Regional Morning Notes Thursday, 12 Sep tember 2019

COMPANY UPDATE NOT RATED Hongkong Land Holdings (HKL SP) Share Price US$5.89 Shining Gems Amid Turmoil Target Price n.a. HKL is trading at an attractive 0.36x P/B, unrepresentative of its underlying asset Upside n.a. quality. HKL has a US$38.7b investment portfolio (c.88% of its gross assets), concentrated in the CBDs of Hong Kong (83%) and (10%). Hong Kong COMPANY DESCRIPTION developers have room to increase leverage further, to boost ROEs (and close P/B gaps Hong Kong Land develops and owns commercial properties with concentrations in vs Singapore peers). Share price catalysts include easing of the Hong Kong political Hong Kong and Singapore, as well as other stalemate, share buybacks and deployment of US$15.4b debt headroom into mainland parts of Asia. China. STOCK DATA WHAT’S NEW GICS sector Real Estate • Hong Kong’s political crisis (since July) and worsening US-China trade tensions have Bloomberg ticker: HKL SP led to corrections in Hong Kong-focused SGX stocks. Since peaking in Mar 19, Shares issued (m): 2352.8 Hongkong Land Holdings’ (HKL) share price has come off by 22%. Current share price is Market cap (US$m): 13858.0 unrepresentative of the quality of its underlying assets (with concentrations in prime CBDs of 3-mth avg daily t'over (US$m): 18.1 HK and Singapore). We see good value in HKL that is trading at 0.36x P/B. Price Performance (%) 52-week high/low S$7.53/S$5.16 INVESTMENT HIGHLIGHTS 1mth 3mth 6mth 1yr YTD • Hong Kong central portfolio (c.75% of gross assets). Hong Kong (mainly investment 8.1 (10.2) (20.2) (13.0) (6.5) properties) contributed 54% of the group’s operating profits before corporate expenses in Major Shareholders % 2018 (vs 2017: 56%). HKL’s Hong Kong central portfolio consists of 12 commercial buildings Holdings 50.41 spanning c.4.9m sf of NFA spread across Grade-A offices (85%), retail (12%), and hotels NAV/Share (US$) 16.50 (3%). Given the prime CBD location, the Hong Kong office segment has a high concentration Net Debt/Share (US$) 1.66 of financial services (41%), legal (30%) and accounting firms (8%), together accounting for PRICE CHART 79% of its tenant base in 1H19. HONGKONG LAND HOLDINGS LTD (lcy) (%) HONGKONG LAND HOLDINGS LTD/FSSTI INDEX • Hong Kong office portfolio to offer earnings resilience despite “short-term” 8.00 120

7.50 challenges. As a result of efforts to term-out leases of a number of key tenants, the Hong 110

Kong office WALE was extended to 4.6 years (vs 4.0 years at end-18). The Hong Kong office 7.00 100 also has low vacancy risks, as there are relatively modest levels of expiries/rent reversions 6.50 expected in 2H19 (10%) and 2020 (20%). However, we also note from Savills’ 2Q19 data, 90 6.00

that central submarket rental growth has decelerated to 0.9% (vs 2.9% in 1Q19). Office 80 5.50 leasing demand has been weighed down by the economic slowdown and the unresolved US- 5.00 70 China trade war. 10 Volume (m) • Management does not foresee “decentralisation” of the central office sub-market (at least for 5 0 their portfolio). They alluded that most tenants were leaving due to tenant management (ie Sep 18 Nov 18 Jan 19 Mar 19 May 19 Jul 19 Sep 19 where spaces are taken back for other tenants’ expansion). Amid the current political turmoil, management noted that Hong Kong still retains its long-term appeal as a business location Source: Bloomberg (with opportunities coming from development of the Greater Bay Area). They also opined ANALYST(S) that businesses (ie tenants) will not usually make re-location decisions based on these short- Peihao Loke term events. +65 6590 6614 [email protected] KEY FINANCIALS Adrian Loh Year to 31 Dec (US$m) 2014 2015 2016 2017 2018 +65 6590 6633 Net turnover 1,876.3 1,932.1 1,993.9 1,616.1 2,665.4 [email protected] EBITDA 1,093.7 2,010.5 3,524.8 5,611.2 2,336.0 Operating profit 1,091.3 2,007.6 3,521.7 5,608.2 2,331.8 Net profit (rep./act.) 1,327.4 2,011.7 3,346.3 5,613.9 2,457.1 Net profit (adj.) 929.9 905.0 848.0 947.0 1,036.0 EPS 39.5 38.4 36.0 40.2 44.2 PE (x) 14.4 14.8 15.8 14.2 12.9 P/B (x) 0.5 0.5 0.4 0.4 0.3 EV/EBITDA (x) 15.5 8.5 4.8 3.0 7.3 Dividend yield (%) 3.3 3.3 3.3 3.5 3.9 Net margin (%) 49.6 46.8 42.5 58.6 38.9 Net debt/(cash) to equity (%) 9.6 8.2 6.4 6.9 9.3 Interest cover (x) 9.6 17.5 31.9 46.3 13.7 ROE (%) 3.4 3.2 2.8 2.8 2.8 Source: Bloomberg, UOB Kay Hian

