Three key investor focuses. We recently hosted investor meetings for Hysan in Hong Kong.Investor focuses included retail sales and occupancy cost trends within the retail rentalportfolio, office leasing updates and acquisition plans. Similar to industry trends, we seeongoing operating challenges for Hysan’s retail portfolio, which will likely weigh on Hysan’snear-term share price performance (trading at 52% NAV discount), partly mitigated by goodmomentum in office portfolio.
Working closely with tenants as occupancy cost rises. Hysan reported mixed retailsales trends in 1H15, including c.+10% y-o-y at Lee Theatre hub and mid-single digitdecline at both Lee Gardens and Hysan Place (excluding a major tenant’s sales). Retailsales at Hysan Place were also affected by one-off factors such as renovation of an anchortenant (completed in 3Q15) and tenant mix refinement in the mid-zone. These resulted inan occupancy cost of close to 20% in 1H15 (vs mid teens in 2014) for the retail portfolio.To help drive tenants’ sales, Hysan plans to increase promotions and marketing of itsmalls, while the company believes maintaining a variety in tenant trade mix between thethree retail hubs will also draw footfall traffic.
In a good position to backfill Lee Garden One office. Hysan’s office portfolio hasbenefited from the strong Central office trends in 1H15, enjoying stronger bargainingpower in lease negotiations. Office portfolio was fully let as of June 2015.Despite havinga major tenant at Lee Garden One returning most of the leased space (6.5 floors) effectiveJanuary 2016, Hysan is in lease negotiations to backfill five office floors (after having let1.5 floors), with tenants from the TMT sector mentioned as potential targets.Actively exploring investment opportunities. Hysan is interested in opportunities bothin and outside HK. With a strong balance sheet (3.2% gearing as of June 2015 vs c.20%which the company is comfortable to gear up to), this leaves Hysan with ample financialcapacity to fund potential acquisitions, in our view.
Maintain Hold rating and a target price of HKD40. Our target price of HKD40 isbased on a 42% discount to our NAV estimate. Catalysts could arise from stabilising retailsales trends in HK and/or positive momentum in HK office rental. Key upside risksinclude higher rental and asset values achieved upon the completion of Lee Garden Three,which are yet to be reflected in our NAV estimate. Key downside risks include risingHong Kong commercial cap rates.