13 April 2015
The Hang Lung Ambition
Q&A on Hang Lung Properties’ ambitious wealth-building endeavour
Jonas Kan (852) 2848 4439 [email protected]
See important disclosures, including any required research certifications, beginning on page 46. The Hang Lung Ambition 13 April 2015
Contents
Q1 Are commercial properties in China worth owning? 1
How much value can systematic and professional Q2 13 management create for retail properties? Is HLP a credible vehicle through which to play the Q3 emergence of premier retail property managers in 19 Greater China? Are there aspects of this ambitious wealth-building Q4 33 exercise that have been overlooked?
Company section: Hang Lung Properties 41
Please also see:
Swire Properties: more on the Cheung Kong/Hutch’s Bold Move: The Hong Kong Property Toolkit: ‘nurturing reward’ Q&A on the prospect of the group A step-by-step guide to the past, becoming a global play, with a present and future of the Hong Kong valuation to match Property Sector 10 April 2015 9 February 2015 Autumn 2013 Jonas Kan, CFA (852) 2848 4439 Jonas Kan, CFA (852) 2848 4439 Jonas Kan, CFA (852) 2848 4439 ([email protected]) ([email protected]) ([email protected])
The Hang Lung Ambition 13 April 2015
Contributing Daiwa Analyst: Thoughts on HLP’s ambitious wealth-building
endeavour About 10 years ago, HLP embarked on an ambitious wealth-building venture in the property space, entailing utilising the over HKD20bn in profit it stands to realise from Hong Kong’s residential property sector to fund a series of ambitious investments in China in an attempt to transform itself into a leading player in the commercial property sector in Greater China. Jonas Kan, CFA (852) 2848 4439 [email protected] That this is a special endeavour deserving investors’ attention is not in doubt, but how this ambition has been priced into HLP shares has changed in recent years. That is to say, from 2005-11, HLP traded like a rising star in
global property, but since then, its valuation has been notably derated.
Although the company’s gross rentals and BVPS rose at decent CAGRs of 12% and 6%, respectively, from 2011-14, its current share price of HKD24.15 represents a 40% drop from its peak of HKD40.30 in 2010.
In this report, we spell out our thoughts on the major issues relating to the sector and HLP itself that we think investors should consider in assessing whether HLP’s shares are undergoing a structural derating, or now represent a rare opportunity to buy into an ambitious, yet safe and reliable vehicle through which to play the long-term potential of prime commercial property assets in Greater China.
This report comes after our 9 February publication on Cheung Kong Group’s latest reorganisation, which we believe could attract global investor interest in Hong Kong family business groups, including HLP, all of which are trading at notable discounts to the market values of their property and business assets. A special aspect to HLP is that its strategy is probably the most simple and focused of the Hong Kong family business groups, and that the value-creation potential associated with professional and systematic management of retail property assets which has already been well- demonstrated by various premier names in global property is something we expect to see at HLP.
In what follows, we attempt to help investors understand what we see as the 4 major questions pertaining to the commercial property sector in Greater China, and to HLP as a vehicle through which investors can obtain exposure to this area.
Jonas Kan, Head of Hong Kong and China Property
The Hang Lung Ambition 13 April 2015
The Hang Lung Ambition 13 April 2015
Question 1
Are commercial properties in China worth owning?
- 1 - The Hang Lung Ambition 13 April 2015
Q1: Are prime commercial properties in China worth owning?
Notwithstanding the various concerns associated with the China commercial property sector, such as over-supply, the lack of a sizeable middle class and office-based employment in China, we contend that there are assets in this sector that are worth owning. However, we would hasten to add that investors should be selective in their choice of asset and take a long-term view. We advocate focusing on property companies that have developed – or are in the process of developing – the specialised skills needed to preserve or enhance the value of their commercial properties over time, and on those that already have (or are in the process of accumulating) a critical mass of income-producing assets in China, capable of expanding their portfolios without putting excessive strain on their balance sheets.
In general, we see prime commercial properties as an asset class that benefits from an expanding population, and the wealth and economic prosperity of any city; and as we see it, China is no exception to this. Generally, a safe and attractive way to play the rise of a large, populous and growing economy is to own prime commercial properties, and in our view, China is no exception.
Commercial properties are essentially property assets used by corporations, retailers, etc., for commercial activities – be it retailing or office-based business activities. (Note that we consider hotels and serviced apartments as comprising a different type of property asset class, and hence, refer only to retail and office property assets in this discussion on commercial property.) Generally, the rise in wealth and population of a city leads to an increase in total retail spending in that city. Similarly, the rise in the level of office-based economic activities and corporate profit also normally results in an increase in the total rents that can be paid by the corporations in that city, which in turn, exerts upward pressure on the aggregate capital value of the commercial property assets in that city. In this light, it would follow that the total market value of China’s commercial property sector should become very large, as long as the country’s economy continues to expand.
China: number of cities by population Population Number Over 10m 12 5-10m 75 1-5m 214 301 Source: China Statistical Year Book, CEIC
Major cities in China in terms of population (m) 1,37070 1,36060 1,360 50 40 30 20 10 0 Xi'an Wuxi Hefei Jinan Dalian Tianjin Harbin Beijing Wuhan Ningbo Fuzhou Suzhou Nanjing Taiyuan Nanning Guiyang Qingdao Kunming Chengdu Shanghai Wenzhou Shenzhen Shenyang Hangzhou Changsha Nanchang Chongqing Zhengzhou Changchun Guangzhou Shijiazhuang China - overall Source: Datastream, Daiwa
Notwithstanding the sizeable aggregate value of commercial property assets in China, the sector faces a number of challenges, particularly as relates to per-square-foot rentals and capital values. In our opinion, there are 3 features that make commercial property in China a challenging sector to play.
- 2 - The Hang Lung Ambition 13 April 2015
First, most of China’s major cities are located on flat land, which means that the size of these cities can continue to expand as “more rings” are added to the geographical spread of these cities. Take Beijing as an example. The total size of the city has expanded exponentially compared with the early 1980s, with the city having growth outward to form a sixth ring, with more in all likelihood to come over time. According to the China Statistical Yearbook, in 2014 there were at least 19 cities in China that were are larger than 10,000sq km (to give some context, Hong Kong occupies about 1,000sq km in terms of area).
China’s 4 Autonomous municipalities and provincial capitals Provincial capitals Population (m) City area (sq km) Shanghai* 24.2 6,340 Beijing* 21.1 16,411 Tianjin* 14.7 11,917 Chongqing* 29.7 82,374 Guangzhou 12.9 7,249 Hangzhou 8.8 16,571 Nanjing 8.2 6,587 Jinan 7.0 8,177 Changsha 7.2 11,816 Chengdu 14.3 12,121 Fuzhou 7.3 13,066 Wuhan 10.2 8,494 Hohhot 3.0 17,200 Zhengzhou 9.2 7,446 Taiyuan 4.3 6,977 Shenyang 7.3 12,980 Shijiazhuang 10.5 15,848 Changchun 7.5 20,604 Nanchang 5.2 7,402 Harbin 10.0 53,068 Guiyang 4.5 8,034 Hefei 7.6 11,445 Xi'an 8.6 10,108 Kunming 6.6 21,012 Haikou 2.2 2,305 Urumqi 2.6 13,788 Lhasa 0.5 29,518 Nanning 7.2 22,112 Yinchuan 2.1 8,874 Lanzhou 3.6 13,086 Xining 2.0 7,665 Source: CEIC *the 4 autonomous municipalities
Second, based on our market research , many provincial and local governments see high-rise office buildings and upmarket shopping malls as “symbols of prosperity” and, hence, generally have a tendency to supply the market with abundant land to develop into commercial properties, without paying sufficient attention to whether there is sufficient economic demand for them. Indeed, it is not uncommon for local governments to “subsidise” the developers to embark on commercial property projects by granting them lower-cost residential GFAs, so that the developers can make enough profit on the residential proportion of these projects to fully fund the construction of the large commercial property complexes next to them. As a consequence, it is typical for many cities in China to have several CBDs.
The third factor is related to the mechanism for allocating capital in China. In many other markets around the world, the availability of capital tends to be a powerful factor restraining the construction and completion of unproductive property projects. However, in China, such a restraint has not been as effective, probably because China’s economy started off as a command economy, and probably still is to a large extent. Note that over 50% of China’s GDP comes from fixed asset investments, and over the past 17 years, China’s M2 has expanded at a CAGR of 17% per year, resulting in a situation where China’s M2 at the end of 2014 was USD19.7tn, 70% larger than that of the US.
- 3 - The Hang Lung Ambition 13 April 2015
China: M2 (CNYbn) 140,000
120,000
100,000
80,000
60,000
40,000
20,000
0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: CEIC
But what compounds the situation further is that in China, it is arguable that capital has not been properly priced in the past, such that some large SOEs or other entities have easier access to capital from the banks, and may not bother that much about the returns on that capital. What makes matters worse is that creating more CBDs helps the sale of land, which is often one of the largest sources of capital for many local governments. As a result, while demand for commercial property in China is growing, the supply of commercial property space is also increasing. Compared with existing stock levels, we estimate that the annual supply of commercial property space in many cities in China could be in the magnitude of 40-50% of the existing stock, which is certainly a recipe for a near-term supply-and-demand imbalance.
To arrive at a balanced view on China’s commercial property sector, however, we believe there are at least 3 considerations that need to be taken into account.
1) The total commercial property stock in China’s major cities does not yet appear to have reached a size that exceeds what those cities’ economies can support in the future. While there is a major oversupply of commercial property space in China at this point and, this is likely to continue in the near future, if China can grow to become an economy that rivals the US in size, and if the importance of its service sector becomes comparable to that of mature Western economies, then this over-supply would not be permanent. Note that New York and London have grade-A office stock of well over 20m sq m currently, based on figures from DTZ, while that for Beijing and Shanghai is still below 10m sq m. Note also that cities like Chicago, San Francisco and Toronto have grade-A office stock of over 5m sq m, while the corresponding grade-A office stock amounts for the largest provincial capitals in China are still in the 1-3m sq m range.
Looked at in this light, the over-supply issue in China’s commercial property sector could partly be a “digestion problem” resulting from some of China’s cities trying to achieve within just a few years what has taken New York, London and many other cities much longer.
Grade-A office stock for the world’s major international cities (m sqm)sqm)(m 25
20
15
10
5
0 Tokyo (Central 5 Wards) New York (Manhattan) London (Central) Hong Kong Shanghai Source: DTZ, Daiwa
- 4 - The Hang Lung Ambition 13 April 2015
Grade-A office stock for China’s main cities (m sq m) 9 8 7 6 5 4 3 2 1 0 Beijing Shanghai Shenzhen Guangzhou Chongqing Chengdu Shenyang Qingdao Hangzhou Nanjing Source: Savills
2) There are factors that could restrain the increase in the number of major cities in China and the size of their core city areas. Judging from the history of how cities globally have developed, very often, growth in demand for city space has tended to result more in the expansion in size of an established major city, rather than the continued emergence of new cities. Even for an economy as large as the US, we would say that the number of major US cities is probably not a lot more than 10 – New York, Boston, Chicago, Los Angeles, San Francisco being among them.
In China, because of the diversity of its population, geography and culture, as well as the central government’s policy to promote the greater distribution of economic prosperity and opportunities throughout the country, we believe the country will eventually surpass the US in having more major cities. But we would not see the number of its cities that are of considerable importance to the country as whole not being much more than 20. If this is the case, then it would be mainly down to about 20-30 cities to meet China’s entire demand for commercial property space.
Daiwa’s selection of the 20 major cities in China for commercial properties
Source: Daiwa
- 5 - The Hang Lung Ambition 13 April 2015
Our observation is that pretty much none of the cities in China have robust and sophisticated long-term town-planning driving their development. This means that the continued expansion of the nation’s cities is likely to continue to put a strain on their social infrastructure, in particular, transport and housing. This in turn implies that the geographical expansion of many cities in China would be constrained at some point.
Over time, we can see a situation developing whereby there is a hierarchy of cities in China, with one major city being supported by many satellite cities in surrounding areas and, that together, they will form a large metropolitan area, linked by efficient and modern highways and high-speed rail. It would follow then that prime commercial properties in China’s top-20 cities would be in a better position than those in cities outside the top 20, even though over-supply could be a lasting issue in many peripheral satellite cities.
China’s high-speed railway network
Source: Daiwa
3) Some companies and retailers should have sufficient rent-paying capability. We note that currently a rental budget of HKD3-5/sq ft would allow a corporation to rent almost any office building in China, with the exception of a handful of the most prime office buildings in Beijing and Shanghai. And in our view, USD3- 5/sq ft should be affordable for many international corporations as many have been paying office rents at similar or higher levels in other cities. In Hong Kong for example, rents for prime grade-A offices in Central- Wanchai-Causeway Bay range from USD5-20/sq ft; and based on our industry research, in London, rents in the West End and the Bank area range from USD5-18/sq ft. Our understanding is that many cities have office buildings commanding rents of over USD5/sq ft. If these cities can find corporations that are willing to pay USD5/sq ft or more for some of its office buildings, we do not see why this cannot happen in China.
As for retail rents, we believe there are retailers that can achieve sales per sq ft of USD500 or more in their stores in China, which would be a respectable level by global standards. Note that for many international retailers, the achieved sales price for their merchandise in China is often 20% or more higher than it is in Hong Kong, and globally on average. Thus, it would seem that at least some retailers could afford to pay
- 6 - The Hang Lung Ambition 13 April 2015
USD8 or more in retail rent (based on a 20% occupancy cost assumption), especially given that some of them are determined to stay in the China market for the long term.
