Xiaomo: Lowering the target price of Hang Lung Properties (00101) to HK$10 with a dividend rate of about 7.1%, attractive rating “increase in holdings”

The Zhitong Finance App learned that Xiaomo released a research report saying that the core net profit of Hang Lung Properties (00101) fell 10% year on year in the first half of the year, mainly affected by non-cash provisions for Wuhan apartments. If removed, the core net profit fell by only 2%, which is in line with expectations. The bank believes that the market's view on Hang Lung Properties is too pessimistic. In the first half of the year, merchant sales in mainland shopping malls increased 17% year over year (up 24% in the first quarter and 9% in the second quarter). Management expected that merchant sales could record high unit growth in the second half of the year. The guidelines were better than the bank's expectations, reflecting the strong performance of non-luxury brand tenants and the continued diversification of the brand portfolio. The target price was lowered from HK$12 to HK$10, with a 63% discount (lower than the historical average of 1.5 standard deviations) based on the net asset value forecast per share to reflect the weak sentiment of global luxury brands and maintain the “gain” rating.

Xiaomo said that in the first half of the year, retail rental revenue of Hang Lung Properties rose 6% year on year, down from 17% of merchant sales. This is mainly due to the fact that in the downward cycle of the past few years, the Group switched more rental income to fixed rent (about 80%), and rent growth will inevitably lag behind during the recovery cycle; in addition, merchant sales growth was driven by non-luxury brands, and the share rent for such tenants was lower, which also led to a slower increase in rental income. The bank believes that Hang Lung Properties' efforts to guarantee rental income in the downturn cycle are underestimated by the market. For example, in 2022 at Shanghai Ganghui Hang Lung Plaza, merchant sales fell 19%, and rent revenue fell only 1%, reflecting the high percentage of defensive non-luxury brands.

In terms of investment properties in Hong Kong, overall rental income in the first half of the year remained roughly flat (down 0.5%). Among them, office buildings and serviced apartments increased by 1% and 7% respectively, while retail sales fell 2%, mainly affected by the relocation of flagship tenants in Causeway Bay and the renovation of new tenants. Management said that according to similar comparison standards, overall rental income in Hong Kong actually recorded a year-on-year increase in the number of units. With the completion of tenant restructuring in the second half of the year and the recovery of the Hong Kong office market, rental income is expected to improve year over year in the second half of the year.

Xiaomo expects that Hang Lung Properties' core net profit for the full year of this year fell 5% year on year, but operating profit (which the bank believes is a more accurate evaluation indicator) was corrected in the first half of the year, predicting a compound annual growth rate of about 4% for rental operating profit from 2026 to 2028. The bank expects core net profit to rebound 8% year-on-year for the 2027 fiscal year, benefiting from increased rental operating profit, the low base effect of property provisions in 2026, and revenue from the recording and sale of the Yufeng residential project on Situbat Road in the East Mid-Levels.

In terms of dividends, management indicated that it is unlikely that dividends will be cut again, and that when profits are stable (interest capitalization ratio is normalized, there are no more property provisions) and the contribution of Hang Lung Plaza in Hangzhou increases, it is possible to consider increasing dividends. Xiaomo expects a stable dividend of HK$0.52 per share from 2026 to 2028, with an attractive dividend ratio of around 7.1%.