by winston » Tue Dec 30, 2008 8:26 am
20081218 Macquarie Hongkong Land Holdings (Downgrade to Underperform) - Not yet
Event
We downgrade HKL to Underperform from Neutral given its recent price performance, based on an unchanged target price of US$2.32. We are just two months into an office market downcycle that may last two years. We believe it is too early for a sustained recovery in landlord listed prices.
Impact
Short-term recovery only: The HK landlords have bounced 30% off their November lows outperforming the HSI by 16%. This is a typical short-term rally before a sustainable recovery in listed prices that will probably start some time in 2009. In past cycles, we saw a short rally occur once before the true bottom was reached in the 1994/95 down cycle, twice during 1997/98 and once during the 2001 to 2003 period. Our Microstrategy team also believes we are in a typical bear market rally – see their report of 17 December, Settling the debate of “P†over “Eâ€.
Office downcycle likely to last up to two years: We are just two months into an office market downcycle that may last two years if past cycles are any guide. Yes, new supply is limited this cycle, but future net absorption growth is also very uncertain. There is significant space in Central to backfill once financial firms move to ICC. The 1994/95 downcycle lasted two years and spot rents fell 40%; the 1996/98 downcycle lasted two years and spot rents fell 60% while the 2001 to 2003 downcycle lasted three years and spot rents fell 66%. So far in this cycle, spot rents have probably fallen around 10–15% from their 3Q08 highs.
HKL will look to retain cash – dividend to come down: We expect HKL to keep its dividend flat (at best) as it enters this downcycle. While this is a better outcome than during the Asian Financial crisis where its 1997 dividend was not reached again until 2007, we have cut our dividend forecast for 2008 by 13%, 2009 by 22% and 2010 by 33%.
Earnings revision
No change.
Price catalyst
12-month price target: US$2.32 based on a 50% discount to NAV methodology.
Catalyst: Clarity over HK GDP growth and spot rents bottoming.
Action and recommendation
HKL remains in a strong financial position to ride out this cycle. However, we believe it is too early for a sustained recovery for any of the landlords’ share prices. We suggest investors that have taken advantage of the recent bounce should take profits. We see no reason for new entrants into the stock at current levels. Downgrade to Underperform from Neutral.
It's all about "how much you made when you were right" & "how little you lost when you were wrong"