On February 13, Hong Kong Internationa Construction Investment ManagementGroup （0687.HK, NC）， HNA Group’s Hong Kong-listed subsidiary, announced it wasselling two residentia land sites in the Kai Tak area to Henderson Land for c.HK$16bn. HNA Group is a Chinese conglomerate based in Haikou, China. The transaction isexpected to be completed on February 14, 2018. We maintain our Neutra rating and12-month HK$51.2 price target.
Chinese land market purchases have slowed since mid-2017…
Southbound flows to the land market accounted for over half n of residentia landpurchases during c.2016 to 1H2017. If one were to look at the land bidders（including government, URA and MTRC tenders）， c.26%/30% of attributable GFAwas won by Chinese companies in March FY16 and March FY17, versus35%/15% for the six key loca developers over the two periods.
However, in March FY18, the ratio dropped significantly to only c.8% by Chinesecompanies, while that for the six key loca developers rose to 65%.
HNA Group acquired four land sites in the Kai Tak area between November 2016and March 2017 through government land tenders, at a tota land cost ofc.HK$27.2 bn and a GFA of 2.0 mn sq ft.
…which we attribute partly to tighter contro in Chinese outbound rea estateinvestments
According to an SCMP article on November 7, 2017, the Chinese government hasamended its overseas investment regulations, directing that overseasinvestments by offshore business units “controlled” by Chinese companiesshould be reported to the government and subject to government scrutiny. Thus,if a Hong Kong subsidiary of a Chinese company invests in an overseas deal, the transaction would also be subject to the US$300 mn threshold to obtain theauthority’s approval. According to a February 11 article in Reuters, the NationalDevelopment and Reform Commission （NDRC） has updated its list of “sensitive”sectors to include offshore investments in rea estate, hotels, motion picture studiosand sports clubs.
Aside from land price appreciation in Hong Kong and active participation n from keyloca players （which has led to more JVs during bidding rather than single bidders），we see the tighter contro in Chinese outbound rea estate investment as part ofreason for fewer wins by the Chinese companies.
Henderson Land is acquiring the two sites at a 12% premium to HNA’s origina tenderprice, with limited near-term accretion, in our viewn
The selling price of HK$15,959 mn for the two residentia development sites isHK$1.7 bn higher than the price HNA initially paid, or a 12% premium. The two sites（per previous news and government announcements） are:
Kai Tak Area 1L Land site No.3 with a c.398,000 sq ft GFA, which HNA boughtfor HK$5.4 bn in December 2016.
Kai Tak Area 1K Land site No. 3 with a c.655,000 sq ft GFA, which HNA boughtfor HK$8.8 bn in November 2016.
We believe the price premium could be due to extra costs in design and foundationwork already spent, in addition to land appreciation during the past year. Forreference, from November 2016 to February 2018, property prices increased byc.16%, according to the Centa-City Leading Index.
At an average land cost （AV） of HK$15,200 per sq ft GFA, we estimate n the all-in costwould roughly amount to HK$22,000 per sq ft SFA. Based on pricing for recent newlaunches - according to EPRC, the adjacent project in Kai Tak area, One Oasis byWheelock, saw over 300 primary transactions since 3Q17 at an average ASP ofc.HK$21,800 per sq ft SFA - we see limited near-term accretion. We think marginupside would likely rest on further growth in the physica market, if any. We assume5% yoy residentia market price growth in 2018, but a 15% decline in the followingthree years amid challenges due to rate hikes and increased supply.
While we are positive on Henderson Land’s active monetization of non-core assets…
Management has been actively monetizing non-core assets in the past two years,including selling smaller hotels and non-core offices in Hong Kong and certaindevelopment projects in China. We see this is as NAV accretive and providing recycledfresh capita for new investments.
… the company’s landbanking strategies seem unclear
Henderson Land has been consistently assembling old buildings in urban areas, inaddition to positive developments in farm land conversions, over the past 12-24 months.
However, while the company sold a residentia development land site in Tuen Mun in theNew Territories to Evergrande （3333.HK, Neutral, HK$22.10） in January 2018, accordingto HKET, Henderson Land acquired two residentia development land sites for HK$16 bnthis month. We hope to get more guidance from management in terms of its focus andcapex uantum for landbanking strategies in Hong Kong during the upcoming FY resultsin mid-March.
Valuation
Our estimates and PT are unchanged. Our 12-month price target of HK$51.2 is based onan unchanged 30% discount to 2018E NAV of HK$73.16. We remain Neutra rated.
Risks
Upside risks: Faster-than-expected property sales or farmland conversions. Downsiderisks: Unexpected change in government housing policies or an abrupt economicdownturn.