Henderson Land (0012.HK) FY18 Results in Line; En Bloc Sales Continue to ﬁll the Earnings Gap Sell

21 March 2019 | 3:29PM HKT

Henderson Land (0012.HK) FY18 results in line; en bloc sales continue to ﬁll the earnings gap Sell

Justin Kwok, CFA 0012.HK 12m Price Target: HK$42.00 Price: HK$46.10 Downside: 8.9% +852-2978-0481 | [email protected] Goldman Sachs (Asia) L.L.C. Colin Yao FY2018 results highlight +852-2978-1474 | [email protected] Goldman Sachs (Asia) L.L.C. n Underlying profit largely flat yoy at HK$19.8bn, on the back of c.HK$6.9bn contributions from non-core asset disposals, in line with our forecast. n Attributable development segment profit was up 4% to HK$6.8bn, which already included the HK$2.8bn profit from Key Data ______their development sites disposal to Evergrande, otherwise the Market cap: HK$175.9bn / $22.4bn Enterprise value: HK$249.3bn / $31.8bn segment would have seen a sharp decline. 3m ADTV: HK$155.3mn / $19.8mn Hong Kong n Attributable net rental was up 6% to HK$7.0bn, on the back of Hong Kong Property M&A Rank: 3 positive rental reversions across HK and China. GS Forecast ______n BVPS rose 7% to HK$71.15. 12/18 12/19E 12/20E 12/21E Revenue (HK$ mn) New 21,982.0 20,309.7 22,202.7 25,211.5 n DPS rose 5% to HK$1.80 per share (or at a faster growth if one Revenue (HK$ mn) Old 22,762.1 23,214.1 22,621.9 -- EBITDA (HK$ mn) 9,290.0 8,145.7 9,497.0 9,019.1 were to take into account for their 1-for-10 bonus shares EPS (HK$) New 7.08 3.17 2.93 2.96 EPS (HK$) Old 4.69 3.19 2.86 -- issuance). P/E (X) 6.1 14.6 15.8 15.6 P/B (X) 0.6 0.6 0.6 0.6 Dividend yield (%) 4.2 4.0 4.0 4.0 Key takeaways from analyst briefing FCF yield (%) (1.6) 1.0 (0.9) (1.1) n HK land banking initiatives 6/18 12/18 6/19E 12/19E EPS (HK$) 3.42 3.66 1.57 1.60 o The company made efforts to acquire residential GS Factor Profile ______development sites in the market (two from private sales Growth

and one from Urban Renewal Authority) with a total of Financial Returns 1.34mn sq ft GFA, in addition to 2.4mn sq ft GFA (on full Multiple resumption) from old buildings’ assembly, during the year. Integrated For the latter, their average land cost is running at

c.HK$8,500 per sq ft GFA, or c.HK$10,000 per sq ft SFA. Percentile 20th 40th 60th 80th 100th

o There was limited update on their farm land conversion 0012.HK relative to Asia ex. Japan Coverage 0012.HK relative to Hong Kong Property front. We note that management is optimistic that as the Source: Company data, Goldman Sachs Research estimates. government is trying to push ahead with the infrastructure See disclosures for details. plans for the Kwu Tung North NDA (new development

Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S. Goldman Sachs Henderson Land (0012.HK)

