EUR 850.00 For Business Accounts Only

Morningstar | Hang Lung Properties' Interim Results in Line; China Retail Assets Show Mixed Performance

Hang Lung Properties reported in-line interim results. For investment properties in China, revenue and earnings were up 11% and 14%, respectively. Both accounted for about half of our full-year estimate. In Hong Kong, rental income and earnings were up 3% year on year, as expected. Development properties were also in line. For the interim, the company reported underlying earnings per share of HKD 0.52, down 24%, attributed to lower earnings from development properties. Hang Lung declared an interim dividend of HKD 0.17 per share, unchanged from a year ago. The results contained no surprises. We maintain our no-moat and stable moat trend ratings along with our HKD 24 fair value estimate. The share price has weakened in recent months, and we believe this is a good entry point for investors looking for exposure to retail assets in China through a proven operator.

The retail malls in China collected 2% more rents year on year. In Shanghai, Plaza 66 achieved a 13% increase in rental revenue after the upgrade last year. More encouragingly, retail sales were up 15% after several years of stagnation. Grand Gateway 66, currently undergoing renovation, saw rental revenue down 9%. On a like-for-like basis, rental revenue was up 1%, but retail sales were down 5%. Two malls in Shenyang, still undergoing renovation, showed relatively weak performance. Palace 66 saw flat rental revenue and retail sales dropping 1%. Forum 66 saw rental revenue and retail sales falling 16% and 2%, respectively, but the occupancy rate improved 10 points to 87%. Parc 66 in Jinan and Center 66 in Wuxi began to show promise, with rental revenue up 6% and 18%, respectively. Retail sales were up 20% and 15%, respectively. Tianjin Riverside 66 was also in the midst of tenant reshuffling, resulting in flat rental revenue and an 11% decline in retail sales. Olympia 66 in Dalian, still in the first leasing cycle after opening in late 2016, saw 10% higher rental revenue and 45% higher retail sales.

In Hong Kong, the leasing portfolio achieved a 3% increase in revenue and earnings. Retail sales were up 10%, benefiting from the city’s continued recovery in retail and tourism. The steady performance of the leasing portfolio should underpin the steady dividend payout, which represents a yield of 4.5% at the latest closing price.

The company budgeted a capital expenditure of HKD 43 billion over the next three to four years for projects under construction. This includes Kunming Spring City 66 and Wuhan Heartland 66, which are scheduled to open in mid-2019 and 2020. Prelease for these assets is currently underway. Given the continued growth of the country’s consumer class, especially in lower-tier cities, and their more favorable demographics, we believe these projects should have fewer teething pains compared with the company’s earlier foray into second-tier cities. These assets and the recent acquisition in Hangzhou, along with the continued maturation of existing assets, should power Hang Lung's earnings growth for many years to come.