Improving retail sentiment in China and HK
- HLP posted a 1% yoy increase in 1H22 underlying profit, despite challenges from varying degrees of lockdowns in cities in China.
- Management sees double-digit positive rental reversions in China luxury malls, indicating strong high-end local consumption.
- Local-focused malls in HK performed better than tourist-centric ones in 1H22 with yoy growth in tenant sales.
- We upgrade HLP to Add from Hold, with a lower TP of HK$17.1, due to improvements in retail sentiment in China and HK.
Underlying profit up 1% yoy and flattish DPS in 1H22
HLP reported a 1% yoy increase in 1H22 underlying profit to HK$2.2bn (46% of our initial FY22F estimate); this includes HK$108m net profit from sales of a luxury house of its Blue Pool Road project. Interim DPS was flat yoy at HK$0.18.
Double-digit rental reversions in China luxury malls maintained
Revenue from China investment properties (IP) was up 1% yoy in Rmb terms in 1H22 on the back of varying degrees of lockdowns in Shanghai and other cities; OP margin was down 1.1% pt yoy to 67.4%. Excluding Wuhan Heartland 66 which was opened in 1H21, mall occupancies remained largely unchanged from end-2021, at 86-99% at end-Jun 22. Management said its luxury mall portfolio was able to maintain double-digit positive rental reversions in 1H22. It is still optimistic of the high-end retail sales outlook in China in the medium to long term, but uncertainties due to Covid-19-related lockdowns may inevitably affect short-term retail sales performance of the luxury malls.
Defensiveness seen in local-focused retail space in HK
HK IP posted a 4% yoy decline in 1H22 revenue due to negative rental reversion in both office and retail space. OP margin was down 2.4% pt yoy to 80.7%. Its retail portfolio in more local-focused HK East and Mongkok appeared to be more defensive than those more tourist-centric in Causeway Bay and Central, with slightly positive yoy growth in tenant sales, as HLP refined its trade mix to capture the revival of local consumption.
Sales of China serviced apartments to be delayed
HLP has pre-sold 125 out of a total of 294 units of HK residential project The Aperture, which is scheduled for completion in FY23F. On the other hand, we think that its plan for pre-sales of Heartland Residences (490 units) in China would have to be delayed due to the recent poor sentiment for residential sales in China.
Upgrade to Add from Hold with a lower TP of HK$17.1
We cut our FY22-24S EPS by 4-12% to factor in lower revenues from IP and deferred booking of development properties (DP) in HK and China, lowering HLP’s NAV by 5% to HK$28.6 as a result, while keeping cap rates unchanged. Our TP is thus lowered to HK$17.1 based on an unchanged 40% discount to NAV; we however upgrade HLP to Add from Hold on the back of improvements in retail sentiment in China and HK. Stronger-than-expected rental growth in China and HK are key rerating catalysts, while a key risk is further unexpected lockdowns in Shanghai and other cities in China.