Company Reports

Hang Lung Properties, or HLP, is a property developer that develops and holds a portfolio of investment properties for rental income in Mainland China and Hong Kong. Beginning in the late 1990s, the company pursued a strategy of pivoting from Hong Kong residential development to Chinese commercial properties. So thorough was the pivot that the company has not made any land acquisitions in Hong Kong for nearly 20 years, until late 2020.

Hang Lung Properties’ 2023 results were within expectations. Despite a lack of property sales booking in 2023, revenue was flat against last year as mainland China's retail properties benefited from a post-COVID recovery. While we continue to expect Hang Lung Properties’ luxury malls to benefit from the secular growth in the middle and high-income mainland Chinese population, we lower our near-term rental and occupancy assumptions to reflect a weaker economic outlook in mainland China. In our view, luxury spending from the ultra-high-net-worth segment will remain resilient through economic cycles, but we expect a pullback in luxury spending from middle-income shoppers in the near term, given the challenging economic environment.

We transfer coverage of Hang Lung Properties, or HLP, with a no-moat rating and lower our fair value estimate to HKD 19 from HKD 22 to factor in the impact of currency headwinds. However, we think the shares are undervalued currently with the firm trading at around 0.4 times price/book ratio and 6.4% dividend yield for 2023. We continue to like the firm for its focus on high-quality luxury malls in China, as we believe it helps the company to ride on the increasing middle- and high-income mainland Chinese population, which has driven up strong demand for luxury goods. Although China’s overall consumer spending is showing signs of weakness, we believe that luxury demand will remain resilient, as evidenced by strong sales performance in some of the recent luxury brand results, for example, LVMH and Hermes.

Hang Lung Properties, or HLP, is a property developer that develops and holds a portfolio of investment properties for rental income in Hong Kong and China. Beginning in the late 1990s, the company pursued a strategy of pivoting from Hong Kong residential development to Chinese commercial properties. So thorough was the pivot that the company has not made any land acquisitions in Hong Kong for nearly 20 years, until late 2020.

Our fair value estimate of Hang Lung Properties remains at HKD 22, with our long-term view largely unchanged as the company exits the pandemic following the easing of travel restrictions in China and Hong Kong. The group’s 2022 results were resilient despite various COVID-19-related headwinds disrupting businesses and affecting consumer sentiments. Full-year revenue of HKD 10.3 billion was a slight miss to our HKD 10.8 billion forecast due to weaker performance from its China leasing portfolio that saw a 7% depreciation in the Chinese yuan and the reintroduction of local pandemic containment measures in the second half of 2022 causing business disruption and lower foot traffic. Nevertheless, with China and Hong Kong joining the rest of the world to substantially ease travel restrictions, we think the worst is over for the group and expect it to benefit from the recovering domestic consumption and business outlook, which should lead to improving leasing and rental performances for its China and Hong Kong retail and office portfolio. We think the group is undervalued based on current prices and like it for its high-quality China leasing portfolio that we believe will strongly emerge from the pandemic to drive the group’s earnings.

Hang Lung Properties is unique in the field of real estate companies in Hong Kong. Beginning in the late 1990s, the company pursued a strategy of pivoting from Hong Kong residential development to Chinese commercial properties. So thorough was the pivot that the company has not made any land acquisitions in Hong Kong for nearly 20 years, until late 2020.

Despite the extensive lockdowns across its operating geographies in mainland China and Hong Kong, we see Hang Lung Properties' first-half result as resilient and reflective of the group’s high-quality property portfolio. The booking of a residential unit sale at Blue Pool Road, a completed project in Hong Kong, provided an uplift to overall revenue. However, we lower 2022 and 2023 revenue forecasts by 5% as we factor in lower rental from the malls closures in the first half, and slower office rental growth at Plaza 66. We expect a sharp rise in 2023 revenue due to the booking of Aperture, a residential project in Kowloon Bay.

Hang Lung Properties is unique in the field of real estate companies in Hong Kong. Beginning in the late 1990s, the company pursued a strategy of pivoting from Hong Kong residential development to Chinese commercial properties. So thorough was the pivot that the company has not made any land acquisitions in Hong Kong for nearly 20 years, until late 2020.

Hang Lung Properties' shares underperformed peers', with the recent Shanghai lockdown and a removal from the FTSE EPRA Nareit Global Real Estate Index resulting in the stock being further sold down in the week ending June 3. Shares are trading at a 30% discount to our fair value estimate of HKD 22 and we believe the downside is priced in. Shanghai has gradually reopened and visuals on social media posts from the reopening were positive, with shoppers lining up outside luxury shops in Plaza 66. Current COVID-19 testing policies are likely to present a challenge for the general population to move around the city and may translate into a slower recovery in foot traffic and, in turn, retail sales. In our recent conversation with the company, no guidance on rental concessions was offered, but we note that rental subsidy was small in 2020. We estimate a 7% impact on our revenue and earnings per share forecasts as a worst case assuming 10 months of income for Plaza 66 and Grand Gateway. However, the magnitude of the decline is likely to be lower as rental concession should be amortized.

