EUR 850.00 For Business Accounts Only

Morningstar | Slowdown in China Retail Is not Structural, Hang Lung Well-Positioned to Reap Future Growth

Year to date, shares of Hang Lung Properties dropped almost 20%, underperforming the market by 5%. The poor performance was attributed to an increasing anxiety over a decline in the Hong Kong property market, coupled with a slowing retail sales growth in China. However, we believe these risk factors have been more than priced in. The company has very limited exposure to the Hong Kong residential real estate sector. Its retail assets in China are centrally located and well managed with excellent long-term growth opportunities. We maintain our no-moat and stable moat trend ratings along with our HKD 24 fair value estimate. The shares are now trading at 35% below our fair value estate. The current share price weakness represents a good entry point for investors looking for exposure to quality retail assets in China through a proven operator. A dividend yield near 5%, backed by recurrent income from mature assets, should provide good downside protection.

For the month of October, China’s retail sales growth slowed to 8.6% year on year, a low for the past five months. Year through October, retail sales growth is 9.2%, comparing to 10% plus growth seen in the years before. Retail sales had been strong during the first quarter, up more than 10% year on year. However, since then, the weight of trade war as well as a slowing real estate market and weakening domestic stock market dragged on retail sales growth. We believe these are merely short-term factors. The long-term trend of accelerated consumption growth is unchanged, powered by urbanization and income growth. The continued emergence of a consumption culture and the rise of e-commerce are creating a pool of increasingly discerning consumers. Similar to that seen in U.S., we expect a bifurcation of retail assets in China with top performing assets increasing commanding a larger share of retail sales owing to their competitive advantages in asset quality, tenant mix, and marketing and promotion.