Hongkong Land (HKL) (SGX:H78) has outperformed the broader Straits Times Index (STI) in the last 6 months and 1 year with a nearly 29% gain and 14% gain respectively as compared to STI with an approximately 5% and 8% gain respectively.
This was despite broader macro issues such as the Russia-Ukraine Conflict, COVID-19 pandemic, China regulatory clampdown and the Chinese property sector debt issues.
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The outperformance was mainly due to the $500 million share buyback programme announced on 6th September 2021 when the share price was $4.20. At a share price of $4.20, the share buyback programme would have amounted to approximately 5% of total share outstanding. As of 28 February 2022, HKL has utilised $272 million of the buyback programme.
The buyback programme reflects its management’s view that the stock was significantly undervalued. HKL’s capital allocation practice was to prioritise investment in new assets to drive long-term growth and shareholder value, and it would only invest in share buybacks on an opportunistic basis.
HKL also announced its FY2021 results on 28th February 2022 and declared a dividend of $0.22 which was in line with the dividend declared in the prior year.
Hongkong Land’s financial results
| P&L in US’m | FY21 | FY20 | FY19 | FY18 | FY17 | Variance (%) | Variance (%) |
| EPS in US’$ | FY21 vs FY20 | FY21 vs FY19 | |||||
| Revenue | 2,384 | 2,094 | 2,319 | 2,665 | 1,616 | 14% | 3% |
| Underlying profit | 966 | 963 | 1,076 | 1,036 | 947 | 0% | -10% |
| Net profit/(loss) | -349 | -2,647 | 198 | 2,457 | 5,614 | -87% | -276% |
| Debt to equity ratio | 0 | 0.13 | 0.09 | 0.09 | 0.07 | 15% | 60% |
| Underlying EPS | 0.415 | 0.413 | 0.46 | 0.44 | 0.40 | 1% | -10% |
| EPS/(Loss per share) | (0.15) | (1.13) | 0.08 | 1.05 | 2.39 | -87% | -277% |
| Dividend per share | 0.22 | 0.22 | 0.22 | 0.22 | 0.20 | 0% | 0% |
| NAV per share | 15.05 | 15.30 | 16.39 | 16.43 | 15.66 | -2% | -8% |
HKL’s operations has no doubt been impacted by the pandemic with rental rates declining and rent relief provided to tenants continuing to have an impact on the bottom line. Market sentiments also weakened in the second half of the year amidst tightened credit conditions in China.
Revenue increased by 14% YoY and 3% vs FY19, mainly due to higher sales of properties. Rental income was higher than 2020 by 1% but lower than 2019 by 3.6%. FY21’s underlying profit remained constant as compared to FY20 but was lower than FY19’s by 10% due to both lower rental income and higher financing charge because of the debt taken on for the acquisition of development sites.
Hong Kong’s investment properties continues to see negative rental reversions while Singapore and China were able to record positive rental reversions due to the improved conditions.
The property development segment saw a 28% YoY revenue increase, showing strong signs of recovery. However, it is still lower than before the pandemic due to the movement restrictions of the pandemic and broader investor sentiments.
Underlying profit attributable to shareholders remained broadly in line with the prior year at $966 million. Including net losses of $1,315 million resulting primarily from lower valuations of the Group’s investment properties, the loss attributable to shareholders was US$349 million in 2021. This compares to a loss of $2,647 million in 2020, which included a $3,610 million reduction in property valuations. Consequently, net asset value per share declined to $15.05 from $15.30 in 2020.
The value of HKL’s investment properties portfolio as at 31st December 2021 declined by 5%, primarily due to lower market rents for the Hong Kong Central Portfolio with a 5% decline in valuations, partially offset by higher valuations for its prime assets in Singapore and China.
2022 outlook for HKL
The profit contribution from HKL’s prime investment properties portfolio is expected to largely remain stable in 2022.
Lower profits are anticipated from the development properties business, primarily due to the timing of sales completions in China.
3 Positive takeaways
1) Potential recovery in Hong Kong’s commercial rent prices
Recovery in rental prices in the Central district where Hongkong land has most of its investment properties. This may signal a potential turnaround for the valuation of its investment properties should rental prices continue its upward trend.