Sales per sq ft for the major retail property assets in Hong Kong and China (USD/sq ft) 5,0003,500 4,0003,000 3,0002,500 2,000 1,500 1,000 USD500 500 USD300 0 Harbour City Times Square Plaza 66 Grand Gateway Center 66 Forum 66 Parc 66 Palace 66 66
Source: Companies, Daiwa
While some of retailers may postpone expanding, or may even trim their number of stores, we believe that many of them would at least keep one major store in a major China city, for reasons of long-term strategic value. If the wealth and income of Chinese consumers continues to grow over time, and if the population or catchment areas of the major malls in China’s cities continue to rise, the number of retailers that can achieve sales of USD500/sq ft or more in China should continue to rise, and these retailers should have sufficient sales and operating profit to underpin their rent-paying capability for retail space.
China: retail property stock in the major cities (m sq m) 12
10
8
6
4
2
0 Beijing Shanghai Shenyang Chengdu Chongqing Guangzhou Wuhan Tianjin Shenzhen Hangzhou
Source: Savills
Another angle to look at is what would be the required critical mass of tenant sales needed to justify an investment in China’s commercial property sector. The benchmark we use is tenant sales of USD250m or CNY1.6bn, which we estimate should generate about CNY320m or USD50m in annual gross rental income, assuming that a mall can sustain an occupancy cost of 20%. Some USD250m in annual sales would translate into USD500/sq ft in sales per sq ft, assuming a mall has 0.5m sq ft of lettable area and 1m sq ft in GFA.
While the supply of retail space in China is large, one factor that could help developers is the fact that current construction costs in China are still not high. Assuming a mall has a GFA of 1m sq ft GFA, we estimate that the total construction cost (excluding land) would be about CNY1bn, which would represent a gross yield on cost of about 30% (if we ignore the land cost factor). As such, as long as a developer can keep the land cost under control, a high-end mall in China should be capable of generating a decent return of well over 15% a year if its tenant sales can be ramped up to CNY1.6bn or more a year over a 2-3 leasing cycle.
- 7 - The Hang Lung Ambition 13 April 2015
Sales per sq ft of major retail property assets in Hong Kong and China (USD/sq ft) 5,0003,500 4,0003,000 3,0002,500 2,000 1,500 1,000 USD500 500 USD300 0 Harbour City Times Square Plaza 66 Grand Gateway Center 66 Forum 66 Parc 66 Palace 66 66
Source: Companies, Daiwa
Achieved gross rental income of the major retail property assets in HK and China (HKDm) 6,000
5,000
4,000
3,000
2,000
1,000
0 Harbour City Times Square Grand Gateway Shenzhen MIXc Plaza 66 Hangzhou MIXc Center 66 Palace 66 66 Source: Companies, Daiwa
Admittedly, CNY1.6bn in tenant sales a year is not a small figure for a mall in China – but neither is it that large. Assuming an average ticket size of CNY300 (which we consider an affordable sum for a major city in China), a mall would need to see around 14,600 purchases a day to get to this figure. Assuming that each paying shopper makes 1.5x purchases on average whenever they shop in the mall, the mall would need about 10,000 people to shop there every day on average. Sogo HIK, with just about 0.4m sq.ft.in GFA, has about 27,000 sales tickets a day on average, against average daily traffic of 90,000 people. Its annual retail sales were USD1.2bn in 2014, we estimate, over 4x the USD250m in tenant sales levels we expect for quality malls in China.
- 8 - The Hang Lung Ambition 13 April 2015
Annual retail sales sensitivity analysis Avg. no. of purchases per day 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 200 0.4bn 0.7bn 1.1bn 1.5bn 1.8bn 2.2bn 2.5bn 2.9bn 3.3bn 3.6bn 300 0.5bn 1.1bn 1.6bn 2.2bn 2.7bn 3.3bn 3.8bn 4.4bn 4.9bn 5.4bn 400 0.7bn 1.5bn 2.2bn 2.9bn 3.6bn 4.4bn 5.1bn 5.8bn 6.5bn 7.3bn 500 0.9bn 1.8bn 2.7bn 3.6bn 4.5bn 5.4bn 6.4bn 7.3bn 8.2bn 9.1bn 600 1.1bn 2.2bn 3.3bn 4.4bn 5.4bn 6.5bn 7.6bn 8.7bn 9.8bn 10.9bn 700 1.3bn 2.5bn 3.8bn 5.1bn 6.4bn 7.6bn 8.9bn 10.2bn 11.4bn 12.7bn 800 1.5bn 2.9bn 4.4bn 5.8bn 7.3bn 8.7bn 10.2bn 11.6bn 13.1bn 14.5bn 900 1.6bn 3.3bn 4.9bn 6.5bn 8.2bn 9.8bn 11.4bn 13.1bn 14.7bn 16.3bn 1,000 1.8bn 3.6bn 5.4bn 7.3bn 9.1bn 10.9bn 12.7bn 14.5bn 16.3bn 18.2bn 1,200 2.2bn 4.4bn 6.5bn 8.7bn 10.9bn 13.1bn 15.2bn 17.4bn 19.6bn 21.8bn 1,400 2.5bn 5.1bn 7.6bn 10.2bn 12.7bn 15.2bn 17.8bn 20.3bn 22.9bn 25.4bn 1,600 2.9bn 5.8bn 8.7bn 11.6bn 14.5bn 17.4bn 20.3bn 23.2bn 26.1bn 29.0bn 1,800 3.3bn 6.5bn 9.8bn 13.1bn 16.3bn 19.6bn 22.9bn 26.1bn 29.4bn 32.7bn 2,000 3.6bn 7.3bn 10.9bn 14.5bn 18.2bn 21.8bn 25.4bn 29.0bn 32.7bn 36.3bn Avg. valuepurchase per (HKD) 2,200 4.0bn 8.0bn 12.0bn 16.0bn 20.0bn 24.0bn 28.0bn 31.9bn 35.9bn 39.9bn 2,400 4.4bn 8.7bn 13.1bn 17.4bn 21.8bn 26.1bn 30.5bn 34.8bn 39.2bn 43.6bn 2,600 4.7bn 9.4bn 14.2bn 18.9bn 23.6bn 28.3bn 33.0bn 37.8bn 42.5bn 47.2bn 2,800 5.1bn 10.2bn 15.2bn 20.3bn 25.4bn 30.5bn 35.6bn 40.7bn 45.7bn 50.8bn 3,000 5.4bn 10.9bn 16.3bn 21.8bn 27.2bn 32.7bn 38.1bn 43.6bn 49.0bn 54.5bn Source: Company, Daiwa
Given the size of the populations of China’s major cities, we do not see CNY1.6bn as a demanding figure for a mall to achieve in 2-3 leasing cycles. Indeed, some of the more popular malls in tier-2 cities in China have managed to achieve tenant sales of over CNY1.6bn in their first year of operation – China Resources Land’s MIXc in Nanning achieved tenant sales of CNY1.8bn in its first full year of operation in 2013, while Wharf’s Chengdu IFS saw tenant sales of CNY2.2bn in 2014 (the mall had a soft opening in January 2014 with about a 70% occupancy, and hence the CNY2.2bn figure does not reflect the mall’s tenant sales in the first full year of operation). Moreover, despite intense competition and the impact of the government’s anti- corruption campaign, as of 2014, there were a few retail property assets in China that had already seen retail sales surpass CNY3bn, according to data from linkshop.com.
- 9 - The Hang Lung Ambition 13 April 2015
Achieved retail sales of various retail property assets in China in 2014 (CNYm) 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 66 Store Store Center City Shenzhen MIXc Shenzhen Store Wuhan Int'l Plaza Int'l Wuhan Shopping Center Shopping Nanjing Deji Plaza Deji Nanjing Changchun Ouya Changchun Dept Store Dept Shanghai Plaza 66 Plaza Shanghai Commercial Mall Commercial Shopping Center Shopping Commercial Bldg Commercial Commercial Capital Commercial Changchun Charter Changchun Guangzhou Tee Mall Guangzhou Shenyang Zhongxing Shenyang Shijiazhuang Bei Bei Guo Shijiazhuang BeijingCity Joy Xidan Nanjing Golden Eagle Golden Nanjing Beijing Yansha Outlets Yansha Beijing Guangzhou Taikoo Hui Taikoo Guangzhou New World Dept Store Dept World New Shanghai Yaohan Dept Yaohan Shanghai Harbin Grand Shopping Grand Harbin Shanghai Nanjing Road Nanjing Shanghai Beijing Shin Kong Place Kong Shin Beijing Nanjing Zhongyang Dept Zhongyang Nanjing Shanghai Qingpu Outlets Qingpu Shanghai Shanghai Grand Gateway Grand Shanghai Nanjing Xinjiekou Cenbest Xinjiekou Nanjing Chengdu Wangfujing Dept Wangfujing Chengdu Hangzhou Tower Shopping Tower Hangzhou Guangzhou Grandview Mall Grandview Guangzhou
Property Names in Chinese Beijing Shin Kong Place 北京新光天地百货 Nanjing Deji Plaza 南京德基广场 Guangzhou Grandview Mall 廣州正佳广场 Shenzhen MIXc 深圳万象城 Hangzhou Tower Shopping City 杭州大厦购物城 Guangzhou Tee Mall 廣州天河城广场 Changchun Ouya Commercial Capital 长春欧亚 Shanghai Yaohan Dept Store 上海第一八佰伴 Nanjing Zhongyang Dept Store 南京中央商场 Shanghai Grand Gateway 66 上海港匯恒隆廣場 Wuhan Int'l Plaza 武汉国际广场 Beijing Yansha Outlets 北京燕莎奥特莱斯 Shijiazhuang Bei Guo Commercial Bldg 石家莊北國商城 Beijing Xidan Joy City 北京西单大悦城 Nanjing Golden Eagle Shopping Center 南京金鷹國際購物中心 Shanghai Nanjing Road New World Dept Store 上海南京路新世界百貨 Nanjing Xinjiekou Cenbest Dept Store 南京新街口百货 Shenyang Zhongxing Commercial Mall 沈阳中兴 Changchun Charter Shopping Center 长春卓展购物中心 Shanghai Qingpu Outlets 上海青浦百联奥特莱斯 Guangzhou Taikoo Hui 廣州太古匯 Chengdu Wangfujing Dept Store 成都王府井百货 Harbin Grand Shopping Center 哈尔滨远大购物中心 Shanghai Plaza 66 上海恒隆广场 Source: linkshop.com,Google, Daiwa
Retail sales of major retail property assets in HK and China (USDm) 5,000
4,000
3,000
2,000
1,000
0 Harbour City Times Square Sogo HK Shin Kong Shenzhen Hangzhou Grand Plaza 66 Center 66 Palace 66 Place MIXc Building Gateway 66
Source: Companies, Daiwa
- 10 - The Hang Lung Ambition 13 April 2015
In our view, quality is the key for China commercial properties. While China has an abundant grade-A office supply, our observation is that there are not many buildings that meet international grade-A standards – and fewer still that can sustain international grade-A standards over time. As we see it, there should be enough demand in Shanghai and Beijing to support the demand for at least 5-10 major grade-A office buildings over time; while in tier-2 cities (which are mostly provincial capitals of major provinces), there should be enough demand for at least 1-3 grade-A office buildings over time.
While we do not disagree with the common perception that many Chinese cities have too many CBDs and too many so-called grade-A office buildings, this does not contradict our view that there would be at least a handful of prime grade-A office buildings in Beijing, Shanghai and probably a few other major cities, that could command and sustain USD5/sq ft in monthly rent.
For a retail property sector, quality is also the key. In general, we think the culture of shopping in malls has just started to form in China, and that shopping malls will continue to gain market share against department stores and pedestrian streets, which have been the dominant retail formats in China in the past. While many Chinese cities have abundant retail space and shopping malls, those under systematic and professional management are limited, in our view. Indeed, the economics for prime retail properties in China, generally, should be better than those for office properties, and this is an issue we examine in the next section.
The China retail property sector
Source: Daiwa
- 11 - The Hang Lung Ambition 13 April 2015
- 12 - The Hang Lung Ambition 13 April 2015
Question 2
How much value can systematic and professional management create for retail properties?
- 13 - The Hang Lung Ambition 13 April 2015
Q2: How much value can systematic and professional management
create for retail properties?
A demand and supply analysis seems to be the conventional method used by the stock market to analyse retail properties, and often other property assets too. While we do not dispute the importance of a conventional demand and supply analysis, we would caution that the way demand and supply factors work for retail properties or shopping malls is more subtle and complex than for other property segments such as offices. In our opinion, management plays an important role in creating value for retail malls over time.
Arguably, each retail shop in a mall is unique in a certain way, and the range of unit rents for shops within the same mall can be very wide. Take Harbour City as an example. The range of unit rents for different retailers inside this mall ranges from as low as HKD50/sq ft to more than HKD2,000/sq ft, even though these stores are located just a few minutes’ walk from one another. In retail properties, it is not uncommon to find retail malls situated on opposite sides of the same street, yet having achieved rents that are miles apart. Case in point: Landmark and Worldwide House in Central. While Landmark houses the flagship stores of Louis Vuitton and Tiffany and the like, with merchandise that can be as expensive as USD10,000+ per item, Worldwide House on the opposite side of the street contains shops selling basic merchandise, such as lunch boxes for as little as USD3 each.
In our opinion, one important component determining the value of retail properties, is their management. We see 2 philosophies in the running of retail property businesses: one is to see it simply as a landlord business, and the other is to see it as a partnership (between the owner of the property and its retail tenant clients).
