Hongkong Land Holdings Ltdpg.jrj.com.cn/acc/Res/CN_RES/INVEST/2016/2/4/2ccd9466-2... ·...

Deutsche Bank Markets Research

Rating

Sell Asia

Hong Kong

Property

Company

Hongkong Land Holdings Ltd

Date

4 February 2016

Recommendation Change

Weaker office demand, higher office supply; downgrading to Sell

Reuters Bloomberg Exchange Ticker HKLD.SI HKL SP SES HKLD

ADR Ticker ISIN HNGKY US4385813088

Forecasts And Ratios

Year End Dec 31 2013A 2014A 2015E 2016E 2017E

Sales (USDm) 1,857.1 1,876.3 1,781.4 1,863.0 2,072.0

EBITDA (USDm) 918.7 1,069.4 820.2 953.1 972.2

Reported NPAT (USDm) 1,189.6 1,327.4 787.7 843.8 829.8

DB EPS FD (USD) 0.40 0.40 0.33 0.36 0.35

PER (x) 17.2 16.9 17.2 16.1 16.4

EV/EBITDA (x) 15.5 12.6 14.8 12.7 12.3

DPS (net) (USD) 0.18 0.19 0.19 0.19 0.19

Yield (net) (%) 2.6 2.8 3.2 3.3 3.3

Source: Deutsche Bank estimates, company data

Downgrading to Sell on weaker-than-expected demand for HK Grade-A office

________________________________________________________________________________________________________________

Deutsche Bank AG/Hong Kong

Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, 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. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015.

Price at 3 Feb 2016 (USD) 5.77

Price target - 12mth (USD) 4.86

52-week range (USD) 8.74 - 5.71

HANG SENG INDEX 18,992

Jason Ching, CFA

Research Analyst

(+852) 2203 6205

[email protected]

Tony Tsang

Research Analyst

(+852) 2203 6256

[email protected]

Key changes

Rating Hold to Sell ↓

Price target 7.20 to 4.86 ↓ -32.5%

Sales (FYE) 1,843 to 1,781 ↓ -3.4%

Op prof margin (FYE)

47.4 to 46.0 ↓ -2.9%

Net profit (FYE)

844.1 to 787.7 ↓ -6.7%

Source: Deutsche Bank

Price/price relative

5.0

6.0

7.0

8.0

9.0

2/14 8/14 2/15 8/15

Hongkong Land Holdin

HANG SENG INDEX (Rebased)

Performance (%) 1m 3m 12m

Absolute -17.6 -21.6 -25.1

HANG SENG INDEX -13.3 -15.8 -22.7

Source: Deutsche Bank

While performance of the HK Grade-A office market has been resilient so far (compared with marked declines in prices/rents in retail/residential), we expect the pace of slowdown in office demand to accelerate ahead of the weakening economy and the oncoming supply peak in 2017. By factoring in a 20% decline in HK Grade-A office rents and higher cap rates at 5.5% for office/6% for retail, we cut our NAV by 20%. Historically, HKL has traded at a steeper discount to NAV (-1SD) during an office market downturn, forming a basis to our target discount to derive our target price of US$4.86.

Weaker demand/upcoming supply peak could be triggers for a turning point Performance in the HK Grade-A office was strong in 2015, particularly boosted by demand from PRC companies, limited new supply and a historically low vacancy rate. However, more challenges are emerging ahead, on the back of a new round of MNC downsizing, small companies shutting down as the economy continues to slow and decentralization trend for MNCs. Moreover, the current limited supply/low vacancy situation (current drivers of the office market) is likely to reverse on the upcoming supply peak from 2017 onwards.

HKL historically traded at -1SD discount to NAV in an office market downturn Hongkong Land has historically traded at an average discount of 25% to NAV (ranging between the peak of 31% premium to NAV in 1993 to the trough discount of 61% in 2008), P/E of 20x (peaked at 50x in 2001 and troughed at 6x in 2008) and P/B of 0.7x (peaked at 1.2x in 1993 and troughed at 0.3x in 2008). Following a 21% selloff in the past three months, Hongkong Land is now trading at a 21% discount to NAV, 18x P/E, 0.5x P/B with a 3% potential dividend yield. While the current valuation is at par/close to the historical average, HKL has traded at a steeper discount to NAV (average at about -1SD) during an office market downturn historically. Hence, we see potential downside ahead.

Target price at a 38% discount to our revised NAV estimate of US$7.83/shr Our target price is based on a 38% discount to our revised NAV estimate of US$7.83/shr, which implies a 2015E PER of 15x. Our target discount is mostly in line with the average discount during an office market downturn (mostly at -1SD), which we believe is appropriate. Risks: better than expected economic recovery/rate hike.

4 February 2016

Property



Model updated:03 February 2016

Running the numbers

Asia

Hong Kong

Property

Hongkong Land Holdings Ltd Reuters: HKLD.SI Bloomberg: HKL SP

Sell Price (3 Feb 16) USD 5.77

Target Price USD 4.86

52 Week range USD 5.71 - 8.74

Market Cap (m) EURm 12,289

USDm 13,576

Company Profile

Hongkong Land Holdings Limited invests in and develops commercial properties. The Company owns and manages prime office and retail space in Hong Kong. Through its subsidiaries, the Company also develops commercial and residential buildings as well as infrastructure in Asia.

