Hang Lung Properties (0101.HK) Above Expectations: Plaza 66
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July 27, 2017 EARNINGS REVIEW Hang Lung Properties (0101.HK) Neutral Equity Research Above expectations: Plaza 66 growing but others still stabilizing What surprised us Investment Profile Hang Lung Properties (HLP) reported 1H 2017 underlying profit of Low High HK$3,040mn, down 4% yoy on higher finance expense, but ahead of our Growth Growth Returns * Returns * forecasts on faster property sales bookings and gross margins at 65%, 7pp Multiple Multiple higher yoy. Headline overall rental revenue was down 2% yoy with China - Volatility Volatility 4% yoy and HK 1% yoy. However, excluding currency impact, China rental Percentile 20th 40th 60th 80th 100th was indeed up 1% in RMB terms, while that from HK was up 3% excluding Hang Lung Properties (0101.HK) AEI. Interim DPS was flat yoy at HK¢17. BVPS was up 3% hoh to HK$28.9, Hong Kong Property Peer Group Average * Returns = Return on Capital For a complete description of the investment with HK$1bn positive revaluation for IPs in HK being partly offset by minus profile measures please refer to the HK$0.3bn for those in China. disclosure section of this document. Key data Current Price (HK$) 19.32 What to do with the stock 12 month price target (HK$) 21.80 While management characterized the operating environment for Chinese Market cap (HK$ mn / US$ mn) 86,727.5 / 11,102.6 Foreign ownership (%) -- cities in which they operate as challenging, it was clear that growth resumed in Shanghai with Plaza 66 as tenant sales grew 20% yoy 12/16 12/17E 12/18E 12/19E EPS (HK$) New 1.38 1.20 1.07 1.04 excluding AEI. Rental revenue from non-Shanghai properties was flat hoh EPS revision (%) 0.0 7.5 (2.8) (2.5) on an RMB basis, an improvement from -5% hoh for the prior 6 months. EPS growth (%) 21.4 (13.2) (10.4) (3.2) EPS (dil) (HK$) New 1.38 1.20 1.07 1.04 Near term, we think relatively muted growth in rentals as positives in Plaza P/E (X) 11.6 16.2 18.0 18.6 P/B (X) 0.6 0.7 0.7 0.7 66 will partly be offset by AEIs in Grand Gateway 66 and retail malls in HK, EV/EBITDA (X) 9.6 12.3 13.1 13.2 while most upcoming completions are scheduled for 2019E. At only 1.0% Dividend yield (%) 4.7 3.9 3.9 3.9 ROE (%) 4.8 4.2 3.7 3.6 gearing (net debt/equity), HLP remains keen to build up its land bank in China; while it is reluctant to buy back, management indicated Hang Lung Price performance chart Group (0010.HK, NC) would continue to raise its stake in HLP (55.13% as of 22 33,000 Dec 2016). We revise our 2017E-19E EPS by -2.8% to 7.5% post results, with 21 31,000 a new 12-mo NAV-based TP of HK$21.80 (from HK$21.50), set at the same 20 29,000 40% discount to FY18E NAV. Key risks: Stronger-/weaker-than-expected 19 27,000 luxury retail sales in China; stronger-/weaker-than-expected RMB. 18 25,000 HLP 1H 2017 results highlights 17 23,000 16 21,000 (HK$mn) 1H162H161H17YoY Chg HoH Chg GSe (1H17) +/‐ GSe Jul-16 Oct-16 