Henderson Land (0012.HK) Balance Sheet (HK$ mn) ______Sell Rating since Apr 24, 2018 12/18 12/19E 12/20E 12/21E Cash & cash equivalents 18,665.0 18,183.0 13,120.6 6,922.6 Accounts receivable 15,239.0 16,001.0 16,801.0 17,641.0 Inventory 97,177.0 97,212.0 96,907.8 96,907.8 Ratios & Valuation ______Other current assets 3,098.0 1,593.0 1,737.1 1,895.6 12/18 12/19E 12/20E 12/21E Total current assets 134,179.0132,989.0 128,566.5 123,367.0 P/E (X) 6.1 14.6 15.8 15.6 Net PP&E 177,087.0 185,232.7 194,729.7 203,748.8 P/B (X) 0.6 0.6 0.6 0.6 Net intangibles 0.0 ------FCF yield (%) (1.6) 1.0 (0.9) (1.1) Total investments 128,937.0 130,300.7 132,520.3 134,415.8 EV/EBITDA (X) 28.2 33.9 29.7 31.9 Other long-term assets 903.0 903.0 903.0 903.0 CROCI (%) 6.9 3.3 2.4 2.2 Total assets 441,106.0 449,425.4 456,719.5 462,434.6 ROE (%) 10.3 4.0 4.0 4.0 Accounts payable 6,217.0 6,217.0 6,217.0 6,217.0 Net debt/equity (%) 21.4 21.1 22.3 23.8 Short-term debt 33,021.0 15,924.0 6,688.0 6,688.0 Interest cover (X) 11.5 9.2 10.7 10.1 Other current liabilities 23,076.0 25,386.2 27,482.4 28,080.3 Days inventory outst, sales 1,417.8 1,746.8 1,595.6 1,403.0 Total current liabilities 62,314.0 47,527.2 40,387.4 40,985.3 Receivable days 288.0 280.7 269.6 249.3 Long-term debt 53,609.0 70,706.0 79,942.0 79,942.0 Days payable outstanding 219.3 206.7 197.0 151.2 Other long-term liabilities 7,191.0 7,191.0 7,191.0 7,191.0 DuPont ROE (%) 9.8 3.9 3.9 3.9 Total long-term liabilities 60,800.0 77,897.0 87,133.0 87,133.0 Turnover (X) 0.0 0.0 0.0 0.1 Total liabilities 123,114.0125,424.2127,520.4 128,118.3 Leverage (X) 1.4 1.4 1.4 1.4 Preferred shares ------Total common equity 313,153.0 319,031.8 323,852.1 328,822.9 Growth & Margins (%) ______Minority interest 4,839.0 4,969.4 5,347.0 5,493.3 12/18 12/19E 12/20E 12/21E Total liabilities & equity 441,106.0 449,425.4 456,719.5 462,434.6 Total revenue growth (10.1) (7.6) 9.3 13.6 Net debt, adjusted 67,965.0 68,447.0 73,509.4 79,707.4 EBITDA growth 4.0 (12.3) 16.6 (5.0) Average capital employed 368,933.5 389,202.6 397,578.3 408,366.1 EPS growth 2.4 (55.3) (7.6) 1.2 RNAV 291,500.4 308,913.7 -- -- DPS growth 15.8 1.7 0.0 0.0 BVPS (HK$) 71.15 72.49 73.58 74.71 EBIT margin 42.3 40.1 42.8 35.8 EBITDA margin 42.3 40.1 42.8 35.8 Cash Flow (HK$ mn) ______Net income margin 141.7 62.2 58.0 51.7 12/18 12/19E 12/20E 12/21E Net income 31,157.0 13,933.1 12,874.6 13,025.1 Price Performance ______D&A add-back 0.0 0.0 0.0 -- 0012.HK (HK$) Hang Seng Index Minority interest add-back 215.0 130.4 377.6 146.3 Net (inc)/dec working capital (20,751.0) (796.9) (495.8) (840.0) 60 34,000 Other operating cash flow (9,726.2) (2,980.0) (5,121.5) (5,601.0) 55 32,000 Cash flow from operations 894.810,286.6 7,634.9 6,730.4 Capital expenditures (4,064.0) (8,145.7) (9,497.0) (9,019.1) 50 30,000 Acquisitions ------45 28,000 Divestitures -- 741.0 -- --

