JP Morgan has released a research report stating that Hang Lung Properties' core net profit for the first half of the year fell 10% year-on-year, primarily due to a non-cash provision for apartments in Wuhan. Excluding this provision, the core net profit decline was only 2%, in line with expectations. The bank believes the market is overly pessimistic about Hang Lung Properties, noting that its mainland shopping malls saw a 17% year-on-year increase in tenant sales in the first half (24% growth in Q1 and 9% in Q2). Management expects high single-digit sales growth for the second half, a more positive outlook than the bank's forecast, reflecting strong performance from non-luxury brand tenants and continued diversification of the brand portfolio. The target price has been lowered from HK$12 to HK$10, based on a 63% discount to net asset value per share (1.5 standard deviations below the historical average), to account for weaker global luxury brand sentiment. The 'Overweight' rating is maintained.
JP Morgan indicated that Hang Lung Properties' mainland retail rental income rose 6% year-on-year in the first half, slower than the 17% growth in tenant sales. This is because, during the downturn cycle of the past few years, the group converted more rental income into fixed rents (about 80%), meaning rent growth naturally lags in a recovery cycle. Additionally, tenant sales growth is driven by non-luxury brands, which have lower turnover rents, resulting in slower rental income growth. The bank believes the market underestimates Hang Lung Properties' efforts to protect rental income during downturns. For example, at Shanghai Grand Gateway 66, tenant sales fell 19% in 2022, while rental income only declined 1%, reflecting the defensive nature of a higher proportion of non-luxury brands.
In terms of Hong Kong investment properties, overall rental income in the first half was broadly flat year-on-year (down 0.5%), with offices and serviced apartments rising 1% and 7% respectively, while retail fell 2%, mainly due to a flagship tenant moving out of Causeway Bay and renovation work by new tenants. Management stated that on a like-for-like basis, overall Hong Kong rental income actually recorded low single-digit growth year-on-year. With tenant restructuring expected to complete in the second half and recovery in the Hong Kong office market, they anticipate rental income will turn positive year-on-year in the second half.
JP Morgan expects Hang Lung Properties' full-year core net profit to decline 5% year-on-year, but operating profit (which the bank views as a more accurate metric) already turned positive in the first half. The bank forecasts a compound annual growth rate of approximately 4% for rental operating profit from 2026 to 2028. It expects core net profit for fiscal 2027 to rebound 8% year-on-year, benefiting from growth in rental operating profit, a low base effect from property provisions in 2026, and the booking of revenue and disposal gains from the Villa Vigneto residential project at Stubbs Road on the Mid-Levels East.
Regarding dividends, management has indicated that further dividend cuts are unlikely and stated that when earnings stabilize (with interest capitalization rates normalizing and no further property provisions) and contributions from Hangzhou Center improve, they could consider increasing dividends. JP Morgan expects dividends to remain stable from 2026 to 2028, with a forecast of HK$0.52 per share, offering an attractive dividend yield of approximately 7.1%.
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