Maintaining Hold; current share price most ly reflects Hysan’s fair value
While high-end retail in Hong Kong saw a marked slowdown on the back of a softening Chinese economy, Hysan is better cushioned with only 8% of its rental revenue coming from turnover rents, much lower than peers (ranging from 16-20%). However, we believe this rental structure will only provide a near-term buffer as Hysan will still be suffering from softer re ntal revision in upcoming reviews. By assuming slower retail rental growth ahead, we lower our NAV estimate to HK$61.6/share (from HK$66.3) and our target price accordingly to HK$36.9 (HK$39.8). With the shares trading at a 44% discount to NAV, we believe Hysan is close to it s fair value at the current share price.
1H13 underlying profit +38% YoY to HK$1,033m, driven by Hysan Place
Hysan reported 1H13 revenue +38% YoY to HK$1,531m, driven mostly by the contribution from Hysan Place (HK$366m), which was opened in Aug-12. Excluding this, the like-for-like revenue increase was 14% YoY. Excluding a revaluation gain of HK$2,356m (reflecting improved rentals across the portfolio), underlying profit increased by 38% to HK$1,033m, on track to our FY projection. An interim dividend of HK$0.22/share was declared (HK$0.17/ share) a year ago.
Beneficiary of decentralization trend as tenants focus on cost savings
Central Grade-A office rents are still amon g the most expensive in Asia despite having fallen by 20% from the peak. On top of a slowing economy, tenants are increasingly elastic on rental expenses such that moving away from Central continues to be an attractive option . Moreover, on the back of numerous redevelopment plans currently in progress , existing tenants are being forced to look for new spaces. This incremental demolition-driven demand is expected to drive rental performance in the coming quarters.
Target price at a 40% discount to our revised NAV estimate of HK$61.6/share
Our target price is based on a 40% discount to our revised NAV estimate of HK$61.6/share (HK$66.3 previously), which implies 2013/14E PER of 20x/19x. Our lowered target discount is based on the historical average discount of 40%, which we believe is appropriate to reflect the current point in the market cycle. Risks: fluctuations in HK/China economies; movements in capitalization rates and interest rates.