HONGKONG LAND HOLDINGS LTD(HKLD.SI)：A CHALLENGING YEAR AHEAD FOR HK OFFICE LANDLORDS; MAINTAINING SELL

Deutsche Bank Markets Research Rating Sell Asia Hong Kong Property Company Hongkong Land Holdings LtdDate 9 March 2014 Forecast Change A challenging year ahead for HK office landlords; maintaining Sell Reuters Bloomberg Exchange Ticker HKLD.SI HKL SP SES HKLD ADR Ticker ISIN HNGKY US4385813088 Forecasts And Ratios Year End Dec 31 2012A 2013A2014E2015E2016ESales (USDm) 1,114.8 1,857.11,817.91,797.92,024.5Reported NPAT (USDm) 1,437.7 1,189.6875.4807.2799.3DB EPS FD (USD) 0.33 0.400.370.340.34PER (x) 18.0 17.217.518.919.1DPS (net) (USD) 0.17 0.180.180.180.18Source: Deutsche Bank estimates, company data Maintaining Sell on soft outlook/downside risk to NAV; target price at US$5.5 ________________________________________________________________________________________________________________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. MICA(P) 054/04/2013. Price at 7 Mar 2014 (USD) 6.50Price target - 12mth (USD) 5.5052-week range (USD) 7.63 - 5.66HANG SENG INDEX 22,660 Jason Ching, CFA Research Analyst (+852) 2203 6205 jason.ching@db.com Tony Tsang Research Analyst (+852) 2203 6256 tony.tsang@db.com Key changes Price target 5.60 to 5.50↓-1.8%Sales (FYE) 1,381 to 1,818↑31.6%Op prof margin (FYE) 56.6 to 52.2↓-7.8%Net profit (FYE) 912.5 to 875.4↓-4.1%Source: Deutsche Bank Price/price relative 5.06.07.08.09.03/129/123/139/13Hongkong Land HoldinHANG SENG INDEX (Rebased) Performance (%) 1m3m12mAbsolute 8.29.4-13.0HANG SENG INDEX 4.7-4.6-0.5Source: Deutsche Bank With expiring rents in FY14 some 9% higher than the average net rent achieved in FY13, we expect to see the first negative rental reversion in 2014. Moreover, we are seeing a first alarming sign in demand emerging, on the back of soft hiring expectations. In particular, overall take-up for Hong Kong Grade-A office registered a negative take-up of 25,016sqm in 2013, representing the first in 11 years with full-year negative take-up and first two consecutive quarters of negative absorption since 2002. On the other hand, the risk of cap rate decompression is rising on the back of firming 10-year US treasury yields, which could lead to more NAV downside ahead, in our view. Maintain Sell. Underlying profit +20% YoY to US$935m, boosted by residential sales revenue Hongkong Land reported FY13 revenue +67% YoY to US$1,857m, boosted by a surge in residential sales revenue. Rental revenue rose 9% YoY to US$811m, driven by strong performance from the HK portfolio (average net rent achieved in HK office +10% YoY to HK$99/sf and retail +17.5% YoY to HK$201/sf). However, HK office vacancy rose to a four-year high at 5% (vs. 3.4% a year ago). Meanwhile, a fair value gain of US$269m was recorded in FY13, driven mainly by lower cap rates used for MBFC in Singapore. However, the Hong Kong office portfolio registered a revaluation loss over the period. Underlying profit rose 20% YoY to US$935m, in line with our expectation. A final dividend of US$12cent/share was declared for 2013 (up from US$11cent/share in 2012). Sizeable shadow spaces overshadowing the bounce in hiring desire According to Hudson, hiring expectation remained soft in 1Q14 despite seeing a bounce from 4Q13, but still below the two-year average and coinciding with the soft leasing market. In particular, the banking/finance sector saw the largest improvement QoQ at 54% (45% in 4Q13). However, as banks generally have sizeable shadow spaces in their offices, there is no need to look for additional space as yet. Meanwhile, hiring expectation in the consumer and IT sectors remained subdued, with just 38%/30% of the executives expressing plans to grow headcounts in 1Q14, down markedly from 56%/58% in 2Q13. Target price at a 35% discount to our revised NAV estimate of US$8.45/share We base our target on a 35% discount to our revised NAV estimate of US$8.45/share (US$8.62/share), which implies a 2014E PER of 15x. We adopt NAV as our primary valuation metric, in line with peers under our coverage. We set our target discount below the stock’s long-term average NAV discount, which is appropriate on a deteriorating outlook. Key risks r