31 January 2019 | 6:15AM HKT Hang Lung Properties (0101.HK) Positive rental reversions and progressive completions to drive growth; Buy Reiterate Buy 0101.HK 12m Price Target: HK$20.00 Price: HK$16.84 Upside: 18.8% Justin Kwok, CFA +852-2978-0481 | [email protected] Goldman Sachs (Asia) L.L.C. We reiterate our Buy rating on Hang Lung Properties (HLP) as we Colin Yao +852-2978-1474 | [email protected] think both FY18 results and management guidance provided at its Goldman Sachs (Asia) L.L.C. briefing reaffirm our view that its resilient fundamentals and pathway to earnings growth are underappreciated by the market based on current valuations due to concerns about the macro environment and the Hangzhou project acquisition last May. Key Data __________________________________ Management is optimistic on China rental operations amid Market cap: HK$75.6bn / $9.6bn Enterprise value: HK$104.1bn / $13.3bn uncertain macro backdrop 3m ADTV: HK$63.7mn / $8.1mn Hong Kong n China rental growth pace accelerated into 2H2018 Hong Kong Property M&A Rank: 3 o Amid uncertain macro backdrop, HLP’s 2H18’s rental GS Forecast ________________________________ revenue growth in China accelerated to 6% yoy on RMB 12/18 12/19E 12/20E 12/21E Revenue (HK$ mn) New 9,408.0 9,637.0 10,523.5 11,707.6 basis, faster than 1H18’s 2%, driven by better Revenue (HK$ mn) Old 9,356.8 9,920.1 9,985.5 -- EBITDA (HK$ mn) 6,227.0 6,454.8 6,951.1 7,673.3 performance across both malls in and out of Shanghai EPS (HK$) New 1.80 0.93 0.99 1.12 (with the exception their Tianjin Riverside 66 mall). EPS (HK$) Old 0.96 0.98 0.97 -- P/E (X) 9.5 18.1 17.0 15.0 Management is optimistic on their China operations, on P/B (X) 0.6 0.5 0.5 0.5 Dividend yield (%) 4.4 4.6 4.8 4.9 the back growth and underlying consumption and also FCF yield (%) (2.1) (2.1) 6.2 6.8 positive policy tailwinds as authority continues to redirect 6/18 12/18 6/19E 12/19E more spending back to onshore. EPS (HK$) 1.04 0.75 0.45 0.47 o We see their relatively strong performance as GS Factor Profile ____________________________ Growth differentiated against broader consumer related names, as Financial Returns pointed out in our China Consumer team’s recent note (China Consumer Connections: Pulse Check: Multiple Premiumization and desire for experiences lead the Integrated growth), within discretionary spending trades: big ticket Percentile 20th 40th 60th 80th 100th items, luxury, and travel retail are facing greater pressure, while affordable categories remain stable. We attribute 0101.HK relative to Asia ex. Japan Coverage 0101.HK relative to Hong Kong Property this relative outperformance partly to - Source: Company data, Goldman Sachs Research estimates. See disclosures for details. Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S. Goldman Sachs Hang Lung Properties (0101.HK) Hang Lung Properties (0101.HK) Balance Sheet (HK$ mn) __________________________________ Buy Rating since Jan 17, 2019 12/18 12/19E 12/20E 12/21E Cash & cash equivalents 10,510.0 5,297.8 5,094.0 7,058.0 Accounts receivable 2,046.0 2,120.8 2,283.9 2,521.2 Inventory 2,442.0 2,442.0 2,442.0 2,442.0 Ratios & Valuation _______________________________________ Other current assets -- -- -- -- 12/18 12/19E 12/20E 12/21E Total current assets 15,099.09,961.7 9,920.912,122.2 P/E (X) 9.5 18.1 17.0 15.0 Net PP&E 168,078.0 174,614.7 174,569.1 174,522.1 P/B (X) 0.6 0.5 0.5 0.5 Net intangibles -- -- -- -- FCF yield (%) (2.1) (2.1) 6.2 6.8 Total investments 1,423.0 1,520.9 1,619.8 1,720.1 EV/EBITDA (X) 15.9 16.1 14.9 13.3 Other long-term