China / Hong Kong Company Guide Hang Lung Properties Version 10 | Bloomberg: 101 HK EQUITY | Reuters: 101.HK Refer to important disclosures at the end of this report DBS Group Research . Equity 22 Jan 2020 BUY Higher dividend signals positive earnings Last Traded Price ( 21 Jan 2020):HK$18.24 (HSI : 27,985) outlook Price Target 12-mth: HK$21.66 (18.8% upside) BUY with HK$21.66 TP. The stock is trading at a 50% discount to Analyst Jeff YAU CFA, +852 36684180 [email protected] our estimated current NAV and offers an attractive dividend yield of Ian CHUI CFA, +852 36684174 [email protected] 4.2% for FY20. The company’s retail mall operations in China are Jason LAM +852 36684179 [email protected] going from strength to strength. Improving tenants’ sales growth at What’s New its retail malls in China augurs well for reversionary growth and retail turnover rents. Portfolio expansion should provide additional • FY19 underlying profit grew 9%, 4% ahead of momentum to drive rental income, offering better earnings quality our forecast and in turn supporting share price upside. Maintain BUY with • Final DPS was up 2% to HK$0.59, a positive HK$21.66 TP. surprise Continued healthy retail sales growth translating into sequential • Healthy retail sales growth from China retail rental income improvement. Despite a higher comparison base, properties, coupled with portfolio expansion, retail sales at Shanghai Plaza 66 grew 21% in FY19. Retail malls supports higher rental income in China outside Shanghai posted favourable growth in tenants’ sales. In particular, retail sales at Shenyang Palace 66, Wuxi Center 66, and • Maintain BUY with HK$21.66 TP Dalian Olympia 66 jumped 20-29% y-o-y. This supported the sequential growth in China rental income. With the good showing, HLP raised its final DPS by 2% to HK$0.59, which signals the Price Relative management’s positive outlook on its core leasing operations. Portfolio expansion to lift rental income. The progressive opening of new properties in Kunming, Wuhan, Wuxi, and Shenyang is giving an additional boost to HLP’s recurrent earnings growth. This should enhance its ability to raise dividends. Valuation: Our TP for Hang Lung Properties is based on a target discount of 40% to our Jun-2020 NAV estimate. Forecasts and Valuation FY Dec (HK$ m) 2018A 2019A 2020F 2021F Key Risks to Our View: Turnover 9,408 8,852 10,016 10,518 A slower retail market recovery in China could be a drag on its EBITDA 6,323 5,953 6,654 6,955 earnings growth and share price performance. Pre-tax Profit 5,703 6,050 6,708 6,969 Interest rate hikes may lead to capitalisation rate expansion for rental Underlying Profit 4,093 4,474 4,851 5,041 EPS (HK$) 0.91 0.99 1.08 1.12 properties in Hong Kong, and in turn adversely affect their valuation. EPS Gth (%) (26.0) 9.3 8.4 3.9 Further depreciation in Rmb may negatively impact the valuations PE (X) 20.0 18.3 16.9 16.3 and rental contributions from its rental properties in China. P/Cash Flow (X) 12.1 9.2 11.4 8.5 At A Glance EV/EBITDA (X) 18.6 19.7 17.7 16.9 Issued Capital (m shrs) 4,498 DPS (HK$) 0.75 0.76 0.77 0.78 Mkt Cap (HK$m/US$m) 82,038 / 10,558 Div Yield (%) 4.1 4.2 4.2 4.3 Major Shareholders (%) Net Gearing (%) 11 19 23 26 Hang Lung Group Ltd 57.9 ROE (%) 3.0 3.2 3.5 3.5 Free Float (%) 42.1 Est. NAV (HK$): 36.4 36.1 3m Avg. Daily Val. (US$m) 10.67 Disc. to NAV (%) (50) (49) GICS Industry: Real Estate / Real Estate Management & Development Earnings Rev (%): (0) 0 Consensus EPS (HK$): 1.08 1.14 Bloomberg ESG disclosure score (2018)^ 52.5 Other Broker Recs: B:12 S:2 H:0 - Environmental / Social / Governance 49.6 / 43.9 / 67.9 Source: Company, DBS Bank (Hong Kong) Limited (“DBS HK”), ^ refer to back page for more information Thomson Reuters ed-JS/ sa- CS /DL Company Guide Hang Lung Properties WHAT’S NEW Revenue from its Hong Kong portfolio were both up 2% to Hang Lung Properties’ (HLP) FY19 underlying earnings came HK$4.01bn. Due to the social unrest, total retail sales in at HK$4.47bn, up 9% y-o-y. The growth was led by slumped 17% y-o-y in 2H19, with retail income down 1.8% increased rental earnings and lower interest expenses (due to h-o-h. As such, HLP’s rental receipts from Hong Kong fell the adoption of an amendment