Price Performance

5.0

6.0

7.0

8.0

9.0

Feb 14May 14Aug 14Nov 14Feb 15May 15Aug 15Nov 15

Hongkong Land Holdings LtdHANG SENG INDEX (Rebased)

Margin Trends

44

48

52

56

60

13 14 15E 16E 17E

EBITDA Margin EBIT Margin

Growth & Profitability

0

1

2

3

4

5

6

-10

-5

0

5

10

15

13 14 15E 16E 17E

Sales growth (LHS) ROE (RHS)

Solvency

0

5

10

15

20

02468

101214

13 14 15E 16E 17E

Net debt/equity (LHS) Net interest cover (RHS)

Jason Ching, CFA

+852 2203 6205 [email protected]

Fiscal year end 31-Dec 2013 2014 2015E 2016E 2017E

Financial Summary

DB EPS (USD) 0.40 0.40 0.33 0.36 0.35

Reported EPS (USD) 0.51 0.56 0.33 0.36 0.35

DPS (USD) 0.18 0.19 0.19 0.19 0.19

BVPS (USD) 11.4 11.7 11.9 12.0 12.2

Weighted average shares (m) 2,353 2,353 2,353 2,353 2,353

Average market cap (USDm) 16,121 15,714 13,576 13,576 13,576

Enterprise value (USDm) 14,258 13,517 12,131 12,068 12,005

Valuation Metrics P/E (DB) (x) 17.2 16.9 17.2 16.1 16.4

P/E (Reported) (x) 13.6 11.8 17.2 16.1 16.4

P/BV (x) 0.52 0.58 0.49 0.48 0.47

FCF Yield (%) 4.1 5.2 nm 2.1 2.4

Dividend Yield (%) 2.6 2.8 3.2 3.3 3.3

EV/Sales (x) 7.7 7.2 6.8 6.5 5.8

EV/EBITDA (x) 15.5 12.6 14.8 12.7 12.3

EV/EBIT (x) 15.6 12.7 14.8 12.7 12.3

Income Statement (USDm)

Sales revenue 1,857 1,876 1,781 1,863 2,072

Gross profit 1,001 1,161 936 1,074 1,107

EBITDA 919 1,069 820 953 972

Depreciation 2 2 0 0 0

Amortisation 0 0 0 0 0

EBIT 917 1,067 820 953 972

Net interest income(expense) -64 -69 -76 -84 -87

Associates/affiliates 235 123 172 173 175

Exceptionals/extraordinaries 269 416 0 0 0

Other pre-tax income/(expense) 0 0 0 0 0

Profit before tax 1,357 1,537 916 1,042 1,059

Income tax expense 157 196 129 198 230

Minorities 11 14 0 0 0

Other post-tax income/(expense) 0 0 0 0 0

Net profit 1,190 1,327 788 844 830

DB adjustments (including dilution) -255 -398 0 0 0

DB Net profit 935 930 788 844 830

Cash Flow (USDm)

Cash flow from operations 1,230 1,375 -406 381 431

Net Capex -563 -563 -1,060 -100 -100

Free cash flow 667 813 -1,466 281 331

Equity raised/(bought back) 0 0 0 0 0

Dividends paid -375 -375 -366 -592 -443

Net inc/(dec) in borrowings 202 -154 558 135 44

Other investing/financing cash flows -70 -28 908 261 2

Net cash flow 424 256 -366 86 -66

Change in working capital 291 291 -1,042 -289 -280

Balance Sheet (USDm)

Cash and other liquid assets 1,406 1,663 1,296 1,382 1,314

Tangible fixed assets 0 0 0 0 0

Goodwill/intangible assets 0 0 0 0 0

Associates/investments 4,930 4,904 5,076 5,249 5,424

Other assets 26,659 27,066 28,392 28,899 29,239

Total assets 32,996 33,633 34,764 35,530 35,977

Interest bearing debt 4,432 4,320 4,877 5,073 5,117

Other liabilities 1,665 1,715 1,943 2,117 2,138

Total liabilities 6,097 6,034 6,821 7,190 7,255

Shareholders' equity 26,857 27,548 27,893 28,290 28,671

Minorities 42 50 50 50 50

Total shareholders' equity 26,899 27,598 27,943 28,340 28,722

Net debt 3,025 2,657 3,581 3,691 3,803

Key Company Metrics

Sales growth (%) nm 1.0 -5.1 4.6 11.2

DB EPS growth (%) na -0.5 -15.3 7.1 -1.7

EBITDA Margin (%) 49.5 57.0 46.0 51.2 46.9

EBIT Margin (%) 49.4 56.9 46.0 51.2 46.9

Payout ratio (%) 35.6 33.7 56.0 53.0 54.0

ROE (%) 4.5 4.9 2.8 3.0 2.9

Capex/sales (%) 30.3 30.0 59.5 5.4 4.8

Capex/depreciation (x) 268.0 268.0 nm nm nm

Net debt/equity (%) 11.2 9.6 12.8 13.0 13.2

Net interest cover (x) 14.3 15.5 10.8 11.3 11.1

Source: Company data, Deutsche Bank estimates

4 February 2016

Property



Investment thesis

Outlook

We downgrade HKL to Sell from Hold. While the performance of the HK

Grade-A office market has been resilient so far (compared with marked

declines in prices/rents in retail/residential), more challenges for office demand

are emerging ahead, on the back of a new round of MNC downsizing and

small companies shutting down (which has been a strong source of demand in

the past year), as the economy continues to slow. Moreover, the current

limited supply/low vacancy situation (which are factors supporting the office

market currently) may well reverse upon the upcoming supply peak from 2017

onwards. These factors could well be triggers for a sooner-than-expected

turning point in the HK Grade-A office market, in our view.

