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Morningstar | New Morningstar analyst report for Hang Lung Properties

Hang Lung Properties is unique in the field of real estate companies in Hong Kong. Starting in late 1990s, the company pursued a strategy of fully pivoting from Hong Kong residential development to Chinese commercial assets. So thorough was the pivot that the company has not made any land acquisitions in Hong Kong since 2001. Hang Lung has developed two commercial projects in Shanghai. Since opening in the early 2000s, both saw strong growth over the next decade and a half, averaging 25% annual growth in retail sales and rental income. The company redeployed proceeds from two large successful Hong Kong residential projects and several share placements in the early 2000s, into several large prime commercial land plots in Tier 2 cities from 2005 to 2013. Starting in 2012, retail sales growth of Shanghai malls faltered, while newly opened projects in other cities were less successful and required extensive repositioning and tenant changes. At the end of 2017, the company has seven commercial projects in operation, with five more newly opened or under construction.We attributed the recent slowdown to the anticorruption campaign, given these assets’ focus on luxury brands. Clearly, such events do not represent any secular trends in the Chinese retail sector. With the waning of the anticorruption campaign, luxury retailing began to recover, similar to the recovery seen in Macau casino sector. The company’s repositioning effort has restored retail sales growth at most of its assets.Nationally, retail sales growth has slowed to below 10% annually. However, the retail sector is still well supported by growing consumption. Further, there are considerable regional differences, with lower-tier cities likely seeing stronger growth. We believe the company’s assets in Tier 2 cities have a strong probability of developing into premier retail destinations in their respective cities, given the company’s early acquisition of centrally located large land plots and its proven ability as a retail asset manager. As such, these assets are likely to deliver growth in retail sales and rental incomes over the next three to four leasing cycles on par with the assets in Shanghai.