China / Hong Kong Company Guide Hang Lung Properties Version 9 | Bloomberg: 101 HK EQUITY | Reuters: 101.HK Refer to important disclosures at the end of this report DBS Group Research . Equity 31 Jul 2019 BUY Retail sales growth gathering Last Traded Price ( 30 Jul 2019):HK$18.64 (HSI : 28,147) momentum Price Target 12-mth: HK$22.38 (20.1% upside) (Prev HK$20.35) BUY with HK$22.38 TP. The stock is trading at a 49% discount to Analyst our estimated current NAV and offers an attractive dividend yield Jeff YAU CFA, +852 36684180 [email protected] of 4.0% for FY19. Stellar tenants’ sales growth at its retail malls in Ian CHUI +852 36684174 [email protected] Jason LAM +852 36684179 [email protected] China augurs well for reversionary growth. Portfolio expansion and asset enhancement initiatives should provide additional What’s New momentum to drive rental income, offering better earnings quality • Improving retail tenants’ sales to underpin and in turn providing share price upside. HLP is among our preferred landlords. BUY with HK$22.38 TP. reversionary growth Portfolio expansion to lift rental income. The progressive opening • New properties to spice up rental earnings of new properties in Kunming, Wuhan, Wuxi, and Shenyang in • BUY with HK$22.38 TP 2019-20 should give an additional boost to Hang Lung Properties’ recurrent earnings growth, and its ability to raise dividends. Pre- leasing at Spring City 66 in Kunming is progressing smoothly, with Price Relative 88% of retail space already pre-committed. This mall is scheduled to open for business in late Aug. Improving retail sales growth translating into higher income. Despite a higher comparison base, retail sales at Shanghai Plaza 66 grew 15% in 1H19. Retail malls outside Shanghai posted favourable growth in tenants’ sales. In particular, retail sales at Shenyang Palace 66, Dalian Olympia 66, and Jinan Parc 66 jumped 25-29%. Sequential retail sales improvement supports positive Forecasts and Valuation and improving reversionary growth. FY Dec (HK$ m) 2017A 2018A 2019F 2020F Turnover 11,199 9,408 8,909 10,917 Valuation: EBITDA 7,837 6,326 5,891 7,065 Our TP for Hang Lung Properties is based on a target discount of Pre-tax Profit 7,278 5,703 6,079 7,311 40% to our Jun-2020 NAV estimate. Underlying Profit 5,530 4,093 4,378 5,331 EPS (HK$) 1.23 0.91 0.97 1.19 Key Risks to Our View: EPS Gth (%) (12.8) (26.0) 7.0 21.8 PE (X) 15.2 20.5 19.1 15.7 A slower retail market recovery in China could be a drag on its P/Cash Flow (X) 8.1 12.3 13.6 10.6 earnings growth and share price performance. EV/EBITDA (X) 13.4 16.6 17.8 14.8 DPS (HK$) 0.75 0.75 0.75 0.77 Interest rate hikes may lead to capitalisation rate expansion for Div Yield (%) 4.0 4.0 4.0 4.1 rental properties in Hong Kong, and in turn adversely affect their Net Gearing (%) 2 11 20 24 valuation. ROE (%) 4.2 3.0 3.2 3.8 Est. NAV (HK$): 36.5 37.3 Further depreciation in Rmb may negatively impact the valuations Disc. to NAV (%) (49) (50) and rental contributions from its rental properties in China. Earnings Rev (%): 6 24 Consensus EPS (HK$): 0.99 1.06 At A Glance Other Broker Recs: B: 11 S: 2 H: 3 Issued Capital (m shrs) 4,498 Source: Company, DBS Bank (Hong Kong) Limited (“DBS HK”), Mkt Cap (HK$m/US$m) 83,837 / 10,716 Thomson Reuters Major Shareholders (%) Hang Lung Group Ltd 57.6 Free Float (%) 42.4 3m Avg. Daily Val. (US$m) 12.53 ICB Industry: Financials / Real Estate Investment & Services ed-JS/ sa- CS /TW Company Guide Hang Lung Properties WHAT’S NEW 2018. Outside Shanghai, retail malls posted favourable growth in tenants’ sales in 1H19. In particular, retail sales at Shenyang Palace 66, Dalian Olympia 66, and Jinan Parc 66 Due to the absence of development earnings, Hang Lung jumped 25-29%. Shenyang Forum 66 and Tianjin Riverside Properties’ (HLP) 1H19 underlying profit fell 4% to 66 also showed signs of turning around with mild retail sales HK$2.23bn, coming in 30% above our estimate. The growth of 2-3%. Continued retail sales improvement discrepancy arose from lower-than-expected interest expense supports positive and improving reversionary growth which as a result of the adoption of an amendment to the will underpin future rental income expansion. accounting standard on the capitalization of borrowing costs. Despite lower earnings, interim DPS was flat at HK$0.17. Scheduled to open for business in late Aug, the retail mall at Kunming Spring City 66 has been 88% pre-committed. The Gross rental receipts were up 2% to HK$4.2bn. Aided by office tower will be handed over to tenants for renovation in positive rental reversion