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Sustainability Initiatives Will Reduce Costs And Appeal To Eco-Conscious Tenants

WA
Consensus Narrative from 14 Analysts

Published

February 02 2025

Updated

February 02 2025

Narratives are currently in beta

Key Takeaways

  • Hang Lung Properties' focus on fixed rents and increased brand presence aims to stabilize revenue and boost net margins, especially in luxury sectors.
  • Strategic development projects and sustainability initiatives are set to diversify revenue streams and potentially reduce costs, enhancing future earnings.
  • Depreciation of the renminbi, competitive pressures in malls, and financing challenges threaten revenue, income stability, and margins for Hang Lung Properties.

Catalysts

About Hang Lung Properties
    An investment holding company, engages in the property investment, development, and management activities in Hong Kong and Mainland China.
What are the underlying business or industry changes driving this perspective?
  • Hang Lung Properties is focusing on increasing fixed rents during renewals, which are expected to grow by 6%, providing a more stable revenue stream and reducing reliance on variable sales rents that have been declining. This strategy should positively impact revenue stability.
  • The company has been proactive in consolidating its brand presence and increasing occupancy rates even in a tough market, particularly in luxury and sub-luxury sectors, which are outperforming the market. This is aimed at maintaining or growing market share and improving net margins over time.
  • With new development projects such as Westlake 66 in Hangzhou and the Center 66 Phase 2 in Wuxi expected to complete by 2025, Hang Lung is poised to increase its revenue streams from additional retail, office, and hotel spaces, which should positively impact future earnings.
  • Hang Lung's strategic focus on expanding its portfolio with sustainability initiatives, such as using low carbon emission steel in projects and leveraging renewable energy across properties, may result in cost savings and appeal to eco-conscious tenants, positively impacting net margins over time.
  • The successful arrangement of a HK$10 billion syndicated loan amidst a difficult market environment demonstrates strong financial management and confidence from major banks, potentially leading to favorable borrowing terms and stabilization or reduction in financing costs, which would support future earnings.

Hang Lung Properties Earnings and Revenue Growth

Hang Lung Properties Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?
  • Analysts are assuming Hang Lung Properties's revenue will grow by 2.7% annually over the next 3 years.
  • Analysts assume that profit margins will increase from 19.1% today to 30.4% in 3 years time.
  • Analysts expect earnings to reach HK$3.7 billion (and earnings per share of HK$0.78) by about February 2028, up from HK$2.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting HK$4.6 billion in earnings, and the most bearish expecting HK$3.3 billion.
  • In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.8x on those 2028 earnings, down from 13.7x today. This future PE is greater than the current PE for the HK Real Estate industry at 7.2x.
  • Analysts expect the number of shares outstanding to decline by 0.16% per year for the next 3 years.
  • To value all of this in today's terms, we will use a discount rate of 12.04%, as per the Simply Wall St company report.

Hang Lung Properties Future Earnings Per Share Growth

Hang Lung Properties Future Earnings Per Share Growth

Risks

What could happen that would invalidate this narrative?
  • The depreciation of the renminbi significantly impacts rental revenue in Hong Kong dollar terms, ultimately reducing Hang Lung's revenue stream.
  • The subpar performance in certain mainland malls, driven by aggressive competition and pricing strategies, poses a risk to maintaining rental income and occupancy rates.
  • The adjustment in dividends and reliance on scrip dividends to preserve cash could signal financial strain, affecting investors’ perception of earnings stability.
  • Continued pressure on retail sales due to reduced consumer confidence and shifting luxury spending trends could impact future revenue growth.
  • Challenges in the financing environment, with potential for increased costs in future refinancings, could affect net margins by raising interest expenses.

Valuation

How have all the factors above been brought together to estimate a fair value?
  • The analysts have a consensus price target of HK$7.13 for Hang Lung Properties based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$9.5, and the most bearish reporting a price target of just HK$5.4.
  • In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be HK$12.2 billion, earnings will come to HK$3.7 billion, and it would be trading on a PE ratio of 12.8x, assuming you use a discount rate of 12.0%.
  • Given the current share price of HK$6.15, the analyst's price target of HK$7.13 is 13.7% higher.
  • 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.

How well do narratives help inform your perspective?

Disclaimer

Warren A.I. is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by Warren A.I. are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that Warren A.I.'s analysis may not factor in the latest price-sensitive company announcements or qualitative material.

Read more narratives

Fair Value
HK$7.1
14.6% undervalued intrinsic discount
Analyst Price Target Fair Value
Future estimation in
PastFuture-185m17b2014201720202023202520262028Revenue HK$14.4bEarnings HK$4.4b
% p.a.
Decrease
Increase
Current revenue growth rate
3.40%
Real Estate revenue growth rate
0.22%