2) Hongkong Land is seizing growth opportunities
In China, decreased competition in the primary land market presented an opportunity for HKL to replenish its land bank in its core markets. During the year, eight primarily residential sites were acquired – all in cities where it already has a presence – with two wholly-owned projects in Chengdu, one each in Chongqing, Nanjing and Wuhan, as well as a joint venture in each of Chengdu, Chongqing and Wuhan.
In Singapore, HKL through MCL land secured two joint venture projects during the year, including an Executive Condominium site in the Tengah which is forecasted to launch in September 2022 and a predominantly residential mixed development site at Northumberland Road which is expected to be launched in April 2022.
3) Healthy increase of gearing levels while maintaining strong financial position
Net debt as at 31 December 2021 was $5.1 billion, up from $4.6 billion at the end of 2020, primarily due to the acquisition of new sites during the year. Net gearing increased slightly at the end of 2021 to 15% from with 13% at the end of 2020.
As HKL has utilised about 56% of its share repurchase program in the six months since it was announced, it may announce a further increase to its share repurchase program at its AGM in May 2022.
4 Negative Takeaways
1) China and Hong Kong zero-COVID policy and slow reopening of the economy.
Hong Kong previously had success with its zero Covid policy, but it all unravelled as Hong Kong currently has the highest covid death rate in the world due to its inability to attain a sufficiently high vaccination rate. Hong Kong is now considering a large-scale lockdown and to implement universal COVID-19 testing. Hong Kong is also still closed off to most of the world.
These issues are in sharp contrast to many countries in many parts of the world who are focused on reopening and resuming ordinary lives and has a significantly negative impact on the overall Hong Kong’s business environment.
2) Continued weakness in Hong Kong’s investment properties
Hong Kong’s investment properties are significantly below its 2019 highs. Physical vacancy was 5.2% at the year-end, compared to 6.3% at end of 2020. On a committed basis, vacancy was 4.9%. HKL’s portfolio outperformed the overall Central Grade A office market which had a vacancy of 8.0% at the end of 2021, compared to 7.3% at the end of 2020. This pales in comparison to the past where there was effectively near zero vacancy in its Hong Kong portfolio.
In addition, rental reversions during the year were negative, reflecting the decrease in rents since the onset of the pandemic and the 2019 Hong Kong protests. While portfolio mix has improved, the portfolio continues to have a sectoral risk with financial institutions, legal firms and accounting firms occupying 82% of the total leased office space.
The weighted average lease expiry of the office portfolio at the end of 2021 declined to 4.2 years, compared to 4.6 years at the end of 2020.
3) Post-covid leasing dynamics
There is continued uncertainty of the post-covid leasing dynamics for both office and retail. To mitigate this uncertainty, in June 2021, HKL launched Centricity Flex, a 25,000 sqft premium flexible office solution, at Edinburgh Tower in Central. The facility offers tenants access to private office suites, meeting rooms, an open work area, private work pods, event spaces, and a café.
4) China’s property market debt crisis
China’s property market continues to be tight and uncertain due to the credit situation of many major Chinese developers. While HKL was able to capitalise on this weakness by replenishing its land bank, there could be uncertainty over the timing of development property sales due to lowered consumer confidence.
Closing statement
HKL’s share price has outperformed various indices mainly due to its share buyback programme and resilient investment property portfolio providing strong recurring income.
On an overall basis, HKL’s FY2021 results were mixed, with a consistent revenue performance overshadowed by negative rental reversions resulting in a valuation loss for its Hong Kong investment properties. HKL was able to demonstrate its resilient balance sheet by replenishing its land bank while other Chinese developers’ grapples with a debt crisis.
Looking ahead, HKL’s strong financial position cannot be emphasised enough as it expects its investment portfolio to remain largely stable while it focuses on launching its land banks both in China and Singapore. It will also continue its share buyback programme, and this will serve to support its share price.
Unfortunately, investors have to be wary as HKL operates in challenging macro conditions with a zero-COVID policy and covid case resurgence leading to a delayed reopening of the economy. A continued weakness in its Hong Kong’s investment properties portfolio together with an uncertain post-covid leasing dynamic means that the timing of recovery is uncertain. Lastly, China’s property market debt crisis has impacted consumer confidence and will continue to be an overhang.
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