By factoring in a 20% decline in HK Grade-A office rents and higher cap rates

at 5.5% for office/6% for retail, we trim our NAV by 20%. Following a sharp

sell-off in the past three months, Hongkong Land is now trading at par/close to

the historical average. However, HKL has traded at a steeper discount to NAV

(average at about -1SD) during an office market downturn historically, and we

see a potential share price downside ahead.

Valuation

Our target price is based on a 38% discount (25% earlier) to our revised NAV

estimate of US$7.83/share, which implies a 2015E PER of 15x. We adopt NAV

as our primary valuation metric, in line with peers under our coverage. Our

revised target price discount is steeper than its long-term historical average of

25% and in line with the average discount during an office market downturn

(mostly at -1SD), which we believe is appropriate.

Risks Movement in the Hong Kong economy: With significant exposure to the

Grade-A office and prime retail markets in Hong Kong (71% of GAV),

earnings are exposed to a recovery in the Hong Kong economy, which

significantly affects leasing demand/rents.

Correlation between interest rates/cap rates: There has been a strong

correlation between interest rates and cap rates – if the ample liquidity

situation is to stay for a longer-than-expected period, the current low cap

rates could be maintained for prolonged periods, resulting in higher asset

values.

Tight new supply situation: Given a vast majority of the new completion in

the upcoming supply peak in 2017 is outside Central, Hongkong Land may

see more resilient performance in rentals as tenants may have limited

choice.

4 February 2016

Property



Turning point in HK office market

Weaker demand/upcoming supply peak are triggers

Performance in the HK Grade-A office was strong in 2015 (with rents +10.7%

YoY in Central), particularly boosted by demand from PRC companies, limited

new supply and a historically low vacancy rate. According to JLL, take-up for

Central Grade-A office totalled 53,891sqm in 2015 (+176% YoY), the strongest

year since 2011. Leasing demand was particularly strong in 2Q15 at

32,504sqm (some 60% of full-year’s take-up), on the back of a strong stock

market. Meanwhile, take-up fell into negative territory in 4Q15 (-3,396 sqm) on

the back of softer economic outlook.

Figure 1: Supply, take-up and vacancy in Central Figure 2: Supply, take-up and vacancy in all districts

0%

2%

4%

6%

8%

10%

12%

-40,000

-20,000

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

New supply Take-up Vacancy rate

Sqm ('000)

0%

2%

4%

6%

8%

10%

12%

-50,000

0

50,000

100,000

150,000

200,000

250,000

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350,000

400,000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

New supply Take-up Vacancy rate

Sqm ('000)

Source: JLL; Deutsche Bank


Figure 3: Effective rental trend in Central (HK$/sf/mth) Figure 4: Rental trend by district (index 1Q87 = 100)

0

20

40

60

80

100

120

140

1Q01

4Q01

3Q02

2Q03

1Q04

4Q04

3Q05

2Q06

1Q07

4Q07

3Q08

2Q09

1Q10

4Q10

3Q11

2Q12

1Q13

4Q13

3Q14

2Q15

HK$/sf/month

0

100

200

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600

3Q

88

3Q

89

3Q

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91

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92

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95

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99

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00

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01

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03

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3Q

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3Q

10

3Q

11

3Q

12

3Q

13

3Q

14

3Q

15

Overall Central Wanchai/Causeway Bay Tsim Sha Tsui HK East Source: JLL; Deutsche Bank


4 February 2016

Property



However, we expect more challenges to emerge in the Grade-A office market

in Hong Kong on the back of:

1) A new round of MNC downsizing – There has been an increase in the

downsizing efforts from the international financial institutions since

Dec-15. A high-profile case is of Barclays Capital, which announced to

close its cash equity and bond trading business in Hong Kong,

vacating about 100,000 sf of office space in Cheung Kong Center.

Surrendered space would translate into more shadow space in the

office market, hence pushing up vacancy levels.

2) Decentralization trend for MNCs – On the back of the historically high

Central office rents, there is a trend of MNCs moving out of core

locations to save on rental expenses. There is indeed a new

phenomenon where location sensitivity is lower for MNCs as

compared with the previous cycles when they preferred to move to

the best buildings outside Central rather than the less-quality buildings

in Central. For instance, Abax moved out of IFC in Central to ICC,

GAM relocated to Lee Gardens in Causeway Bay from Exchange

Square and Prudential moved from Exchange Square to Island East.

Meanwhile, Mizuho has also committed to relocate to the upcoming

New World Centre project in Tsim Sha Tsui by consolidating its

current operations in Pacific Place and Chater House.

3) Small companies shutting down – Sizeable demand for Grade-A office

in 2015 came from small companies, particularly new asset

management start-ups, who often look for space in trophy buildings

so as to boost their profile. However, this demand could slow down as

the economy continues to decelerate. Moreover, given these new

start-ups usually come without a strong track record, some may fail if

economic conditions deteriorate further. Indeed, there were numerous

cases in 2015 of new asset management start-ups being forced to

shut down and surrender their space.