The “landlord business” versus the “partnership business” Landlord business Partnership business Focus Minimising vacant space Maximising tenant sales Tenant mix No special strategy, other than maximising achieved Creating a chemistry which is most conducive to shoppers coming rent repeatedly and to facilitate the malls becoming more popular and more relevant Tenant sales No special attention. Caring mainly whether the Closely monitoring the changes in tenant sales, their distribution etc to get a tenants pay rent on time. pulse on the most current situation of the mall. Positioning Do not pay special focus on fine-tuning the mall's Constant fine-tuning to search for an optimal level versus prevailing retail positioning environment Tenant relationship Getting tenants to pay the maximum rent Work as partners with tenants to create a larger pie for all No special attention and working team on major Dedicated teams to work with major retail groups to facilitate the execution of retail groups their retail strategy Customer traffic Waiting passively for the shoppers to come Using active promotion to attract its target shoppers to come repeatedly Source: Daiwa
We believe that generally most property companies, not only in Hong Kong but in other parts of the world as well, tend to start off primarily adopting the ‘landlord business’ approach for its ease and simplicity. If an owner of a property sees itself as just a landlord, its priorities are probably just that of minimising vacancy rates and making sure space is leased to the highest bidders. This way to manage the business is relatively straight-forward and simple, though the trade-off is that, if a retail property asset is managed in such a way, its aggregate tenant sales would not be too much better than that of the overall market. This management approach allows the asset to ride on the growth of the overall market or the growing importance of the district where it is located, but it may not be able to demonstrate exceptional resilience during difficult times – nor would it outperform peers in the same district in a consistent and sustained fashion.
By way of contrast, under a partnership business, the priorities and focus of the landlord are very different as its focus is growing the pie of aggregate tenant sales rather than merely filling up the space. Instead of merely trying to fill up the space, the priority is to ensure the tenant mix is right, that more shoppers prefer to shop in the mall and that they come repeatedly so that they gradually form a habit to shop in the mall instead of going to other malls in other districts or buying on-line. Note that if a retail property is managed in this way, then considerable importance needs to be placed on 1) monitoring how consumer behaviour in the mall changes, 2) the overall positioning of the mall, 3) the appropriate trade mix inside the mall, 4) the store management strategies of the retailers, 5) the changing merchandise and positioning of each of the retailers inside the mall, and most importantly, 6) how to continue to fine-tune and modify the various aspects of the mall so that the mall can stay strong and relevant in terms of being able to attract the most popular retailers and the biggest spenders. - 14 - The Hang Lung Ambition 13 April 2015
Retail sales in Harbour City versus the Hong Kong retail sector since 2003 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Harbour City retail sales (HKDm) 4,700 6,800 7,800 8,900 11,400 13,500 15,500 20,100 27,100 30,800 33,800 35,000 YoY change (%) 44.7% 14.7% 14.1% 28.1% 18.4% 14.8% 29.7% 34.8% 13.7% 9.7% 3.6% HK overall retail sales (HKDm) 172,863 191,533 204,373 219,004 246,999 273,128 274,740 324,968 405,733 445,498 494,449 493,238 YoY change (%) 10.8% 6.7% 7.2% 12.8% 10.6% 0.6% 18.3% 24.9% 9.8% 11.0% -0.2% Market share (%) 2.7% 3.6% 3.8% 4.1% 4.6% 4.9% 5.6% 6.2% 6.7% 6.9% 6.8% 7.1% Source: Company, Daiwa
In short, instead of being a passive landlord collecting rent determined by the market, a retail property owner can also become an active manager, providing a crucial link between the retailers and shoppers, and bringing its own input (such as promotions, hardware improvements, changes in positioning and tenant mix, etc.) to work towards driving up retail sales at the mall to get a larger portion of the city’s overall retail pie. As such, we believe retail property management is a management-intensive business and that landlords play an important and leading role in the development of a mall and the growth of retail sales for tenants in the mall.
We observe that there are significant differences between the achieved retail sales – and hence retail rental income performance – of malls under these 2 different models. While most property owners/developers tend to adopt the traditional landlord model to run their business, our read is that the strongest players in the industry tend to be those that lean more towards the latter model. We also observe that in recent years, there has been growing recognition by retail landlords in Hong Kong of the value that can be created by robust retail property management, although establishing the platform, culture, human resources and management system to achieve this is not an easy and simple process.
In our opinion, the value that can be created by systematic and professional management of retail property assets is significant. Retail is essentially a fragmented industry everywhere, with retail sales in a city being spread around easily hundreds, if not thousands, of retail properties; and very often a typical mall’s share of the city’s retail pie tends to be very small, often well under 0.5%. This, however, should mean that there is substantial room for a popular mall to continue to take market share from a weaker retail property asset. We think that what commercial real-estate companies like the US’s Simon Property (Not rated) and Australia’s Westfield (Not rated) have demonstrated is that retail property can be a scalable business, and that once a company has got a proper system in place, the number of malls it is capable of running at the same time can be expanded significantly to possibly hundreds, or more.
We believe this scalability aspect of retail malls is of particular importance in China. As there is an abundant supply of retail space in many Chinese cities, there is considerable room for strong players to consolidate the market. In this connection, what Hong Kong’s Harbour City has shown is that if a mall can continue to get some of the most popular retailers (both established and upcoming ones) and the biggest spenders to come continuously, there is significant room for its market share of the city’s retail pie to rise. In 2014, Harbour City achieved retail sales of HKD35bn, representing some 7% of Hong Kong’s overall retail sales for the year, up from 6.8% in 2013.
Admittedly, the 7% achieved by Harbour City was likely a global anomaly and there were probably special factors at work in its case. As such, we do not see a 7% market share as an attainable level for top malls in most cities in the world. That said, 1-2% would not appear inconceivable if the mall is sizeable and houses the most popular retailers in the city. Shown below are the retail sales of various major cities in China in 2014, which suggests that a 2% market share of the existing pie would translate into tenant sales of CNY2.2-18.2bn. As the population and per capita spending in major Chinese cities should continue to rise over time, this implies substantial room for capital value expansion for well-managed retail property assets.
- 15 - The Hang Lung Ambition 13 April 2015
China retail sales (CNYbn) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Tier-1 cities Region Beijing Greater Bohai Rim 166 183 201 230 263 291 330 384 465 531 623 690 770 838 910 Shanghai Greater YRD 187 202 220 240 266 298 338 387 458 517 607 681 741 805 872 Guangzhou Greater PRD 112 125 137 149 168 191 220 262 319 362 450 524 598 688 770 Shenzhen Greater PRD 74 61 69 80 92 144 168 193 228 257 300 352 401 443 484
Tier-2 cities Region Hangzhou Greater YRD 20 22 25 28 32 44 52 61 76 89 105 124 141 161 180 Nanjing Greater YRD 42 47 53 60 71 100 117 138 165 194 229 270 310 353 396 Suzhou Greater YRD 35 39 45 53 63 91 106 125 155 203 240 283 324 366 406 Wuxi Greater YRD 35 39 44 49 58 82 96 113 139 154 183 214 244 276 305 Fuzhou Greater PRD 35 39 43 49 58 66 78 94 113 134 162 195 232 261 299 Xiamen Greater PRD 17 19 22 23 26 27 31 36 42 57 69 80 88 97 107 Jinan Greater Bohai Rim 35 40 45 53 69 81 94 110 136 160 180 211 242 274 290 Qingdao Greater Bohai Rim 31 35 40 51 61 87 101 120 146 173 196 230 264 299 327 Tianjin Greater Bohai Rim 74 83 83 92 104 119 138 165 208 243 286 340 392 447 474 Chengdu Western 55 63 71 77 88 101 116 136 162 195 243 287 333 377 420 Chongqing Western 72 78 85 93 107 123 143 171 215 248 294 349 403 460 510 Xian Western 36 41 46 50 58 67 78 94 118 138 164 197 226 258 287 Dalian Northern 49 53 59 57 65 73 84 98 118 140 164 192 222 253 283 Shenyang Northern 57 62 70 72 81 92 105 123 151 178 207 243 280 319 340 Changsha Central South 31 34 40 45 53 74 87 104 127 152 186 220 252 286 316 Wuhan Central South 61 69 77 85 96 113 129 152 190 216 257 303 347 392 437 Nanning South Western 21 23 26 29 33 38 44 52 65 76 91 107 126 145 162 Kunming South Western 24 27 29 33 37 42 48 57 57 86 106 127 149 170 191 Total* 3,911 4,306 4,814 5,252 5,950 6,835 7,915 9,357 11,483 13,268 15,700 18,392 21,031 23,781 26,239 Source: CEIC, Daiwa *Total for China as a whole
As we see it, over time, retail rents collected by a landlord from a mall are driven by the sustainable occupancy cost of the retailers in the mall. As such, the value of a retail mall will be ultimately driven by the achieved retail sales at that mall. Shown below are the appraised book values of various major retail property assets of Hong Kong listed companies and our estimated valuation range for retail property sales based on their achieved tenant retail sales. We think this illustrates that the value of a mall can range widely, anywhere from USD0.3bn to USD15bn. And the bottom line is that good retail property managers can create significant value in so far as they can allow a mall to move up their position in this very wide valuation range over time.
Categories of malls Implied sales Annual tenant per sq ft per Annual gross rental (USD) Categories sales year# (USD) 15%* 18%* 20%* Remarks AAA >USD3bn >6,000 >450m >540m >600m Mega mall AA >USD1bn-3bn 2,000-6,000 150m-450m 180m-540m 200m-600m Should be seen as premier malls even by global standard A USD500m-1bn 1,000-2,000 75m-150m 90m-180m 100m-200m Would be among top 20 in the country B USD250m-500m 500-1,000 37.5m-75m 45m-90m 50m-100m Our benchmark for satisfactory level performance in China (upon maturity***) C USD100-250m 200-500 15m-37.5m 18m-45m 20m-50m Below USD100m <200 <15m <18m <20m Source: Daiwa * occupancy cost; ** gross cap rate; *** we assume about 3 leasing cycles (7-8 years) # based on 1m sq ft GFA and 0.5m net lettable area (50% efficiency)
Valuation range for various categories of malls Capital value (USDbn) Implied sales Cap rate ** Annual tenant per sq ft per Annual gross rental (USD) 4% cap. rate 5% cap rate 6% cap rate 7% cap. rate 8% cap rate Categories sales year# (USD) 15%* 18%* 20%* 15-20% 15-20% 15-20% occup. 15-20% 15-20% occup. cost occup. cost cost occup. cost occup. cost AAA >USD3bn >6,000 >450m >540m >600m 11.3bn-15bn 9bn-12bn 7.5bn-10bn 6.43bn-8.57bn 5.63bn-7.5bn AA >USD1bn-3bn 2,000-6,000 150m-450m 180m-540m 200m-600m 3.8bn-15bn 3bn-12bn 2.5bn-10bn 2.14bn-8.57bn 1.88bn-7.5bn A USD500m-1bn 1,000-2,000 75m-150m 90m-180m 100m-200m 1.9bn-5bn 1.5bn-4bn 1.25bn-3.3bn 1.07bn-2.86bn 0.94bn-2.5bn B USD250m-500m 500-1,000 37.5m-75m 45m-90m 50m-100m 0.94bn-2.5bn 0.75bn-2bn 0.63bn-1.67bn 0.54bn-1.43bn 0.47bn-1.25bn C USD100-250m 200-500 15m-37.5m 18m-45m 20m-50m 0.38bn-1.25bn 0.3bn-1bn 0.25bn-0.83bn 0.21bn-0.71bn 0.19bn-0.63bn Below USD100m <200 <15m <18m <20m <0.5bn <0.4bn <0.33bn <0.29bn <0.25bn Source: Daiwa * occupancy cost; ** gross cap rate; *** we assume about 3 leasing cycles (7-8 years) # based on 1m sq ft GFA and 0.5m net lettable area (50% efficiency)
- 16 - The Hang Lung Ambition 13 April 2015
Hong Kong has a population of just 7m while the major cities in China have over 25m each already. What China’s high-speed rail system means is that for many cities in China, the number of people living within 3 hours travelling time from its city centre can be over 100m. We also believe that in retailing, there is a tendency for retail sales to gravitate disproportionately towards the most popular retail properties in the strongest retail district. As such, if one assumes that the wealth and income of the Chinese population can continue to rise over time, we think there is no reason China cannot have a handful of retail malls whose tenant sales represent about half of Harbour City’s achieved tenant sales in 2014, which is HKD35bn or USD4.5bn.
Based on a 20% occupancy cost and a 6% gross cap rate, a mall with USD2.25bn in retail sales should command a value of USD7.5bn, which would rise to USD9bn if the gross cap rate used is 5%. This constitutes one upside associated with China retail property assets, in our view. Currently, the estimated book value of HLP’s completed malls in China range from HKD3-15bn while there are a few retail property assets in Hong Kong that are worth over HKD20bn, with the highest being over HKD80bn. As such, over time, the room for capital value expansion in the most popular malls in China should remain significant.
Book value of major retail property assets in HK and China (HKDbn) 100
80
60
40
20
0 Harbour City Times Square Pacific Place Mall Langham Place Mall Grand Gateway 66 Plaza 66 Center 66
Source: Companies, Daiwa
Another upside offered by China retail properties is their scalability. We do not assume China has many malls whose tenant sales exceed USD3bn, but we believe that USD500m-USD1bn is quite possible for the top malls in China’s major cities, and we believe that the cities that can support this level of tenant sales in its top malls is over 30 (China has 500 cities with populations of over 2m) . Indeed, based on data from linkshop.com (see the chart on p.19), some 24 malls or department stores in China have already achieved over USD500m in annual tenant sales. Again, based on a 20% occupancy cost and 6% gross cap. rate, malls with USD500m-USD1bn in retail sales can command a capital value of USD1.3bn-2.6bn, 5-10x of the estimated USD250m construction cost required to build such a mall.
In short, for all the valid concerns about over-supply and other issues in the China retail property sector, we believe there is considerable value to be unlocked in the China retail mall industry. Relative to the value of the prime retail property assets in Hong Kong, we think there is still considerable potential for the current most productive malls in China to catch up, whether in terms of tenant sales, rental income and capital value, as the above tables show.
