Hongkong Land - Sell: Tomorrow is Getting Worse

Maintain Sell — Our US$2.05 target price is at a 40% discount to our 09ENAV estimate of USD3.42/share. It factors in 30-40% cuts in residential prices by end-2009, 30-40% decreases in office, retail, and residential rentals in 2009 and 2010, and cap rates of 6-8%. We believe the HK property market's downward spiral will continue, leading to further downside for the stock.

Core earnings 14% below consensus; dividend payout ratio cut — HKL reported FY08 underlying earnings rose 9% YoY to USD375mn, but 14%below market consensus, mainly due to a USD140mn provision for Singapore residential developments. Though it maintained full-year dividend at USD0.13/sh, it cut the overall dividend payout ratio from FY07’s 87% to FY08’s 79% and 58% based on pre-provision core earnings. The significant cut in dividend payout ratio signals management’s big concerns on the Hong Kong property rental market, reflected in recurring income.

Capital value written down by 4% in 08, but not enough — The write-down is not enough compared with Jones Lang LaSalle’s figures of 13.5% capitalvalue decrease in the Central Grade “A” office market. We expect more impairments made in 2009.

Hong Kong office portfolio vacancy rate rose to 5.5% in Jan 09 — Vacancy was 2.6% as of Dec 2008 (2% as of end-07), rising to 5.5% in Jan 09 following Morgan Stanley’s move to ICC. HK Land’s vacancy rate should reach 4.5% by Dec 2009. The market has underestimated the squeeze in Grade A office demand due to the global financial crisis.

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