4) Some tenants may not be sustainable – Another main demand source

for trophy office buildings is from city-level PRC commercial banks

such as Bohai Bank and Beijing Bank. Given that they usually establish

their offices well in advance of the actual operation so as to boost

their profile (i.e. yet to obtain the relevant license to operate in Hong

Kong), they may scale back their space needs when the business

focus is back to profitability of the underlying business.

5) Upcoming supply peak from 2017 onwards – Limited supply alongside

a historically low vacancy are two key factors supporting the strong

performance of the office market currently. However, this situation

may reverse upon the upcoming supply peak from 2017 onwards.

These factors could well be triggers for a sooner-than-expected turning point in

the HK Grade-A office market, in our view.

4 February 2016

Property



Upcoming supply peak in 2017 and beyond

We believe new supply will still remain tight in 2016. According to Savills,

about 1.5mn sf is expected to come on-stream, of which 474k sf is from the

One Harbour Gate building in Hung Hom, recently acquired by China Life (most

of the space will be for self-occupation). If annual take-up remains at 1.7mn sf

(five-year average annual take-up in 2010-2014), there would not be enough

new supply in 2016 to meet demand. However, more new supply is expected

to come on-stream in 2017 and 2018, with 2.4mn sf and 2.1mn sf of new

completion, respectively.

Figure 5: Future Grade-A office supply by district

Project Developer District HK Island KLN / NT Total

2016

NKIL 6314 J/O Kai Cheung Road and Wang Kwong Road, Kowloon bay

Goldin Financial Kowloon Bay 681,890

KIL 11111 J/O Hung Luen Road and Kin Wan Street, Hung Hom Wheelock Hung Hom 474,240

STTL463 Junction of On Yiu Street and On Kwan Street, Shek Mun

Billion Development Shatin 344,319

New supply in 2016 1,500,450

2017

14-30 King Wah Road Henderson North Point 275,809

New World Centre Redevelopment NWD Tsim Sha Tsui 260,000

Junction of Hang Yip Street, Wai Yip Street, Yan Yip Street and Kwun Tong Road

Mapletree Kwun Tong 528,241

Junction of Wang Chiu Road and Lam Lee Road Swire Properties Kowloon Bay 555,000

NKIL 6311 J/O Sheung Yuet Road, Wang Tai Road and Wang Yuen Street

HK Pacific Investments Kowloon Bay 266,499

2 Ng Fong Street, San Po Kong Billion Development San Po Kong 314,214

Hong Kong Science Park, Phase 3 (Bldg 20E & 22E), Pak Shek Kok

HKSAR Tai Po 200,000

New supply in 2017 2,399,763

2018

1 Hennessy Road, Wanchai Chinachem Wanchai 251,999

Sunning Plaza and Sunning Court Redevelopment Hysan Causeway Bay 300,000

Taikoo Place Phase 2A (ex-Somerset House) Swire Properties Quarry Bay 716,002

180 Wai Yip Street, Kwun Tong SHKP /Wong’s Kwun Tong 383,364

650 Cheung Sha Wan Road First Group Cheung Sha Wan 154,827

33 Tseuk Luk Street, San Po Kong SHKP San Po Kong 245,748

New supply in 2018 2,051,940

2019

704-730 King's Road & 201-227 Tsat Tsz Mui Road NWD Quarry Bay 389,989

Junction of Hung Yip Street, Wai Yip Street, Shun Yip Street Nan Fung / Link REIT Kwun Tong 883,888

123 Hoi Bun Road Wheelock Kwun Tong 476,972

8-10 Wong Chuk Hang Road Swire Properties Aberdeen / Wong Chuk Hang

308,000

New supply in 2019 2,058,849

Source: Savills, Deutsche Bank

4 February 2016

Property



Historically traded at steeper discount during office market downturns

Current valuation is close to historical average

Hongkong Land has historically traded at an average discount of 25% to NAV

(ranging between the peak of 31% premium to NAV in 1993 to the trough

discount of 61% in 2008), P/E of 20x (peaked at 50x in 2001 and troughed at 6x

in 2008) and P/B of 0.7x (peaked at 1.2x in 1993 and troughed at 0.3x in 2008).

Figure 6: Historical discount to NAV trend

-80%

-60%

-40%

-20%

0%

20%

40%

Jan-

92

Apr

-93

Jul-9

4

Oct

-95

Jan-

97

Apr

-98

Jul-9

9

Oct

-00

Jan-

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-03

Jul-0

4

Oct

-05

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07

Apr

-08

Jul-0

9

Oct

-10

Jan-

12

Apr

-13

Jul-1

4

Oct

-15

Discount to NAV -1SD Average +1SD

Source: Bloomberg Finance LP; Deutsche Bank

Figure 7: Historical P/E trend

0

10

20

30

40

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60

Jan-

92

Apr

-93

Jul-9

4

Oct

-95

Jan-

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Apr

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PE -1SD Average +1SD


4 February 2016

Property



Figure 8: Historical P/B trend

0.2

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Jan

-92

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r-9

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PB -1SD Average +1SD


Figure 9: Historical dividend yield trend

0.0%

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Div yield -1SD Average +1SD


Following a 21% sell-off in the past three months (vs. -16% Hang Seng Index),

Hongkong Land is now trading at a 21% discount to NAV, 18x P/E, 0.5x P/B

with a 3% potential dividend yield.