Feb-17 May-17 Underlying profit 3,167 3,174 3,040 ‐4.0% ‐4.2% 2,480 22.6% Underlying EPS, basic (HK$) 0.70 0.71 0.68 ‐4.0% ‐4.2% 0.55 22.6% Hang Lung Properties (L) Hang Seng Index (R) DPS (HK$) 0.17 0.58 0.17 0.0% NM 0.17 0.0% BVPS (HK$) 28.42 28.14 28.86 1.6% 2.6% n.a. n.a. Source: Company data, Goldman Sachs Global Research. Share price performance (%) 3 month 6 month 12 month Absolute (5.1) 0.6 15.6 INVESTMENT LIST MEMBERSHIP Rel. to Hang Seng Index (13.6) (13.4) (5.4) Neutral Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 7/27/2017 close. Coverage View: Neutral Justin Kwok, CFA +852-2978-0481 [email protected] Goldman Sachs (Asia) L.L.C. Goldman Sachs does and seeks to do business with companies Nelson Wang covered in its research reports. As a result, investors should be +852-2978-1642 [email protected] Goldman Sachs (Asia) L.L.C. aware that the firm may have a conflict of interest that could Ritchie Sun affect the objectivity of this report. Investors should consider +65-6654-5459 [email protected] Goldman Sachs (Singapore) Pte this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non- US affiliates are not registered/qualified as research analysts with FINRA in the U.S. The Goldman Sachs Group, Inc. Global Investment Research July 27, 2017 Hang Lung Properties (0101.HK) Hang Lung Properties: Summary Financials Profit model (HK$ mn) 12/16 12/17E 12/18E 12/19E Balance sheet (HK$ mn) 12/16 12/17E 12/18E 12/19E Total revenue 13,059.0 11,222.4 9,550.7 9,682.3 Cash & equivalents 24,325.0 27,266.4 29,936.8 32,100.3 Cost of goods sold (4,143.0) (3,141.1) (2,129.5) (2,385.6) Accounts receivable 3,939.0 3,565.8 3,246.9 3,180.0 SG&A (607.0) (619.1) (637.7) (656.8) Inventory 2,352.0 2,352.0 2,352.0 2,352.0 R&D -- -- -- -- Other current assets 0.0 0.0 0.0 0.0 Other operating profit/(expense) 53.0 107.6 109.2 110.9 Total current assets 30,616.0 33,184.2 35,535.7 37,632.3 EBITDA 8,362.0 7,569.7 6,892.7 6,750.8 Net PP&E 143,030.0 142,975.4 142,919.2 142,861.3 Depreciation & amortization (53.0) (54.6) (56.2) (57.9) Net intangibles 0.0 0.0 0.0 0.0 EBIT 8,309.0 7,515.1 6,836.5 6,692.9 Total investments 1,251.0 1,314.9 1,379.8 1,445.5 Interest income 794.0 607.6 673.7 730.6 Other long-term assets 10.0 10.0 10.0 10.0 Interest expense (1,111.0) (1,106.3) (1,106.3) (1,106.3) Total assets 174,907.0 177,484.5 179,844.7 181,949.1 Income/(loss) from uncons. subs. 62.0 63.9 64.9 65.7 Others (75.0) 0.0 0.0 0.0 Accounts payable 6,327.0 6,643.4 6,975.5 7,324.3 Pretax profits 7,979.0 7,080.3 6,468.8 6,382.9 Short-term loans 568.0 3,106.0 2,941.3 8,178.3 Income tax (1,372.0) (1,230.5) (1,175.3) (1,200.3) Other current liabilities 932.0 716.5 824.3 770.4 Minorities (412.0) (470.0) (473.2) (515.2) Total current liabilities 7,827.0 10,465.9 10,741.1 16,273.0 Long-term debt 26,514.0 23,976.0 24,140.7 18,903.7 Net income pre-preferred dividends 6,195.0 5,379.8 4,820.3 4,667.5 Other long-term liabilities 8,421.0 8,421.0 8,421.0 8,421.0 Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 34,935.0 32,397.0 32,561.7 27,324.7 Net income (pre-exceptionals) 6,195.0 5,379.8 4,820.3 4,667.5 Total liabilities 42,762.0 42,862.9 43,302.8 43,597.7 Post-tax exceptionals 0.0 0.0 0.0 0.0 Net income 6,195.0 5,379.8 4,820.3 4,667.5 Preferred shares 0.0 0.0 0.0 0.0 Total common equity 126,565.0 128,571.7 130,018.7 131,313.0 EPS (basic, pre-except) (HK$) 1.38 1.20 1.07 1.04 Minority interest 5,580.0 6,050.0 6,523.2 7,038.4 EPS (basic, post-except) (HK$) 1.38 1.20 1.07 1.04 Total liabilities & equity 174,907.0 177,484.5 179,844.7 181,949.1 EPS (diluted, post-except) (HK$) 1.38 1.20 1.07 1.04 BVPS (HK$) 28.14 28.59 28.91 29.20 DPS (HK$) 0.750.750.750.75RNAV (HK$ mn) 161,043.6 163,260.0 -- -- Dividend payout ratio (%) 54.4 62.7 70.0 72.3 RNAVPS (HK$) 35.39 35.81 36.30 -- Free cash flow yield (%) 6.2 6.8 6.5 5.9 Growth & margins (%) 12/16 12/17E 12/18E 12/19E Ratios 12/16 12/17E 12/18E 12/19E Sales growth 45.9 (14.1) (14.9) 1.4 ROE (%) 4.8 4.2 3.7 3.6 EBITDA growth 40.3 (9.5) (8.9) (2.1) ROA (%) 3.5 3.1 2.7 2.6 EBIT growth 40.6 (9.6) (9.0) (2.1) ROACE (%) 5.1 4.6 4.2 4.1 Net income growth 21.7 (13.2) (10.4) (3.2) Inventory days 272.3 273.3 403.1 359.9 EPS growth 21.4 (13.2) (10.4) (3.2) Receivables days 71.4 122.0 130.2 121.1 Gross margin 68.3 72.0 77.7 75.4 Payable days 578.5 753.6 1,167.2 1,094.0 EBITDA margin 64.0 67.5 72.2 69.7 Net debt/equity (%) 2.1 (0.1) (2.1) (3.6) EBIT margin 63.6 67.0 71.6 69.1 Interest cover - EBIT (X) 26.2 15.1 15.8 17.8 Cash flow statement (HK$ mn) 12/16 12/17E 12/18E 12/19E Valuation 12/16 12/17E 12/18E 12/19E Net income pre-preferred dividends 6,195.0 5,379.8 4,820.3 4,667.5 P/E basic (X) 11.6 16.2 18.0 18.6 D&A add-back 53.0 54.6 56.2 57.9 P/B (X) 0.6 0.7 0.7 0.7 Minorities interests add-back 412.0 470.0 473.2 515.2 EV/EBITDA (X) 9.6 12.3 13.1 13.2 Net (inc)/dec working capital (1,767.0) 689.6 651.1 415.6 Dividend yield (%) 4.7 3.9 3.9 3.9 Other operating cash flow (111.0) (279.4) 42.8 (119.6) Cash flow from operations 4,782.0 6,314.6 6,043.6 5,536.6 Underlying valuation 12/16 12/17E 12/18E 12/19E Capital expenditures 0.0 0.0 0.0 0.0 Underlying profit (HK$ mn) 6,341.0 5,379.8 4,820.3 4,667.5 Acquisitions 0.0 0.0 0.0 0.0 Underlying EPS (HK$) 1.41 1.20 1.07 1.04 Divestitures 0.0 0.0 0.0 0.0 Others 0.0 0.0 0.0 0.0 Underlying ROE (%) 5.0 4.2 3.7 3.6 Cash flow from investments 0.0 0.0 0.0 0.0 Underlying ROA (%) 3.5 3.1 2.7 2.6 Underlying ROACE (%) 5.2 4.6 4.2 4.1 Dividends paid (common & pref) (3,373.1) (3,373.2) (3,373.2) (3,373.2) Underlying P/E (X) 11.3 16.2 18.0 18.6 Inc/(dec) in debt (5,689.0) 0.0 0.0 0.0 Underlying dividend payout (%) 53.2 62.7 70.0 72.3 Common stock issuance (repurchase) 0.0 0.0 0.0 0.0 Underlying EPS growth (%) 44.3 (15.2) (10.4) (3.2) Other financing cash flows (2,683.9) 0.0 0.0 0.0 Cash flow from financing (11,746.0) (3,373.2) (3,373.2) (3,373.2) Total cash flow (6,964.0) 2,941.4 2,670.4 2,163.4 Note: Last actual year may include reported and estimated data.