The Hangzhou Project is fairly priced, but definitely not a bargain. Recapping from our previously issued Morning Note and Flash Note, we expect that the Hangzhou project can deliver initial rental yield of 4.6%, given our relatively conservative rental assumptions of RMB27.1/sq.m per day and RMB5.0/sq.m per day for retail areas and offices, respectively. It is worth noting that the ramp-up period required for the Hangzhou project is expected to be much shorter than HLP’s other projects under development, namely the Heartland 66 in Wuhan and the Spring City 66 in Kunming, given that the size is much smaller than the other two projects.
Short-term pain in exchange for long-term growth. Total development cost of the project is expected to be about RMB19 billion, including land cost of RMB10.73 billion. We expect that land cost will result in an increase in interest payment, thus dissipating HLP’s profitability. We expect the pain to taper off when the new projects gradually ramp up. We also revise our revenue forecasts upwards to reflect higher property sales assumptions.
Since we do not expect HLP to raise dividend during 2018-2020, we trim our TP by 10.4% to HKD19.91, but maintain our "Accumulate" investment rating. Our new target price represents a 45% discount to the revised 2018 NAV estimate of HKD36.2. Our TP implies 20.5x/24.9x/25.0x for 2018/2019/2020 underlying PER and 0.65x/0.64x/0.63x for 2018/2019/2020 PBR. HLP’s dividend yield edged up to 4.9% after the recent pullback in stock price, which we expect to be quite attractive for long-term investors given HLP’s financial strength and future growth prospects. However, investors have to be patient in waiting for the Company’s new projects to gradually ramp up.