2023: In-Line Results With Lower DPS; Higher Growth Visibility Of Retail In 2024
Hysan’s underlying profit dropped 14.0% yoy to HK$1,832m, in line with our estimate. Turnover fell 7.2% due to: a) AEIs on 10% of retail area, and b) negative rental reversion of offices. Net gearing ratio further increased to 27.2%. Annual DPS declined 25% yoy to HK$1.08. The retail business has climbed out of the trough, but offices are likely to continue facing challenges. Trim FY24/25 earnings forecasts by 2.1%/5.4% respectively. Maintain BUY. Lower target price to HK$17.99.
RESULTS
• Results in line; DPS declined 25% yoy. In FY23, Hysan Development’s (Hysan) recurring underlying net profit dropped 14.0% yoy to HK$1,832m, which is 3.6% higher than our estimate. Turnover fell 7.2%, as: a) about 10% of retail area was closed for asset enhancement initiatives (AEI) works, and b) offices continued to see negative rental reversion. Net gearing ratio further increased to 27.2%. Annual DPS declined 25% yoy to HK$1.08.
• Operational highlights: a) resilient retail portfolio. Despite a slight decrease of occupancy ratio (ie from 99% in 2022 to 97% in 2023), rental reversion is predominately positive, b) the office portfolio continued to face structural challenges, seeing 89% occupancy ratio (vs 90% in 2022) and negative rental reversion, c) Hysan is patient with weak residential market, reporting 60% occupancy rate and sold/leased 25% of the apartments of Villa Lucca, and d) cap rates for valuation are stable. Overall, we think Hysan’s operation in 2023 is on track.
STOCK IMPACT
• Retail business has climbed out of the trough; offices to continue to face challenges. For 2024, management sees higher growth visibility of the retail portfolio: a) the new flagship stores of luxury brands in Lee Garden One, which will finish AEIs and reopen in 2024, are expected to contribute mid-single-digit/mid-teens retail rental growth in 2024/25 respectively; and b) backed by mid-teens occupancy cost ratio, management expect overall positive rental reversion in 2024. For office properties, management holds a cautious view and will strive to maintain a high occupancy ratio. We expect rental reversion to stay in the negative zone.
EARNINGS REVISION/RISK
• We lower our forecasts for 2024/25 underlying net profit by 2.1%/5.4% respectively to factor in a lower margin assumption.
VALUATION/RECOMMENDATION
• Maintain BUY with a lower target price of HK$17.99, derived from 6.8% targeted 2024 dividend yield and 2024 DPU of HK$1.22/share. We slightly raise our targeted yield from 6.5% previously to reflect higher risk premium caused by dividend policy volatility.
SHARE PRICE CATALYST
• Stronger-than-expected recovery of Hong Kong’s retail sales.
• Earlier-than-expected interest cut.