for office and retail properties, rental Sep-19. The second office tower at Center 66 will also be revenue from the Hong Kong investment property portfolio completed soon. Conrad Hotel at Forum 66 is on track for expanded by 3% to HK$2bn. opening in Sep-19. In Wuhan, Heartland 66 is expected to come onstream in stages from 2H20 onwards. About 40% of Despite Rmb depreciation of 6%, rental revenue from retail area has been pre-leased. New rental properties should Mainland China rose 1% in 1H19. In Rmb terms, revenue spice up its recurrent earnings starting from FY20. would have increased 7% y-o-y (or 4% h-o-h) thanks to increased retail income from Shanghai Plaza 66, Shenyang The company sold 111 car parks at Laichikok Bay Garden for Palace 66 and Wuxi Center 66, and improved contributions HK$110m at an exit yield of 2.6%. The transaction will be from office premises. This was despite the US-China trade completed in Sep-19. disputes and other global uncertainties. With overall margin improving slightly to 76.5%, rental earnings rose 3% to HK$3.22bn. Despite a higher comparison base, retail sales at Shanghai Plaza 66 grew a further 15% in 1H19 after rising 13% in Page 2 Company Guide Hang Lung Properties Results Summary (HK$m) 1H18 1H19 % Chg Comments Turnover 5,150 4,204 (18) 1H19: absence of property sales revenue Property leasing 3,117 3,217 3 1H19: China portfolio: up 3% despite short-term rental disruption by major renovation in Grand Gateway 66 and a 6% Rmb depreciation against HKD; Hong Kong portfolio: up 4% Property sales 565 0 (100) 1H18: from the booking of 3 semi-detached houses at 23-29 Blue Pool Road and 5 Long Beach apartments Other net (loss)/income 70 4 (94) 1H18: included gain of HK$45m and HK$25m on disposal of certain investment properties and assets held for sale respectively Administrative expenses (292) (317) 9 Operating profit 3,460 2,904 (16) Change in fair value of investment properties 2,456 1,438 (41) 1H19: total value of investment properties HK$66.3bn from HK and HK$70.6bn from China; includes HK$69m of fair value gain from the reclassification of 111 carpark spaces in Laichikok Garden as assets held for sale. Interest income 256 96 (63) 1H19: reduction of average deposit balance after settling payments on capital expenditure and Hangzhou land premium Finance costs (542) (8) (99) 1H19: more borrowing costs were capitalised to the projects under development with additional construction costs for projects under development, full payment of land premium of Hangzhou Westlake 66 and the adoption of an amendment to the accounting standard on the capitalisation of borrowing costs effective Jan 2019 Share of profits of joint venture 54 38 (30) Profit before taxation 5,684 4,468 (21) Taxation (736) (698) (5) Non-controlling interests (259) (254) (2) Net profit 4,689 3,516 (25) Underlying net profit 2,319 2,229 (4) Interim DPS (HK$) 0.17 0.17 0 Source: Hang Lung Properties Page 3 Company Guide Hang Lung Properties CRITICAL FACTORS TO WATCH KEY ASSUMPTION Critical Factors Residential price - HK Retail mall performance to dictate share price. HLP’s share price performance should be primarily driven by its investment property portfolio in China (which comprises mainly retail malls) as we estimate that these assets account for about 50% of its gross asset value. Generally, performance of these retail malls has strong correlation with China’s retail consumption, especially luxury goods. Tenants’ sales growth to underpin reversionary growth, which in turn dictates future rental income growth. In 1H19, tenant sales growth at its retail malls in China gathered momentum despite the ongoing US-China trade war. During the period, Office rental - HK Plaza 66 recorded healthy retail sales growth of 15% y-o-y despite a higher comparison base. Retail malls outside Shanghai registered improving tenants’ sales. We note that retail sales at Center 66, Olympia 66, and Palace 66 recorded impressive growth of 25%, 27% and 29% respectively. Even Riverside 66 and Forum 66 recorded mild retail sales growth of 2-3%. As a result, these malls registered favourable reversionary growth. Facelift to rejuvenate the malls. Asset enhancement initiatives play a crucial role in unlocking the earnings potential of shopping malls in China/Hong Kong, which in turn provides Retail rental (Shopping centre) - HK additional growth impetus for HLP. The company has been carrying out large-scale enhancement works at Grand Gateway 66 in Shanghai. Ph 1 of the upgrade works has been completed with the renovated area being fully let at higher income.