1H18 results highlights
Hang Lung Properties （HLP） reported above-expectation 1H18results due to higher property sales profit, while rental contributionwas in line.
1H18 underlying profit was HK$2,319mn, n down 23.7% yoy onlower development profit contribution, but was 9% higher thanour forecasts mainly on earlier-than-expected property salesprofit recognition.
Overall rental revenue was up 7.4% yoy （slightly ahead of ourforecasts）， with HK up 3.2% yoy and China up 11.4% yoy.However, if we were to exclude the RMB FX impact, 1H Chinarental revenue was up 2.4% yoy on RMB terms.
Interim DPS was flat yoy at HK17, in line with our forecasts.
Positive revaluation of HK$2.2bn for IPs in HK and HK$0.2bn forthose in China, with BVPS up 1.1% hoh to HK$30.6.
Key takeaways from analyst briefing
Update on China operations:
The China retail portfolio saw 2% yoy growth in rentalrevenue to RMB1,367mn. Plaza 66 in Shanghai continuedits solid growth in revenue to 7% in to RMB763mn, whileGrand Gateway revenue was down 9.1% yoy （withoccupancy down 13pp yoy） due to major AEIs, with 32%of the leasable area closed by end of June 2018 forrenovation.
Outside of Shanghai, only one of the six malls （ShenyangForum 66） recorded a decline in revenue yoy, while therest saw positive growth of 0-18% yoy in RMB terms.
Management said it was able to secure leadership positioning for three of themalls （Palace 66 in Shenyang, Parc 66 in Jinan and Center 66 in Wuxi, in theirrespective cities） after roughly 4-5 years of ramp-up.
Management believes the 17% yoy revenue decline o at Forum 66 Mall inShenyang reflects the tough operating environment, but it is hopeful that thenew management team can improve operations in the next 1-2 years.
M&A:
As a recap, HLP acquired a 2.6mn sq ft GFA mixed-use site in Hangzhou inMay 2018 for RMB10.7bn, which is scheduled for openings from 2024onwards.
With the aforesaid addition, management expects a new wave of completionsto be scheduled from 2019 to 2024, at an average of 2.8mn sq ft GFA p.a.,versus the 2010 to 2017 average of 2.5mn sq ft GFA.
However, management said it would continue looking for new investmentopportunities in China and is expecting more capex in the years ahead. At themoment, with all committed capex （c.HK$48bn outstanding） and keepingother parameters constant, management guides for net debt gearing toincrease to 23-25% by 2024
Dividend:
Management stated that in line with HLP’s current objectives, the companywill remain focused on rental profit. Without giving much colour on 2H18EDPS （remains flat yoy in our model）， management is confident it will seenoticeable growth into 2019, when new completions are scheduled to open（including Kunming’s Spring City 66 shopping mall/office, and Shenyang’sForum 66 hotel portion, Wuxi’s Center 66 office tower 2 and Wuhan‘sHeartland 66 shopping mall）， which could lead to a potential dividend hike.
What to do with the stock
We revise our 2018E/19E/20E EPS by 3.7%/0.2%/0.7%, mainly to factor in the paceof HK property inventory sales 2018 YTD and other rental segment assumptions,with our FY19E NAV revised up slightly by 0.3% to HK$36.57 as a result.
However, we lower our 12-month NAV-based target price by 8% to HK$20.00 （fromHK$21.80）， as we expand our target discount by 5pp to 45% versus the stock’s NAVdiscount levels of 42% （post-QE average） and 53% （-1SD）， due to increased macrouncertainties （e.g., RMB FX） and a likely smaller growth trajectory into 2H18 as wemay see negative FX impact from the company’s China rentals. Maintain Neutral.
Looking ahead, though near-term positives in the retail market recovery are likely tocontinue to be partly offset by ongoing AEIs （similar to what happened in FY2017），we continue to expect HLP to start to see noticeable rental profit growth into 2019when new-completion projects are scheduled to be opened （including Kunming’sSpring City 66 shopping mall/office, Shenyang’s Forum 66 hotel portion, Wuxi’sCenter 66 office tower 2 and Wuhan‘s Heartland 66 shopping mall）， which shouldprovide additional support for a potential dividend hike.
Risks:
NAV-accretive acquisitions or disposals; slower-than-expected recovery in China luxuryretail market.