Henderson Land's 2022 Earnings Miss on Weak Demand; FVE Lowered to HKD 40

Henderson Land’s 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 second-half 2022 more than we had expected. The company’s inventory of unsold units jumped 64% by end-2022. As a result, the operating margin for its Hong Kong property development segment fell to 22%, below our estimated 31%. We lower our fair value estimate to HKD 40 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.