HLD is a leading property developer with businesses in Hong Kong andthroughout mainland China. In addition to property development andproperty investment, HLD also has department store operations, hoteloperations, ferry operations and a utility business through 4 listed companies. HLD has a wide variety in its land bank in Hong Kong including agriculturalland in New Territories （44.9 million sq.ft.）， old buildings acquired forredevelopment and land purchased through government land auctions （24.2million sq.ft.）。
We estimate underlying net profit to be HKD15,282 million, HKD9,929million and HKD10,432 million in 2017-2019, respectively. Since weexpect that HLD’s property development revenue recognized in 2018 willdecrease, the reduction will drive down the underlying net profit in that year. Underlying net margins are expected to be 57.2%, 51.0% and 44.0% in2017-2019, respectively.
Initiate with “Neutral” rating and a TP of HKD54.08, which represents a32.0% discount of our 2018 NAV estimate. HLD has secured its projectpipelines in the next few years through the redevelopment of old buildings andthe conversion of agricultural land into residential development. The bloom inthe residential property market in Chinese tier-2 cities will be reflectedgradually in HLD’s residential development business. Nevertheless, thegovernment has rejected the idea to offer concessions on land premium in thestarter homes scheme. In our view. HLD’s current share price has alreadypriced in the improvements in fundamentals.