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Regional Morning Notes Thursday, 12 Sep tember 2019

• Potential share buybacks in the offing. Management highlighted that current share price HKL’S CENTRAL PORTFOLIO level is attractive (ie with earnings yield >7%, based on 2018 results), and continues to evaluate any share repurchases against alternative uses of capital (eg new development projects, acquisition of investment properties). In 2018, HKL used c.US$132m on share repurchases in Apr 18 (ie average cost of US$7.00/share) and in Sep 18 (ie average cost of US$6.85/share).

• More development opportunities to come from mainland China, supported by US$15.4b acquisition headroom. As at end-1H19, HKL had a US$3.9b net debt position, which translates to a net gearing of 10% (vs 9% at end-2H18). On our estimates, the group has a sizable acquisition headroom of US$15.4b (assuming comfortable net gearing of 50%). Management alluded that despite participating in a number of auctions, they were only able to secure one new site (ie Houguan Lake Project/totalling 226,000 sqm at a land cost of

Rmb1.7b) in 1H19 due to keen interest by other bidders. However, management expects the group to be more active going forward, due to the steady land supply (via government land

auctions), as well as the recent softening in land market sentiment. The tightening of Source: HKL restrictions on developers’ financing is expected to benefit other more well-capitalised PROPERTIES CARRYING VALUE (AT 30 JUN 19) developers (including HKL).

• Currently, HKL’s development portfolio (totalling 6m sf of GFA) spans seven countries, and Mainland China (c.55% of total GFA under construction) is among the key markets. Already, HKL has 20 projects across seven Mainland China cities (including Beijing, Shanghai, Chengdu, Chongqing, , , ). VALUATION/RECOMMENDATION • Current P/B is approaching Asian Financial Crisis troughs (-2.0 SD). At 0.36x P/B, HKL trades at 31%/47% discount to HK/SG peers’ average. On a historical basis, current P/B is also 51% below its long-term mean of 0.73x P/B. Source: Bloomberg

• Room for higher leverage. Hong Kong developers trade at a lower 0.5x P/B average (vs GROSS ASSET VALUE (AT 30 JUN 19) Singapore peers’ 0.68x), which can be explained by their lower ROEs averaging 5% (vs Singapore peers’ 7%). By decomposing ROE, we can attribute ROE deviations to capital structure (and not ROAs). Hong Kong developers have lower financial leverage averaging 1.6x (vs HKL: 1.2x), which are much lower compared to Singapore peers’ (2.6x). SHARE PRICE CATALYST

• Positive news flow on office leasing activity, easing in the Hong Kong political stalemate, share buybacks and deployment of US$15.4b acquisition headroom in Mainland China. Source: Bloomberg

PEER COMPARISON Book Price Market ----- PE ------Yield ---- NAV Current 8-yr P/B Fwd Fwd Net Company Ticker 11 Sep 19 Cap Curr Fwd Curr Fwd ps P/B Mean ROE ROA Gearing* (lcy) (US$m) (x) (x) (%) (%) (lcy) (x) (x) (%) (%) (%) Hong Kong Developers Ck Asset Holdings Ltd 1113 HK 57.10 26,899 13.7 11.9 3.7 4.1 90.08 0.63 0.87 6.9 5.3 4.1 Kerry Properties Ltd 683 HK 25.85 4,802 14.6 14.9 5.3 5.4 68.52 0.38 0.52 5.6 n.a. 20.4 New World Development 17 HK 10.46 13,643 8.4 8.0 4.8 4.9 21.51 0.49 0.50 3.9 2.2 35.8 Sun Hung Kai Properties 16 HK 117.80 43,540 9.8 10.6 4.3 4.5 188.42 0.63 0.72 6.3 5.0 12.0 Wharf Real Estate Investment 1997 HK 45.90 17,776 7.3 7.5 4.7 4.9 73.35 0.63 0.76 4.7 4.0 18.0 Hongkong Land Holdings HKL SP 5.89 13,858 7.7 8.1 3.9 4.0 16.50 0.36 0.54 2.9 2.5 9.3 Average 0.52 0.65 5.1 3.8 16.6 Singapore Developers CapitaLand CAPL SP 3.60 13,150 6.0 6.9 3.4 3.6 4.45 0.81 0.82 7.2 3.1 98.3 CityDev CIT SP 9.90 6,510 6.0 6.4 2.0 2.0 11.29 0.88 1.11 5.4 2.8 41.4 GuocoLand GUOL SP 2.01 1,725 7.0 8.0 3.5 3.5 3.45 0.58 0.76 4.1 2.5 95.8 Ho Bee Land HOBEE SP 2.29 1,105 NA NA NA NA 4.62 0.50 0.58 NA N/A 69.7 Oxley OHL SP 0.315 949 31.7 25.4 9.5 9.5 0.36 0.87 2.85 15.7 4.0 206.1 Wing Tai WINGT SP 2.05 1,141 2.4 5.4 2.9 2.9 4.57 0.45 0.50 2.5 N/A 11.7 Average 0.68 1.10 7.0 3.1 87.2 * Net Gearing: Net Debt to Total Common Equity Source: Bloomberg, UOB Kian

