Henderson Land’s 2022 Earnings Miss on Weak Demand

Henderson Land’s 00012 2022 profit (excluding fair value changes of its investment properties) of HKD 9.6 billion was disappointing, with the impact from higher mortgage rates and weak sentiment hurting the Hong Kong residential market in the second half of 2022 more than we had expected. The company’s inventory of unsold units jumped 64% by year-end. As a result, operating margin for the Hong Kong property development segment fell to 22%, below our estimated 31%. We lower our fair value estimate to HKD 40 per share from HKD 49 as we roll forward our model and assume a slower sales recovery. We also expect margins to revert to their long-term average of 30% as the company’s higher-margin projects sell through. Despite the disappointment, we expect the market to look forward as Hong Kong’s reopening should lift overall consumer and homebuyer confidence. We believe much of the bad news is reflected, with Henderson Land trading near its traditional trough of 0.3 times price/book.

The company’s land bank in China continues to deplete, declining by 39% year on year to 21.8 million square feet in 2022. Although Henderson Land believes that the property market in China will recover with the lifting of COVID-19 restrictions, it prefers to partner with government-backed developers such as China Resources Land (they signed a strategic partnership agreement in October 2022) and CapitaLand for further opportunities in the mainland. We are positive on this move as it allows Henderson Land to share its risk with a high-quality developer. We expect the China real estate industry to consolidate over the next few years as private-sector and smaller developers leave the industry due to myriad financial hindrances. While the recent land bids in prime locations remain highly competitive, we also expect better opportunities for well-established, financially strong companies such as Henderson Land as more land parcels come up for auction in the second half of 2023.