Well positioned to benefit from positive office trends in HK,partly mitigating headwinds from HK retail market
Retail rental supported by strong positive reversions in1H15 and a high portion of FY15 expiring leases committed
Maintain Hold rating and a fair value target price of HKD40
Stronger office than retail rental growth in 1H15. While investors have mostly focused onHysan’s retail rental portfolio recently, the bright spot in 1H15 results came from its office portfolio(36% of 1H15 gross rental). Hysan reported office rental growth of +10% y-o-y in 1H15 or +7-8%y-o-y excluding one-off income. With 35% gross asset value (GAV) contributed by HK officeassets, we expect Hysan to be a beneficiary of the office upcycle we anticipate. That said, webelieve investor concerns over slowing retail sales in HK may weigh on Hysan’s near-term stockprice performance, given the company’s 47% GAV exposure to HK retail assets on our estimates.
Solid retail rental performance in 1H15. Hysan’s retail rental portfolio delivered steadyperformance in 1H15, including 1) 6% y-o-y increase in retail rental in 1H15 driven by positivereversions of 35%; 2) limited contribution from turnover rent, which accounted for 5.3% retailrental in 1H15 (vs 5.2% in FY14) reflecting the company’s leasing strategy in recent years to shiftrental to base rents; 3) a high portion of c80% of FY15 expiring retail leases committed; and 4)10% y-o-y retail sales growth at Lee Theatre hub in 1H15 (although Hysan Place’s retail sales,down in mid-single-digit y-o-y, were affected by a tenant’s renovation and tenant mix refinement).
In-line 1H15 results. Hysan reported 1H15 underlying earnings of HKD1,163m, up 7.5% y-o-ydriven by +7% y-o-y gross rental growth. 1H15 earnings represented 50-51% of our and consensusFY15e earnings (before results). Hysan declared an interim DPS of HKD0.25, up 9% y-o-y andimplying a payout ratio of 23% (flat y-o-y). Hysan reported book NAV 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).
Maintain Hold rating and a target price of HKD40. We keep our FY15-17e earnings andNAV estimates unchanged. Our FY15-17e earnings are 2-4% above consensus. Our targetprice of HKD40 is based on a 42% discount (0.5 standard deviations below the historicalaverage) to our NAV estimate of HKD69/share. Hysan stock currently trades at 51% NAVdiscount. Catalysts could arise from stabilising retail sales trends in HK and/or positivemomentum in HK office rental. Key upside risks include higher rental and asset valuesachieved upon the completion of Lee Garden Three, which are yet to be reflected in our NAVestimate. Key downside risks include rising Hong Kong commercial cap rates.