Hongkong Land: Transfer Coverage With USD 6.10 Fair Value; Near-Term Office-Space Headwinds Remain

We transfer and resume coverage of Hongkong Land H78 with a fair value estimate of USD 6.10, which implies a price/book ratio of 0.4, in line with the 10-year historical average. Our narrow moat rating for the company is unchanged, and we continue to like the company for its high-quality commercial portfolio in the heart of Hong Kong central business district, or CBD. The portfolio’s prestigious positioning and strategic location has attracted demand from occupiers trading up for quality office space in the current office market downturn, and we expect this trend to persist in the foreseeable future. Over the long run, we expect office rents to be underpinned by the structural long-term undersupply of Hong Kong CBD Grade A offices and Hong Kong’s status as an international financial hub.

We estimate an 11% decline in revenue in 2023, mainly due to less completion of planned development, given the weak real estate market conditions in mainland China. That said, we expect the higher margin investment properties business to remain resilient as the retail recovery in Hong Kong partly offsets a challenging office market. Over the longer term, we expect it would take around 12–18 months for excess office supply to be absorbed and another six to 12 months for rents to recover on improved demand. While we think the 44% discount to our fair value as of Oct. 5 close price is attractive, we note that the current Hong Kong office market weakness could continue to weigh on its near-term share price.