1H15 underlying earnings up 7.5% y-o-y driven by positiverental growth across all asset classes led by office segment
Retail rental portfolio saw positive growth in retail sales in1H15 with limited exposure to turnover rent
We have a Hold rating and a target price of HKD40
In-line 1H15 results. Hysan reported 1H15 underlying earnings of HKD1,163m, up 7.5%y-o-y, in line with our estimate and represented 50-51% of ours and consensus FY15eearnings. Hysan declared an interim DPS of HKD0.25, up 9% y-o-y and implying a payoutratio of 23% (same as 1H14’s 23% but lower than our assumed 24%). Hysan reported bookNAV of HKD64.13, up 2% h-o-h, while gearing remained low at 3.2% as of June 2015(vs. 4.2% as of end-2014). Management expects steady performance for the rest of 2015 andbelieves the company is in a good position to explore further investment opportunities.
Solid rental growth led by office segment. Gross rental rose 7% y-o-y and 5% h-o-h toHKD1,714m driven by positive rental reversions and sustainably high occupancy(98%/100%/95% as of June 2015 for retail/office/residential vs. 100%/98%/97% as ofend-2014). By asset class, office rental grew the fastest, up 10% y-o-y, followed by retail(6% y-o-y) and residential (3% y-o-y). Net rental margin came in at 89% in 1H15,compared to 89% in 1H14 and 87% in FY14.
Positive retail sales growth in 1H15 and limited exposure to turnover rent. Within retailrental, turnover rent came in at HKD50m in 1H15 (vs. HKD60m in 1H14), representing 5.3%of total retail rental (vs. 5.2% in FY14 and 6.7% in 1H14), which we believe reflects Hsyan’sstrategy to shift rental towards base rent. Hysan reported c40% y-o-y increase in estimatedoverall tenant sales in 1H15, which we believe could be skewed by sales of a major retailtenant. By property, estimated tenant sales grew c.80% at Hysan Place, c.10% at Lee Theatrehub, but declined at Lee Gardens hub in 1H15, according to the company.
We have a Hold rating and a target price of HKD40. Our unchanged target price ofHKD40 is based on a 42% discount to our NAV estimate. Our target discount is based ona 0.5 standard deviation below the historical average. We expect steady rental growthfrom Hysan’s rental portfolio although, with 47% of its GAV contributed by HK retailassets, we expect market concerns over slowing retail sales in HK will remain a near-termoverhang on Hysan’s stock. Key upside risks include higher rental and asset valuesachieved upon the redevelopment of Sunning Plaza/Sunning Court, which are yet to bereflected in our NAV estimate. Key downside risks include an increase in Hong Kongcommercial cap rates.