4 February 2016

Property



While the current valuation is at par/close to its historical average, Hongkong

Land has traded at a steeper discount to NAV (average at about -1SD) during

an office market downturn historically (i.e. 1994-1996, 1998-1999, 2000-2003,

2008-2009 and 2012-2013). Hence, we see a potential share price downside

ahead. Specifically, our target price implies a potential downside of 21% from

current levels.

Figure 10: Historical discount to NAV versus Central office rents

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

0

20

40

60

80

100

120

140

1Q92

2Q93

3Q94

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2Q98

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2Q08

3Q09

4Q10

1Q12

2Q13

3Q14

4Q15

Central office rents (LHS) Discount to NAV (RHS)

HK$/sf/month

Source: Bloomberg Finance LP; JLL; Deutsche Bank

4 February 2016

Property



Financial analysis

Earnings revised downwards by 5-8% in FY15-17 to reflect price/rental declines for full down-cycle

By factoring in price and rental declines for the full down-cycle in the HK

property market, i.e. a 40% decline in residential prices and retail rents, 20%

decline in office rents as well as higher cap rates of 5% for residential, 5.5% for

offices, 6% for retail and 8% for car parks (versus our previous assumption of

20% decline in residential prices and retail rents and cap rates of 4% for

residential, 5% for office, 5.25% for retail and 4% for car parks), we trim our

earnings projection for Hongkong Land in FY15-17 by 5-8%.

Figure 11: Summary of earnings revision

2015F 2016F 2017F

(US$ mn) New Old % New Old % New Old %

Rental income 831 836 -1% 854 872 -2% 845 904 -7%

Service income 130 130 0% 137 137 0% 143 143 0%

Sales of trading property 821 877 -6% 873 908 -4% 1,084 1,115 -3%

Revenue 1,781 1,843 -3% 1,863 1,917 -3% 2,072 2,163 -4%

Gross profit 936 994 -6% 1,074 1,124 -4% 1,107 1,191 -7%

Pre-tax profit 916 991 -8% 1,042 1,109 -6% 1,059 1,150 -8%

Underlying profit 788 844 -7% 844 893 -5% 830 898 -8%

Core EPS (US$/shr) 0.33 0.36 -7% 0.36 0.38 -5% 0.35 0.38 -8%

DPS (US$/shr) 0.19 0.20 -5% 0.19 0.20 -5% 0.19 0.21 -8%

Source: Deutsche Bank estimates

In particular, we expect core profit to decline by 15% YoY to US$788mn in

FY15, mostly due to lower bookings in development sales and rental from the

Hong Kong retail portfolio. While we expect core net profit to recover by 7%

YoY to US$844mn in FY16, the recovery will most likely be driven by higher

development bookings. Meanwhile, we expect core net profit to resume the

declining trend in FY17 as a negative rental reversion kicks in.

4 February 2016

Property



Figure 12: Income statement (US$ mn)

For year ended Dec 31 2012A 2013A 2014A 2015F 2016F 2017F

Rental income 745.5 811.3 842.5 830.7 853.7 844.8

Service income 117.2 119.7 123.9 130.1 136.6 143.4

Sales of trading property 252.1 926.1 909.9 820.7 872.7 1,083.7

Revenue 1,114.8 1,857.1 1,876.3 1,781.4 1,863.0 2,072.0

Cost of sales (234.7) (858.1) (717.5) (845.4) (788.9) (965.1)

Gross Profit 880.1 999.0 1,158.8 936.0 1,074.2 1,106.9

Gross interest expenses - - - 146.3 152.2 153.5

Capitalized interest - - - (29.3) (30.4) (30.7)

Net interest expense/(income) 98.8 106.2 113.5 117.1 121.7 122.8

Interest income 37.9 42.2 44.5 41.2 37.5 35.5

Administrative expenses (85.6) (93.7) (105.1) (115.8) (121.1) (134.7)

Others 4.9 11.3 13.6 - - -

SG&A (42.8) (40.2) (47.0) (74.6) (83.6) (99.2)

Revaluation gains 667.1 269.4 416.3 - - -

Other adjustments 1.6 - - - - -

Profit from operations 1,407.2 1,122.0 1,414.6 744.4 868.9 884.9

Associates 165.8 235.2 122.8 171.9 173.1 174.6

Pre-tax profit 1,573.0 1,357.2 1,537.4 916.2 1,042.0 1,059.5

Taxation (123.7) (157.1) (195.7) (128.5) (198.2) (229.7)

Post-tax profit before MI 1,449.3 1,200.1 1,341.7 787.7 843.8 829.8

Minority interests (11.6) (10.5) (14.3) - - -

Net attributable profit 1,437.7 1,189.6 1,327.4 787.7 843.8 829.8

Adjustment for non-recurring items (661.5) (254.8) (397.5) - - -

Core net profit 776.2 934.8 929.9 787.7 843.8 829.8

Core EPS (US$) 0.331 0.397 0.395 0.335 0.359 0.353

DPS (US$) 0.17 0.18 0.19 0.19 0.19 0.19

Source: Deutsche Bank estimates, company data

4 February 2016

Property



Figure 13: Balance sheet (US$ mn)