40 26,000 Others 6,256.1 4,602.4 4,853.9 4,144.9 Cash flow from investing 2,192.1 (2,802.3) (4,643.0)(4,874.2) 35 24,000 Dividends paid (common & pref) (7,122.0) (7,966.3) (8,054.3) (8,054.3) Inc/(dec) in debt 6,326.0 0.0 0.0 -- Apr-18 Jul-18 Oct-18 Jan-19 Other financing cash flows (10,631.9) 0.0 0.0 0.0 3m 6m 12m Cash flow from financing (11,427.9)(7,966.3) (8,054.3) (8,054.3) Absolute 17.3% 15.3% (3.7)% Total cash flow (8,341.0)(482.0)(5,062.4) (6,198.0) Rel. to the Hang Seng Index 2.5% 8.0% 3.6% Free cash flow (3,169.2) 2,140.9 (1,862.0) (2,288.7) Source: FactSet. Price as of 20 Mar 2019 close. Source: Company data, Goldman Sachs Research estimates. Income Statement (HK$ mn) ______12/18 12/19E 12/20E 12/21E Total revenue 21,982.0 20,309.7 22,202.7 25,211.5 Cost of goods sold (11,504.3) (10,976.3) (11,518.1) (15,004.7) SG&A (1,187.7) (1,187.7) (1,187.7) (1,187.7) R&D ------Other operating inc./(exp.) ------ESO expense ------EBITDA 9,290.08,145.7 9,497.09,019.1 Depreciation & amortization 0.00.00.00.0 EBIT 9,290.08,145.7 9,497.09,019.1 Net interest inc./(exp.) (150.0) (229.0) (356.5) (436.6) Income/(loss) from associates 12,212.0 6,707.1 7,073.6 6,040.4 Pre-tax profit 33,495.014,623.816,214.014,622.8 Provision for taxes (2,123.0) (1,869.3) (2,961.8) (1,451.4) Minority interest (215.0) (130.4) (377.6) (146.3) Preferred dividends ------Net inc. (pre-exceptionals) 31,157.012,624.112,874.613,025.1 Post-tax exceptionals 0.0 1,309.0---- Net inc. (post-exceptionals) 31,157.013,933.112,874.613,025.1 EPS (basic, pre-except) (HK$) 7.08 2.87 2.93 2.96 EPS (diluted, pre-except) (HK$) 7.08 2.87 2.93 2.96 EPS (basic, post-except) (HK$) 7.08 3.17 2.93 2.96 EPS (diluted, post-except) (HK$) 7.08 3.17 2.93 2.96 EPS (diluted, excl. ESO) (HK$) ------DPS (HK$)1.80 1.83 1.83 1.83

21 March 2019 2 Goldman Sachs Henderson Land (0012.HK)

area), once progress is made, the conversion of their c.709k sq ft site in this area would be relatively straight forward (only premium negotiation is pending). o Gearing rose by 3.4 pp yoy to 22.4%, while management see it as comfortable amid relative higher funding cost and their intention to continue to monetize non-core assets. n Non-core asset disposals o Looking into 2019, at the moment, they will recognize a HK$1.3bn disposal gain from the sale of No. 8 Observatory Road (transaction completed in March 2019). o Without giving specific guidance, management is confident to continue monetizing non-core en bloc properties amid demand from both investors (e.g. property private equity funds) and self-use (e.g. Chinese corporates with existing operational presence in HK). n Dividend o Management see their DPS running at c.40% payout ratio to underlying earnings. While they acknowledge the latter was partly funded by non-core asset sales, they see enough buffer to sustain the current level of earnings until there is pick-up in contributions from their recurring operations amid increase in urban renewal sites and investment properties completions. o We estimate its FY2018 full year DPS of HK$1.80/share would translate into c.HK$7.9 bn of distribution, which is now running close to the estimated recurring attributable segment cash flow of HK$8.2bn (c.HK$6bn from rentals post-tax and HK$2.2bn from HKCG dividend).

