Performance review

The 2022 results were slightly lower than expected due to exchange rates

ESR announced 2022 results: Net profit of the mother (PATMI) increased 64.3% year-on-year to US$574 million, slightly lower than market expectations. It mainly reflects the impact of exchange rate changes (the impact of the exchange rate on the company's total performance of the company segment is about 100 million US dollars). If this influence is excluded, we believe that the company's 2022 performance is in line with expectations.

The scale of asset management has been rising steadily, and asset performance in the new economy has been outstanding. The size of corporate asset management (AUM) increased 12% year over year to $156.4 billion in 2022 (based on the exchange rate at the end of 2021), with new economy assets accounting for 62%. By the end of 2022, the average maturing rent increase in the asset portfolio under management was 7.5%, and the rental rate reached 95% (excluding regions other than mainland China reached an average of 98%); the growth momentum of the new economy development sector was good. The capital value of new construction and completion in 2022 increased 20% and 85% year-on-year to US$6.5 billion and US$5.5 billion, respectively, a record high.

The balance sheet remains healthy. By the end of 2022, the company's balance ratio (net debt/total assets) was 22.8%, down 5.1ppt from the previous year (mainly due to the sale of some assets). Cash on hand was $1.8 billion, the weighted average debt period was 5.1 years, and the average financing cost was 4.2%.

Development trends

The company expects to further consolidate fundamental quality through asset circulation. At present, the company has initially completed business integration with the ARA platform and achieved some cost concentration. In the future, we expect the company to further dispose of non-core assets and return capital to improve operational flexibility (the annual report revealed that the company is currently evaluating business sales of no more than 750 million US dollars).

We expect the company's performance to continue to grow moderately in 2023. We expect the company to maintain a steady scale of project completion and fund-raising in 2023 to promote the continuous development of the asset sector in the new economy. Judging from the characteristics of the segment, we believe that the performance of the fund management division is still expected to achieve double-digit year-on-year growth. The investment and development segment may be negatively affected by asset price adjustments to some extent. Overall, we think that earnings in 2023 can still maintain positive single-digit growth (if the depreciation of the US dollar is not taken into account).

Profit forecasting and valuation

Based on exchange rate changes and conservative expectations of commercial asset prices for some time to come, we lowered our 2023-24 net profit forecast by 5% and 12% to US$660 million (+6% YoY) and US$650 million (+7% YoY). Maintaining an outperforming industry rating, the target price was lowered by 21.6% to HK$19.6 (corresponding to 18 times the core price-earnings ratio in 2023, with 43% upside compared to the current stock price), mainly reflecting adjustments in profit forecasts and reduced market risk appetite. The company is currently trading 13 times the 2023 core price-earnings ratio and 0.9 times the 2023 net price-earnings ratio. We believe the current valuation is at a historically low level, so we recommend focusing on investment opportunities within the year.

risks

The decline in global commercial real estate prices exceeded expectations; the company's opening and completion traffic in 2023 fell short of expectations; leasing demand declined rapidly in some markets; and financing costs continued to rise rapidly.