There is no change in our long-term thesis after Hang Lung Properties’ solid fiscal 2021 result. We expect the group’s luxury malls in Mainland China to benefit from rising domestic consumption and this was reflected in strong tenant sales in fiscal 2021, which translated into property leasing revenue growth of 45% for its China portfolio. This was also supported by the completion of Heartland 66 in Wuhan.

Hang Lung Properties is unique in the field of real estate companies in Hong Kong. Beginning in the late 1990s, the company pursued a strategy of fully pivoting from Hong Kong residential development to Chinese commercial properties. So thorough was the pivot that the company has not made any land acquisitions in Hong Kong for nearly 20 years, until late 2020.

The valuation for Hong Kong real estate stocks remains attractive, in our view. With economic recovery expected in 2022, the near-term positive catalyst for the sector is the reopening of borders with mainland China, then internationally. We expect the share prices of landlords with larger retail exposure to rally ahead of any news of border reopenings. At a 15% discount to our fair value, Wharf REIC is our preferred pick and we expect the landlord to benefit the most as close to 90% of operating income is derived in Hong Kong, mainly from its two flagship properties in Harbour City and Times Square. Link REIT, Swire Properties and Hongkong Land would also benefit though the latter two have a smaller proportion of retail contribution. A recovery in office rents is likely to be the driver for Hongkong Land and Swire Properties, though a recovery in office should lag retail as corporates need to confirm their business plans after the reopening of borders, in our view. Swire Properties and Hongkong Land are trading at close to a 24% discount to their respective fair values while Link REIT’s more defensive portfolio sees the trust trading at a narrower discount to its fair value.

Hang Lung Properties is unique in the field of real estate companies in Hong Kong. Beginning in the late 1990s, the company pursued a strategy of fully pivoting from Hong Kong residential development to Chinese commercial properties. So thorough was the pivot that the company has not made any land acquisitions in Hong Kong for nearly 20 years, until late 2020.

The share prices of Hong Kong developers declined sharply on Monday following a Reuters news report the Chinese government expects greater social contributions from Hong Kong developers in future, given tight land and housing supply, and high property prices. With housing affordability issues having persisted for an extended period of time, the high property prices were cited by mainland China state media as a contributing factor to antigovernment protests in late 2019. The primary market concern is developers’ holdings of agricultural farmland, which is able to be developed once land conversion takes place. The latter would result in a land premium being paid but prices are usually below land auction prices. However, the share price reaction appears to factor in the risk of "land resumption" by the Hong Kong government, in our view.

Hang Lung Properties posted a solid first-half result with underlying net profit increasing 11% year on year to HKD 2.2 billion. Total rental revenue increased 19% on-year to HKD 4.97 billion. The stronger result was driven by continued growth in its properties in mainland China, particularly in the luxury segment. Luxury retail sales saw a triple-digit increase against the same period last year, while the sub-luxury segment saw mid-double-digit growth. While retail sales continue to benefit from closures of borders and limited international travel, the group’s execution is also a key driver with the opening of Heartland 66 in Wuhan and the upgrade of Olympic 66 in Dalian. The latter is expected to see additional luxury brands moving into the mall.

Hang Lung Properties is unique in the field of real estate companies in Hong Kong. Beginning in the late 1990s, the company pursued a strategy of fully pivoting from Hong Kong residential development to Chinese commercial properties. So thorough was the pivot that the company has not made any land acquisitions in Hong Kong for nearly 20 years, until late 2020.

Hang Lung Properties is unique in the field of real estate companies in Hong Kong. Beginning in the late 1990s, the company pursued a strategy of fully pivoting from Hong Kong residential development to Chinese commercial properties. So thorough was the pivot that the company has not made any land acquisitions in Hong Kong for nearly 20 years, until late 2020.

Hang Lung Properties is unique in the field of real estate companies in Hong Kong. Beginning in the late 1990s, the company pursued a strategy of fully pivoting from Hong Kong residential development to Chinese commercial properties. So thorough was the pivot that the company has not made any land acquisitions in Hong Kong for nearly 20 years, until late 2020.

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 Properties announced 2020 full-year results with underlying earnings of HKD 4.2 billion or underlying EPS of HKD 0.93, down 6% year on year. Full year dividend totaled HKD 0.76 per share, flat from a year ago. The earnings were below consensus and our estimate by 5% and 7%, respectively. Market reaction was muted after the results announcement. We believe the market was satisfied with the growth of the mainland portfolio, along with in-line operating profit and steady dividend. We retain our fair value estimate of HKD 22, and our no-moat rating. The shares are currently fairly valued.