FY2024 results are in line with market expectations
Lingzhan Real Estate Fund announced financial results for the 2024 fiscal year: revenue and net property income (NPI) increased 11.0% and 9.5% year over year to HK$13.58 billion and HK$10.07 billion (mainly due to revenue from new property purchases); dividend per share (DPU) and net assets per share (NAV) decreased by 4.3% and 5.4% year on year to HK$2.63 and HK$70.02 (respectively, increase in fund share and decrease in fair value of asset portfolio), in line with market expectations.
The overall operation is steady. The company's property operations in Hong Kong, China were stable. Among them, retail property revenue increased 2.2% year over year, occupancy rate remained 98% at the end of fiscal year 2024, rent renewal rate increased by 0.8 ppt to 7.9% year on year; revenue from parking and related businesses increased 3.4% year over year. The company's overseas properties continued to operate well. Retail occupancy rates in Singapore and Australia were 97.8% and 99.7% respectively. In addition, the performance of the company's properties in mainland China was slightly divided, retail properties picked up marginally, and office properties continued to be under pressure. The occupancy rates were 96.6% and 92.3% (+1.4ppt and -3.2ppt), respectively. The rent renewal rates for FY24 were 2.8% and -10.2%, respectively.
Asset portfolio valuations declined. Affected by rising capitalization rates and depreciation of the exchange rate, the asset valuation of the company's property portfolio fell 0.6% year over year to HK$236 billion at the end of fiscal year 2024. With the exception of car parks in Hong Kong, China, and logistics in mainland China, all other asset types of property have declined to varying degrees.
A healthy balance sheet. As of the end of fiscal year 2024, the company's net debt ratio1 was 19.5% (up 1.7ppt year on year), the average borrowing cost was 3.78% (up 4 bps from the end of September 2023), fixed-rate debt accounted for 70% of total debt, and the overall risk was manageable.
Development trends
Follow changes in retail consumption trends in Hong Kong, China. Although the sales growth rate of the company's retail stores in Hong Kong, China in FY2024 was superior to the overall market trend, the year-on-year sales growth rate in the second half of FY2024 slowed as Hong Kong people spent more in the mainland. Looking ahead, we believe that supermarkets and other business formats that are more affected by the mainland may face challenges over a longer period of time. It is recommended to focus on the impact of changes in consumer trends on performance.
Profit forecasting and valuation
Considering the weakening performance of retail properties in Hong Kong, China, we lowered the DPU for FY2025 by 4% to HK$2.57 and introduced a DPU forecast of HK$2.57 for FY2026 (flat year over year). Maintaining the outperforming industry rating and lowering the target price by 15% to HK$40, mainly reflecting adjustments in profit forecasts and more careful medium- to long-term profitability judgments. The target price implies an expected dividend rate of 6.4% for FY2025, with 17.3% upside compared to the current stock price. Currently, the stock price is trading at an expected dividend rate of 7.5% for FY2025 and an expected dividend rate of 7.5% for FY2026.
risks
Local retail property performance in Hong Kong, China fell short of expectations; overseas commercial asset prices declined more than expected.