Investment highlights
For the first time, Hang Lung Properties (00101) was given an outperforming industry rating. The target price was HK$18.01, corresponding to the 2023/24 price-earnings ratio of 16.0/15.0 times 2023/24, the 2023/24 dividend yield of 4.3%/4.3%, and an upward margin of 26%. Hang Lung is a value blue chip with steady growth and high dividends: as an established Hong Kong-funded real estate developer, the company has a forward-looking layout in the mainland and has accumulated scarce high-quality commercial assets, mainly high-end shopping malls, to provide solid support for steady growth in rental income and profit, as well as a high percentage of stable dividends. In the short term, we think the background of post-pandemic consumption recovery is also expected to provide additional support for stock prices. The reasons are as follows:
It lays out high-end businesses in the mainland in a forward-looking manner, and it is expected that the strong will continue to be strong under the first-mover advantage. Hang Lung started in Hong Kong, China, and has been located in the mainland since the 90s. Currently, it is the leading high-end commercial operator in the mainland. The mainland contributed nearly 70% of revenue in 2022. The company operates 10 shopping malls in the mainland (7 of which are high-end), ranking second in terms of market share of high-end markets. We believe that the flexibility and resilience of rent growth in high-end markets is superior to shopping malls that target mass consumption, and that the operating threshold is higher. Scarce luxury brand resources are the core barrier. Considering that Hang Lung has built up deep brand relationships and has a stable first-mover advantage, the project layout has taken the lead, is basically in the core area of Tier 1 and 2 cities, and continues to adapt to mainland consumer trends and polish business management capabilities to improve the performance of the same stores. We expect the company to be a strong player in the high-end market, compounded by the impressive performance of newly opened office buildings in recent years. The compound growth rate of mainland rent is expected to exceed 10% in the next 3 years, providing solid support for the company's overall revenue growth.
Steady finances support high dividends, and the current allocation value of cash bulls is outstanding. Thanks to strict financial discipline, Hang Lung has historically maintained a low leverage ratio. The net debt ratio at the end of 2022 was only 28%, and average financing costs have continued to improve in recent years. The 3.5% level at the end of 2022 is competitive in the industry. Strong financial and cash flow also supports high dividends. Since 2012, the company's dividend per share has remained at HK$0.7-0.8, and the dividend rate has remained above 80% in the past 5 years. Looking ahead, we believe that endogenous growth in mainland shopping mall rents will still be the main driver of the company's revenue, and that rising rents for newly opened projects will bring about an increase in operating profit margins. The compound growth rate of the company's revenue and profit is expected to be 10.2% and 7.8% in 2023-25. Among them, 2023 is expected to take advantage of the post-pandemic consumption recovery, combined with property development, revenue and profit growth is expected to reach 25%/21%.
Considering the company's highly certain profit growth rate and attractive dividend rate (the 2023 dividend rate is currently 5.4%), we believe that the company has high allocation value in both the short and long term.
What's the biggest difference between us and the market? We believe that the company's profit and dividend performance are expected to be ahead of peers, and the allocation value has not yet been fully recognized by the market.
Potential catalyst: Shopping malls significantly outperformed their peers in rent and profit performance.
Profit forecasting and valuation
We expect the company's EPS for 2023-25 to be HK$1.13, 1.20, and HK$1.31, respectively, and a CAGR of 7.8%. The company is currently trading 12.7/11.9 times the 2023/24 price-earnings ratio.
risks
The recurrence of the epidemic affected offline consumption; the outflow of high-end consumption exceeded expectations; and the results of project adjustments fell short of expectations.