- 17 - The Hang Lung Ambition 13 April 2015
Achieved gross rental income of major retail property assets in HK and China (HKDm) 6,000
5,000
4,000
3,000
2,000
1,000
0 Harbour City Times Square Grand Gateway Shenzhen MIXc Plaza 66 Hangzhou MIXc Center 66 Palace 66 66 Source: Companies, Daiwa
Achieved retail sales of various retail property assets in China in 2014 (CNYm) 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 66 Store Store Center City Shenzhen MIXc Shenzhen Store Wuhan Int'l Plaza Int'l Wuhan Shopping Center Shopping Nanjing Deji Plaza Deji Nanjing Changchun Ouya Changchun Dept Store Dept Shanghai Plaza 66 Plaza Shanghai Commercial Mall Commercial Shopping Center Shopping Commercial Bldg Commercial Commercial Capital Commercial Changchun Charter Changchun Guangzhou Tee Mall Guangzhou Shenyang Zhongxing Shenyang Shijiazhuang Bei Bei Guo Shijiazhuang BeijingCity Joy Xidan Nanjing Golden Eagle Golden Nanjing Beijing Yansha Outlets Yansha Beijing Guangzhou Taikoo Hui Taikoo Guangzhou New World Dept Store Dept World New Shanghai Yaohan Dept Yaohan Shanghai Harbin Grand Shopping Grand Harbin Shanghai Nanjing Road Nanjing Shanghai Beijing Shin Kong Place Kong Shin Beijing Nanjing Zhongyang Dept Zhongyang Nanjing Shanghai Qingpu Outlets Qingpu Shanghai Shanghai Grand Gateway Grand Shanghai Chengdu Wangfujing Dept Wangfujing Chengdu Nanjing Xinjiekou Cenbest Xinjiekou Nanjing Hangzhou Tower Shopping Tower Hangzhou Guangzhou Grandview Mall Grandview Guangzhou Source: linkshop.com
Retail sales of major retail property assets in HK and China (USDm) 5,000
4,000
3,000
2,000
1,000
0 Harbour City Times Square Sogo HK Shin Kong Shenzhen Hangzhou Grand Plaza 66 Center 66 Palace 66 Place MIXc Building Gateway 66
Source: Companies, Daiwa
However, we believe the key is management, rather than the size of the retail property asset owned. Changing customer preferences and the popularity of different brands are issues that need to be closely monitored, and a retail property company needs to have a system in place to achieve this if it is going to run an operation with scale. Similarly, international retailers have their overall strategy and retail landlords need to be close to them so that they can be their partner in many different cities. In the world of luxury retailing, there are several main groups, such as LVMH, Kering, Richemont, etc., which own a large portion of the world’s major brands. A retail property company needs to be able to establish a proper and effective system so that it could become a valued partner to the world’s major brands, in our view.
- 18 - The Hang Lung Ambition 13 April 2015
Question 3
Is HLP a credible vehicle through which to play the emergence of premier retail property managers in Greater China?
- 19 - The Hang Lung Ambition 13 April 2015
Q3: Is HLP a credible vehicle through which to play the emergence of premier retail property managers in Greater China?
For all the valid concerns relating to commercial properties in China, we believe that 2 other considerations need to be taken into account to arrive at a balanced view on the subject. 1) There are not that many really prime and well-managed prime commercial properties in China yet. 2) The China retail malls managed under the “partnership philosophy” represent a tiny fraction of the country’s malls; we believe that systematic and professional management can create significant value for the malls in China.
The investment question following on from the above is: Which companies are credible vehicles for investors to capitalise on this theme?
Our view on this is that professional retail-property management (in the sense that retail malls are seen as a partnership business, and that there is a system in place to drive a continuous improvement in the sales productivity of the mall) is still a relatively new concept in Hong Kong and/or possibly Asia, let alone China. Indeed, it is arguable that Hong Kong, or possibly Asia, has many property asset owners and traders, but not that many asset managers.
We think that while China has many retail landlords, not many of them are dedicated to managing large-scale prime malls in China. There is a handful, in our opinion, and they are: China Resources Land, Hang Lung Properties, SHK Properties, Swire Properties, Wharf and possibly a few more. We think there are a few that are focusing on mid-tier assets and seem to have the ambition to move up the ladder. Our view is that the China retail mall industry is large enough to accommodate all of them, and that any constraints on their growth would come not so much from the level of competition, but more as to how well and how quickly individual companies can improve their management of large-scale retail property assets in China and Hong Kong.
As a stock, we think HLP offers a credible way to play on the investment theme related to the emergence of premier retail property managers in Greater China for the following reasons:
1. It enjoys an early-mover advantage
Grand Gateway 66 and Plaza 66 opened in Shanghai in 2001 and 2002, respectively, which is about when luxury retailing and the shopping-mall culture began to take shape in the city. Hence, while the performance of these 2 malls was not particularly noteworthy when they were first opened, their tenant sales began to ramp up quickly when they entered their second and third leasing cycles.
Gross rental income at Grand Gateway 66 (HKDm) 5th lease 1,400 4th lease 1,200
1,000 3rd lease
800
600 2nd lease 1st lease 400
200
0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: Company, Daiwa
- 20 - The Hang Lung Ambition 13 April 2015
Achieved retail sales at Grand Gateway 66 (HKDm) 6,000 5th lease 4th lease 5,000 3rd lease 4,000 2nd lease 3,000 1st lease 2,000
1,000
0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: Daiwa estimates based on disclosed gross rental income and occupancy cost
Gross rental income at Plaza 66 (HKDm) 5th lease 1,000 4th lease
800 3rd lease
600 2nd lease 400 1st lease 200
0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: Company, Daiwa
Achieved retail sales at Plaza 66 (HKDm) 5th lease 6,000 4th lease
5,000 3rd lease
4,000
3,000 2nd lease
2,000 1st lease
1,000
0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: Daiwa estimates based on disclosed gross rental income and occupancy cost
In retrospect, both Grand Gateway 66 and Plaza 66 have been among the top performers in China’s retail property sector for the past decade, and one consequence of this is that the retailers that took floor space in them early have probably seen many years of robust sales growth and profitability. In much the same way, we think HLP will benefit from its first-mover advantage in the China retail property sector.
Moreover, HLP’s track record in terms of ramping up tenant sales at both Grand Gateway 66 and Plaza 66 should also position it well to appeal to both retailers and local governments in other China cities. Indeed, we think HLP has taken advantage of its credentials or first-mover advantage to have been able to secure many prime retail property sites in China at a reasonable cost, an issue to which we now turn.
- 21 - The Hang Lung Ambition 13 April 2015
2. It has already secured low-entry costs in China’s commercial property sector
We believe that entry costs are important in assessing a company’s long-term competitiveness in any business. As such, one factor that should continue to work to HLP’s favour is that it secured low entry costs into the industry, with the average land cost for its total 33.7m sq ft of GFA of China landbank (excluding car parks) at CNY451/sq ft. For the 9 land purchases it has made in China since 2000, 6 of them cost less than CNY1bn, reflecting that the group was able to take advantage of the window of opportunity open at the time in which to make deals with the local China governments (such as during the aftermath of the global financial crisis in 2008).
HLP: China landbank Attributable GFA (m sq ft) No. of Land Land Completion Date of Hotel/ Cumulative Car car park cost cost (actual/ acquisition Project City District Usage* Stake Retail Office SA Total total* parks Total# spaces (CNYm) (CNY/sq ft) target) Dec 1992 Grand Gateway 66 Shanghai Xuhui S/O/SA* 69.3% 0.9 0.9 - 1.8 1.8 0.3 2.1 835 1,441 800 2000 Dec 1993 Plaza 66 Shanghai Jianan S/O 82% 0.5 1.4 - 1.9 3.7 0.5 2.4 804 1,509 800 2001 Feb 2005 Riverside 66 Tianjin Heping Lu S 100% 1.6 - - 1.6 5.3 1.2 2.8 800 800 500 2014 Sep 2005 Palace 66 Shenyang Shenhe S 100% 1.2 - - 1.2 6.5 0.8 2.0 864 760 633 2010 Aug 2006 Forum 66 Shenyang Shenhe S/O/SA/H* 100% 1.1 7.1 1.1 9.3 15.8 2.1 11.4 2,139 895 96 2012 Dec 2006 Center 66 Ph.1 Wuxi Chong'an 100% 1.3 1.6 - 2.9 18.6 1.2 4.1 1,292 685 240 2013 Feb 2007 Parc 66 Jinan Lixia S 100% 1.8 - - 1.8 20.4 0.9 2.7 789 570 317 2011 May 2009 Center 66 Ph. 2 Wuxi Chong'an S/O/SA/H* 100% - - 1.2 1.2 21.7 - 1.2 - 415 341 After 2015 May 2009 Olympia 66 Dalian Xigang S 100% 2.4 - - 2.4 24.1 1.6 4.0 1,214 1,300 542 2015 Sep 2011 Spring City 66 Kunming Panlong S/O/SA 100% 1.7 1.9 1.1 4.7 28.8 2.0 6.7 2,000 3,497 744 2018 Feb 2013 Heartland 66 Wuhan Qiaokou S/O/SA* 100% 1.9 1.6 1.4 4.9 33.7 2.6 7.5 3,240 3,300 673 2019 14.4 14.5 4.8 33.7 13.2 46.9 13,977 15,172 451 Source: Company, Daiwa Note: S=shops, O=office, H=hotels, SA=serviced apartments * excluding car parks # including car parks
Meanwhile, prime retail property sites in the centres of China’s main cities could become one of the few property asset classes in China that could command scarcity value over time. While the window to acquire large retail sites in the centre of China’s main cities has narrowed in the past few years, it still exists but may not last for much longer. In our opinion, size matters when it comes to shopping malls and our benchmark is that a large-scale mall in China needs to have a GFA of at least 1m sq ft and a floor plate of more than 100,000 sq ft in order to achieve a critical mass of tenants. Securing sites of this size in established commercial districts of the world’s major cities is now next to impossible. But in China, this is still possible, with prices still based on the current level of economic development in a city. And while the opportunity is still there, inflation and many other factors will likely lead to the cost of these sites rising over time.
Against this backdrop, we think there are special economics associated with buying prime commercial sites in China early (ie, before the markets have proved their potential). Even though some China cities may not yet have a large and mature enough middle class to support large-scale middle-class malls, we do see a commercial case for acquiring such sites early in cities that have solid prospects of becoming more economically vibrant over time. In any case, HLP now has 7 malls operating in China, with 3 more under development. This brings us to our next point, which is that HLP’s portfolio is starting to reach critical mass in terms of scale.
3. It is reaching scale and achieving reasonable progress in terms of maintaining and growing tenant sales and improving the tenant mix relative to the nature of the business
We have observed that over the 2010-present day period, HLP has rapidly rolled out its commercial property projects in China, with basically one new mall completed every year since 2010. While this pace may not be that fast compared with that of the local players in China, our view is that such a pace is fast for large-scale malls of more than 1m sq. ft that have easily well over 200 tenants each.
- 22 - The Hang Lung Ambition 13 April 2015
HLP: summary of its 10 commercial property projects in China Project Grand Gateway 66 Plaza 66 Palace 66 Parc 66 Forum 66 Center 66 Riverside 66 Olympia 66 Spring City 66 Heartland 66 Total City Shanghai Shanghai Shenyang JinanShenyang Wuxi Tianjin Dalian Kunming Wuhan Dec 2006/ Land acquisition time Dec 1992 Dec 1993 Sep 2005 Feb 2007 Aug 2006 May 2009 Feb 2005 May 2009 Sep 2011 Feb 2013 Year of completion 2000 2001 2010 2011 2012 2013 2014 2015 2018 2019 Retail 0.9 0.5 1.2 1.8 1.1 1.3 1.6 2.4 1.7 1.9 14.4 Office 0.9 1.4 - - 7.1 1.6 - - 1.9 1.6 14.5 Serviced apt/ hotels - - - - 1.1 1.2 - - 1.1 1.4 4.8 Sub-total 1.8 1.9 1.2 1.8 9.3 4.1 1.6 2.4 4.7 4.9 33.7 Car parks 0.3 0.5 0.8 0.9 2.1 1.2 1.2 1.6 2.0 2.6 13.2 Total 2.1 2.4 2.0 2.7 11.4 5.3 2.8 4.0 6.7 7.5 46.9 Source: Company, Daiwa Note: shaded areas refer to areas that may be converted for residential use
HLP: China portfolio
Source: Company, Daiwa
- 23 - The Hang Lung Ambition 13 April 2015
Source: Company, Daiwa
- 24 - The Hang Lung Ambition 13 April 2015
Source: Company, Daiwa
Admittedly, HLP’s newly opened malls in China have not produced outstanding results immediately and its Palace 66 in Shenyang has been a concern to the market for some time (but it had finally overcome most of its problems by 2014, in our view). That said, we stand by our view that the shopping-mall business is essentially a very long- term one and the returns for this business are heavily back-end loaded. The general industry benchmark is that it takes 2-3 leasing cycles for a mall to mature and take off (this has also been the case for Grand Gateway 66 and Plaza 66), which means around 8-9 years.
We think consumers are creatures of habit and that, generally, it takes time for a mall to accumulate a critical mass of shoppers. Usually, a mall’s first lease is about trying out a tenant mix to fit the expected profile of the shoppers that the mall wants to attract. In the second lease, the manager of the mall needs to refine its tenant mix and redefine its positioning in the light of what it learned in the first lease term, and to take into account changes in consumer tastes and the competitive landscape. As such, even if things are running smoothly and the landlord gets most things right in the second leasing cycle, the landlord often needs to wait until around the third leasing cycle before it can really start to command pricing power over its existing tenants and those retailers keen to take space in the mall.
