We recently visited Shanghai's Qibao Vanke Plaza, a subsidiary of Lingzhan. Lingzhan completed the acquisition of the remaining 50% of the company's shares in February 2024. Here are the main highlights:
The acquisition was completed in February 2024 at a 26.3% discount. Lingzhan completed the acquisition of the remaining 50% interest in the project from Vanke in February 2024, at a cost of RMB 2,384 billion (refer to the property's valuation of RMB 5.2 billion, with a valuation discount of 26.3%). According to Lingzhan data, the project is expected to generate annual net property revenue of RMB 487 million, with an expected rental return of over 9%.
The rent is almost full and there are ongoing rent adjustments. According to project personnel, even during the 2020-22 period, the project's occupancy rate was as high as 95%, which is higher than 80-90% of other nearby shopping centers.
The project achieved a positive rent adjustment rate of approximately 11% in 2023, and even in a challenging retail environment, managers expect to achieve low single-digit positive rent adjustments in 2024, mainly supported by catering.
Light meals performed well. Among various industries, the overall performance of light food restaurants with a customer unit price of less than 100 yuan is superior to other industries. At the same time, high-end cosmetics and gold jewelry are the industries with the highest sales, with an average revenue of RMB 0.7-17,000 per square meter/month, while the total sales volume of the entire shopping center is about RMB 2,000 per square meter/month.
Asset appreciation and tenant structure upgrades to maintain growth. Lingzhan has been optimizing the tenant mix and introducing popular brands such as Lululemon, Salomon, and other luxury brands to improve the overall rent affordability of tenants. Meanwhile, the shopping center's assets of about 7,000 square meters on 4/5 floors are undergoing asset upgrading plans, which are expected to be completed in the 3rd quarter of 2024. Lingzhan said that most of the area has been pre-leased, and it is expected that a double-digit return on investment will be achieved after completion, and the overall occupancy rate will return to more than 95%.
Maintain the buy rating. Compared with Lingzhan's latest borrowing costs, the project's transaction yield is attractive, and can increase dividends by about 1-2 HK cents per share. We believe Leader is managing its idle cash more actively, bringing higher long-term dividends to fund unitholders. Since late May 2024, the yield difference between the lead dividend rate and 10-year US Treasury bonds has remained above 300 basis points, which is 1.3 standard deviations below the long-term valuation. We have maintained our target price of HK$47.7 and our purchase rating.