderate than our previous expectation. By factoring in our latest view,we raise our NAV estimate to HK$67.9/share. Reiterating Buy.
Raising earnings by 0-17% in FY16-18E by factoring in new assumptions
By factoring in our revised price and rental assumptions for HK propertymarket, we raise our core net profit estimate to a 9% YoY decline toHK$9,996m in FY16. Meanwhile, we expect core profits to be mainly flat YoYin 2017 at HK$9,895m and to dip by 3% YoY to HK$9,557m in 2018 mostlydue to negative rental reversion in its IP portfolio.
We expect residential price +5%/office rents -5%/retail rents -5% in 2H16
Against the backdrop of a low interest rate/ample liquidity environment, wheresellers’ holding power is relatively stronger, we anticipate the pace ofprice/rental decline will be more moderate ahead than our previous projection.For 2H16, we expect HK residential prices to rise by up to 5% (implying flat forthe full year), Grade-A office rents and prime retail rents to soften by 5% (+0%/-5% for FY16). For 2017/18, we expect residential prices to soften further by11%/7%, office rents and prime retail rents to decline by 10% per annum.
Target price at 25% discount to our revised NAV estimate of HK$67.9/share
We base our revised target price of HK$51.0 on a 25% discount to our NAVestimate of HK$67.9/share, implying a 2016E PE of 17x. Our target discount issmaller than the historical average of 43%, which we believe is appropriate onthe back of the solid recurrent income base from its investment propertyportfolio and its stake in HK & China Gas (which makes up close to 80% of ourestimated NAV). Key risks: economic slowdown, interest rate changes andgovernment measures.