Profit is expected to increase slightly year-on-year, which is basically in line with market expectations
We expect Hang Lung Properties' revenue to be +2% year-on-year in 2023, with mainland retail properties remaining the main driving force; the basic net profit attributable to shareholders is expected to be +3% year-on-year, which is basically in line with market expectations; and the dividend payout is expected to remain at HK$0.78 per share for the whole year, corresponding to a dividend yield of 8.4%.
Key points of interest
It is expected that rents in the Mainland will increase by a high single digit. The company's 1H23 retail performance in mainland shopping malls was impressive, with a year-on-year growth rate of +42%, laying a good foundation for the whole year; the company's marketing activities were intense in the second half of the year (“VIP party” in November and Christmas and New Year's Day promotions in December). We expect its retail sales to be in line with the historical trend of increased seasonality and better than in the first half of the year. After factoring in the depreciation of the Hong Kong dollar on the growth rate, we expect that shopping malls in the Mainland will still be able to record high single-digit revenue growth rates, driving the Mainland's overall rent to record similar increases.
Overall property rents in Hong Kong are expected to rise slightly. On the retail side, the company's 1H23 benefited from the recovery in visitors to Hong Kong and the promotion of retail sales +22% and rent +6%; according to data from the Hong Kong Rating and Property Assessment Department and the Travel Industry Network, the average rent index for retail properties in Hong Kong continued to rise from July to November, and the number of visitors to Hong Kong maintained a recovery trend in October to November. Based on this, we expect the company's Hong Kong retail properties to continue to perform steadily in the first half of the year and record single-digit rent growth rate throughout the year. In terms of office buildings, considering the good location of the company's properties (distributed in locations such as Central and Causeway Bay), and that rent relief was granted last year, and the base is low, we expect the annual rent and occupancy rate to be roughly the same (1H23 rent +1% year over year, occupancy rate 88%).
Strong financial conditions support high dividends, and sales of development projects can supplement additional cash flow. As of the end of 1H23, the company's net debt ratio was 30.4%. With the gradual completion of the Hangzhou project and the peak of capital expenditure during the year, we expect the company's net debt ratio to decline after peaking in 2024 (we expect no more than 40%); at the end of 1H23, the company's average financing cost rose slightly to 3.9%. Considering that the company gradually increased relatively low-cost RMB financing and benefiting from possible US dollar interest rate cuts during the year, we think the probability that its financing costs will rise significantly later. Considering the company's steady investment property rental performance and prudent capital expenditure management, we believe that the company has a solid foundation to maintain a fixed annual dividend of HK$0.78 for 2023-24. In addition, the company's Kunming “Grand Hyatt” project was launched on 2H23. Although profitable settlement is difficult in the short term, the cash flow dimension is expected to provide additional support for the company.
Profit forecasting and valuation
Considering that the appreciation of the Hong Kong dollar is dragging down the financial results of the report, we lowered our 2023/24 profit forecast by 5%/7% to HK$43.2/4.62 billion, and introduced a profit forecast of HK$5.12 billion for 2025. Taking into account the recent deterioration in risk appetite, the target price was lowered by 18% to HK$13.23, corresponding to 42% upside. Based on the steady implementation of the company's performance and the high visibility of fixed dividends of HK$0.78, we still maintain our rating of outperforming the industry and reaffirm the value of its defensive allocation. Currently trading at 9.1x 2024 P/E with a dividend rate of 8.4%.
risks
High-end consumption outflows exceeded expectations; settlement progress or profit margins for developed properties were worse than expected.