Full Analysis On Hongkong Land Holdings Limited

June 22, 2017

Hongkong Land Holdings Limited (“Hongkong Land”) (SGX:H78) ([stock_quote symbol=”SGX:H78″ show=”name” nolink=”1″ class=”1″]) owns and manages almost 800,000 sq. metre of prime office and luxury property in key Asian cities, primarily in Singapore and Hong Kong. Founded in 1889 as The Hongkong Land Investment and Agency Company, Hongkong Land has come a long way since the Hong Kong Government’s Central Praya Reclamation project that kick-started its adventure. Today, Hongkong Land has active (inclusive of developing) commercial and residential developments in Hong Kong, Macau, Singapore, Jakarta, Bangkok, Hanoi, Mainland China, Philippines and Vietnam. Hongkong Land is a member of the Jardine Matheson Group.

Funfact: Hongkong Land acquired the Dairy Farm company in the early 1970s for its land, and subsequently expanded it to be one of Asia’s largest food and supermarket groups. Hongkong Land was also the company that built the first Mandarin Oriental hotel, The Mandarin. Today, both The Dairy Farm Group and the Mandarin Oriental Hotel Group exist as separate listed companies alongside Hongkong Land under the Jardines umbrella.

Hongkong Land has a standard listing on the London Stock Exchange with secondary listings in Bermuda and Singapore.

TICKER SYMBOL: SGX:H78
MARKET CAP: USD17.67 Billion (17 June 2017)
MARKET PRICE / SHARE: SGD7.51 (17 June 2017)
INDUSTRY: Real Estate

THE BUSINESS

Hongkong Land’s business is in property – 1) Commercial and 2) Residential.

The company’s strategy has been consistent over the years, which is to develop prime commercial properties which it retains and manages as long-term investments, and premium residential and accompanying commercial properties which are developed for sale.

Commercial

As stated, Hongkong Land’s commercial properties are retained for long-term investment. The growing commercial portfolio provides high quality office and retail space that caters to the business needs of local and multinational corporations. In 2016, financial institutions, legal firms and accounting firms occupy 77% and 82% of Hongkong Land’s total leased office space in Hong Kong and Singapore respectively. During that year, Hongkong Land’s office leasing vacancy was 2.2% and 0.1% for Hong Kong and Singapore respectively.

The story of Hongkong Land began in Central, the premier Central Business District of Hong Kong that the company played a key role in. Following up on its success in Hong Kong, Hongkong Land invested in major commercial developments in other key Asian cities, notably the Marina Bay Financial Centre in Singapore (the heart of the city state’s new Central Business District). The next step is Mainland China – Beijing’s WF Central a retail and 74-room Mandarin Oriental hotel in Wangfujing.

Residential

Hongkong Land develops luxury and high-quality housing for trading purposes. Projects range from high-rise apartment towers to exquisite villas, and from single-building developments in developed markets, such as Hong Kong and Singapore, to large-scale complexes in fast-developing markets such as Indonesia and mainland China.

These projects are done through both the company itself (wholly owned subsidiaries) and joint ventures.

For FY2016, revenue from Hongkong Land’s Commercial and Residential operations made up close to 50% of revenue respectively, consistent over the past 4 years. From 2005-2016, Hongkong Land’s:

Shareholders’ Funds increased from US$7 billion (2005) to US$31 billion (2016)
Net Asset Value per share increased from US$3.86 (2005) to US$13.30 (2016)

Note: Over this period, Hongkong Land’s shares count increased from, 2.23 billion (2006) to 2.24 billion (2016), just a 0.01% increase.

KEY OPPORTUNITIES

Prime properties

When we are talking about a portfolio of prime commercial properties in the heart of Hong Kong’s financial district, it doesn’t get any better than this.

Like its namesake, Hongkong Land’s commercial properties in Hong Kong make up the bulk of its assets. Out of the Hongkong Land’s Investment Properties value of US$27.7 billion in 2016, its commercial properties in Hong Kong made up US$26.1 billion, or 94% of its investment properties. Taking a step back to see the bigger picture, Hongkong Land’s commercial properties in Hong Kong made up 71% of its total assets, not small change!

