Reiterate Buy on higher probability of NAV realization via farmland conversion.
　　With the largest agricultural land reserve among peers and the government’saccelerated pace in increasing housing supply via new-town development andland-use conversion, HLD has a competitive edge over peers in replenishing itslandbank through such alternative means, which is increasingly importantfollowing intensifying competition from Mainland developers in government landtenders. These alternative means ensure better profitability and translate into ahigher probability of NAV realization. Moreover, we also see good progress inacquiring projects via urban redevelopment during the year. Reiterate Buy.
　　FY16 underlying profit +29% YoY to HK$14,169mn, boosted by disposal gain
HLP reported FY16 revenue up 8% YoY to HK$25,568mn, boosted by a 13%YoY increase in development sales bookings. Rental revenue dipped slightly by1% YoY to HK$5,559mn （HK$5,589mn in FY15）， yet, by including contributionsfrom associates, rental revenue rose 1% YoY （HK: +2.1%, China -2.8%; theChina portfolio was impacted by Rmb depreciation, while rental in Rmb wasup 3.4% YoY）。 Boosted by a HK$3,930mn disposal gain from Golden Centre,underlying profit rose 29% YoY to HK$14,169mn （or HK$10,189mn net of thedisposal gain, largely in line with our estimate）。 A final dividend ofHK$1.13/share was declared （+5.6% YoY）， bringing the full-year dividend toHK$1.55/share in 2016 （+7% YoY from HK$1.45/share in FY15）。
　　Meaningful progress in acquisitions of urban redevelopment projects
HLD saw meaningful progress in the acquisition of urban redevelopmentprojects in FY16. In particular, five projects reached the 100% stake status（from above 80% but below 100% a year ago）。 In addition, the scale of twoprojects further expanded via the acquisition of nearby sites. HLD has a total of17 active urban redevelopment projects with total GFA of about 1.8mn sf. Ontop of this, there are 22 urban redevelopment projects （total GFA of 2mn sf）currently undergoing ownership consolidation （80% stake or above secured），awaiting full ownership to be secured for redevelopment to commence.
　　Target price at 25% discount to our revised NAV estimate of HK$74.9/share
Our target price is based on a 25% discount to our revised NAV estimate ofHK$74.9/shr （HK$67.9/shr）， implying a 2017E PE of 19x. Our target discount issmaller than the historical average of 43%, which we believe is appropriategiven the solid recurrent income base of its investment property portfolio andits stake in HK & China Gas （which makes up close to 80% of our estimatedNAV）。 Key risks: economic slowdown, rate hike and policies.
　　Investment thesis
　　Outlook
　　We reiterate our Buy rating on Henderson Land with a target price of HK$56.2（from HK$51.00）。 With the largest agricultural land reserve among peers andthe government’s accelerated pace in increasing housing supply via new-towndevelopment and land-use conversion, HLD has a competitive edge over peersin replenishing its landbank through such alternative means, which isincreasingly important following intensifying competition from Mainlanddevelopers in government land tenders. These alternative means ensure betterprofitability and translate into a higher probability of NAV realization.Moreover, we also see good progress in acquiring projects via urbanredevelopment during the year.
　　Valuation
　　We calculate our estimated NAV via a sum-of-the-parts valuation. Fordevelopment properties, we apply DCF to estimate the value of the projects bytaking the estimated cash inflows from property sales minus the outstandingcosts, including any outstanding land costs, construction costs, and relatedincome taxes and LAT for China projects. We take into account only theexisting land bank and do not assume any terminal value in the DCF analysis.
　　For investment properties, we use the income capitalization approach, takingthe estimated rental revenues of the investment properties and dividing this bythe estimated cap rates. Our estimated rents and cap rates differ between thevarious types of properties and their locations. When arriving at the NAV forthe company, we take the aggregate estimated value for the above businesssegments and add the company's net cash position or subtract its net debtposition.
　　Our target price is based on a 25% discount to our revised NAV estimate ofHK$74.9/shr （previously HK$67.9/shr）， implying a 2017E PE of 19x. Our targetdiscount is smaller than the historical average of 43%, which we believe isappropriate given the solid recurrent income base of its investment propertyportfolio and its stake in HK & China Gas （which makes up close to 80% of ourestimated NAV）。
　　Risks
　　Macro risks: 1） external shocks and interest rate hikes; 2） stricter-thanexpectedgovernment tightening measures; 3） unexpected fluctuations in theChinese economy.
　　Company-specific risks: 1） track record in execution in China not fully proven;2） HLD could face stronger-than-expected competition for land bank.