We estimate that the cancellation, net of confiscated deposits, might reduce Hongkong Land’s FY09F earnings by 2% while the NAV impact is negligible (<1%).
Background of Tower Four purchase: The Icelandic insurer purchased Tower Four (68 units) of One Central Residences backin October 2006 for HK$782mn, or an average ASP of HK$4,400psf (vs current market price of around HK$4,600psf), for which it had paid a 30% deposit with the remaining 70% to be settled upon handover of units.
Hongkong Land has a 49% stake in the One Central project in Macau, consisting of 796 residential units and 98 serviced apartments, which are expected to be completed in 4Q09F and 2010F, respectively. Prior to the cancellation by the insurer, over 97% of the One Central residential units had been pre-sold.
Our US$2.77 price target is based on a 29% discount to Hongkong Land’s end-FY10F NAV of US$3.90, representing a mid-cycle valuation. We see upside risks should Central rents turn out to be more resilient than expected. Under a scenario where Central Grade-A office rent bottoms at HK$70psf instead of our assumed HK$51psf, we would estimate 25% potential upside to our end-FY10F NAV of US$3.90 to US$4.90, which implies a valuation of US$3.50 based on mid-cycle discount of 29%.
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