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Morningstar | Hang Lung Full-Year Results Miss due to Lower Hong Kong Property Sales, but China Leasing in Line

Hang Lung Properties, or HLP, announced full-year results with underlying earnings of HKD 4.1 billion or EPS of HKD 0.91. The results were 10% below our projection. The shortfall was largely attributed to lower property sales revenue in Hong Kong. The property leasing business in China, the company’s earnings driver, was mostly in line, with the top line slightly below coupled with better margin. We adjusted our growth assumptions, reflecting the continuing asset enhancement initiatives in China and slower property sales in Hong Kong. We reduce our fair value estimate from HKD 24 to HKD 22, and maintain the company’s no-moat rating.

We adjusted our assumption on rental revenue growth to reflect continued AEI at certain assets. The impact on earnings were offset by delayed booking from property sales in Hong Kong. Our thesis on the company as the purveyor of quality retail assets is unchanged. The shares are now trading at 15 times 2019 earnings, with a dividend yield of price have retreated during second half of the year, now trading at a P/E of revised 2019 earnings. With a dividend yield near 5%, supported by recurrent income. We urge continued patience as the company grooms its assets.

For the property leasing business in China, the company recorded revenue growth and operating profit growth of 7% and 12%, year on year. While part of the growth was attributed to currency movement, rental income grew 4% in local currency, a respectable showing amidst the negative sentiment stemming from slowing economy and trade dispute. Assets not affected by asset enhancement initiatives showed strong performance, achieving double-digit growth in rental income or retail sales.

Hong Kong leasing portfolio’s performance was steady with top line and bottom line growing at 3%, in line with the city’s economic growth rate. Revenue from Hong Kong property sales were minimal during the second half the year, leading to earnings shortfall for the year.

Net gearing rose to 12%, reflecting the acquisition of the plot in Hangzhou and the ongoing construction. The company stated that it may selectively sell the service apartment component of its projects in Wuhan, Wuxi and Kunming. The management emphasized that this is not a necessity, but rather a means to generate profit or funding for additional acquisition opportunities. It stated that it will be comfortable with 30% net gearing.