Here is a look at Hongkong Land’s Central portfolio:

Source: Hongkong Land Holdings Limited Annual Report 2016

Furthermore, despite economic uncertainties in the past few years, Hongkong Land’s vacancy rate for both its office and retail operations in Hong Kong has been low. Moreover, rental reversions are also relatively positive, reflecting the unique positioning of the portfolio and the scarcity of supply of high-quality space in core Central.

Source: Hongkong Land Holdings Limited 2016 Results Presentation

Here is a look at Hongkong Land’s Singapore portfolio:

Source: Hongkong Land Holdings Limited Annual Report 2016

For Hongkong Land’s Singapore commercial portfolio, only One Raffles Link is 100% owned. For Marina Bay Financial Centre and One Raffles Quay, Hongkong Land has a 33% stake in both investments.

The other owners of One Raffles Quay are:

Keppel REIT (SGX:K71U) ([stock_quote symbol=”SGX:K71U” show=”name” nolink=”1″ class=”1″])
Suntec Real Estate Investment Trust (SGX:T82U) ([stock_quote symbol=”SGX:T82U” show=”name” nolink=”1″ class=”1″])

The other owners of Marina Bay Financial Centre are:

Phase 1: Keppel REIT & Suntec REIT
Phase 2: Keppel REIT & DBS Group Holdings Limited (SGX:D05) ([stock_quote symbol=”SGX:D05″ show=”name” nolink=”1″ class=”1″])

And as recent as June 2017, it was announced that Malaysia-listed IOI Properties Group Bhd (KLSE:IOIPG) ([stock_quote symbol=”KLSE:IOIPG” show=”name” nolink=”1″ class=”1″]) and Hongkong Land will jointly develop and manage a prime land of ~1.1 hectares (118,400 sq. ft) adjacent to One Raffles Quay. The plan for this area includes two office towers of ~1.26 million sq. ft of leasable space, and a small retail podium of ~30,000 sq. ft. Under the completion of the proposed JV structure, IOI Properties will hold 67% with Hongkong Land holding the remaining 33%. Following its blueprint in Hong Kong, it looks like Hongkong Land is set to expand its footprint in the financial hub of Singapore yet again.

Jardine Group of Companies

Hongkong Land is part of the Jardine Group of Companies. Five generations after James Johnstone Keswick took over in Hong Kong from William Keswick’s cousin – John Bell-Irving (Chairman of Jardines in 1889), the Keswicks are still the main family in charge of the conglomerate.

The Jardine Group of companies’ interests today range from:

Hotel: Mandarin Oriental International Limited (SGX:M04) ([stock_quote symbol=”SGX:M04″ show=”name” nolink=”1″ class=”1″])
Supermarket and pharmacies: Dairy Farm International Holdings Limited (SGX:D01) ([stock_quote symbol=”SGX:D01″ show=”name” nolink=”1″ class=”1″])
Commercial & Residential Properties and Developments: Hongkong Land
Astra International Tbk PT (IDX:ASII) ([stock_quote symbol=”IDX:ASII” show=”name” nolink=”1″ class=”1″]): Agriculture, Financial Service, Heavy Equipment, Financial Service
Automotive: Jardine Cycle & Carriage Ltd (SGX:C07) ([stock_quote symbol=”SGX:C07″ show=”name” nolink=”1″ class=”1″]), Jardine Motors
Insurance: Jardine Lloyd Thompson Group PLC (LON:JLT) ([stock_quote symbol=”LON:JLT” show=”name” nolink=”1″ class=”1″])
And many more!

With such a wide network over the entire Asia Pacific region, Hongkong Land is well positioned to explore investment opportunities either internally or partnerships with external well reputable partners:

Internally (within the Jardine Group):

WF CENTRAL (Beijing) – Inclusive of a 74-room Mandarin Oriental Hotel
Astra Land (Indonesia) – 50% JV with Astra International to jointly pursue primarily residential trading opportunities, in 2016, Astra Land entered into a 50% JV with Modern Realty to co-develop a 69-hectare area in Jakarta Garden City
World Trade Centre developments (Indonesia) – 50% JV (PT Jakarta Land) with PT Central Cipra Murdaya
Anandamaya Residences (Indonesia) – 40% JV with affiliate Astra International

Externally (ventures with well reputable partners):

Marina Bay Financial Centre (Phase 1) – 33% owners with Keppel REIT & Suntec REIT
Marina Bay Financial Centre (Phase 2) – 33% owners with Keppel REIT & DBS Group Holdings Limited
Nava Park (Jakarta, Indonesia) – 49% JV with PT Bumi Serpong Damai
Bamboo Grove & New Bamboo Grove (Chongqing, China) – 50% JV with Longfor Properties
Landmark Riverside & Central Avenue (Chongqing, China) – 50% JV with China Merchants Shekou Holdings
WE City (Chengdu, China) – 50% JV with KWG Property Holding Group
Central Park (Beijing, China) – 40% JV with Vantone Group
One Central (Macau) – 47% JV with Shun Tak Holdings

We think that this list is sufficient to demonstrate Hongkong Land’s reach within the region.