Estimated achieved retail sales of HLP’s various malls in their different years of operation (HKDm) 6,000
5,000
4,000
3,000
2,000
1,000
0 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10 Yr 11 Yr 12 Yr 13 Yr 14
Grand Gateway 66 Plaza 66 Palace 66 Parc 66 Forum 66 Center 66
Source: Daiwa estimates based on disclosed gross rental income and occupancy costs
- 25 - The Hang Lung Ambition 13 April 2015
Gross rental income of HLP’s various malls in their different years of operation (HKDm) 1,400 1,200 1,000 800 600 400 200 0 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10 Yr 11 Yr 12 Yr 13 Yr 14
Grand Gateway 66 Plaza 66 Palace 66 Parc 66 Forum 66 Center 66
Source: Company, Daiwa
Note that the achieved retail sales and rental income of HLP’s malls opened in 2010 in China actually compare quite well with those achieved by Grand Gateway 66 and Plaza 66 in their first few years of operation.
As mentioned in Question 1, our benchmark for assessing the types of malls HLP is operating in China is CNY1.6bn in sales. According to our industry research, USD500/sq ft in sales would be regarded as a Class-A mall in the US. Thus, we think the achieved sales and sales per sq ft of HLP’s new malls in China (ranging from USD160-380/sq ft or USD28-380/sq ft after excluding Palace 66, we estimate) look reasonable for malls that are in their initial years of operation. Of course, the achieved tenants sales of Palace 66 have been below average, but we note that concerted efforts have been put into revitalizing this mall in recent years and its tenant sales have been catching up since 2H13, with 12% YoY growth in achieved tenant sales in 2014.
Of course, the nature of the mall industry is that the first lease can be called the “childhood years” and a lot depends on whether tenant sales in the mall can be ramped up once these years are over. HLP’s achieved this for Grand Gateway 66 and Plaza 66 when these 2 malls entered their second leasing cycles. With this in mind, one key question for HLP would be whether it can ramp up retail sales at its new malls when they enter their second or third leasing cycles, and we discuss this in the next subsection below.
4. HLP is starting to apply systematic management in the running of its business
Admittedly, Shanghai is a special city in China in terms of affluence and economic development, and for HLP to achieve what its Shanghai malls did in 2010 may not be easy for it to replicate in many tier-2 cities in China. Hence, it remains to be seen whether and how quickly HLP’s new malls in China can follow in the footsteps of Grand Gateway 66 and Plaza 66.
That said, we think the skills needed to ramp up a shopping mall can be learned, and if a company can develop and continue to hone its system to drive a continuous improvement in the performance of a mall, its ability to manage and ramp up the mall should also continue to improve over time. There is a considerable overlap in terms of tenants at HLP’s different malls – for example, Louis Vuitton, H&M, Uniqlo, Armani, Burberry, etc., are all tenants in several malls owned by HLP. Presumably, if a company has a system to drive the development of its partnership relations and has continuous communication with the major brands, these skills and experience should be at least partly transferable to the management of its other malls.
Similarly, a retail property manager should also have a better grasp of the pros and cons and effects of different types of promotional campaigns if it has developed a system to enable it to monitor and learn from each experience. And a retail property manager should have a better grasp of the performance of its malls and changing consumer preferences if it has developed a system to track its tenants’ sales performances, as well as customer preferences. These are just some of the benefits associated with running a business in a systematic and professional way, in our view.
- 26 - The Hang Lung Ambition 13 April 2015
However, we do not think this currently applies to many retail malls in Hong Kong and China, and believe that many property companies need to overcome certain cultural barriers before making changes. Nonetheless, we believe that HLP is one of the few to move in this direction. And this brings us to the next point, which is that we think HLP has been learning and making progress as a manager of commercial properties.
5. HLP has been learning and improving as a manager of commercial property assets
We acknowledge that HLP’s Hong Kong assets have not been the most productive in Hong Kong in the past. That said, our read is that HLP seems to be one of the few property managers with the determination and commitment to keep on improving both its property assets and the way it manages these assets.
We think this is important because, in our view, the absolute performance of a mall may not be as important as its prospects for continuous improvement. We believe that retail property is essentially a very management-intensive business and whether the company has the commitment to continue to improve constitutes an important element in its future prospects for sustained rental and NAV growth.
In this connection, HLP has demonstrated that it is capable of fixing teething and other problems in its portfolio. Take its Palace 66 in Shenyang as an example; while this mall encountered sluggish sales growth after opening, the group has been able to move this mall beyond its problems mainly by adjusting its positioning to focus on the young and trendy – bringing in tenants that fit well into the mall’s new positioning, as well as phasing out those tenants that did not fit. And although this resulted in 2 years (2012-13) of sales weakness at this mall, we have observed that Palace 66’s situation appears to have shifted from 2H13, while the 12% YoY achieved retail sales growth for Palace 66 in 2014 serves as further evidence that its problems are likely to be coming to an end.
Meanwhile, we also think that HLP has been proactive in its management of Parc 66 in Jinan. Parc 66’s achieved sales during its first full year of operation (2012) were actually pretty good, at more than HKD1bn. And HLP appears determined to improve and upgrade this mall. It has focused on fine-tuning its tenant mix and trying to move up the mall’s positioning once it entered into a second leasing cycle in late 2013. This resulted in lower occupancy and rental income for this mall in 2014, but we see this as a sign of good management that is aimed at securing stronger and more sustainable earnings growth in the medium to long term.
Operating and financial performance of Palace 66 2011 2012 2013 2014 Gross rental (HKDm) 150 164 160 166 Occupancy rate (%) 95% 88% 90% 90% Retail GFA (m sq ft) 1.2 1.2 1.2 1.2 Achieved rental (gross area) (HKD/sq ft) 11 13 12 13 Occupancy cost (%) 30% 30% 27% 25% Source: Company, Daiwa
Operating and financial performance of Parc 66 2012 2013 2014 Gross rental (HKDm) 365 367 336 Occupancy rate (%) 95% 85% 85% Retail GFA (m sq ft) 1.8 1.8 1.8 Achieved rental (gross area) (HKD/sq ft) 18 20 18 Occupancy cost (%) 30% 26% 24% Source: Company, Daiwa
Similar things can also be said about the performance of HLP’s Shanghai malls over the past few years. While there are concerns in the market as to whether the sales performances of these malls have peaked already, we think it is still too early to dismiss their potential for further growth. Although they did not achieve significant retail sales growth over 2013- 14 (tenant sales in Plaza 66 declined modestly over this period), we think this needs to be taken in the context that there has been a significant increase in completion between high-end malls in Shanghai over the past few years, and that the anti-corruption campaign in the Mainland has had a significantly adverse impact on luxury consumption in China.
- 27 - The Hang Lung Ambition 13 April 2015
Before this period, the tenant sales for both malls had risen substantially. As such, we think these 2 malls could just be going through a consolidation period after several years of rapid tenant sales and rental income growth. The current tenant sales of these 2 malls (at USD450-600m) do not look that high relative to the current most productive malls in Hong Kong (USD1-4.5bn). And we do not see why these malls cannot catch up with the most productive malls in Hong Kong, as long as they remain among the most popular malls in Shanghai.
Annual retail sales at the major malls in Hong Kong and China (HKDbn) 40 35 30 25 20 15 10 5 0 Harbour City Times Square SOGO CWB Shin Kong Shenzhen Hangzhou Grand Plaza 66 Hangzhou Shanghai Place MIXc Building Gateway 66 MIXc Jiuguang Source: Company, Baidu, Daiwa
Also, although the sales growth of these 2 malls has been uninspiring over the past few years, the rental income has continued to rise, suggesting that HLP has a fair amount of bargaining power over the brands, and this is in spite of the challenging overall retail environment in Shanghai. In fact, the some of the major global brands, such as Chanel, Prada, Escada, Celine and Tod’s, have expanded their stores in Plaza 66 (doubling their GFA in some cases) over the past 2 years, suggesting that many major brands still think that having a presence in Plaza 66 has strategic value despite the completion of many new malls in Shanghai. Similarly, other major brands, such as Bottega Veneta, Burberry, Emporio Armani and Gucci, have taken space in Grand Gateway 66 in recent years, suggesting that many brands are still confident that the mall is moving up its positioning in the Shanghai retail property market.
In addition, we note that HLP will embark on major AEI work for its properties (with Plaza 66 and Grand Gateway 66 the two main examples) to ensure that they remain competitive (as they have now been open for more than 10 years). We see all this as a sign of the proactive management of HLP’s retail property assets, as is the group’s increased focus on revamping its Hong Kong portfolio (please see Q4 for details). Meanwhile, our recent visit to the group’s recently opened Riverside 66 in Tianjin indicates to us that HLP has put less emphasis on attracting luxury-brand tenants and more on F&B tenants, tenants that have strong online platforms and those that are popular with youngsters. We see this as a sign that the group has been learning and adapting its strategy to the changing market environment.
- 28 - The Hang Lung Ambition 13 April 2015
A tenant in Riverside 66 which is strong in on-line platform
Source: Daiwa
A tenant in Riverside 66 which is popular among youngsters
Source: Daiwa
- 29 - The Hang Lung Ambition 13 April 2015
A strong local designer brand in Riverside 66
Source: Daiwa
If the above (ie, Q3) confirms HLP’s credentials as an active operator in the mall business, then we think HLP can also be seen as a stock to play on the theme of growing consumer spending in China, for the following reasons:
1. The stock offers a simple and focused equity story. Compared with many other property companies in Asia, HLP’s asset and earnings structure is relatively simple, driven primarily by its rental income, and it does not have material non-property investments and exposure.
HLP: rental income from Hong Kong and China (HKDm) 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Hong K ong China Dividends
Source: Company
Basically, we think HLP is now embarking on an unusual ride in the property sector, offering the promise of significant value creation over time. We believe the effective start of the company’s ambitious wealth-building journey can be traced back to the 1990s, when its restraint in buying land, its share placement in 1996 (raising HKD3bn in new equity), and its off-loading of non-core properties enabled it to build up a war chest ahead of the 1997-2Q03 downturn in the Hong Kong property market. This then allowed it to take advantage of the ensuing collapse in land prices to build up a landbank of high-end residential properties.
- 30 - The Hang Lung Ambition 13 April 2015
Essentially, the Hang Lung Group, through HLP, acquired 4 major sites in urban areas over 1999-2001, at a cost of HKD5.9bn for the land and some HKD14.5bn in development costs, totalling HKD20.4bn, on our estimates. These projects, especially HarbourSide and Long Beach, have turned out to be very profitable, enabling the group to raise HKD37bn in sales proceeds so far, on our estimates.
Seen in this light, what HLP has been doing is essentially an “asset swap” whereby it has reinvested the money it has made from the Hong Kong residential property market into prime commercial properties on the Mainland. Since 2005, it has spent around HKD12.2bn on acquiring prime commercial sites in China’s major cities and has then gone on to roll out its projects, with the phase one of 7 of them already completed.
Major residential sites acquired by HLP over the 1999-2001 period No. of units GFA (m sq ft) Year of land acquisition Total land cost (HKDm) The HarbourSide 1,122 1.4 1999 2,172 AquaMarine 1,616 1.3 2000 850 Carmel-on-the-Hill 188 0.1 2000 251 The Long Beach 1,829 1.7 2001 2,580 4,755 4.5 5,853 Source: Company, Daiwa estimates
In China, we expect capital and talent to continue to move into the major cities. Compared with Tokyo and London (which account for about 20% and 10% of the respective populations of Japan and the UK), we do not think the current populations of Beijing and Shanghai are large relative to China’s total population and foresee considerable room for the populations of China’s top 20-30 cities to continue to expand, with the main bottlenecks being infrastructure, the size of the cities, and real-estate prices. For China’s cities that have growing populations and continuous economic development, we think it is only reasonable to expect their private consumption to increase as well.
While there is abundant commercial property space in China, large-scale malls in the main city centres have become difficult to find. We also think that, currently, the main retail format in China is still in the form of pedestrian streets and department stores. In comparison, shopping malls are just emerging as a retail format, and we think the malls will become the most important retail format in China over time, as is the case in Hong Kong now. As such, even if overall consumer spending in China slows, the largest and most well-managed malls should still achieve sustained growth in retail sales and rental through market share expansion. In this light, we think the HLP story is simple and focused.
2. HLP is very well financed. We estimate that HKLP has invested CNY12.2bn in buying land since 2005 and this was more than covered by the more than HKD37bn in sales proceeds it has raised from the sale of its Hong Kong residential property assets since 2004. We also notice that its property ambitions have been supplemented by its major equity fund-raising moves, totalling HKD25.2bn in 1996-2010, on our estimates.
HLP: major equity fundraisings from 1996 to present New shares Share price Value Event issued (m) (HKD) (HKDm) Dec 1996 Share placement 310 10.1 3,131 Dec 2004 Share placement 370 12.0 4,440 Nov 2006 Share placement 410 16.3 6,683 Nov 2010 Share placement 294 37.5 10,896 25,150 Source: Company, Bloomberg, Daiwa Note: November 2010 value is net proceeds
- 31 - The Hang Lung Ambition 13 April 2015
HLP’s current rental properties in China have an annual gross rental of about HKD3.92bn, and we estimate this to rise to over HKD7bn by 2020, when its 10 projects will have all opened. With many of its malls now entering into their second leasing cycles, and growing rental income (plus potentially further proceeds from the sales of non-core assets), HLP’s ability to fund its property ambitions and take advantage of further land-acquisition opportunities is strong, in our view. Additionally, we think HLP’s appeal to investors is strengthened in that some aspects of its business appear to have been overlooked, which constitutes another source of hidden value for HLP shares, in our view.
HLP: shareholders’ funds and net debt (HKDm) 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 (20,000) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Shareholder equity Net debt Source: Company
- 32 - The Hang Lung Ambition 13 April 2015
Question 4
Are there aspects of this ambitious wealth-building exercise that have been overlooked?