As of Dec 31 2012A 2013A 2014A 2015F 2016F 2017F

Non-current assets 23,499 23,602 23,722 24,784 24,886 24,984

Investment properties 23,494 23,583 23,697 24,758 24,858 24,958

Other assets 6 19 24 26 29 27

Associates 4,270 4,930 4,904 5,076 5,249 5,424

Other investments 83 58 53 53 53 53

Other non-current assets 79 39 63 73 72 71

Current assets 3,854 4,367 4,891 4,779 5,270 5,444

Properties for sale 2,513 2,670 2,923 3,220 3,583 3,827

Debtors & deposits/receivables/others 358 291 305 263 305 303

Bank balances & cash 982 1,406 1,663 1,296 1,382 1,314

Current liabilities (1,567) (2,192) (1,832) (2,459) (2,078) (2,093)

Bank loans and overdrafts 1 4 4 1 1 1

Other loans due within one year 363 708 285 685 131 126

Creditors, deposits & accruals/others 1,143 1,409 1,442 1,372 1,490 1,450

Taxation 60 71 102 103 103 159

Proposed dividend - - - 298 353 358

Total assets less current liabilities 30,218 30,804 31,800 32,305 33,452 33,884

Non-current liabilities 3,967 3,821 4,091 4,251 5,001 5,051

Long term bank loans 844 998 1,120 1,144 1,894 1,944

Other long term loans 3,047 2,722 2,911 3,047 3,047 3,047

Others 76 102 60 60 60 60

Deferred income tax 66 83 111 111 111 111

Issued share capital 235 235 235 234 234 234

Share premium 370 370 370 370 370 370

Retained profits 25,543 26,252 26,943 27,289 27,686 28,068

Shareholders' funds 26,148 26,857 27,548 27,893 28,290 28,671

Minority interests 37 42 50 50 50 50

Total capital employed 30,218 30,804 31,800 32,305 33,452 33,884 Source: Deutsche Bank estimates, company data

4 February 2016

Property



Valuation

Our revised NAV estimate is US$7.83/share

We adopt NAV as our primary valuation metric, in line with the residential-

focus peers under our coverage. Our approach is based on a sum-of-the-parts

valuation, where we use DCF to estimate the value of its projects by taking the

estimated cash inflows from property sales minus outstanding costs, including

any outstanding land costs, construction costs, and related income taxes and

LAT for China projects. We take into account only the existing land bank and

do not assume any terminal value in the DCF analysis.

For investment properties, we use the income capitalization approach, taking

the estimated rental revenues of the investment properties and dividing this

figure by the estimated cap rates. Our estimated rents and cap rates vary

between the different types of properties and their locations. When arriving at

the NAV for the company, we take the aggregate estimated value for the

above business segments and add the company’s net debt position. Moreover,

we value the stakes of listed companies at the prevailing market price.

By factoring in price and rental declines for the full down-cycle in the HK

property market, i.e. a 40% decline in residential prices and retail rents, 20%

decline in office rents and cap rates of 5% for residential, 5.5% for offices, 6%

for retail and 8% for car parks, our estimated NAV is US$7.83/share.

Figure 14: NAV breakdown

(HK$ mn) (US$ mn) (US$/share) %

Development property

Singapore 10,817 1,378 0.59 7.5%

Chongqing 10,442 1,330 0.57 7.2%

Shenyang 101 13 0.01 0.1%

Beijing 2,402 306 0.13 1.7%

Chengdu 980 125 0.05 0.7%

24,742 3,152 1.34 17.1%

Investment property

Retail 22,651 2,886 1.23 15.7%

Office 115,229 14,679 6.24 79.6%

Hotel 3,301 421 0.18 2.3%

141,182 17,985 7.64 97.6%

Gross asset value (GAV) 165,924 21,137 8.98 114.7%

Net cash / (debt) (20,857) (2,657) (1.13) -14.4%

Outstanding land premium (393) (50) (0.02) -0.3%

Net asset value (NAV) - fully diluted 144,674 18,430 7.83 100.0% Source: Deutsche Bank estimates

4 February 2016

Property



Target price based on 38% discount to our NAV estimate of US$7.83/shr

Our target of US$4.86 is based on a 38% discount (25% earlier) to our revised

NAV estimate of US$7.83/shr, which implies a 2015E PER of 15x. We adopt

NAV as our primary valuation metric, in line with peers under our coverage.

Our revised target discount is steeper than its long-term historical average of

25% and in line with average discount during an office market downturn

(mostly at -1SD), which we believe is appropriate.

Following a 21% sell-off in the past three months, Hongkong Land is trading at

a 21% discount to NAV, 18x P/E and 0.5x P/B, with a 3% potential dividend

yield. While the current valuation is at par/close to its historical average, HKL

has traded at a steeper discount to NAV (average at about -1SD) during an

office market downturn historically. Hence, we see potential downside ahead.

