The company's recent situation
We recently focused on M3 and M4 shopping malls in several second- and third-tier cities in the Jiangsu and Zhejiang regions.
reviews
The overall operation of the research mall is good. The subjects of our research are at various stages, but regardless of whether they are projects that have been in operation for a relatively long time (projects that have been in operation for about 10 years) or projects that have just recently opened, their turnover has recorded double-digit growth since 2024 (mainly contributing to increased passenger traffic). At the same time, they are actively implementing local business format adjustments to optimize the merchant portfolio. Overall, there are no obvious signs of a decline in brand hierarchy.
The competitive advantage of China Resources M3 and M4 subbusinesses lies in expanding channels. A common trend we found in several of the cities we visited was that the differentiation in business performance among business districts and commercial entities was intensifying. This differentiation began to be evident during the pandemic, but was more fully reflected since 2023. Many of the non-China Resources businesses we visited were in a state of declining occupancy rates, declining brand levels, shrinking passenger flow, and passive adjustment. In contrast, China Resources's commercial entity gained more traffic and market share during the downward phase of the industry, further expanding its leading edge over its peers.
A major area of competitiveness of China Resources with other business entities is the awareness and ability to actively manage operations. In our interview, we believe that the core of China Resources's enhanced business advantage is the reflection of active management ability in the downward cycle. Unlike some M1 and M2 projects that the same market may be more familiar with, the M3 and M4 businesses we have investigated do not generally have location and hardware advantages (even some projects have very low business district maturity), but they have achieved impressive business performance. The key is that China Resources continues to actively adjust and optimize the merchant portfolio (this often requires business management managers to formulate reasonable competitive strategies), and at the same time actively support and participate in merchant operations to shape a win-win relationship. Compared with some peers, which may still be biased towards short-term financial benefits and have a relatively weak sense of active management, we believe that the deepening of China Resources's operations actually represents a progressive force for the industry. Furthermore, this ability and advantage is built up in the platform and is not easy to be shaken.
The growth mechanism for the next 2-3 years is relatively clear. We believe that the continued inclination of market share towards dominant commercial entities and the continued implementation of active adjustments under these conditions are likely to enable these businesses to continue to achieve at least single-digit annualized performance growth. At the same time, we believe that the market's capacity for M3 and M4 products can also be improved. Despite heavy luxury or phased pressure, China Resources's overall competitiveness is in the upward channel.
Profit forecasting and valuation
Keep profit forecasts unchanged, but suggest upward risks (such as an increase in potential commercial sub-leasing projects, and potential investment mergers and acquisitions). Maintaining an outperforming industry rating and raising the target price by 6% to HK$35 (corresponding to 20 times the 2024 price-earnings ratio and 19% upward space), mainly considering consolidation of growth certainty and optimization of the overall market conditions in the Hong Kong stock market. The company traded 17.5 times the 2024 price-earnings ratio.
risks
The heavy luxury sector experienced a decline that exceeded expectations in 2024; the operating performance of newly opened shopping malls in 2024 was weaker than expected; and the overall recovery of the Chinese consumer market fell short of expectations.