- 33 - The Hang Lung Ambition 13 April 2015
Q4: Are there aspects of this ambitious wealth-building exercise that have been overlooked?
We think HLP’s vision of transforming itself into a leading commercial property company in China is fairly rare, especially among property companies in Hong Kong and/or possibly Asia. We believe that the systematic and professional management of commercial properties can add significant value for commercial property assets. We also believe China offers a favourable environment for companies with the necessary vision and skills – ie, there aren’t many markets in the world that have as many up-and-coming and populous cities (populations of over 10m), and where developers can secure mega sites in city centres where total development costs are not much higher than total construction costs.
Of course, the China property market is facing many challenges, but overall we judge that many of these can be overcome by those property companies that are experienced and well-capitalised, and that can develop a proper system to run a portfolio of commercial property assets in a country in an efficient and effective manner, thus creating a virtuous cycle for the developer, tenants and customers. We also think that the top-3 commercial property assets in China’s tier-2 cities and the top-5 commercial property assets in the tier-1 cities should be relatively protected from the many problems and challenges facing China’s property sector. As such, the key question for investors looking at the China commercial property sector is: Which companies can develop their commercial property projects into top players in their respective cities, and can they sustain their position?
This is a challenging endeavour but we think the rewards are worth it. We also think that, as yet, not many companies are dedicated to such projects, and that China’s market is probably large enough to accommodate at least 10 major players.
Our read is that HLP is fully dedicated to this task and, as such, we see its property ambition as being one of the most ambitious wealth-building exercises among the property companies in Hong Kong and possibly Asia as well. And we think one differentiating factor is that it has maintained a strong balance sheet to ensure that it has sufficient capital to roll out its projects and take advantage of landbank opportunities. To the investment community, we think the HLP’s case also appeals as its business strategy is simple, clear and focused. In addition, we think there are at least four other factors relating to HLP that may have been neglected by the market, and which would constitute hidden value for the group.
One is the rental growth potential of its Hong Kong portfolio. We see it as a natural consequence that as HLP started to build a system to run its diverse landbank a few years ago, that it came to realise that many improvements could be made to its Hong Kong portfolio. Indeed, our view has been that the property environment in Hong Kong is currently very favourable for asset managers that have the skills to upgrade property assets.
Range of prices and rents of various property asset classes in Hong Kong (HKD/sq ft, based on GFA) Capital value (HKD/sq ft, based on GFA) Rental value 600,000300,000 3,000300
200,000 200 100x 200x
100,000 100 10x 14x 12x 9x 0 0 Residential Office Retail Residential Office Retail Source: Daiwa
- 34 - The Hang Lung Ambition 13 April 2015
For HLP’s Hong Kong portfolio, we think there are at least four areas where there is scope for improvement in its achieved rental income. One obvious case is its Causeway Bay properties, as we see the area becoming an even more vibrant commercial district in Hong Kong, but the current achieved rentals for Fashion Walk and Hang Lung Centre do not yet seem to have fully reflected their full potential. In this light, we see the group’s latest attempt to bring in H&M as an anchor tenant for the Hang Lung Centre, as well as its attempt to revamp Fashion Walk, as moves in the right direction.
At the same time, we also believe that Mongkok previously lacked modern retail malls to take full advantage of the district’s retail potential, like Harbour City has done in Tsimshatsui. We believe the mall at Langham Place has done well in recent years, and we see HLP’s Grand Plaza and Langham Place Mall forming a more important cluster in the Mongkok retail property market over the next 1-3 years. In addition, we believe that HLP owns interesting niche assets in Central, on The Peak, and in Kowloon East, etc., and think there is considerable room for further improvement in HLP’s position in the Hong Kong property market in the coming years.
HLP: Hong Kong portfolio
Source: Company, Daiwa
- 35 - The Hang Lung Ambition 13 April 2015
Source: Company, Daiwa
- 36 - The Hang Lung Ambition 13 April 2015
Source: Company, Daiwa
Another factor is a potential change in HLP’s corporate strategy to focus more on asset turnover. We have observed some changes in HLP’s strategy in recent years, and it seems that with more emphasis is now being put on asset turnover. This was apparent in its determination to sell leftover units in the HarbourSide in 2014 and its stated intention to sell out remaining units in the Long Beach in West Kowloon. Thus, we think the most important development to watch is whether HLP will move to sell some of the serviced apartments in its upcoming China projects, which we think is a good way to raise funds to finance the construction capex for its upcoming projects, potential future land acquisitions, etc.
We estimate that HLP has at least 6m sq ft of GFA that it can dispose of in the form of serviced apartments or residential units. The potential sales proceeds and property sales net profit this could generate would exceed HKD15bn and HKD3bn, respectively, on our estimates. In our opinion, greater emphasis on asset turnover would improve HLP’s ROE and reduce the financing burden that may fall on its shareholders once it finds good land- acquisition opportunities. More importantly, the monetisation of some of the value of its low-cost landbank could well enable HLP to pay a higher dividend, which we think would be welcomed by the market. We note that if HLP were to raise its DPS slightly, it would generate a dividend yield of over 4%, which would mean that it should be able to offer above average DPS and NAV growth prospects, in our view.
HLP: projects in China where useable areas can be developed into new areas for sale Project City Land Year of Attributable GFA (m sq ft) acquisition time comple-tion Retail Office Hotel/SA Sub-total Car parks Total Grand Gateway 66 Shanghai Dec 1992 2000 0.9 0.9 0.0 1.8 0.3 2.1 Plaza 66 Shanghai Dec 1993 2001 0.5 1.4 0.0 1.9 0.5 2.4 Palace 66 Shenyang Sep 2005 2010 1.2 0.0 0.0 1.2 0.8 2.0 Parc 66 Jinan Feb 2007 2011 1.8 0.0 0.0 1.8 0.9 2.7 Forum 66 Shenyang Aug 2006 2012 1.1 7.1 1.1 9.3 2.1 11.4 Center 66 Wuxi Dec 2006 / May 2009 2013 1.3 1.6 1.2 4.1 1.2 5.3 Riverside 66 Tianjin Feb 2005 2014 1.6 0.0 0.0 1.6 1.2 2.8 Olympia 66 Dalian May 2009 2015 2.4 0.0 0.0 2.4 1.6 4.0 Spring City 66 Kunming Sep 2011 2018 1.7 1.9 1.1 4.7 2.0 6.7 Heartland 66 Wuhan Feb 2013 2019 1.9 1.6 1.4 4.9 2.6 7.5 Source: Company, Daiwa Note: Area shaded in blue = GFA that can be developed into serviced apartments for sale
- 37 - The Hang Lung Ambition 13 April 2015
The third factor to note is the potential of Hang Lung Group to raise its stake in HLP. We do not think the group has any urgent need for a corporate restructuring in the near term. However, we do think that it makes sense for Hang Lung Group to continue to raise its stake in HLP. We note that from a regulatory standpoint, Hang Lung Group can continue to raise its stake in HLP until it reaches 75%. Were this is to happen, we think investors would see it as a positive.
Changes in Hang Lung Group’s stake in HLP Selected transactions disclosed by Hang Lung Group Date No. of shares bought Average price (HKD) Total amount (HKDm) Shareholding after the event 13-Jun-13 3,012,000 25.432 76.6 51.04% 7-Aug-13 2,000,000 25.080 50.2 52.02% 17-Feb-14 1,000,000 21.846 21.8 53.02% Source: Company, Daiwa Note: On 5 Feb 2014, Hang Lung Group announced that it acquired on the open market in Hong Kong an aggregate of 100,979,000 HLP shares over the period from 5 Jun 2013 to 5 Feb 2014, at an aggregate consideration of approx HKD2,545m in cash, representing approx. 2.25% of the total issued share capital of HLP
And the fourth is the impact of new supply on the China retail property market. While abundant new supply can have a varying impact on the outlook of a property asset class, we think the actual impact is different depending on whether this happens in the retail sector or the office market.
Generally, a corporation only needs one office address. However, retailers may have one or more shops depending on the economy. For retailers, our read is that as long as a shop’s sales and operating profit are viable, a retailer will not hesitate to open more stores (and sometimes having more shops actually enhances customer awareness). Our read is that consumers like to have as many shopping choices as possible. As such, our view is that competition in the retail property sector is often a choice of the district as well as the mall or shopping area in question.
In this light, an increase in the supply of retail spaces in a district may not be a bad thing, in so far that having more retail spaces should help in terms of attracting a greater variety of retailers to come to that district. And an increase in the number and variety of offerings should increase the attractiveness of the district to retailers, which could ultimately culminate in what we call “the virtuous cycle in retailing”. By this, we mean that popular retailers in a mall are able to attract quality shoppers to come to that mall. This, in turn, would attract more popular retailers, which could lead to a virtuous cycle that would keep on going as long as the managers of the asset can ensure that the retail property asset remains strong and relevant, or better still, stronger and more relevant.
This leads us to believe that an abundant supply of retail property space in a district is not necessarily a bad thing, especially for the strongest retail property assets in that district, where the benefits usually offset the negative effects of greater competition. For one thing, the greater the number of retail property spaces in a retail district, the easier it is for new retailers to open stores in that district. And hence the breadth of offering in that district increases, which should enhance its appeal to consumers. As such, while more retail space leads to more competition, this adverse impact should be more than offset by the expansion of the industry pie made possible by the enhanced attractiveness of a district as a retail hub. As such, we think an abundant supply of new retail space is a much less worrying situation than if this were to occur in the office market.
As a consequence, retail sales (and by extension retail rents) are often not evenly distributed across a retail area. Instead, strong retail property assets are often able to gain market share from the weaker retail property assets, as the top retail performers in less popular malls often aspire to gain access to the No.1 mall in a district. As such, an abundant supply of retail space is a negative mainly for the less popular property assets. But for the most popular retail malls in a district, this could well have a positive impact. Seen in this light, the investment value of retail properties depends on: 1) whether the location of a mall gives it the potential to be become the most popular in a district and the city, and 2) whether it has the management to realise this potential and sustain its position in the industry given all the changing variables such as the availability of new supply, changing consumer preferences, rising popularity of online shopping, etc.
- 38 - The Hang Lung Ambition 13 April 2015
We see significant room for value creation for the property companies that have the management and systems to create strong retail property assets over time. Against this background, it is probably no coincidence that many of the world’s most valuable property companies are also strong retail property managers.
To conclude, we believe HLP is now undertaking a special wealth-creating exercise within the global property arena. The stock is currently trading at a 54% discount to our end-2015 NAV forecast of HKD46.50 and close to its past-6-year low in terms of share price. We think HLP’s current valuation has factored in a lot of the risks, and believe investors may not fully appreciate that the commercial property business tends to be back-end loaded (in that it takes at least 2 or 3 leasing cycles for a mall’s rental income potential to be revealed). As such, we think there are various value-adding aspects relating to HLP Properties that investors have yet to fully recognise.