Figure 15: Discount to NAV

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4 February 2016

Property



Figure 18: HK property – valuation table

DB Trade Report Mkt Cap

12M Daily T/O

3 Feb Target Implied Est. NAV EPS PE(x)

Company Ticker Rating Ccy Ccy USDm USDm Price Price Upside NAV Disc FY15E FY16E FY17E FY15E FY16E FY17E

Covered

SHKP 16 HK Buy HKD HKD 31,302 63.9 80.90 99.20 23% 132.3 -39% 7.07 7.26 5.02 11.9 11.6 16.8

MTRC 66 HK Buy HKD HKD 26,420 15.8 35.15 40.74 16% 58.2 -40% 1.95 1.87 2.19 18.0 18.7 16.1

CK Property 1113 HK Buy HKD HKD 20,457 79.5 39.85 50.00 25% 66.7 -40% 3.80 3.55 3.19 10.9 11.6 12.9

Henderson Land 12 HK Buy HKD HKD 17,908 23.2 39.55 47.88 21% 68.4 -42% 2.86 2.94 2.71 14.7 14.3 15.5

Hongkong Land HKL SP Sell USD USD 14,611 19.9 5.77 4.86 -16% 7.8 -26% 0.33 0.36 0.35 18.4 17.2 17.5

Wharf 4 HK Hold HKD HKD 13,962 33.7 34.85 49.82 43% 83.0 -58% 3.83 4.09 3.78 9.4 8.8 9.5

Link REIT 823 HK Hold HKD HKD 12,644 32.5 43.25 42.00 -3% 49.1 -12% 1.77 1.93 2.00 24.7 22.6 21.9

Hang Lung 101 HK Buy HKD HKD 7,986 16.8 13.40 22.66 69% 30.2 -56% 1.03 1.06 1.14 13.4 13.1 12.1

Sino Land 83 HK Buy HKD HKD 7,680 8.2 9.68 13.45 39% 19.2 -50% 0.88 0.80 0.87 11.1 12.2 11.2

New World Dev 17 HK Buy HKD HKD 7,346 20.8 5.95 8.67 46% 13.3 -55% 0.75 0.68 0.58 8.2 9.0 10.6

Hysan Dev 14 HK Sell HKD HKD 4,058 6.4 30.45 27.66 -9% 46.1 -34% 2.07 2.03 1.98 14.6 14.8 15.2

Kerry Properties 683 HK Hold HKD HKD 3,245 7.0 16.96 21.38 26% 38.9 -56% 2.44 2.03 1.92 7.2 8.6 9.1

Great Eagle 41 HK Sell HKD HKD 1,858 1.2 21.35 16.9 -21% 30.7 -30% 2.25 1.89 1.60 9.5 11.3 13.4

Shun Tak 242 HK Hold HKD HKD 997 2.1 2.48 3.80 53% 11.0 -77% 0.43 0.44 NA 6.0 5.7 NA

Not Rated

Swire Properties 1972 HK NR HKD HKD 14,943 7.7 19.68 NA NA NA NA 1.32 1.29 1.35 15.1 15.4 14.7

Wheelock 20 HK NR HKD HKD 7,571 6.4 28.40 NA NA NA NA 5.03 5.34 5.25 5.8 5.4 5.5

Chinese Estates 127 HK NR HKD HKD 4,201 0.3 16.84 NA NA NA NA NA NA NA

Hopewell 54 HK NR HKD HKD 2,600 1.7 22.35 NA NA NA NA 1.70 2.13 1.59 13.7 10.9 14.6

K. Wah Int'l 173 HK NR HKD HKD 981 0.9 2.69 NA NA NA NA 0.32 0.51 0.57 8.4 5.3 4.7

Wing Tai Properties 369 HK NR HKD HKD 717 0.1 4.06 NA NA NA NA 0.30 0.30 0.32 13.9 13.9 13.0

Langham Hospitality Investments

1270 HK NR HKD HKD 669 0.5 2.47 NA NA NA NA 0.17 0.17 0.17 15.0 15.0 15.0

Overall average -45% 12.1 11.8 12.5 Source: Deutsche Bank estimates, Company data, Bloomberg Finance LP Consensus estimates for companies NR

4 February 2016

Property



Figure 19: HK property – valuations table (cont.)

EPS growth % BVPS PB(x) DPS Dividends yield % Net gearing %

Company Ticker FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E

Covered

SHKP 16 HK -11 3 -31 153.0 156.4 157.6 0.6 0.5 0.5 3.4 3.4 3.4 4.0 4.0 4.0 11.2 11.7 12.2

MTRC 66 HK -2 -4 17 28.7 29.4 30.3 1.2 1.2 1.2 1.2 1.2 1.3 3.3 3.4 3.6 12.0 14.8 11.8

CK Property 1113 HK 4 -7 -10 61.1 63.0 64.8 0.7 0.7 0.6 1.4 1.6 1.4 3.5 3.9 3.5 10.4 10.4 10.3

Henderson Land 12 HK -8 3 -8 81.1 82.9 84.5 0.5 0.5 0.5 1.1 1.1 1.1 2.7 2.7 2.7 14.9 12.9 11.0

Hongkong Land HKL SP -15 7 -2 11.9 12.0 12.2 0.5 0.5 0.5 0.2 0.2 0.2 3.1 3.1 3.1 12.7 12.7 12.8

Wharf 4 HK 13 7 -8 102.9 105.3 107.4 0.3 0.3 0.3 1.8 1.8 1.8 5.0 5.0 5.0 18.1 13.6 8.5

Link REIT 823 HK 7 9 3 51.5 51.5 51.5 0.8 0.8 0.8 1.8 1.9 2.0 4.2 4.4 4.6 11.5 20.6 20.5

Hang Lung 101 HK -56 3 8 28.7 29.0 29.4 0.5 0.5 0.5 0.8 0.7 0.7 5.4 5.4 5.4 1.1 6.4 9.2