Investment view, valuation and risks n As per the company release, Chairman Mr. Lee Shau Kee has informed the board of directors that he is considering to step down from the positions of Chairman and Managing Director after the forthcoming AGM (May 28), and has proposed to the board to appoint his two sons, Dr. Lee Ka Kit and Mr. Lee Ka Shing as Joint Chairmen and Managing Directors. The board has stated that it will propose a resolution at the upcoming AGM which will be subject to shareholder’s approval. We await further disclosure from the company and management’s guidance to assess the impact, if any, to the overall strategy of the company going forward. n We see risk to Henderson Land’s earnings trajectory given our view that its recurring underlying proﬁt will likely decline amid low bookings from the Hong Kong development segment. While sizable disposal gains have allowed the company to more than offset lower bookings in the past three years, we see the visibility on the timing and sustainability of this strategy as relatively low. We are forecasting very limited growth (< 1% CAGR FY18-21E) in recurring underlying proﬁts in the next three years. n We have revised our 2019/20E EPS by up to 2% factoring in the set of results and our updated assumptions on development schedule. We also introduce our FY21E

21 March 2019 3 Goldman Sachs Henderson Land (0012.HK)

estimates with an EPS of HK$2.96. We maintain our 12-month price target at HK$42 (based on an unchanged 40% discount to 2019E NAV). n Upside risks and what could make us more positive o Share price weakness could invite more-than-expected stake raises from significant shareholders, while we do not expect a substantial stake increase from significant shareholders in the near term given the already relatively high family ownership stake in Henderson Land at 72.82% as of Jun, 2018. o Sizable NAV-accretive farmland conversions: Henderson Land, with c.46mn sqft of farmland on its books, could benefit from a faster farmland conversion process (mainly into residential usage), or one with potentially better economics. While we do not foresee sizable conversions materializing in the near term, given the company has at least c.0.7mn sq ft site area within the Kwu Tong new development area and are in active negotiations with the government, we do not rule out the risk for sooner-than-expected successful conversion. o Sizable NAV-accretive disposals or asset monetization: § Management noted that they see ongoing opportunities to dispose of non-core projects amid still-strong investment demand, however our view is that the relatively large disposal targets have likely already been monetized in the past few years. § However, we note that Henderson Land still holds a list of investment properties in Hong Kong, in addition to a sizable sum of development projects across China, which could be up for monetization if the market conditions are right. If and when these were to be monetized, the gains from disposals could potentially fill the earnings gap coming from lower estimated development-for-sale projects.

21 March 2019 4 Goldman Sachs Henderson Land (0012.HK)

Exhibit 1: Henderson Land FY18 results summary *restated *restated

(HK$mn) FY17 FY18 YoY Chg 2H FY17 1H FY18 2H FY18 YoY Chg HoH Chg

Turnover: 27,960 21,982 -10.1% 16,260 13,142 8,840 -45.6% -32.7% Property sales 20,029 13,335 -19.3% 12,400 9,049 4,286 -65.4% -52.6% - Hong Kong 13,062 9,765 2.2% 11,011 8,508 1,257 -88.6% -85.2% - China 6,967 3,570 -48.8% 1,389 541 3,029 118.1% 459.9% Rental and related revenue 5,678 6,020 6.0% 2,779 2,995 3,025 8.9% 1.0% - Hong Kong 3,979 4,200 5.6% 1,957 2,059 2,141 9.4% 4.0% - China 1,699 1,820 7.1% 822 936 884 7.5% -5.6% Depaertment store operation 834 1,496 79.4% 411 524 972 136.5% 85.5% Hotel and others 1,419 1,131 -20% 670 574 557 -16.9% -3.0%

