We expect FY15 earnings growth of 7% y-o-y driven bystronger office than retail rental growth
Slowing retail sales in HK will likely remain as a stockoverhang
Lower target price to HKD34 (from HKD40)
HK retail leasing outlook uncertain. Hysan’s rental portfolio looks set to deliversteady rental income, which we expect to drive FY15e underlying earnings up 7% yo-y. That said, Hysan, like other HK retail landlords, will likely face ongoing operatingchallenges in the near-term, resulting from slowing retail sales in HK which webelieve could potentially be further weighed by dampened local consumptions in2016 amid macro uncertainties. Despite Hysan stock’s 56% NAV discount, slowingretail sales in HK, which could impact the sustainability of Hysan’s retail rental growthbeyond 2016, will likely remain a near-term stock overhang.
Steady FY15e earnings growth. Hysan will report FY15 results on 8 March. Weforecast FY15e earnings (excluding revaluation gains) of HKD2,321m, up 7% y-o-yand similar to consensus estimate of HKD2,306m. The y-o-y earnings growth mainlyreflects positive rental reversions. In particular, we expect stronger growth for officerental, compared to retail and residential rental in FY15. We forecast FY15e DPS ofHKD1.31 (vs. consensus estimate of HKD1.30), also up 7% y-o-y and implying apayout ratio of 60% (flat y-o-y).
Investors will likely look for sustainability of rental growth. We believe investorfocuses at results briefing will include 1) latest trends in tenants’ retail sales from thec10% growth at Lee Theatre hub, high-single digit decline at Lee Gardens hub andmid-single digit decline at Hysan Place (excluding a major tenant) reported for 1H15;2) updates of leasing of the five office floors at Lee Garden One following thedeparture of a major tenant at end-2015; 3) management’s outlook for office rentalamid volatility in the financial markets, 4) progress of the Lee Garden Three project,and 5) book value growth from HKD64.13 as of June 2015.
Maintain Hold with a lower target price of HKD34 (from HKD40). Our earningsand NAV estimates are largely unchanged. We lower our target price from HKD40 toHKD34 after assuming a wider target discount of 50% or 1 standard deviation belowHysan’s historical average (from 42% or 0.5 SD) reflecting increased uncertainties inthe operating environment faced by HK retail landlords, such as Hysan. Catalystscould arise from stabilising retail sales and/or resilient office rental in HK. Key upsiderisks include higher rental and asset values achieved upon the completion of LeeGarden Three. Key downside risks include rising Hong Kong commercial cap ratesand/or lower-than-expected retail rental achieved.