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HKL HISTORICAL TRADING P/B HK PEERS’ TRADING P/B

(x) (X) 1.4 1.6 1.2 1.4 +2SD 1 1.2 +1SD 0.8 1.0 0.6 0.8 Mean = 0.73x 0.4 0.6 -1SD 0.2 0.4 -2SD 0 0.2 11 12 13 14 15 16 17 18 19 0.0 HK Land CK Asset Kerry Properties New World Development 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 Sun Hung Kai Properties Wharf Real Estate Investment Source: Bloomberg, UOB Kay Hian Source: Bloomberg, UOB Kay Hian

MONTHLY SALES OF NEW HOMES BY SUB-SEGMENT GRADE A OFFICE VACANCY BY DISTRICT

Source: Colliers Source: Savills

MAJOR PROPERTY PORTFOLIO

Ownership Location Lettable area of the property Under Investment Properties (%) Total Office Retail construction/ Ownership Construction to be 100 HK 34 30 4 Development Properties (%) Location Total completed developed 100 HK 43 39 4 Exchange Square 100 139 WE City 50 Chengdu, mainland China 917 480 437 One Exchange Square HK 53 – Central Avenue 50 Chongqing, mainland China 1,101 326 775 Two Exchange Square HK 47 – Landmark Riverside 50 Chongqing, mainland China 1,004 518 486 Three Exchange Square HK 30 – Bamboo Grove Riverside 100 Chongqing, mainland China 161 – 161 Podium HK – 5 The Forum HK 4 – Lijia Landscape 50 Chongqing, mainland China 114 – 114 100 HK 63 59 4 New Bamboo Grove 50 Chongqing, mainland China 640 378 262 Gloucester Tower 100 HK 44 44 – Yorkville North 100 Chongqing, mainland China 1,116 531 585 Landmark Atrium 100 HK 24 – 24 Edinburgh Tower 100 HK 44 31 13 Yorkville South 100 Chongqing, mainland China 881 678 203 York House 100 HK 10 10 – Hangzhou Bay 30 Hangzhou, mainland China 776 – 776 Prince’s Building 100 HK 52 38 14 Yue City 33 Nanjing, mainland China 260 – 260 WF CENTRAL 84 Beijing, mainland China 42 – 42 Caohejing Project 26.7 Shanghai, mainland China 392 – 392 One Central 49 Macau 20 – 20 One Raffles Link 100 Singapore 29 23 6 Wuhan Dream Land 50 Wuhan, mainland China 493 – 493 One Raffles Quay 33.3 Singapore 123 Lake Grande 100 Singapore 50 – 50 North Tower Singapore 71 – Margaret Ville 100 Singapore 22 – 22 South Tower Singapore 52 – Marina Bay Financial Centre 33.3 Singapore 286 Parc Esta 100 Singapore 98 – 98 Tower 1 Singapore 57 2 Arumaya 40 Jakarta, Indonesia 24 – 24 Tower 2 Singapore 95 7 Asya 33.5 Jakarta, Indonesia 1,085 – 1,085 Tower 3 Singapore 117 8 Gatot Subroto 50 Jakarta, Indonesia 77 – 77 World Trade Centre 1 50 JKT, Indonesia 42 37 5 World Trade Centre 2 50 JKT, Indonesia 60 56 4 Nava Park 49 Serpong, Greater Jakarta, 741 71 670 World Trade Centre 3 50 JKT, Indonesia 74 69 5 Indonesia World Trade Centre 5 50 JKT, Indonesia 15 14 1 Broadhill 50 Seremban Forest Heights, 43 – 43 World Trade Centre 6 50 JKT, Indonesia 19 17 2 Malaysia EXCHANGE SQUARE 100 Phnom Penh, 25 17 8 Two Roxas Triangle 40 Manila, The Philippines 98 – 98 Cambodia King Kaew 49 Bangkok, Thailand 164 – 164 Gaysorn 49 Bangkok, Thailand 17 5 12 Central Building 65 Hanoi, Vietnam 4 3 1 The ESSE Sukhumvit 36 49 Bangkok, Thailand 38 – 38 63 Ly Thai To 73.9 Hanoi, Vietnam 7 6 1 29B NDC 70 Ho Chi Minh City, Vietnam 57 – 57