Operating profit: 11,015 10,794 4.1% 6,420 6,145 4,649 -27.6% -24.3% Property sales 5,459 5,273 9.5% 3,551 3,346 1,927 -45.7% -42.4% - Hong Kong 4,017 3,618 7.3% 3,425 3,289 329 -90.4% -90.0% - China 1,442 1,655 14.8% 126 57 1,598 NM NM Rental income 4,287 4,520 5.4% 2,139 2,293 2,227 4.1% -2.9% - Hong Kong 2,955 3,094 4.7% 1,496 1,550 1,544 3.2% -0.4% - China 1,332 1,426 7.1% 643 743 683 6.2% -8.1% Depaertment store operation 265 296 11.7% 127 148 148 16.5% 0.0% Hotel and operation 1,004 705 -29.8% 603 358 347 -42.5% -3.1%

Net interest (204) (150) -26.5% (125) (227) 77 -161.6% -133.9% Bank interest 633 660 4.3% 202 252 408 102.0% NM Finance costs (837) (810) -3.2% (327) (479) (331) 1.2% -30.9% Unallocated operating expenses (1,559) (1,414) -9.3% (645) (730) (684) 6.0% NM Profit from operations 9,252 9,230 7.2% 5,650 5,188 4,042 -28.5% -22.1%

Other income/expenses 14,797 12,053 -19.6% 5,218 4,996 7,057 35.2% 41.3% Provision on inventories 25 (90) -460.0% 22 5 (95) n.a. -2000.0% Gain from inv. prop reval. 9,911 10,465 5.6% 3,148 3,937 6,528 107.4% 65.8% Gain on disposal 4,861 1,678 -66.8% 2,048 1,054 624 -69.5% -40.8%

Associates & JC entities 9,333 12,212 30.7% 4,620 5,640 6,572 42.3% 16.5% Inv prop reval surplus 3,879 4,362 12.5% 1,849 2,648 1,714 -7.3% -35.3% Development income 692 808 16.8% 326 176 632 93.9% 259.1% Rental income 1,795 5,355 198.3% 758 789 4,566 502.4% 478.7% Other income 2,967 1,687 -43.4% 1,687 2,027 (340) -120.2% -116.8% Profit before taxation 33,382 33,495 1.7% 15,488 15,824 17,671 14.1% 11.7% Taxation (2,217) (2,123) 0.4% (817) (632) (1,491) 82.5% 135.9% Profit after taxation 31,165 31,372 1.8% 14,671 15,192 16,180 10.3% 6.5% Minorities (356) (215) -44.6% (137) (162) (53) -61.3% -67.3% Net profit 30,809 31,157 2.4% 14,534 15,030 16,127 11.0% 7.3% Underlying profit 19,516 19,765 1.1% 10,690 13,859 5,906 -44.8% -57.4% Recurring underlying profit 12,031 12,833 6.3% 6,746 8,863 3,970 -41.2% -55.2%

DPS (HK$) 1.71 1.80 5.3% 0.48 0.50 1.30 170.8% NM Reported book per share (HK$) 73.12 71.15 -2.9% 73.12 68.69 71.15 -2.7% 3.6%

