Hang Lung Properties - Mall operations stage nice recovery
- FY22 underlying profit fell 4% to HK$4.2bn, in line with our forecast
- China malls staging nice business recovery with the return of shopper traffic
- Hong Kong rental portfolio sees sequential income improvement
- BUY with HK$17.44 TP
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Gross rental receipts were 3% lower at HK$10bn. China rental income fell 3% to HK$6.75bn, accounting for 67% of total. Excluding the impacts of the Rmb depreciation, rental revenue from China grew 1%. In 2H22, China rental income grew 8% h-o-h to Rmb3bn in Rmb terms. This was despite the disruption brought about by the heightened pandemic situation following the relaxation of the zero-COVID policy.
In Rmb terms, retail income from Plaza 66 in Shanghai was 10% lower, primarily led by the shortfall in turnover rent during the city lockdowns in 1H22. After reopening for business following a two-month lockdown, the mall’s income rebounded strongly, by 20% h-o-h in 2H22. The decline in tenants’ sales at Grand Gateway 66 narrowed to 19% in FY22 from 1H22’s 32%. But due to high-base rents following asset enhancement initiatives, the mall delivered stable income in FY22. Forum 66 registered a decline in income of 8% amidst an 18% drop in tenants’ sales.
The shortfall was offset by increased revenue from Wuhan Heartland 66 and Dalian Olympia 66. Opened in Mar 21, the Heartland 66 mall provided its first full-year income contribution of Rmb232m, up 52% y-o-y, in FY22. With luxury brands joining the mall, Olympia 66 saw its revenue surge 40% to Rmb229m, with tenants’ sales rising 67%. Overall, luxury malls collected 1% less rental receipts in FY22.
Sub-luxury malls recorded a 4% decline in revenue while its tenants’ sales fell 20-29%, led by reduced footfall as a result of pandemic-related restrictions.
On the other hand, office income from China grew 11% to Rmb1.11bn in FY22. This was mainly led by increased contributions from Kunming Spring City 66 and Wuhan Heartland 66, where occupancies improved further to 88% and 73% in Dec 22 from Jun 22’s 79% and 61%, respectively.
Income from the Hong Kong counterparts showed a 3% drop in FY22. Negative rental reversion was working its way through the office and retail portfolios. The income shortfall was partially compensated for by increased income from residential and serviced apartments due to high average occupancy at Kornhill Apartments. However, rental income showed a sequential improvement since the gradual relaxation of social distancing measures. In 2H22, its Hong Kong rental portfolio recorded 3% h-o-h growth in income. Hang Lung Properties has also been refining its tenant mix through the recruitment of new tenants such as Matsukiyo, which should improve its competitiveness.
With rental margins lowered marginally to 71.4% from FY21’s 72.3%, rental earnings fell 4% to HK$7.17bn.
The public launch of Heartland Residences in Wuhan was put on hold in 2022 due to pandemic-related restrictions and weak market sentiment. Hang Lung Properties now plans to offer this development for sale in 2Q23, subject to the market conditions. This project offers 492 units in three towers with completion scheduled in 2023.
Net debt increased to HK$40.3bn in Dec 22 from Jun 22’s HK$39.6bn due to construction expenses incurred on property development in China. This brought its gearing to 30% (Jun 22: 29%). Despite slightly higher gearing, the company’s financial risks remain manageable, in our view. Proceeds from planned apartment sales in China should help relieve its debt load.
Interest rates for c.38% of the company’s total debt are fixed. Besides, about 28% of total borrowing is denominated in Rmb, on a floating basis – they are largely onshore construction loans, for which interest rates have fallen.
Following the recent spike in COVID infection rates, shopping traffic in China started to recover since the beginning of 2023. The company’s malls in China witnessed a promising recovery in tenants’ sales MTD, despite a high comparison base. Sub-luxury malls are faring even better, as tenants’ business is driven more by footfall. Its retail portfolio in Hong Kong is also on the recovery trajectory with the border reopening.
The share price of Hang Lung Properties has appreciated 50% in the last three months. Despite the strong share price rally, the stock is trading at a 61% discount to our assessed current NAV, against its 10-year average of 46%. Even after allowing for the recent share price rebound, the valuation is by no means expensive. The easing of the zero-COVID policy paves the way for post-pandemic economic recovery in China. The retail sector is on its recovery trajectory, which should brighten prospects for the company’s growth in the medium term. By assigning a target discount of 55% to our Dec 23 NAV estimate, we set our TP at HK$17.44. BUY.
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