The results for the first half of 2023 are in line with market expectations
ESR announced the results for the first half of 2023: Net profit to parent (PATMI) decreased by 24% year-on-year to US$289 million (mainly due to a reduction in fair value income and one-time income from investment and development), in line with market expectations. The company follows a sustainable dividend policy and declared an interim dividend of HK12.5 cents per share (approximately 1.6 cents per share), corresponding to an annualized dividend rate of 2.2% (based on the closing price of August 22, 2023).
The fund management business has performed strongly, and profit margins have been rising steadily. The company's fund management revenue and EBITDA for the first half of 2023 recorded US$403 million and US$329 million respectively (up 9% and 14% year on year), mainly due to the expansion of the company's management fee-related asset management scale (fee-related AUM) (up 10% year on year to US$78 billion), the commencement of development projects, and the increase in incentives. Furthermore, by the end of the first half of 2023, the fund management portion of EBITDA accounted for 55% of the Group's EBITDA (up more than 30% from when it was first issued), and the EBITDA profit margin reached 82% (up 4ppt from the previous year).
Construction and completion have maintained a good trend, and asset fundamentals are stable. The company's new commencement and completion scale for the first half of 2023 reached US$3.8 billion and US$2.2 billion respectively (up 9% and 12% year on year). By the end of the first half of 2023, the weighted average renewal rent increase rate for the company's new economy assets reached 10.4%, a record high. The rental rate reached 92% (98% if assets in Greater China are excluded), and the asset portfolio remained stable.
Development trends
Balance sheets are healthy, financing costs are rising, or have a negative impact on performance. By the end of the first half of 2023, the company's balance ratio (net debt/total assets) was 27.6%, cash on hand $1.1 billion, and a weighted average financing cost of 5.6% (up 140 bps from the end of 2022). We believe the company's overall financial situation is good, but the increase in overall interest expenses in the second half of the year may have a negative impact on profits.
Focusing on asset-light strategies, it is expected to benefit from asset development in the new economy in the long term. The company plans to complete asset sales of no less than 1 billion US dollars within 2023. As of the end of June 2023, the company revealed that asset sales of about US$800 million were still to be completed, and asset sales are expected to accelerate in the second half of the year. Furthermore, as the company actively expands into new economy asset types such as data centers, the scale of asset management in the new economy is expected to continue to increase. Thanks to the strong management resilience of new economy assets, we believe the company's performance is expected to remain steady in the long term.
Profit forecasting and valuation
Considering that the company's financing costs have risen more than expected, we lowered net profit for 2023-24 by 8% and 4% to US$560 million and US$630 million (2% year-on-year decrease and 11% increase). Maintaining an outperforming industry rating, the target price was lowered by 19% to HK$15.8 (please refer to Chart 3 for valuation estimates for the corresponding segment, corresponding to 16.1 times the 2023 core price-earnings ratio, which has 33% room to rise compared to the current stock price), mainly reflecting that asset prices may still face some pressure in an overseas high interest rate environment. The company's current stock price is trading at 12.2 times the 2023 core price-earnings ratio and 0.8 times the 2023 net market margin.
risks
The pace of capital circulation has fallen short of expectations; financing costs have risen more than expected; and exchange rates have fluctuated beyond expectations.