Source: Company data, Goldman Sachs Global Investment Research

21 March 2019 5 Goldman Sachs Henderson Land (0012.HK)

Disclosure Appendix

Reg AC

I, Justin Kwok, CFA, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs’ Global Investment Research division. GS Factor Profile The Goldman Sachs Factor Profile provides investment context for a stock by comparing key attributes to the market (i.e. our coverage universe) and its sector peers. The four key attributes depicted are: Growth, Financial Returns, Multiple (e.g. valuation) and Integrated (a composite of Growth, Financial Returns and Multiple). Growth, Financial Returns and Multiple are calculated by using normalized ranks for specific metrics for each stock. The normalized ranks for the metrics are then averaged and converted into percentiles for the relevant attribute. The precise calculation of each metric may vary depending on the fiscal year, industry and region, but the standard approach is as follows: Growth is based on a stock’s forward-looking sales growth, EBITDA growth and EPS growth (for financial stocks, only EPS and sales growth), with a higher percentile indicating a higher growth company. Financial Returns is based on a stock’s forward-looking ROE, ROCE and CROCI (for financial stocks, only ROE), with a higher percentile indicating a company with higher financial returns. Multiple is based on a stock’s forward-looking P/E, P/B, price/dividend (P/D), EV/EBITDA, EV/FCF and EV/Debt Adjusted Cash Flow (DACF) (for financial stocks, only P/E, P/B and P/D), with a higher percentile indicating a stock trading at a higher multiple. The Integrated percentile is calculated as the average of the Growth percentile, Financial Returns percentile and (100% - Multiple percentile). Financial Returns and Multiple use the Goldman Sachs analyst forecasts at the fiscal year-end at least three quarters in the future. Growth uses inputs for the fiscal year at least seven quarters in the future compared with the year at least three quarters in the future (on a per-share basis for all metrics). For a more detailed description of how we calculate the GS Factor Profile, please contact your GS representative. M&A Rank Across our global coverage, we examine stocks using an M&A framework, considering both qualitative factors and quantitative factors (which may vary across sectors and regions) to incorporate the potential that certain companies could be acquired. We then assign a M&A rank as a means of scoring companies under our rated coverage from 1 to 3, with 1 representing high (30%-50%) probability of the company becoming an acquisition target, 2 representing medium (15%-30%) probability and 3 representing low (0%-15%) probability. For companies ranked 1 or 2, in line with our standard departmental guidelines we incorporate an M&A component into our target price. M&A rank of 3 is considered immaterial and therefore does not factor into our price target, and may or may not be discussed in research. Quantum Quantum is Goldman Sachs’ proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for in-depth analysis of a single company, or to make comparisons between companies in different sectors and markets. GS SUSTAIN GS SUSTAIN is a global investment strategy focused on the generation of long-term alpha through identifying high quality industry leaders. The GS SUSTAIN 50 list includes leaders we believe to be well positioned to deliver long-term outperformance through superior returns on capital, sustainable competitive advantage and effective management of ESG risks vs. global industry peers. Candidates are selected largely on a combination of quantifiable analysis of these three aspects of corporate performance. Disclosures Coverage group(s) of stocks by primary analyst(s) Justin Kwok, CFA: Hong Kong Property. Hong Kong Property: Champion REIT, CK Asset Holdings Ltd, Fortune REIT (Hong Kong), GreenTree Hospitality Group, Hang Lung Properties, Henderson Land, Hongkong Land, Huazhu Group, Hysan Development, Kerry Properties, Link REIT, Mapletree North Asia Commercial, New World Development, Shanghai Jin Jiang Intl Hotels, Shangri-La Asia, Sino Land, Sun Hung Kai Properties, Swire Properties, Wharf REIC. Company-specific regulatory disclosures The following disclosures relate to relationships between The Goldman Sachs Group, Inc. (with its affiliates, “Goldman Sachs”) and companies covered by the Global Investment Research Division of Goldman Sachs and referred to in this research. Goldman Sachs had a non-securities services client relationship during the past 12 months with: Henderson Land (HK$46.10) Goldman Sachs makes a market in the securities or derivatives thereof: Henderson Land (HK$46.10) Distribution of ratings/investment banking relationships Goldman Sachs Investment Research global Equity coverage universe

Rating Distribution Investment Banking Relationships Buy Hold Sell Buy Hold Sell Global 35% 54% 11% 65% 58% 56%

As of January 1, 2019, Goldman Sachs Global Investment Research had investment ratings on 2,945 equity securities. Goldman Sachs assigns stocks as Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for the purposes of the above disclosure required by the FINRA Rules. See ‘Ratings, Coverage groups and views and related deﬁnitions’ below. The Investment Banking Relationships chart reﬂects the percentage of subject companies within each rating category for whom Goldman Sachs has provided investment banking services within the previous twelve months.

21 March 2019 6 Goldman Sachs Henderson Land (0012.HK)

Price target and rating history chart(s)

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