Henderson Land Earnings: Transferring Coverage With Lower Valuation; Margins Under Pressure

We transfer coverage of Henderson Land Development 00012 , or HLD, maintaining our no-moat rating and lowering our fair value estimate to HKD 36 from HKD 40 to factor in lower gross margins and the impact of currency headwinds. We think the shares are undervalued currently, trading at around 0.3 times price/book ratio and 8.7% dividend yield for 2023. We like the firm’s strong balance sheet, which enables it to ride out the current headwinds facing the Hong Kong residential market.

HLD’s first-half 2023 revenue improved 8% year on year to HKD 10.3 billion, making up 41% of our full-year estimate. Although we have already assumed more revenue to be booked in the second half of 2023 following the completion of its Hong Kong development properties, this was still slightly below our expectations. The miss is mostly due to the impact of the stronger Hong Kong dollar against the Chinese yuan, and a weak performance from its supermarket business that saw declining sales, as consumption habits changed after the easing of COVID-19 restrictions in Hong Kong. Gross profit also declined 1.9% year on year to HKD 4.6 billion due to the booking of lower-margin development sales. Management expects pressure on housing prices to continue in the near term with competitors marking down prices to drive sales.

We lowered our margins expectation for the firm’s Hong Kong development properties segment for 2023-24 and expect pricing pressure to ease from 2025 after interest rates drop. Our earnings per share estimates were lowered by 11% and 18% for 2023 and 2024, respectively, but are raised slightly by 4% for 2025 largely due to noncash revaluation gain on its investment property portfolio.