Sino Land 83 HK 5 -9 9 19.5 19.8 20.2 0.5 0.5 0.5 0.5 0.5 0.5 5.1 5.1 5.1 NA NA NA

New World Dev 17 HK 0 -9 -15 19.9 20.5 21.1 0.3 0.3 0.3 0.4 0.4 0.4 6.8 6.8 6.5 32.2 41.3 38.9

Hysan Dev 14 HK 2 -2 -3 63.6 64.3 65.1 0.5 0.5 0.5 1.3 1.3 1.3 4.2 4.2 4.2 3.1 3.1 3.3

Kerry Properties 683 HK -5 -17 -5 56.9 58.1 59.1 0.3 0.3 0.3 0.9 0.9 0.9 5.2 5.2 5.2 34.9 34.7 32.2

Great Eagle 41 HK -25 -16 -15 84.6 88.1 91.5 0.3 0.2 0.2 0.6 0.5 0.4 2.7 2.2 1.9 21.0 19.1 17.5

Shun Tak 242 HK -40 4 NA 9.2 9.5 NA 0.3 0.3 NA 0.1 0.1 NA 5.0 5.2 NA NA NA NA

Not Rated

Swire Properties 1972 HK 12 -2 4 36.1 36.7 37.29 0.6 0.5 0.5 0.7 0.7 0.7 3.4 3.5 3.6 17.1 16.9 16.3

Wheelock 20 HK 11 6 -2 99.6 103.6 106.88 0.3 0.3 0.3 1.2 1.3 1.4 4.0 4.3 4.7 41.5 37.2 43.8

Chinese Estates 127 HK NA NA NA NA NA NA NA NA NA NA NA NA

Hopewell 54 HK 17 26 -25 50.8 54.6 55.01 0.5 0.4 0.4 1.1 1.2 1.2 4.9 5.2 5.3 NA NA 0.7

K. Wah Int'l 173 HK 28 58 12 8.4 8.9 9.51 0.3 0.3 0.3 0.2 0.2 0.2 5.6 5.6 5.6 36.4 21.4 28.0

Wing Tai Properties 369 HK -12 0 7 NA NA NA 0.1 0.1 0.1 3.4 3.4 3.4 NA NA 11.2

Langham Hospitality Investments

1270 HK -26 0 0 5.2 5.1 5.07 0.5 0.5 0.5 0.2 0.2 0.2 9.4 9.4 9.4 63.0 63.0 62.3

Overall average -5 4 -3 0.5 0.5 0.5 4.7 4.8 4.7 21.3 21.2 19.5 Source: Deutsche Bank estimates, Company data, Bloomberg Finance LP Consensus estimates for companies NR

4 February 2016

Property



Appendix 1

Important Disclosures

Additional information available upon request

Disclosure checklist

Company Ticker Recent price* Disclosure

Hongkong Land Holdings Ltd HKLD.SI 5.77 (USD) 3 Feb 16 NA *Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/Disclosure.eqsr?ricCode=HKLD.SI

Analyst Certification

The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Jason Ching

Historical recommendations and target price: Hongkong Land Holdings Ltd (HKLD.SI) (as of 2/3/2016)

12

3 4 5

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

Feb 14 May 14 Aug 14 Nov 14 Feb 15 May 15 Aug 15 Nov 15

Secu

rity

Pri

ce

Date

Previous Recommendations

Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating

Current Recommendations

Buy Hold Sell Not Rated Suspended Rating

*New Recommendation Structure as of September 9,2002

1. 09/03/2014: Sell, Target Price Change USD5.50 4. 29/04/2015: Upgrade to Hold, Target Price Change USD7.00

2. 03/08/2014: Sell, Target Price Change USD5.55 5. 02/08/2015: Hold, Target Price Change USD7.20

3. 09/03/2015: Sell, Target Price Change USD5.80

4 February 2016

Property



Equity rating key Equity rating dispersion and banking relationships

Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ) , we recommend that investors buy the stock. Sell: Based on a current 12-month view of total share-holder return, we recommend that investors sell the stock Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell. Notes:

1. Newly issued research recommendations and target prices always supersede previously published research. 2. Ratings definitions prior to 27 January, 2007 were:

Buy: Expected total return (including dividends) of 10% or more over a 12-month period Hold: Expected total return (including dividends) between -10% and 10% over a 12-month period Sell: Expected total return (including dividends) of -10% or worse over a 12-month period

53 %

36 %

11 %21 %17 % 20 %

050

100150200250300350400450500

Buy Hold Sell

Asia-Pacific Universe

Companies Covered Cos. w/ Banking Relationship

Regulatory Disclosures

1.Important Additional Conflict Disclosures

Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the

"Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.

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Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are

consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the

SOLAR link at http://gm.db.com.

4 February 2016

Property



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4 February 2016

Property



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4 February 2016

Property



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Copyright © 2016 Deutsche Bank AG

David Folkerts-Landau Chief Economist and Global Head of Research

Raj Hindocha Global Chief Operating Officer

Research

Marcel Cassard Global Head

FICC Research & Global Macro Economics

Steve Pollard Global Head

Equity Research

Michael Spencer Regional Head

Asia Pacific Research

Ralf Hoffmann Regional Head

Deutsche Bank Research, Germany

Andreas Neubauer Regional Head

Equity Research, Germany

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