Maintain Sell, new TP HK$27.66; retail weakness likely a multi-year story
While Hysan's 1H15 underlying net profit was up YoY, we remain cautious onHysan as the pace of deterioration of the HK retail market is accelerating, andwe believe it is just the beginning of a multi-year structural de-rating. With thesoftening trend in tourist arrivals, stretched financial position of localhouseholds and potential negative wealth impact associated with the recentstock market volatility, we expect further downward pressure on retail sales,which will ultimately drag retail rents. We also expect downside pressure onNAV to emerge as the interest rate hike cycle gets closer. Current valuationsappear rich with a 26% discount to our NAV and dividend yield of only 3.7%.
1H15 underlying net profit up 7% YoY – no positive surprise
Hysan’s 1H15 underlying net profit was HK$1.163bn, up 7% YoY. Turnoverwas up 7.4% YoY to HK$1.71bn. At end-1H15, Hysan’s retail occupancy was98%, office occupancy was 10%, while residential occupancy was 95%. A finalDPS of HK$0.25 was declared, up 8.7% YoY. Despite the softening retailmarket outlook, the fair value gain on investment properties was HK$1.16bn in1H15, and BVPS rose 1.8% YoY to HK$64.13/share. With continued increase inIP values, net gearing fell to 3.2% at end-1H15 from 4.2% at end-1H14.
Pace of deterioration in the Hong Kong retail market accelerating
The more negative news flow associated with retailers recently suggests thepace of deterioration in the Hong Kong retail market has accelerated. Thisreaffirms our cautious view on the Hong Kong retail market that it is just thebeginning of a multi-year structural de-rating. On the back of the softeningtrend in tourist arrivals, stretched financial position of local households andpotential negative wealth impact associated with the recent stock marketvolatility, we expect further downward pressure on retail sales ahead, whichwill ultimately drag retail rents. We expect prime retail rents to fall by as muchas 15-20% in the next 12 months.
Valuations unattractive at only 26% discount to NAV
Our HK$27.66 target price (up from HK$26.80) is based on a 40% discount toour NAV of HK$46.09, raised slightly from HK$44.67 mainly as we factor indetails from the 1H15 results (like lower expenses). Key upside risks include aprolonged low interest rate environment, disposal of key assets at low caprates, and stronger-than-expected leasing performances.