ESR Group Earnings: Cutting Fair Value 20% to HKD 19.50 on Lower AUM Growth Rate and Fee-Earning AUM

We lower ESR Group’s fair value estimate to HKD 19.50 from HKD 24.50 after its disappointing first-half 2023 results. Revenue increased 5.5% year on year to USD 455 million but net profit fell 24.1% to USD 289 million, making up only 37% and 42% of our full-year estimates, respectively. The weakness was due to the absence of fair value gains on its completed investment properties, lower gains on disposal, and a drop in dividend income received. We have included uncalled capital in our assets under management, or AUM, assumptions as we previously expected that the capital would be deployed in the immediate 12 months and generate fee income for the group. However, given the slow capital deployment due to macroeconomic uncertainties, we lowered our fee income as a percentage of AUM assumptions, to factor in a slightly higher ratio of non-fee-earning AUM. We also reduced our forecast AUM growth rates for 2023 and 2024 to reflect the elevated interest-rate environment that has negatively affected the group’s fundraising and deployment activity. As a result, our net profit estimates decreased by 25%, 19%, and 15% respectively for 2023, 2024, and 2025. Despite that, we continue to see the group as undervalued, as it trades at 0.6 times our fair value estimate. We think the group is well-positioned to benefit from a recovery in the real estate transaction market when the interest rate pivots. The firm has dry powder of USD 19.3 billion that we think can be deployed toward the end of 2024 .