Financial Position

Compared to many property development companies saddled with excessive debt, Hongkong Land’s financial position is a breath of fresh air.

As at 31 Dec 2016, Hongkong Land has Bank Balances of US$1.9 billion with Current Borrowings of US$221 million and Long-Term Borrowings of US$3.7 billion. With Core Profit after tax (excluding fair value gain of investment properties) of ~US$900 million over the past 4 years, Hongkong Land looks to be in a rather comfortable position Balance Sheet-wise. It has one of the strongest balance sheets of all the property companies listed in Singapore.

Additionally, in the last couple of years, even with new developments, Hongkong Land’s borrowings has actually decreased; from US$4.4 billion (2011) to US$3.9 billion (2016). Correspondingly, the Group’s net debt has also gone down by over US$1 billion since 2012, from US$3.27 billion (2012) to US$2 billion (2016).

KEY RISKS

Residential Business Dependent on New Land

From a revenue point of view, commercial and residential investments are equally important. The difference between these two are that Hongkong Land’s commercial investments are generally of a recurring nature (rent out to get $). Whereas in the case of residential properties, you can think of them as a one-time income, in which the company develops the property sells it, gets the cash and the end.

Hence, not only do annual returns from residential developments fluctuate due to the nature of the project (Group’s accounting policy only recognizes profit on sold properties on completion), demand is also dependent on economic conditions. But more importantly, as Hongkong Land highlighted in its Annual Report 2016, ongoing land acquisitions are necessary to continue to build this income stream over the longer term.

Mitigating that, it was stated in their Annual Report 2016 that Hongkong Land’s attributable (for those not wholly owned) residential projects in mainland China totals 4.6 million sq. m. Of this 4.6 million sq. m., construction of ~1.8 million sq. m., or 39%, had been completed at the end of 2016. This leaves the group with a sizable ‘order book’ of sorts.

In Singapore, MCL Land, the Group’s wholly-owned residential developer, has at least one project due for completion from 2017 to 2020:

2017: 699-unit LakeVille
2018: 1,327-unit Sol Acres
2019: 710-unit Lake Grande
2020: 316-unit residential site on Margaret Drive

Also in June 2017, MCL Land was awarded the Eunosville site at S$765.78 million (S$909 psf ppr) through a collective sale.

In the residential business, acquiring prime land is an inevitable part of the business. No land no buildings. However, it looks like Hongkong Land has thought this through in detail.

Concentration Risk

Hongkong Land’s commercial properties are well in the heart of Hong Kong and Singapore’s financial district, with the bulk of their tenants in financial institutions, legal firms and accounting firms. Thus, there could be a concentration risk for the company being too exposed to the Hong Kong’s financial sector.

Another potential concentration risk is Hongkong Land’s residential developments in Mainland China. In 2016, Chongqing, the largest city in western China accounted for about 88% of the Group’s residential investments in mainland China. To Hongkong Land’s credit, the company has been going into other cities like Beijing, Chengdu and Shanghai.

VALUATION

Based on Hongkong Land’s FY2016 NAV of US$13.30/share, Hongkong Land currently trades at a Price to Book (P/B) of 0.56x.

The following is a chart with Hongkong Land’s P/B over the past 5Y:

Source: YCHARTS

INVESTOR RELATION

Hongkong Land Holdings Limited Office
Jardine House, 33-35 Reid Street, Hamilton, Bermuda
Philip A. Barnes
Email: gpobox@hkland.com

MAJOR SHAREHOLDERS

Jardine Strategic Holdings Limited – 50.01%

FINANCIALS

Income Statement – Click here
Balance Sheet – Click here

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Full Analysis On Hongkong Land Holdings Limited