Source: HKL, UOB Kay Hian

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PROFIT & LOSS BALANCE SHEET Year to 31 Dec (US$m) 2015 2016 2017 2018 Year to 31 Dec (US$m) 2015 2016 2017 2018 Net turnover 1,932.1 1,993.9 1,616.1 2,665.4 Fixed assets 24,991 27,757 32,588 33,846 EBITDA 2,010.5 3,524.8 5,611.2 2,336.0 Other LT assets 4,734 4,582 5,726 6,855 Deprec. & amort. 2.9 3.1 3.0 4.2 Cash/ST investment 1,569 1,909 1,622 1,375 EBIT 2,007.6 3,521.7 5,608.2 2,331.8 Other current assets 3,078 2,707 2,904 2,887 Total other non-operating income 0.0 0.0 0.0 0.0 Total assets 34,372 36,955 42,840 44,963 Associate contributions 209.7 59.1 248.7 453.7 ST debt 169 221 191 794 Net interest income/(expense) (74.4) (68.9) (78.2) (114.3) Other current liabilities 1,553 1,570 1,621 1,457 Pre-tax profit 2,142.9 3,511.9 5,778.7 2,671.2 LT debt 3,741 3,696 3,980 4,145 Tax (137.2) (167.3) (153.1) (214.1) Other LT liabilities 189 154 172 198 Minorities (6.0) (1.7) 11.7 0.0 Shareholders' equity 28,685 31,294 36,842 38,342 Net profit 2,011.7 3,346.3 5,613.9 2,457.1 Minority interest 35 20 35 28 Net profit (adj.) 905.0 848.0 947.0 1,036.0 Total liabilities & equity 34,372 36,955 42,840 44,963

CASH FLOW KEY METRICS Year to 31 Dec (US$m) 2015 2016 2017 2018 Year to 31 Dec (%) 2015 2016 2017 2018 Operating 896.2 1,096.2 800.2 604.4 Profitability Pre-tax profit 2,142.9 3,511.9 5,778.7 2,671.2 EBITDA margin 104.1 176.8 347.2 87.6 Tax (137.2) (167.3) (153.1) (214.1) Pre-tax margin 110.9 176.1 357.6 100.2 Deprec. & amort. 2.9 3.1 3.0 4.2 Net margin 46.8 42.5 58.6 38.9 Associates (209.7) (59.1) (248.7) (453.7) ROA 2.7 2.4 2.4 2.4 Working capital changes 119.9 253.2 40.0 (329.3) ROE 3.2 2.8 2.8 2.8 Non-cash items 0.0 0.0 0.0 0.0 Other operating cashflows (1,022.6) (2,445.6) (4,619.7) (1,073.9) Growth Investing (145.9) (245.1) (946.9) (1,055.9) Turnover 3.0 3.2 (18.9) 64.9 Capex (growth) (210.1) (239.6) (213.7) (150.4) EBITDA 83.8 75.3 59.2 (58.4) Investment (255.8) (104.2) (670.5) (978.4) Pre-tax profit 39.4 63.9 64.5 (53.8) Others 320.0 98.7 (62.7) 72.9 Net profit 51.6 66.3 67.8 (56.2) Financing (843.0) (518.6) (193.2) 237.0 Net profit (adj.) (2.7) (6.3) 11.7 9.4 Dividend payments (444.9) (443.8) (443.4) (466.6) EPS (2.7) (6.3) 11.7 9.9 Proceeds from borrowings 229.1 266.7 825.1 2,721.5 Loan repayment (575.7) (240.6) (586.1) (1,883.9) Leverage Others/interest paid (51.5) (100.9) 11.2 (134.0) Debt to total capital 11.4 10.6 9.7 11.0 Net cash inflow (outflow) (45.6) 409.0 (339.9) (214.5) Debt to equity 13.6 12.5 11.3 12.9 Beginning cash & cash equivalent 1,658.6 1,565.9 1,898.4 1,616.6 Net debt/(cash) to equity 8.2 6.4 6.9 9.3 Changes due to forex impact (47.1) (76.5) 58.1 (33.2) Interest cover (x) 17.5 31.9 46.3 13.7 Ending cash & cash equivalent 1,565.9 1,898.4 1,616.6 1,368.9

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Disclosures/Disclaimers

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