Hang Lung Properties: Transferring Coverage; Currency Headwinds Offset Recovery

We transfer coverage of Hang Lung Properties 00101, 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.

Given that border restrictions have been lifted in China, management estimates that about 30% of luxury sales have leaked abroad. The leakages are largely due to currency movements, with Japan being a huge beneficiary due to the depreciation of the Japanese yen. However, HLP expects some of the sales to return to mainland China as top luxury brands such as LVMH have mentioned plans to equalize the price differences.

The substantial easing of travel restrictions in China has driven a strong recovery in tenant sales of HLP’s China retail malls. Notably, first-half 2023 tenant sales in HLP’s Shanghai retail portfolio and HLP’s non-Shanghai retail portfolio are up 64% and 23% year on year, respectively. The strong growth figure in Shanghai is largely due to a lower base, as Shanghai endured business suspensions in April 2022 and May 2022 due to COVID-19 measures. Meanwhile, HLP’s seven luxury retail malls in China collected 16% more rent in local currency year on year with the strongest performance coming from Plaza 66 (23% higher year on year).