1H24 results fall short of market expectations

ESR announced 1H24 results: Net profit to mother (PATMI) changed from positive to loss of -0.219 billion US dollars, lower than our and market expectations. It was mainly due to non-cash losses (including fair value losses due to asset sales and asset revaluation) and lack of incentives, and the underlying business is still relatively stable.

Recurring fund management business contributes to steady income. Revenue from the company's 1H24 fund management division fell 37% year on year to $0.254 billion, mainly due to lack of incentives. In addition to incentive fees, revenue from recurring management fees remained generally steady, falling 5% year on year (excluding exchange rate fluctuations, down 2% year on year), with recurring management fee revenue for core assets increasing 7% year over year.

Investment segment profits were affected by non-cash losses, and fundamentals were stable. EBITDA in the 1H24 investment segment turned negative year-on-year to -0.161 billion US dollars, mainly due to fair value losses due to asset sales and revaluation. Asset management was generally steady: As of the end of 1H24, the rental rate of the company's asset portfolio was 87% (94% excluding assets in Greater China), down 4ppt from the end of 2023; the rate of increase in rent renewal due to maturity was 10.7% (19.4% excluding assets in Greater China), an increase of 2.5 ppt from the end of 2023.

Development activities continue to slow down, and reserve projects are abundant. Affected by macro-environmental fluctuations, the company's development activities remained cautious. 1H24 recorded an operating volume of 1.3 billion US dollars, down more than 60% from 1H23; reserve projects are still quite abundant, with a total construction area of 23.1 million square meters.

The balance sheet is good. The company's weighted average interest cost decreased by 40 bps to 4.9% from the end of 2023, and the balance to liability ratio increased by 1.6 ppt to 32.3% from 30.7% at the end of 2023 (mainly due to a mismatch between refinancing time and repayment time, total loans increased at the end of 1H24), and the overall balance sheet was good.

Development trends

Pay attention to the impact of interest rate cuts on the company's operating pace. The company disclosed that it continues to focus on asset disposal and non-core business, and plans to recover approximately $2.9 billion within 12-18 months; at the same time, the 1H24 end company holds $23.7 billion in uncollected capital, which will still be used for project investment in due course in the future. Looking ahead, we believe that overseas interest rate cuts are expected to boost the recovery of the company's investment and financing business.

Profit forecasting and valuation

As the fair value revaluation loss of the company's assets exceeded expectations, we lowered 2024-25 net profit by 108% and 55% to -0.036 billion US dollars and 209 million US dollars. We believe that the company's business operations are expected to benefit from potential interest rate cuts in overseas markets. Fundamentals may begin to stabilize and maintain the industry rating. However, on the other hand, due to the uncertainty of short-term privatization matters, we take a cautious approach to the target price and maintain the target price of HK$12.11. The target price corresponds to 0.9 times the 2024 net market ratio, with 2.0% upside compared to the current stock price. The company's current stock price is trading at 0.9 times the 2024 net market ratio and 0.8 times the 2025 net market ratio.

risks

The pace and extent of overseas interest rate cuts fell short of expectations; the company's asset cycle was slow; and the exchange rate fluctuated beyond expectations.