HLP: Share price performance (Rebased) 390 340 290 240 190 140 90 40 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Hang Lung Prop HSI Source: Bloomberg, Daiwa
HLP: PBR PBR (x) Hang Lung Properties PBR 3.0 Current PBR: 0.79x 2.5
2.0
1.5 +1SD: 1.39x average since 1990: 0.99x 1.0
0.5 -1SD: 0.59x 0.0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Source: Company, Datastream, Daiwa
HLP: P/NAV (Disc)/prem Hang Lung Properties (disc)/prem to NAV 40% Current NAV disc: -49.0% 20%
0% +1SD: -9.1%
(20%) Avg since 1990= -28.5%
(40%)
(60%) -1SD: -47.9%
(80%) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: Company, Datastream, Daiwa estimate
- 39 - The Hang Lung Ambition 13 April 2015
- 40 -
Financials / Hong Kong 101 HK Financials / Hong Kong 13 April 2015
Hang Lung Properties
Hang Lung Properties Target (HKD): 34.90 34.90 Upside: 44.5% 101 HK 10 Apr price (HKD): 24.15
A good entry point into an ambitious wealth-builder 1 Buy (unchanged) 2 Outperform • A large prize awaits property companies that can execute well in the 3 Hold China commercial property sector 4 Underperform • We see HLP as a contender for that prize, and believe there are facets 5 Sell of the company the market may not have recognised • Ambitious wealth-building is under way at HLP; reaffirm Buy (1) rating
We see HLP as a credible vehicle that has special appeal for long- term investors, not least being that
it was an early mover in the China Forecast revisions (%) Jonas Kan, CFA commercial property sector, and Year to 31 Dec 15E 16E 17E (852) 2848 4439 that its strategy is simple, clear and Revenue change --- [email protected] focused. Moreover, we would argue Net profit change --- Core EPS (FD) change - - - that there are some facets of the company the market may not have Source: Daiwa forecasts ■ What's new adequately factored in, including the In this report, we have attempted to room for improvement in the retail Share price performance present a balanced view of the sales and rental income generated (HKD) (%) 26.0 105 investment value of HLP shares by its Hong Kong assets. through assessing what we see as the 24.8 99 23.5 93 4 major questions pertaining to the What we recommend China commercial property sector, 22.3 86 In our view, HLP is a strong 21.0 80 and to HLP as a vehicle through contender for the prize awaiting Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 which investors could obtain companies that can nurture prime HLung Prop (LHS) Relative to HSI (RHS) exposure to this business. commercial properties in China. As
such, we reaffirm our Buy (1) rating 12-month range 21.10-25.95 ■ What's the impact and 12-month target price of Market cap (USDbn) 13.96 A prize awaits managements that HKD34.90, based on an unchanged 3m avg daily turnover (USDm) 16.61 can execute well. We see significant Shares outstanding (m) 4,479 25% discount to our end-2015E NAV Major shareholder Hang Lung Group (52.9%) potential for value creation of HKD46.50. The key risk to our associated with applying systematic call would be a deterioration in Financial summary (HKD) and professional management to China’s economic outlook. prime commercial property assets in Year to 31 Dec 15E 16E 17E Revenue (m) 12,702 14,558 15,702 China. In our view, there are not yet ■ How we differ Operating profit (m) 9,412 10,760 11,601 more than 8 major companies We think the returns for commercial Net profit (m) 6,730 7,750 8,470 focusing on this segment, and we Core EPS (fully-diluted) 1.503 1.730 1.891 property businesses are by nature EPS change (%) (32.8) 15.2 9.3 believe the China market is large backend-loaded, and believe HLP enough to accommodate at least 10 Daiwa vs Cons. EPS (%) 4.3 24.9 45.4 has been making steady progress in PER (x) 16.1 14.0 12.8 major players. As such, we contend terms of applying systematic and Dividend yield (%) 3.3 3.5 3.7 that the potential for value creation professional management to its DPS 0.800 0.850 0.900 PBR (x) 0.8 0.8 0.8 is mainly dependent on retail property assets, although this management skill rather than the EV/EBITDA (x) 11.9 10.6 10.0 may have yet have been recognised ROE (%) 5.0 5.6 6.0 competitive environment. by the stock market. Source: FactSet, Daiwa forecasts
See important disclosures, including any required research certifications, beginning on page 46 The Hang Lung Ambition 13 April 2015
Financial summary
Key assumptions Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Gross rental income (HKDm) 4,546 5,161 6,098 6,642 7,216 7,962 8,911 9,794 Rental EBIT (HKDm) 3,726 4,194 4,896 5,286 5,589 6,057 6,771 7,442 Property sales profit (HKDm) 5,256 2 3,063 1,511 7,419 3,040 3,680 3,859
Profit and loss (HKDm) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Rental income 4,546 5,161 6,098 6,642 7,216 7,962 8,911 9,794 Property sales 7,511 3 1,274 2,496 9,814 4,740 5,647 5,908 Other Revenue 00000000 Total Revenue 12,057 5,164 7,372 9,138 17,030 12,702 14,558 15,702 Other income 35 231 2,774 829 922 999 1,019 1,039 COGS (3,075) (968) (1,630) (2,301) (3,995) (3,606) (4,093) (4,373) SG&A (456) (512) (626) (642) (644) (683) (724) (767) Other op.expenses 0 0 0 0 0 0 0 0 Operating profit 8,561 3,915 7,890 7,024 13,313 9,412 10,760 11,601 Net-interest inc./(exp.) (47) (93) (348) (437) (698) (700) (714) (728) Assoc/forex/extraord./others 166 98 105 96 75 79 83 87 Pre-tax profit 8,680 3,920 7,647 6,683 12,690 8,791 10,129 10,960 Tax (1,432) (815) (944) (1,088) (2,146) (1,523) (1,825) (1,920) Min. int./pref. div./others (574) (364) (525) (545) (522) (538) (554) (570) Net profit (reported) 6,674 2,741 6,178 5,050 10,022 6,730 7,750 8,470 Net profit (adjusted) 6,674 2,741 6,178 5,050 10,022 6,730 7,750 8,470 EPS (reported)(HKD) 1.605 0.613 1.380 1.128 2.238 1.503 1.730 1.891 EPS (adjusted)(HKD) 1.605 0.613 1.380 1.128 2.238 1.503 1.730 1.891 EPS (adjusted fully-diluted)(HKD) 1.605 0.613 1.380 1.128 2.238 1.503 1.730 1.891 DPS (HKD) 0.710 0.710 0.740 0.750 0.760 0.800 0.850 0.900 EBIT 8,561 3,915 7,890 7,024 13,313 9,412 10,760 11,601 EBITDA 8,561 3,915 7,890 7,024 13,313 9,412 10,760 11,601
Cash flow (HKDm) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Profit before tax 8,680 3,920 7,647 6,683 12,690 8,791 10,129 10,960 Depreciation and amortisation 23 25 27 29 31 33 35 36 Tax paid (1,131) (735) (1,018) (1,088) 1,741 (1,650) (1,825) (1,920) Change in working capital 1,414 620 554 314 740 780 795 810 Other operational CF items (182) (73) 171 266 543 536 541 549 Cash flow from operations 8,804 3,757 7,381 6,204 15,745 8,490 9,675 10,435 Capex (3,666) (5,982) (8,088) (9,274) (6,620) (6,680) (7,450) (7,890) Net (acquisitions)/disposals 0 0 0 0 0 0 0 0 Other investing CF items 119 124 129 134 136 140 145 148 Cash flow from investing (3,547) (5,858) (7,959) (9,140) (6,484) (6,540) (7,305) (7,742) Change in debt 0 0 0 0 0 0 0 0 Net share issues/(repurchases) 137 10,896 0 0 0 0 0 0 Dividends paid (2,820) (3,014) (3,183) (3,582) (3,313) (3,582) (3,805) (4,029) Other financing CF items (386) (392) (415) (430) (442) (460) (470) (475) Cash flow from financing (3,069) 7,490 (3,598) (4,012) (3,755) (4,042) (4,275) (4,504) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash 2,188 5,389 (4,177) (6,947) 5,506 (2,092) (1,905) (1,811) Free cash flow 5,138 (2,225) (707) (3,070) 9,125 1,810 2,225 2,545 Source: FactSet, Daiwa forecasts
- 42 - The Hang Lung Ambition 13 April 2015
Financial summary continued …
Balance sheet (HKDm) As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Cash & short-term investment 11,535 27,202 36,025 34,321 39,946 38,256 36,476 34,880 Inventory 5,855 5,963 6,109 5,695 4,046 2,820 1,650 0 Accounts receivable 1,494 1,983 1,270 2,865 1,916 2,015 2,130 2,260 Other current assets 0 0 452 0 0 0 0 0 Total current assets 18,884 35,148 43,856 42,881 45,908 43,091 40,256 37,140 Fixed assets 96,291 107,646 122,955 138,354 146,048 152,794 159,952 168,081 Goodwill & intangibles 0 0 0 0 0 0 0 0 Other non-current assets 993 1,888 1,053 1,045 1,223 1,290 1,295 1,320 Total assets 116,168 144,682 167,864 182,280 193,179 197,175 201,503 206,541 Short-term debt 1,480 4,500 1,113 1,657 5,657 5,680 5,760 5,890 Accounts payable 3,076 3,430 4,811 5,977 7,906 8,130 8,165 8,320 Other current liabilities 1,132 1,196 392 633 1,581 1,610 1,623 1,650 Total current liabilities 5,688 9,126 6,316 8,267 15,144 15,420 15,548 15,860 Long-term debt 4,978 12,236 28,623 33,322 29,441 29,820 29,865 29,950 Other non-current liabilities 12,876 8,396 8,947 9,524 9,591 9,680 9,820 9,930 Total liabilities 23,542 29,758 43,886 51,113 54,176 54,920 55,233 55,740 Share capital 4,159 4,472 4,477 4,479 4,479 4,479 4,479 4,479 Reserves/R.E./others 83,785 105,247 113,451 120,055 127,848 130,996 134,941 139,382 Shareholders' equity 87,944 109,719 117,928 124,534 132,327 135,475 139,420 143,861 Minority interests 4,682 5,205 6,050 6,633 6,676 6,780 6,850 6,940 Total equity & liabilities 116,168 144,682 167,864 182,280 193,179 197,175 201,503 206,541 EV 107,773 102,907 107,929 115,459 109,996 112,192 114,167 116,068 Net debt/(cash) (5,077) (10,466) (6,289) 658 (4,848) (2,756) (851) 960 BVPS (HKD) 21.145 24.535 26.341 27.816 29.544 30.247 31.127 32.119
Key ratios (%) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Sales (YoY) 188.9 (57.2) 42.8 24.0 86.4 (25.4) 14.6 7.9 EBITDA (YoY) 166.0 (54.3) 101.5 (11.0) 89.5 (29.3) 14.3 7.8 Operating profit (YoY) 166.0 (54.3) 101.5 (11.0) 89.5 (29.3) 14.3 7.8 Net profit (YoY) 179.5 (58.9) 125.4 (18.3) 98.5 (32.8) 15.2 9.3 Core EPS (fully-diluted) (YoY) 178.6 (61.8) 125.1 (18.3) 98.4 (32.8) 15.2 9.3 Gross-profit margin 74.5 81.3 77.9 74.8 76.5 71.6 71.9 72.2 EBITDA margin 71.0 75.8 107.0 76.9 78.2 74.1 73.9 73.9 Operating-profit margin 71.0 75.8 107.0 76.9 78.2 74.1 73.9 73.9 Net profit margin 55.4 53.1 83.8 55.3 58.8 53.0 53.2 53.9 ROAE 8.6 2.8 5.4 4.2 7.8 5.0 5.6 6.0 ROAA 6.5 2.1 4.0 2.9 5.3 3.4 3.9 4.2 ROCE 9.7 3.4 5.5 4.4 7.8 5.3 6.0 6.3 ROIC 9.2 3.2 6.2 4.7 8.3 5.7 6.2 6.4 Net debt to equity n.a. n.a. n.a. 0.5 n.a. n.a. n.a. 0.7 Effective tax rate 16.5 20.8 12.3 16.3 16.9 17.3 18.0 17.5 Accounts receivable (days) 33.0 122.9 80.5 82.6 51.2 56.5 52.0 51.0 Current ratio (x) 3.3 3.9 6.9 5.2 3.0 2.8 2.6 2.3 Net interest cover (x) 182.1 42.1 22.7 16.1 19.1 13.4 15.1 15.9 Net dividend payout 44.2 115.8 53.6 66.5 34.0 53.2 49.1 47.6 Free cash flow yield 4.8 n.a. n.a. n.a. 8.4 1.7 2.1 2.4 Source: FactSet, Daiwa forecasts
Company profile Hang Lung Properties (HLP) is the property arm of Hang Lung Group, which is one of the most established property developers in Hong Kong. In the 1990s, it invested in 2 major commercial property projects in Shanghai, which later became among the most popular commercial property assets in Shanghai and China. Since the early 2000s, it has been pursuing a strategy of focusing on the commercial property sector in China, and has subsequently acquired 8 major sites outside Shanghai. It now has a stated strategy to transform itself into a leading player in commercial property in Greater China.
