17 January 2019 | 7:56PM HKT Hang Lung Properties (0101.HK) Undervalued as new level of rental growth approaches; up to Buy Buy Justin Kwok, CFA 0101.HK 12m Price Target: HK$20.00 Price: HK$15.74 Upside: 27.1% +852-2978-0481 | [email protected] Goldman Sachs (Asia) L.L.C. We believe HLP’s resilient fundamentals and pathway to earnings Colin Yao +852-2978-1474 | [email protected] growth are underappreciated by the market based on current trough Goldman Sachs (Asia) L.L.C. valuations due to concerns about the macro environment and the Hangzhou project acquisition last May. We see the stock re-rating as the market begins to factor in HLP’s strong positioning within the industry. We upgrade the stock to Buy, from Neutral, with 27% upside to our revised 12-month target price of HK$20.00, Key Data __________________________________ highlighting three points that we believe create a compelling Market cap: HK$70.7bn / $9.0bn Enterprise value: HK$87.9bn / $11.2bn investment argument. 3m ADTV: HK$62.3mn / $8.0mn Hong Kong Hong Kong Property 1. Internal growth drivers—HLP is about to embark on another M&A Rank: 3 period of active project completions with a substantial increase in GS Forecast ________________________________ 12/17 12/18E 12/19E 12/20E rental floor space in the next two years vs. flat GFA since 2015. In Revenue (HK$ mn) New 11,199.0 9,356.8 9,920.1 9,985.5 our view, this will help drive its rental revenue to a 12% CAGR in Revenue (HK$ mn) Old 11,199.0 9,922.1 9,773.1 9,412.8 EBITDA (HK$ mn) 7,462.0 6,092.7 6,649.8 6,644.2 2018E-2020E (from 4% in 2013-2017). EPS (HK$) New 1.81 0.96 0.98 0.97 EPS (HK$) Old 1.81 1.04 0.95 0.92 P/E (X) 10.6 16.5 16.1 16.3 2. Positive tailwinds from government policies—A new P/B (X) 0.6 0.5 0.5 0.5 e-commerce law in China should lower import tariffs and restrict the Dividend yield (%) 3.9 4.8 4.9 5.1 FCF yield (%) 5.0 (1.2) (2.1) 6.8 activities of daigou, and therefore looks supportive for the types of onshore shopping malls that HLP develops. 12/17 6/18 12/18E -- EPS (HK$) 0.95 0.52 0.44 -- ____________________________ 3. A near-trough-level valuation—56% discount to FY19E NAV, GS Factor Profile Growth versus 5-year average of 44%; its discount has widened to 14 pp Financial Returns more than that of the sector (PropCos ex-REIT), which is the widest in recent years. The stock is also trading at just 0.5X P/B versus a Multiple 5-year average of just under 0.8X and currently offers a 4.9% Integrated dividend yield (FY19E) versus a 5-year average of 4.0%. Percentile 20th 40th 60th 80th 100th 4. Near-term catalyst—As we enter a year with a higher level of 0101.HK relative to Asia ex. Japan Coverage rental growth, we expect the company to raise DPS, which has 0101.HK relative to Hong Kong Property stayed flat since the last cut in FY15. Source: Company data, Goldman Sachs Research estimates. See disclosures for details. Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S. Goldman Sachs Hang Lung Properties (0101.HK) Hang Lung Properties (0101.HK) Balance Sheet (HK$ mn) __________________________________ Buy Rating since Jan 17, 2019 12/17 12/18E 12/19E 12/20E Cash & cash equivalents 18,401.0 14,072.5 7,505.2 5,082.9 Accounts receivable 2,036.0 1,662.4 1,814.4 1,812.9 Inventory 1,612.0 1,612.0 1,612.0 1,612.0 Ratios & Valuation _______________________________________ Other current assets -- -- -- -- 12/17 12/18E 12/19E 12/20E Total current assets 22,263.0 17,560.8 11,145.6 8,721.8 P/E (X) 10.6 16.5 16.1 16.3 Net PP&E 156,256.0 162,794.0 169,330.7 169,285.1 P/B (X) 0.6 0.5 0.5 0.5 Net intangibles -- -- -- -- FCF yield (%) 5.0 (1.2) (2.1) 6.8 Total investments 1,362.0 1,441.4 