Underlying profit at Hongkong Land Holdings fell 5 per cent in 2005 because of fewer apartment sales, the company said yesterday, but higher rents started to feed into its main property leasing arm.
The company, which owns several commercial buildings in Hong Kong's booming main business area, Central, is likely to see a steep rise in rental revenue this year as three-year leases, signed during a 2003 property market slump, are renegotiated.
Some of those cheap rents were reviewed early, in 2005, although that boost to company revenue was balanced by a drop in income from property development.
Hongkong Land posted an underlying profit of US$188 million, down 5 per cent from US$197 million a year earlier, and towards the low end of forecasts by three analysts that fell in a range of US$184 million to US$198 million.
Landlords such as Hongkong Land, Wharf (Holdings) Ltd and Great Eagle Holdings Ltd have emerged as market favourites over Hong Kong's big developers Sun Hung Kai Properties and Cheung Kong (Holdings), at a time when rising interest rates have subdued the housing market.
Hongkong Land, part of one of the oldest trading houses in Asia, Jardine Matheson Holdings Ltd, has 5 million square feet (464,500 square metres) of office and retail space in Central, but is diversifying into residential development on the mainland.
It is also part of a consortium that won a tender to build a new business district in Singapore, together with Chueng Kong and Singapore's Keppel Land Ltd.
But in the near-term, its earnings growth will be driven by the 70 per cent jump in property values in Hong Kong since the 2003 outbreak of the SARS respiratory disease. The property price boom has been accompanied by an equally fast rise in rents.
UBS analyst Leon Ko estimates Hongkong Land's net asset value (NAV) rises 9.3 per cent for every 10 per cent increase in the city's office and retail rents.
Only Great Eagle beats that level of exposure to Hong Kong commercial rent. Consultants CB Richard Ellis forecast a further rise of as much as 20 per cent in commercial rents this year, partly because of an office vacancy rate of just 5 per cent.
At the close of the Singapore stock market yesterday, Hongkong Land shares were trading at US$3.58, up 1.7 per cent.
The stock has gained 14 per cent this year.
UBS has a "buy" rating with a price target of US$4.53 for Hongkong Land stock, a 27 per cent discount to forecast NAV for the end of 2007. CLSA analyst John Saunders has a price target of US$4.43 and a mid-2007 target of US$5.1.
London- and Singapore-listed Hongkong Land, which books fluctuations in the market value of its buildings in its profit and loss statement, reported a 22 per cent rise in profit attributable to shareholders to US$2.06 billion. That was because the company made revaluation gains of US$2.37 billion on its investment properties last year against gains of US$1.7 billion the previous year.
Analysts tend to focus on underlying profit because the revaluation of property can drastically distort the impression of a company's profitability.
(HK Edition 02/24/2006 page3)
