Strong execution amid tough market situations; attractive valuations

Deutsche Bank Markets Research Rating Buy Asia Hong Kong Property Company Hang Lung Properties Date 30 July 2015 Company Update Strong execution amid tough market situations; attractive valuations Reuters Bloomberg Exchange Ticker 0101.HK 101 HK HKG 0101 ADR Ticker ISIN HLPPY US41043M1045 Forecasts And Ratios Year End Dec 31 2013A 2014A 2015E 2016E 2017E Sales (HKDm) 9,138.0 17,030.0 11,384.5 10,915.5 12,222.3 Reported NPAT (HKDm) 7,212.0 11,704.0 6,084.6 5,702.4 5,893.4 DB EPS FD (HKD) 1.19 2.33 1.36 1.27 1.31 PER (x) 22.9 9.9 16.3 17.3 16.8 Yield (net) (%) 2.7 3.3 3.5 3.5 3.6 Source: Deutsche Bank estimates, company data Reiterating Buy, new TP HK$30.16; we see more positive catalysts ahead ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015. Price at 30 Jul 2015 (HKD) 22.05 Price target - 12mth (HKD) 30.16 52-week range (HKD) 26.30 - 20.55 HANG SENG INDEX 24,619 Tony Tsang Research Analyst (+852) 2203 6256 tony.tsang@db.com Jason Ching, CFA Research Analyst (+852) 2203 6205 jason.ching@db.com Foo Leung Research Associate (+852) 2203 6239 foo.leung@db.com Key changes Price target 31.30 to 30.16 ↓ -3.6% Source: Deutsche Bank Price/price relative 1620242832367/131/147/141/15Hang Lung PropertiesHANG SENG INDEX (Rebased) Performance (%) 1m 3m 12m Absolute -4.3 -16.0 -9.8 HANG SENG INDEX -6.2 -12.5 -0.5 Source: Deutsche Bank While HLP's 1H15 results look in line with expectations, we see positive surprises from the details. First, despite tough macro and retail environments for China and HK, HLP achieved solid retail sales and rental growth for its IPs in China and HK due to strong strategic management of HLP (e.g. timely asset enhancement and tenant remix) and industry consolidation (e.g. weaker players like department stores exiting). Second, out of the 5 non-Shanghai malls, 3 have already showed good signs of turnaround. Looking ahead, we see potential positive catalysts to come from stronger performances in HK and China, and continued cap rate compressions for quality IPs in China. 1H15 results look in line, but details present positive surprises For 1H15, HLP reported underlying net profit of HK$2.448bn, down 1% YoY. The slight decline was mainly due to a decrease in interest income and interest capitalization. Rental income was up 9% YoY and rental profit up 3% YoY, less than the growth in rental income mainly due to the lower first-year margins of newly opened IPs in China. An interim DPS of HK$0.17 was declared, flat YoY. Financial positions stayed strong, with net cash of HK$935mn at end-1H15. Stronger-than-expected performances for HK and China IPs In 1H15, rental revenues from Plaza 66 and Grand Gateway malls were up 12% and 6% YoY, respectively – stronger than expected due to successful tenant remix and industry consolidations (e.g. tenants consolidating various spaces in multiple malls into 1 outlet in HLP’s malls). Among the 5 non-Shanghai malls, Palace 66 has already turned around with 10% YoY growth in retail sales, Parc 66 has occupancy back to 90%, while Riverside had high occupancy of 88%. According to management, HLP would continue to work on Forum 66 and Center 66. In HK, despite a tough retail environment, rental revenue and rental profit were both up 7% YoY, with margin high at 86%. Despite rising number of vacant street-front shops, all HLP’s malls were virtually fully let. Positive rental reversions at Grand Plaza and Amoy Plaza have continued after recent renovations, and both enjoyed 13% rental income growth – highlighting the success of HLP’s asset enhancement strategy. With renovations in Causeway Bay completing soon, we expect stronger 2H performance for HLP’s IPs in HK. Attractive valuations at 45% NAV discount and 0.7x PB Our new TP of HK$30.16 (down from HK$31.30) is based on a 25% discount to our estimated NAV of HK$40.21 (down from HK$41.73), mainly as we factored in 5% RMB depreciation from current level. Risks: unexpected economic and policy volatility, unexpected weak response to policy easing by government. 30 July 2015 Property Hang Lung Properties Page 2 Deutsche Bank AG/Hong Kong Model updated:28 July 2015 Running the numbers Asia Hong Kong Property Hang Lung Properties Reuters: 0101.HK Bloomberg: 101 HK Buy Price (30 Jul 15) HKD 22.05 Target Price HKD 30.16 52 We