to the accounting standard marginally h-o-h. on the capitalization of borrowing costs), partially offset by reduced development profit. The result was 4% ahead of our Despite ramp-up losses at new properties in China, overall forecast due to higher-than-expected rental earnings and rental margin was largely stable at 73.9%, with rental lower-than-expected administrative expenses. earnings growing 4% to HK$6.33bn. Final DPS was up 2% to HK$0.59, which came as a pleasant Due to fewer residential units sold, development earnings surprise. This also reflects the management’s positive outlook tumbled 79% to HK$162m in FY19, which stemmed from of HLP’s core leasing operations in China. This brought full- selling one house at Blue Pool Road project. year DPS to HK$0.76, which represents a current dividend yield of 4.2%. In FY19, HLP sold 111 car parking spaces at Laichikok Bay Garden which was previously held as investment properties. Gross rental income went up 5% to HK$8.56bn mainly led by The disposal gains amounted to HK$69m and has been higher contributions from its China rental portfolio. recognised as part of fair value gain of properties. Despite Rmb depreciation, income from the China portfolio rose 7%. In Rmb terms, revenue increased by a higher 12%. Excluding fresh income from new properties such as Kunming Spring City 66, Conrad Shenyang and second office tower at Wuxi Center 66, growth remained strong at 10%, fueled by improved retail income from Shanghai Plaza 66, Shenyang Palace 66 and Wuxi Center 66. Income from Grand Gateway 66 also recovered as the enhanced area gradually re-opened after the renovation. Page 2 Company Guide Hang Lung Properties CRITICAL FACTORS TO WATCH KEY ASSUMPTION Critical Factors Office rental - 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 51% 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 FY19, tenant Retail rental (Shopping centre) - HK sales growth at its retail malls in China gathered momentum despite the ongoing US-China trade war. During the period, Plaza 66 recorded strong retail sales growth of 21% y-o-y despite a higher comparison base. Retail malls outside Shanghai registered improving tenants’ sales. We note that retail sales at Palace 66, Center 66, and Olympia 66, grew by an impressive 20%, 21% and 29% y-o-y respectively. Even Riverside 66 and Forum 66 recorded mild retail sales growth of 5-6%. With the opening of more new luxury branded shops, HLP’s retail malls stands to benefit from continued repatriation of luxury spending (instead of going overseas). This favourable trend bodes well for future reversionary growth. Source: Company, DBS HK 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 additional growth impetus for HLP. The renovation of the South Building at Grand Gateway 66 in Shanghai is gradually being completed with the mall’s occupancy recovering to 91% in Dec- 19. The entire South Building renovation are expected to be completed in 3Q20. With budgeted capital expenditure of HK$800m, we estimate a payback period of 4-5 years. Portfolio expansion to augment income growth. Opened for business in Aug-19, Hang Lung’s retail mall at Spring City 66 in Kunming is 82% occupied in Dec-19. The 315-room Conrad Hotel at Forum 66 opened in Sep-19. As its operations are gradually ramped up, the hotel should bring in desirable foot traffic to the mall. The newly built office tower at Spring City 66 and second office tower at Center 66 were handed over to tenants from Aug-19. Retail mall at Heartland 66 in Wuhan is scheduled to open in mid-20 with c.60% of space being committed. With the new investment properties, the company’s rental income growth from China should improve from FY20. New ventures in Hong Kong. HLP has successfully consolidated the ownership of Amoy Industrial Center in Ngau Tau Kok through compulsory auction. This site is expected to be redeveloped into a residential/retail tower with GFA of c.155,000sf for sale. Project completion is expected in 2022. In Apr-19, HLP formed a joint venture with its parent Hang Lung Group (HLG) to redevelop the sites in North Point into a commercial and office tower with GFA of 105,000sf. HLP and HLG own 66.7% and 33.3% in this redevelopment respectively.