POA Positioning for Recovery – Meeting takeaways CR Land (1109 HK, BUY, TP HK$50.93)
Salient points in management presentation:
- Rental recessions on the way with impact to show from June. In response to the calling of SASAC, CR Land will opt to offer rental concession equivalent to three months for all small and micro enterprises, or 6 months for those within malls located in lockdown-affected areas. The company will also offer rental concession to all tenants that equates to the number of days/weeks that the office or mall in question was closed for.
- Maintaining current 2022 and 14th FYP guidance for now CR Land remains confident on its capability to achieve its growth target set out under the 14th FYP and current obstacles are short-term in nature. They are also maintaining their 2022 guidance for now as well, but this could subject to change if there are no significant improvement by August.
- Expecting sequential sales recovery to come from June 2022 as CR Land’s delayed project launches that were originally scheduled in Apr-May is expected to enter the market this month alongside sequential recovery noted so far into June. Albeit unsure about its presales performance in a y-o-y perspective given a high comparison base in Jun-21, the company is confident to record solid improvements in a m-o-m basis
Three key questions
1. Will the company opt to revise down its FY22F and 14th FYP growth guidance upon the current turbulence and weakness in the property market?
The company has no intentions to adjust their 14th FYP growth targets at the moment, as current turbulences in the property market are considered short-term by the management and CR Land is not affected by the phenomenon. In terms of FY22F targets, however, while the company has yet to make any adjustments for now, they do note that 1) rental income, which contributes a meaningful part of their earnings will likely be affected alongside the rental concessions that they will be offering (see China Property Sector: Are landlords in harm’s way from COVID-19 lockdowns? for our detailed analysis on rental impact of rental concessions may have on CR Land and Longfor); and 2) construction pace has been affected, and while the magnitude of which do appear to be manageable for now, the ability of whether the company can catch up in 2H22 does depend on the overall development in August. As such, the company does not preclude the possibility of downward revising its FY22 profit guidance as it goes further into the year if there are no significant improvements to come by Aug-22.
2. How impactful has COVID-19 lockdown measures been for the company’s malls?
Upon the implementation of COVID-19 lockdown measures in Apr-22, both the company’s rental income and retail sales have taken a toll. Rental income from shopping malls have slowed in 5M22 to 6% growth y-o-y (same-store basis), with same-store-sales growth down 7% y-o-y in the same period. Nevertheless, May on a single month basis did see some m-o-m recovery as lockdown measures started to ease, and it is expected that more recovery will be recorded in June. Construction pace have also partially affected, and one of CR Land’s 12 mall that were scheduled for opening in the year may have to be delayed to 2023.
Meanwhile, in response to the stance of SASAC as well as requests from its tenants, CR Land will be offering rental concessions in its operating malls, with impact to start from June onwards. Under the company’s current plan, CR Land will opt to offer rental concession equivalent to three months for all small and micro enterprises, or 6 months for those within malls located in lockdown-affected areas. The company will also offer rental concession to all tenants that equates to the number of days/weeks that the office or mall in question was closed for. As such, this will likely put a toll on CR Land’s rental performance for 2022 and pose downside risk to current earnings estimates. Having said that, such arrangements are short-term in nature and should not affect the long-term outlook of the company. Additionally, it is believed that more landlords will soon follow suit with similar arrangements, be it SOEs or POEs.
3. Expectations on interim results and dividend policy?
Upon affected construction pace and mall performance upon COVID-19 lockdown measures in 2Q22, the company expressed their expectation that interim results will likely be weak, bearing in mind that comparison base was relatively high as well. In terms of balance sheet, gearing may see some pick up alongside some decline in cash level, but overall financial stability will remain solid nevertheless. In terms of dividend policy, the company has always strived to maintain a long-term stable distribution policy for shareholders. Having considered current market condition and peers performances, the company will unlikely make a lift to their payout ratios this year