China's Aging Demographics Will Pressure Retail Rental Yields

Key Takeaways

• Demographic shifts and e-commerce growth threaten long-term demand for premium retail properties, pressuring occupancy rates and rental income growth.
  
• High exposure to Mainland Chinese markets and ongoing capital expenditure raise risks from regulatory changes, competitive supply, and financial strain on cash flow and profitability.
  
• High occupancy, disciplined financial management, premium developments, and sustainability initiatives collectively position the company for stable earnings and enhanced long-term growth prospects.

Catalysts

An investment holding company, engages in the property investment, development, and management activities in Hong Kong and Mainland China.

• Hang Lung faces significant long-term demographic headwinds due to China's aging population and slowing urbanization, which is expected to suppress future demand for both premium retail and residential properties. This will likely lead to persistent pressure on occupancy rates and rental income, directly impacting top-line revenue growth.
  
• The ongoing and accelerating shift towards e-commerce and digital consumption habits in China is reducing consumer footfall in physical malls, threatening to undermine Hang Lung's core retail rental revenues and exert sustained downward pressure on net margins due to lower variable sales rents.
  
• The company's high lease and asset concentration in Mainland Chinese cities exposes it to heightened regional economic and regulatory volatility, increasing the risk of unstable rental revenues and limiting its ability to offset downturns in specific markets, further impacting earnings and creating margin compression.
  
• Hang Lung's expansion and upgrades, including high-profile developments like Westlake 66 and major capex commitments, are set to coincide with a wave of new supply in prime cities such as Shanghai and Hangzhou, resulting in greater competition, lower occupancy rates and slower ramp-up periods. This is likely to dilute incremental revenue gains from new projects while simultaneously raising financing costs and leverage.
  
• The company's sustained capital expenditure requirements for property development and ESG retrofitting, compounded by the risk of stricter government sustainability mandates or further policy tightening in China's real estate sector, will keep free cash flow under pressure, drive up debt levels, and erode net profitability over the medium to long term.

Hang Lung Properties Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Hang Lung Properties compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Hang Lung Properties's revenue will decrease by 0.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 19.1% today to 29.3% in 3 years time.
• The bearish analysts expect earnings to reach HK$3.3 billion (and earnings per share of HK$0.64) by about July 2028, up from HK$2.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 12.1x on those 2028 earnings, down from 17.8x today. This future PE is greater than the current PE for the HK Real Estate industry at 11.1x.
• Analysts expect the number of shares outstanding to grow by 1.51% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.58%, as per the Simply Wall St company report.

Hang Lung Properties Future Earnings Per Share Growth

Risks

• The company is achieving strong occupancy rates and is consolidating and renewing leases with higher fixed rents, even in a challenging environment, which supports more stable and increasing rental revenue and could drive long-term earnings growth.
  
• Ongoing and near-term completion of major developments such as Westlake 66 in Hangzhou and the Centre 66 Phase 2 in Wuxi, with high pre-commitment levels and premium positioning, are likely to enhance top-line revenue and improve asset yields over the coming years.
  
• Management's disciplined financial approach, including the successful arrangement of a large syndicated loan and effective cost controls, demonstrates prudence and liquidity strength, which reduce refinancing risks and support sustained net margins and earnings.
  
• The company's proactive sustainability efforts, such as increasing renewable energy usage and deploying low-carbon materials, are aligned with long-term regulatory and consumer trends, enabling Hang Lung to command premium rents and foster tenant loyalty, benefiting both revenue and margins.
  
• Resilience in sub-luxury, personal care, and F&B sectors, along with experiential retail strategies and a focus on customer engagement, indicate an ability to adapt to evolving consumption trends, positioning the company for potential revenue and profit growth as consumer confidence returns.

Valuation

• The assumed bearish price target for Hang Lung Properties is HK$5.4, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Hang Lung Properties's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$9.0, and the most bearish reporting a price target of just HK$5.4.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be HK$11.4 billion, earnings will come to HK$3.3 billion, and it would be trading on a PE ratio of 12.1x, assuming you use a discount rate of 12.6%.
  
• Given the current share price of HK$7.67, the bearish analyst price target of HK$5.4 is 42.0% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.