assets 1,853.0 1,853.0 1,853.0 1,853.0 CROCI (%) 5.3 3.7 3.2 3.5 Total assets 186,453.0187,950.3187,962.8 190,217.4 ROE (%) 5.9 3.0 3.2 3.6 Accounts payable 5,996.0 6,295.8 6,610.6 6,941.1 Net debt/equity (%) 11.7 15.2 13.9 12.4 Short-term debt 2,414.0 3,514.0 5,966.7 5,966.7 Interest cover (X) 5.8 7.0 7.8 8.9 Other current liabilities 536.0 510.5 523.3 516.9 Days inventory outst, sales 78.6 92.5 84.7 76.1 Total current liabilities 8,946.010,320.313,100.5 13,424.7 Receivable days 79.2 78.9 76.4 74.9 Long-term debt 24,839.0 23,739.0 19,529.3 19,529.3 Days payable outstanding 895.1 855.1 786.4 719.3 Other long-term liabilities 9,074.0 9,074.0 9,074.0 9,074.0 DuPont ROE (%) 5.6 2.9 3.0 3.4 Total long-term liabilities 33,913.0 32,813.0 28,603.3 28,603.3 Turnover (X) 0.1 0.1 0.1 0.1 Total liabilities 42,859.0 43,133.3 41,703.8 42,028.0 Leverage (X) 1.3 1.3 1.3 1.3 Preferred shares -- -- -- -- Total common equity 137,561.0 138,274.5 139,126.9140,430.8 Growth & Margins (%) ____________________________________ Minority interest 6,033.0 6,542.5 7,132.1 7,758.6 12/18 12/19E 12/20E 12/21E Total liabilities & equity 186,453.0187,950.3187,962.8 190,217.4 Total revenue growth (16.0) 2.4 9.2 11.3 Net debt, adjusted 16,743.021,955.220,402.018,438.0 EBITDA growth (16.6) 3.7 7.7 10.4 Average capital employed 154,500.5 163,554.6 166,716.6 166,644.2 EPS growth (0.6) (48.3) 6.6 13.2 RNAV 157,377.9 161,239.6 -- -- DPS growth 0.0 2.7 3.9 3.8 BVPS (HK$) 30.58 30.74 30.9331.22 EBIT margin 65.7 66.5 65.665.1 EBITDA margin 66.2 67.0 66.1 65.5 Cash Flow (HK$ mn) ______________________________________ Net income margin 85.9 43.3 42.3 43.0 12/18 12/19E 12/20E 12/21E Net income 8,078.0 4,176.7 4,450.6 5,037.0 Price Performance _______________________________________ D&A add-back 43.0 44.3 45.6 47.0 0101.HK (HK$) Hang Seng Index Minority interest add-back 574.0 509.5 589.6626.5 Net (inc)/dec working capital (1,536.0) 225.0 151.7 93.3 22 34,000 Other operating cash flow (2,336.0) (123.4) (86.2) (106.6) 20 32,000 Cash flow from operations 4,823.0 4,832.15,151.4 5,697.1 Capital expenditures (6,581.0) (6,581.0) -- -- 18 30,000 Acquisitions -- -- -- -- 16 28,000 Divestitures -- -- -- -- 14 26,000 Others -------- Cash flow from investing (6,581.0)(6,581.0) 0.00.0 12 24,000 Dividends paid (common & pref) (3,373.3) (3,463.2) (3,598.2) (3,733.1) Inc/(dec) in debt 2,532.0 0.0 (1,757.0) -- Apr-18 Jul-18 Oct-18 Jan-19 Other financing cash flows (2,531.8) 0.0 0.0 0.0 3m 6m 12m Cash flow from financing (3,373.2)(3,463.2)(5,355.2)(3,733.1) Absolute 19.4% 1.6% (16.2)% Total cash flow (5,131.2)(5,212.2)(203.8) 1,964.0 Rel. to the Hang Seng Index 6.2% 5.6% (1.2)% Free cash flow (1,758.0) (1,748.9) 5,151.4 5,697.1 Source: FactSet. Price as of 30 Jan 2019 close. Source: Company data, Goldman Sachs Research estimates. Income Statement (HK$ mn) _______________________________ 12/18 12/19E 12/20E 12/21E Total revenue 9,408.0 9,637.0 10,523.5 11,707.6 Cost of goods sold (2,587.0) (2,623.4) (2,995.2) (3,438.3) SG&A (637.0) (656.1) (675.8) (696.1) R&D -------- Other operating inc./(exp.) 43.0 97.3 98.6 100.0 ESO expense -- -- -- -- EBITDA 6,227.0 6,454.8 6,951.1 7,673.3 Depreciation & amortization (43.0) (44.3) (45.6) (47.0) EBIT 6,184.0 6,410.5 6,905.5 7,626.3 Net interest inc./(exp.) (624.0) (675.1) (728.9) (672.2) Income/(loss) from associates 97.0 97.9 98.9 100.2 Pre-tax profit 9,921.0 5,833.3 6,275.5 7,054.3 Provision for taxes (1,269.0) (1,147.1) (1,235.3) (1,390.8) Minority interest (574.0) (509.5) (589.6) (626.5) Preferred dividends -- -- -- -- Net inc.