Be patient for border reopening
? A decline in office rental caused Hysan’s underlying profit to fall by 3% yoy in FY21.
? The extended consumption voucher scheme may provide a short-term boost to Hysan’s retail sales, but a significant improvement is unlikely, in our view.
? Reiterate Add with a lower TP of HK$26.6 (55% discount to NAV).
Underlying FY21 net profit declined 3% yoy, flat DPS
Hysan reported a 3% yoy decline in underlying net profit (incl. perpetual securities (PCS)) to HK$2.2bn in FY21 (5% higher than our forecast), due to lower rental revenues from its office and residential investment properties (IP). If PCS were taken into account, its underlying profit dropped 11% yoy to HK$1.9bn. FY21 DPS was flat yoy at HK$1.44.
Decline in HK office rental to be offset by new China IP
Its revenue from office IP dropped 5% yoy to HK$1.7bn in FY21. Occupancy increased 1% pt hoh to 94% at end-FY21. Out of the leasable floor area (LFA) set to expire in 2022, 35% is already committed. It saw expansion from new economy sectors (e.g. technology, co-working and medical sectors) which took up a combined 30% of LFA at end-FY21. Negative rental reversion will likely sustain in FY22F given HK’s continued border closure. On the other hand, management expects revenue contribution from Shanghai
Lee Gardens to begin in 2H22F, for which we factor in a modest increase in Hysan’s office rental income in FY22F.
Conservative outlook for retail income in FY22F due to pandemic
Despite the negative rental reversions in its retail space, Hysan’s improved occupancy (end-FY21: 99%) and stronger retail sales in 2H21 led to a 1% yoy increase in retail revenue in FY21. Sales for clothing and jewellery tenants remarkably outperformed the retail sales growth of these sectors in HK in 2021. In the short term, the HK$10k consumption vouchers to be distributed by the HKSAR Government could drive further retail sales starting from 2Q22, particularly at Hysan Place which targets the mass market. Significant improvement in its tenant sales would hinge on the timing of HK’s border reopening, which is unlikely before end-Jun given HK’s surge in Covid-19 cases.
Start being active in property development
Earlier this month, Hysan announced plans to acquire a 25% stake in an urban redevelopment project led by Henderson Land in To Kwa Wan, for a combined HK$3bn capital commitment. The project is expected to provide 1,150 flats and be completed in FY25F at the latest. It also expects to launch a residential project in Tai Po in 1H22. Management said it will pay attention to net gearing (end-FY21: 11.7%) while expanding its development land bank.
Reiterate Add with a lower TP of HK$26.6
We cut FY22F/23F EPS by 3%/1% to reflect lower rental assumptions for its IP. We also lower our TP for Hysan to HK$26.6, based on a lower NAV of HK$59.2 and a wider target discount of 55%. Reiterate Add. Key downside risk: decline in occupancies due to a weak HK economy.