1,521.8 1,603.1 EV/EBITDA (X) 13.2 14.5 14.1 13.9 Other long-term assets 3,705.0 3,705.0 3,705.0 3,705.0 CROCI (%) 2.3 4.3 4.0 3.3 Total assets 183,586.0 185,501.3 185,703.1 183,314.9 ROE (%) 6.2 3.1 3.2 3.1 Accounts payable 6,327.0 6,643.4 6,975.5 7,324.3 Net debt/equity (%) 4.5 7.4 10.9 9.6 Short-term debt 2,112.0 1,947.3 7,184.3 2,883.3 Interest cover (X) 6.2 5.8 6.7 7.6 Other current liabilities 483.0 707.5 595.3 651.4 Days inventory outst, sales 64.6 62.9 59.3 58.9 Total current liabilities 8,922.0 9,298.2 14,755.1 10,859.0 Receivable days 97.4 72.1 64.0 66.3 Long-term debt 22,708.0 22,872.7 16,165.0 16,376.8 Days payable outstanding 721.7 856.8 903.0 930.0 Other long-term liabilities 9,025.0 9,025.0 9,025.0 9,025.0 DuPont ROE (%) 5.7 3.0 3.0 3.0 Total long-term liabilities 31,733.0 31,897.7 25,190.0 25,401.8 Turnover (X) 0.1 0.1 0.1 0.1 Total liabilities 40,655.0 41,195.9 39,945.1 36,260.8 Leverage (X) 1.3 1.3 1.3 1.2 Preferred shares -- -- -- -- Total common equity 136,844.0 137,768.6 138,711.6 139,418.2 Growth & Margins (%) ____________________________________ Minority interest 6,087.0 6,536.9 7,046.4 7,635.9 12/17 12/18E 12/19E 12/20E Total liabilities & equity 183,586.0 185,501.3 185,703.1 183,314.9 Total revenue growth (14.2) (16.4) 6.0 0.7 Net debt, adjusted 6,419.0 10,747.5 15,844.1 14,177.3 EBITDA growth (10.8) (18.4) 9.1 (0.1) Average capital employed 142,126.0 152,201.5 158,327.5 161,416.7 EPS growth 31.1 (47.1) 2.5 (1.3) RNAV 162,434.7 156,389.3 159,432.8 -- DPS growth (0.0) 0.0 2.7 5.2 BVPS (HK$) 30.4330.6330.84 31.00 EBIT margin 66.2 64.7 66.6 66.1 EBITDA margin 66.6 65.1 67.0 66.5 Cash Flow (HK$ mn) ______________________________________ Net income margin 72.5 45.9 44.4 43.6 12/17 12/18E 12/19E 12/20E Net income 8,124.0 4,297.7 4,406.2 4,349.6 Price Performance _______________________________________ D&A add-back 43.0 43.0 44.3 45.6 0101.HK (HK$) Hang Seng Index Minority interest add-back 426.0 449.9 509.5 589.6 Net (inc)/dec working capital 2,643.0 690.0 180.2 350.3 32 34,000 Other operating cash flow (6,426.0) 145.1 (192.6) (25.2) 28 32,000 Cash flow from operations 4,810.0 5,625.6 4,947.5 5,309.9 Capital expenditures (224.8) (6,581.0) (6,581.0) -- 24 30,000 Acquisitions -- -- -- -- 20 28,000 Divestitures -- -- -- -- 16 26,000 Others -------- Cash flow from investing (224.8)(6,581.0)(6,581.0) 0.0 12 24,000 Dividends paid (common & pref) (3,373.3) (3,373.2) (3,463.1) (3,643.0) Inc/(dec) in debt (3,245.0) 0.0 (1,470.7) (4,089.2) Apr-18 Jul-18 Oct-18 Jan-19 Other financing cash flows (3,890.9) 0.0 0.0 0.0 3m 6m 12m Cash flow from financing (10,509.2)(3,373.2)(4,933.8)(7,732.2) Absolute 8.7% (1.7)% (22.7)% Total cash flow (5,924.0)(4,328.5) (6,567.3) (2,422.3) Rel. to the Hang Seng Index 2.9% 4.2% (8.3)% Free cash flow 4,585.2 (955.4) (1,633.5) 5,309.9 Source: FactSet. Price as of 16 Jan 2019 close. Source: Company data, Goldman Sachs Research estimates. Income Statement (HK$ mn) _______________________________ 12/17 12/18E 12/19E 12/20E Total revenue 11,199.0 9,356.8 9,920.1 9,985.5 Cost of goods sold (3,200.0) (2,762.7) (2,752.3) (2,806.1) SG&A (580.0) (597.4) (615.3) (633.8) R&D -------- Other operating inc./(exp.) 43.0 96.0 97.3 98.6 ESO expense -------- EBITDA 7,462.0 6,092.7 6,649.8 6,644.2 Depreciation & amortization (43.0) (43.0) (44.3) (45.6) EBIT 7,419.0 6,049.7 6,605.5 6,598.6 Net interest inc./(exp.) (654.0) (622.7) (708.8) (710.3) Income/(loss) from associates 78.0 79.4 80.3 81.3 Pre-tax profit 9,902.0 5,724.4 5,977.1 5,969.6 Provision for taxes (1,352.0) (976.9) (1,061.4) (1,030.5) Minority interest (426.0) (449.9) (509.5) (589.6) Preferred dividends -- -- -- -- Net inc.