Hang Lung's most stable first-half profit also halved...| Financial Report Insights

Against the backdrop of a significant cooling in the luxury goods industry, high-end shopping malls are generally experiencing a downturn. Even Hang Lung Properties, which has always been known for its stability, couldn't withstand the pressure: its net profit was halved in the first half of the year, and dividends were cut by 33%.

Earlier this week, Hang Lung Properties announced its mid-term performance for 2024.

1) Key Financial Data

Revenue: The group's revenue in the first half of the year increased by 16.7% year-on-year to HKD 6.11 billion,

Net Profit: Net profit attributable to shareholders plummeted by 56% to HKD 1.06 billion.

2) Segment Revenue:

Property Leasing: Property leasing revenue decreased by 7% year-on-year to approximately HKD 4.886 billion. Among them, property leasing revenue in Mainland China decreased by 6% to around HKD 3.338 billion, while property leasing revenue in Hong Kong dropped by 8% to about HKD 1.548 billion.

Mainland China Luxury Shopping Malls: Hang Lung Properties' overall revenue from luxury shopping malls in Mainland China dropped by 4%. In the first half of the year, revenue at Shanghai Hang Lung Plaza fell by 8% year-on-year, and overall tenant sales within the mall plummeted by 23%. During the same period, revenue at Shanghai Grand Gateway Hang Lung Plaza dropped by 4% year-on-year, with tenant sales falling by 14%.

After the release of the interim report, Hang Lung Properties' Hong Kong stocks plummeted, with a one-day decline reaching 15%.

It is worth noting that this is Hang Lung's first financial report after Chen Qizong's retirement. With the continuous cooling of the luxury goods industry, Chen Wenbo, who took over as Chairman of the group just six months ago, is facing a severe test.

Regarding the reasons for the decline in performance, Chen Wenbo explained that in the past 12 months, with a significant increase in outbound tourists from first-tier cities in Mainland China, especially those traveling to Japan (the depreciation of the yen makes luxury goods there about 30% cheaper than in Mainland China), coupled with a softening of domestic consumption confidence, luxury goods consumption in Mainland China has returned to normal levels, leading to a decline in Hang Lung Properties' performance.

Chen Wenbo believes that when market confidence returns, Hang Lung Properties' business will perform well.

Ratings Repeatedly Downgraded by Institutions

Due to a significant decline in performance, Hang Lung Properties has been downgraded by multiple institutions.

In a research report released this week, Morgan Stanley downgraded Hang Lung Properties from "Buy" to "Hold" and lowered the target stock price from HKD 13.00 to HKD 6.50.

Previously, UBS halved the target price of Hang Lung Properties to HKD 7, downgraded the rating to "Neutral," CLSA downgraded the rating to "Hold" with a target price cut to HKD 5.5, while Credit Suisse maintained a "Hold" rating for Hang Lung Properties but lowered the target price to HKD 6.

Morgan Stanley analysts Praveen K Choudhary and Jeffrey Mak pointed out in their report that although Hang Lung Properties' dividend per share (DPS) for 2024 was cut by 33% year-on-year, dividend payments still do not have sufficient coverage from cash inflows. Morgan Stanley emphasized that the continued cooling of luxury goods consumption poses further risks to Hang Lung Properties' dividend payment capability. In addition, Hang Lung Properties' valuation is only 10 times the price-to-earnings ratio for the 2025 fiscal year, which is not attractive.

Financial reports show that Hang Lung Properties' rental income from shopping centers and commercial properties in mainland China decreased by 6% year-on-year, while EBIT decreased by 10% year-on-year, and tenant sales in shopping centers decreased by 13% year-on-year.

In the first half of the year, Hang Lung Properties saw a 4% year-on-year decrease in rental income from luxury shopping malls in mainland China, while rental income from premium shopping malls increased by 5% year-on-year.

Morgan Stanley has lowered its profit forecast for Hang Lung Properties.

Choudhary and Mak expect that the year-on-year growth of luxury goods sales for the second half of 2024 and the full year will continue to be negative for Hang Lung Properties, leading to a 12% year-on-year decrease in mainland rental income EBIT. Analysts also observed that luxury brands are shifting towards turnover rent models, and there is a trend of tenant consolidation in Hong Kong and China, which is beneficial for the largest and best shopping centers.

Despite various uncertainties, Morgan Stanley is not entirely bearish on Hang Lung Properties.

The report mentions that the demand for luxury goods by Chinese consumers remains significant, the prospect of a rate cut by the Federal Reserve may help the stock price, and the impact from Japan may shift due to currency factors. Additionally, the development of shopping centers and other residential units in Hangzhou may provide the company with some income cushion