- 43 - The Hang Lung Ambition 13 April 2015
Daiwa’s Asia Pacific Research Directory HONG KONG SOUTH KOREA Hiroaki KATO (852) 2532 4121 [email protected] Sung Yop CHUNG (82) 2 787 9157 [email protected] Regional Research Head Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Kosuke MIZUNO (852) 2848 4949 / [email protected] Shipbuilding; Steel (852) 2773 8273 Mike OH (82) 2 787 9179 [email protected] Regional Research Co-head Banking; Capital Goods (Construction and Machinery) John HETHERINGTON (852) 2773 8787 [email protected] Iris PARK (82) 2 787 9165 [email protected] Regional Deputy Head of Asia Pacific Research Consumer/Retail Rohan DALZIELL (852) 2848 4938 [email protected] Jun Yong BANG (82) 2 787 9168 [email protected] Regional Head of Product Management Oil; Chemicals; Tyres Kevin LAI (852) 2848 4926 [email protected] Thomas Y KWON (82) 2 787 9181 [email protected] Chief Economist for Asia ex-Japan; Macro Economics (Regional) Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Game Christie CHIEN (852) 2848 4482 [email protected] Macro Economics (Regional) TAIWAN Junjie TANG (852) 2773 8736 [email protected] Rick HSU (886) 2 8758 6261 [email protected] Macro Economics (China) Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design Jonas KAN (852) 2848 4439 [email protected] (Regional) Head of Hong Kong and China Property Steven TSENG (886) 2 8758 6252 [email protected] Leon QI (852) 2532 4381 [email protected] IT/Technology Hardware (PC Hardware) Banking (Hong Kong, China); Broker (China); Insurance (China) Christine WANG (886) 2 8758 6249 [email protected] Anson CHAN (852) 2532 4350 [email protected] IT/Technology Hardware (Automation); Pharmaceuticals and Healthcare; Consumer Consumer (Hong Kong/China) Kylie HUANG (886) 2 8758 6248 [email protected] Jamie SOO (852) 2773 8529 [email protected] IT/Technology Hardware (Handsets and Components) Gaming and Leisure (Hong Kong/China) Helen CHIEN (886) 2 8758 6254 [email protected] Dennis IP (852) 2848 4068 [email protected] Small/Mid Cap Power; Utilities; Renewables and Environment (Hong Kong/China) John CHOI (852) 2773 8730 [email protected] INDIA Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Becky HAN (852) 2848 4464 [email protected] Head of India Research; Strategy; Banking/Finance Small/Mid Cap (Regional) Saurabh MEHTA (91) 22 6622 1009 [email protected] Joey CHEN (852) 2848 4483 [email protected] Capital Goods; Utilities Steel (China) Kelvin LAU (852) 2848 4467 [email protected] SINGAPORE Head of Transportation (Hong Kong/China); Transportation (Regional) Ramakrishna MARUVADA (65) 6499 6543 [email protected] Brian LAM (852) 2532 4341 [email protected] Head of Singapore Research; Telecommunications (China/ASEAN/India) Transportation – Aviation (Hong Kong/China); Railway; Construction and Engineering Royston TAN (65) 6321 3086 [email protected] (China) Oil and Gas; Capital Goods Jibo MA (852) 2848 4489 [email protected] David LUM (65) 6329 2102 [email protected] Head of Custom Products Group Property and REITs Thomas HO (852) 2773 8716 [email protected] Evon TAN (65) 6499 6546 [email protected] Custom Products Group Property and REITs
Jame OSMAN (65) 6321 3092 [email protected] PHILIPPINES Telecommunications (ASEAN/India); Pharmaceuticals and Healthcare; Consumer Bianca SOLEMA (63) 2 737 3023 [email protected] (Singapore)
Utilities and Energy
- 44 - The Hang Lung Ambition 13 April 2015
Daiwa’s Offices Office / Branch / Affiliate Address Tel Fax DAIWA SECURITIES GROUP INC HEAD OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6753 (81) 3 5555 3111 (81) 3 5555 0661 Daiwa Securities Trust Company One Evertrust Plaza, Jersey City, NJ 07302, U.S.A. (1) 201 333 7300 (1) 201 333 7726 Daiwa Securities Trust and Banking (Europe) PLC (Head Office) 5 King William Street, London EC4N 7JB, United Kingdom (44) 207 320 8000 (44) 207 410 0129 Daiwa Europe Trustees (Ireland) Ltd Level 3, Block 5, Harcourt Centre, Harcourt Road, Dublin 2, Ireland (353) 1 603 9900 (353) 1 478 3469
Daiwa Capital Markets America Inc Financial Square, 32 Old Slip, New York, NY10005, U.S.A. (1) 212 612 7000 (1) 212 612 7100 Daiwa Capital Markets America Inc. San Francisco Branch 555 California Street, Suite 3360, San Francisco, CA 94104, U.S.A. (1) 415 955 8100 (1) 415 956 1935 Daiwa Capital Markets Europe Limited 5 King William Street, London EC4N 7AX, United Kingdom (44) 20 7597 8000 (44) 20 7597 8600 Daiwa Capital Markets Europe Limited, Frankfurt Branch Trianon Building, Mainzer Landstrasse 16, 60325 Frankfurt am Main, (49) 69 717 080 (49) 69 723 340 Federal Republic of Germany Daiwa Capital Markets Europe Limited, Paris Representative Office 36, rue de Naples, 75008 Paris, France (33) 1 56 262 200 (33) 1 47 550 808 Daiwa Capital Markets Europe Limited, Geneva Branch 50 rue du Rhône, P.O.Box 3198, 1211 Geneva 3, Switzerland (41) 22 818 7400 (41) 22 818 7441 Daiwa Capital Markets Europe Limited, Midland Plaza 7th Floor, 10 Arbat Street, Moscow 119002, (7) 495 641 3416 (7) 495 775 6238 Moscow Representative Office Russian Federation Daiwa Capital Markets Europe Limited, Bahrain Branch 7th Floor, The Tower, Bahrain Commercial Complex, P.O. Box 30069, (973) 17 534 452 (973) 17 535 113 Manama, Bahrain Daiwa Capital Markets Hong Kong Limited Level 28, One Pacific Place, 88 Queensway, Hong Kong (852) 2525 0121 (852) 2845 1621 Daiwa Capital Markets Singapore Limited 6 Shenton Way #26-08, DBS Building Tower Two, Singapore 068809, (65) 6220 3666 (65) 6223 6198 Republic of Singapore Daiwa Capital Markets Australia Limited Level 34, Rialto North Tower, 525 Collins Street, Melbourne, (61) 3 9916 1300 (61) 3 9916 1330 Victoria 3000, Australia DBP-Daiwa Capital Markets Philippines, Inc 18th Floor, Citibank Tower, 8741 Paseo de Roxas, Salcedo Village, (632) 813 7344 (632) 848 0105 Makati City, Republic of the Philippines Daiwa-Cathay Capital Markets Co Ltd 14/F, 200, Keelung Road, Sec 1, Taipei, Taiwan, R.O.C. (886) 2 2723 9698 (886) 2 2345 3638 Daiwa Securities Capital Markets Korea Co., Ltd. One IFC, 10 Gukjegeumyung-Ro, Yeouido-dong, Yeongdeungpo-gu, (82) 2 787 9100 (82) 2 787 9191 Seoul, 150-876, Korea Daiwa Securities Capital Markets Co Ltd, Room 301/302，Kerry Center， (86) 10 6500 6688 (86) 10 6500 3594 Beijing Representative Office 1 Guanghua Road，Chaoyang District， Beijing 100020, People’s Republic of China Daiwa SSC Securities Co Ltd 45/F, Hang Seng Tower, 1000 Lujiazui Ring Road, (86) 21 3858 2000 (86) 21 3858 2111 Pudong, Shanghai 200120, People’s Republic of China Daiwa Securities Capital Markets Co. Ltd, 18th Floor, M Thai Tower, All Seasons Place, 87 Wireless Road, (66) 2 252 5650 (66) 2 252 5665 Bangkok Representative Office Lumpini, Pathumwan, Bangkok 10330, Thailand Daiwa Capital Markets India Private Ltd 10th Floor, 3 North Avenue, Maker Maxity, Bandra Kurla Complex, (91) 22 6622 1000 (91) 22 6622 1019 Bandra East, Mumbai – 400051, India Daiwa Securities Capital Markets Co. Ltd, Suite 405, Pacific Palace Building, 83B, Ly Thuong Kiet Street, (84) 4 3946 0460 (84) 4 3946 0461 Hanoi Representative Office Hoan Kiem Dist. Hanoi, Vietnam
DAIWA INSTITUTE OF RESEARCH LTD HEAD OFFICE 15-6, Fuyuki, Koto-ku, Tokyo, 135-8460, Japan (81) 3 5620 5100 (81) 3 5620 5603 MARUNOUCHI OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6756 (81) 3 5555 7011 (81) 3 5202 2021
New York Research Center 11th Floor, Financial Square, 32 Old Slip, NY, NY 10005-3504, U.S.A. (1) 212 612 6100 (1) 212 612 8417 London Research Centre 3/F, 5 King William Street, London, EC4N 7AX, United Kingdom (44) 207 597 8000 (44) 207 597 8550
- 45 - The Hang Lung Ambition 13 April 2015
Disclaimer
This publication is produced by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, and distributed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Securities Capital Markets Co. Ltd., and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person.
Daiwa Securities Group Inc., its subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other interests in the securities of the company under research including derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. The following are additional disclosures.
Japan Daiwa Securities Co. Ltd. and Daiwa Securities Group Inc. Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc.
Investment Banking Relationship Within the preceding 12 months, The subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: Modern Land (China) Co. Ltd (1107 HK); econtext Asia Ltd (1390 HK); Rexlot Holdings Ltd (555 HK); Neo Solar Power Corp (3576 TT); Accordia Golf Trust (AGT SP); Hua Hong Semiconductor Ltd (1347 HK).
*Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司), Daiwa Capital Markets Singapore Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea Co., Ltd.
Hong Kong This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司) (“DHK”) which is regulated by the Hong Kong Securities and Futures Commission. Recipients of this research in Hong Kong may contact DHK in respect of any matter arising from or in connection with this research.
Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationship For “Investment Banking Relationship”, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Relevant Relationship (DHK) DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage. DHK market making DHK may from time to time make a market in the securities covered by this research.
Singapore This research is distributed in Singapore by Daiwa Capital Markets Singapore Limited and it may only be distributed in Singapore to accredited investors, expert investors and institutional investors as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. By virtue of distribution to these category of investors, Daiwa Capital Markets Singapore Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to disclosure of Daiwa Capital Markets Singapore Limited’s interest and/or its representative’s interest in securities). Recipients of this research in Singapore may contact Daiwa Capital Markets Singapore Limited in respect of any matter arising from or in connection with the research.
Australia This research is distributed in Australia by Daiwa Capital Markets Stockbroking Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act. Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research. Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
India This research is distributed by Daiwa Capital Markets India Private Limited (DAIWA) which is an intermediary registered with Securities & Exchange Board of India. This report is not to be considered as an offer or solicitation for any dealings in securities. While the information in this report has been compiled by DAIWA in good faith from sources believed to be reliable, no representation or warranty, express of implied, is made or given as to its accuracy, completeness or correctness. DAIWA its officers, employees, representatives and agents accept no liability whatsoever for any loss or damage whether direct, indirect, consequential or otherwise howsoever arising (whether in negligence or otherwise) out of or in connection with or from any use of or reliance on the contents of and/or omissions from this document. Consequently DAIWA expressly disclaims any and all liability for, or based on or relating to any such information contained in or errors in or omissions in this report. Accordingly, you are recommended to seek your own legal, tax or other advice and should rely solely on your own judgment, review and analysis, in evaluating the information in this document. The data contained in this document is subject to change without any prior notice DAIWA reserves its right to modify this report as maybe required from time to time. DAIWA is committed to providing independent recommendations to its Clients and would be happy to provide any information in response to any query from its Clients. This report is strictly confidential and is being furnished to you solely for your information. The information contained in this document should not be reproduced (in whole or in part) or redistributed in any form to any other person. We and our group companies, affiliates, officers, directors and employees may from time to time, have long or short positions, in and buy sell the securities thereof, of company(ies) mentioned herein or be engaged in any other transactions involving such securities and earn brokerage or other compensation or act as advisor or have the potential conflict of interest with respect to any recommendation and related information or opinion. DAIWA prohibits its analyst and their family members from maintaining a financial interest in the securities or derivatives of any companies that the analyst cover. This report is not intended or directed for distribution to ,or use by any person, citizen or entity which is resident or located in any state or country or jurisdiction where such publication, distribution or use would be contrary to any statutory legislation, or regulation which would require DAIWA and its affiliates/ group companies to any registration or licensing requirements. The views expressed in the report accurately reflect the analyst’s personal views about the securities and issuers that are subject of the Report, and that no part of the analyst’s compensation was, is or will be directly or indirectly, related to the recommendations or views expressed in the Report. This report does not recommend to US recipients the use of Daiwa Capital Markets India Private Limited or any of its non – US affiliates to effect trades in any securities and is not supplied with any understanding that US recipients will direct commission business to Daiwa Capital Markets India Private Limited.
Taiwan This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd and it may only be distributed in Taiwan to institutional investors or specific investors who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd in respect of any matter arising from or in connection with the research.
Philippines This research is distributed in the Philippines by DBP-Daiwa Capital Markets Philippines, Inc. which is regulated by the Philippines Securities and Exchange Commission and the Philippines Stock Exchange, Inc. Recipients of this research in the Philippines may contact DBP-Daiwa Capital Markets Philippines, Inc. in respect of any matter arising from or in connection with the research. DBP-Daiwa Capital Markets Philippines, Inc. recommends that investors independently assess, with a professional advisor, the specific financial risks as well as the legal, regulatory, tax, accounting, and other consequences of a proposed transaction. DBP-Daiwa Capital Markets Philippines, Inc. may have positions or may be materially interested in the securities in any of the markets mentioned in the publication or may have performed other services for the issuers of such securities.
For relevant securities and trading rules please visit SEC and PSE Link at http://www.sec.gov.ph/irr/AmendedIRRfinalversion.pdf and http://www.pse.com.ph/ respectively.
Thailand This research is distributed to only institutional investors in Thailand primarily by Thanachart Securities Public Company Limited (“TNS”).
- 46 - The Hang Lung Ambition 13 April 2015
This report is prepared by analysts who are employed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates. While the information is from sources believed to be reliable, neither the information nor the forecasts shall be taken as a representation or warranty for which Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees incur any responsibility. This report is provided to you for informational purposes only and it is not, and is not to be construed as, an offer or an invitation to make an offer to sell or buy any securities. Neither Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees accept any liability whatsoever for any direct or consequential loss arising from any use of this research or its contents. The information and opinions contained herein have been compiled or arrived at from sources believed reliable. However, Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees make no representation or warranty, express or implied, as to their accuracy or completeness. Expressions of opinion herein are subject to change without notice. The use of any information, forecasts and opinions contained in this report shall be at the sole discretion and risk of the user. Daiwa Securities Group Inc. and/or its non-U.S. affiliates perform and seek to perform business with companies covered in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates, their respective directors, officers, servants and employees may have positions and financial interest in securities mentioned in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this research. Therefore, investors should be aware of conflict of interest that may affect the objectivity of this research.
United Kingdom This research report is produced by Daiwa Capital Markets Europe Limited and/or its affiliates and is distributed in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (“FCA”) and is a member of the London Stock Exchange, Eurex and NYSE Liffe. Daiwa Capital Markets Europe Limited and/or its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and/or its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients. This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available. Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory. Regulatory disclosures of investment banking relationships are available at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Germany This document is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany.
Bahrain This research material is distributed by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm – Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113
This material is provided as a reference for making investment decisions and is not intended to be a solicitation for investment. Investment decisions should be made at your own discretion and risk. Accordingly, no representation or warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document, Content herein is based on information available at the time the research material was prepared and may be amended or otherwise changed in the future without notice. All information is intended for the private use of the person to whom it is provided without any liability whatsoever on the part of Daiwa Capital Markets Europe Limited, Bahrain Branch, any associated company or the employees thereof. If you are in doubt about the suitability of the product or the research material itself, please consult your own financial adviser. Daiwa Capital Markets Europe Limited, Bahrain Branch retains all rights related to the content of this material, which may not be redistributed or otherwise transmitted without prior consent.
United States This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMA’s views at any time. Neither DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DCMA’s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (telephone 212-612-7000).
Ownership of Securities: For “Ownership of Securities” information please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Investment Banking Relationships: For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
DCMA Market Making: For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Research Analyst Conflicts: For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.
Research Analyst Certification: For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report. The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months.
- 47 - The Hang Lung Ambition 13 April 2015
Disclosure of investment ratings Rating Percentage of total Buy* 61.0% Hold** 26.1% Sell*** 12.9% Source: Daiwa Notes: data is for Daiwa’s coverage universe in Asia (ex Japan) and correct as of 31 March 2015. * comprised of Daiwa’s Buy and Outperform ratings. ** comprised of Daiwa’s Hold ratings and stocks not formally rated by Daiwa *** comprised of Daiwa’s Underperform and Sell ratings.
Additional information may be available upon request. Japan - Additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable to where report is distributed by Daiwa Securities Co. Ltd.) If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items. . In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction. . In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan. . For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements. . There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements. . There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us. . Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. * The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc. When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us. Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association
- 48 -