Hang Lung Properties - Building the extension of Plaza 66
- FY23 underlying earnings fell 1% to HK$4.1bn, broadly in line with our estimate
- Final DPS unchanged at HK0.60 with scrip dividend option proposed
- Overall tenants’ sales grew 7% y-o-y in 2H23
- BUY despite lower TP of HK$12.4
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Gross rental revenue grew 3% to HK$10.3bn with higher contributions from both of Hong Kong and China portfolios. Rental receipts from China portfolio rose 3% to HK$7bn, or 8% in Rmb terms. These accounted for 68% of the company’s total rental income (FY22: 67%).
Income from China malls grew 8% to Rmb5bn, mainly led by luxury malls. Aside from positive reversionary growth, turnover rents also grew and made up of c.25% total retail income in China. Excluding Forum 66 which registered 1% revenue decline, other luxury malls recorded income growth ranging from 6% (Grand gateway 66) to 19% (Olympia 66).
Overall tenants’ sales grew 23% in 2023 or 7% in 2H23. Those of luxury malls rose 22% in 2023 or 5% in 2H23. Sub-luxury malls fared better with tenants’ sales jumping 34% in 2023 or 32% in 2H23 on improved foot traffic. Compared to the previous peaks in 2021 or 2H21, both luxury and sub-luxury malls achieved better sales. That said, tenants’ sales for two luxury malls in Shanghai slowed down in 2H23 and were 1% and 9% below their respective levels seen in 2H22 and 2H21. With sluggish economic recovery in China, luxury sales growth is expected to normalise to c.5% in the years ahead.
Sub-luxury malls saw flat rental income dragged by Riverside 66 and Palace 66 as a result of low occupancies at the beginning of FY23. Revenue from Parc 66 went up by 4% following the completion of Ph 1of AEI, with occupancy improving to 93% in Dec-23.
Office income in China increased 5% to Rmb1.2bn in FY23. This was due to solid growth at Plaza 66 and higher average occupancy at Spring City 66 and Heartland 66.
Income from the Hong Kong counterpart was 2% higher at HK$3.3bn. This was mainly driven by retail portfolio which recorded 4% income growth with sales rents rising 17% amid tenants’ sales growth of 14%. Retail rental reversion is turning positive. Despite soft leasing demand, office income also grew by 1% with relatively high occupancy of 89% in Dec-23. On the other hand, residential income fell 7% mainly due to the income shortfall from The Summit which commenced renovation from Sep-23. Renovation works are expected to be completed in early 2025.
With overall rental margins improved to 72.1% from FY22’s 71.4%, rental earnings increased by larger 4% to HK$7.4bn.
Hang Lung Properties recently obtained the approval from local government to build an additional four-storey retail arcade with GFA of c.32,300sf as an extension of Plaza 66. This should enable the company to further enhance the offerings of Plaza 66. Construction works are expected to begin in 3Q24 with project completion scheduled in 3Q26.
Construction works of Westlake 66 in Hangzhou is well underway with the mall scheduled to open for business in early 2025. This mixed-use development also comprises five Grade A office towers and a luxury hotel, Mandarin Oriental Hangzhou, which is slated to open in late 2025.
In Jan-24, Hang Lung Properties sold a house on Blue Pool Road for HK$230m or c.HK$50,000psf. Unit price was 32% below that of another house sold Jun-21. Since its initial launch, the company has sold nine houses for HK$2.77bn. This represented 50% of total.
Net debt stood at HK$45.4bn in Dec-23, up 7% from Jun-23’s HK$42.4bn, primarily due to construction expenses incurred on China projects such as Westlake 66. This translated into 34% of shareholders’ fund. (Jun-23: 33%) Interest cost for 37% of total debt was on fixed rates. Excluding onshore floating-rate borrowings, hedging ratio for offshore debt would be 50%. Interest cover is lowered to 3.6x from 4.6x in FY22.
To improve its financial health, the company intends to monetise its apartments in China when opportunities arise. In Oct-23, Hang Lung Properties has commenced the pre-sale of Grand Hyatt Residences at Spring City 66 in Kunming which contains 254 apartments with scheduled completion in phases from 2024.
To preserve cash, Hang Lung Properties has proposed a scrip dividend arrangement. If the major shareholder, Hang Lung Group, elects to receive all its dividend in form of new shares, this would save the company c.HK$1.65bn but cause 2-3% NAV dilution.
In the previous six months, shares of Hang Lung Properties have corrected 24%. Meanwhile, the stock is trading 74% below our appraised current NAV, >2SD below its 10-year average. Concerns over slowdown in retail sales growth and potential dilution arising from proposed scrip dividend arrangement should be priced in. Maintain BUY with HK$12.4 TP. This is based on target discount of 65% (1.5SD below its 10-year average) to our Dec-24 NAV estimate.
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