Hang Lung Properties FY14 underlying earnings surges to HK$10b

Expectations are slammed, thanks to good selling time.

Hang Lung Properties has reported its FY2014 results, which have been noted to be ahead of both Barclays' and consensus estimates.

According to a research note from Barclays, the real estate firm's FY14 underlying earnings nearly doubled y/y to HK$10,022mn, higher than Bloomberg consensus of HK$6,924mn.

The report noted that the beat was mostly timing-related as Hang Lung sold down most of its HarbourSide inventory at high margins last year.

Meanwhile, stripping out property sales, Hang Lung Properties' core rental earnings increased 5% y/y to HK$5,589mn, largely in line with Barclays' HK$5,599mn estimate.

Although Hang Lung Properties enjoyed a windfall gain from property sales in 2014, as net rentals only increased by 5%, it only raised full year DPS by HK$0.01 to HK$0.76, taking its trailing dividend yield to 3.5%.

Meanwhile, during the company's results briefing, despite the strong headline profit, management appeared cautious with its outlook but more reflective in its strategy on how to sustain financial performance through the current China retail headwinds while using the time to build up its management team and upgrade its properties to prepare for better times to come.

Here's more from Barclays: 

BVPS increased by 6% y/y to HK$29.5 – Although HLP continued to record positive revaluations, the HK$1,705mn (HK was HK$1,595mn and China was HK$110mn) had continued to slow from FY2013’s HK$2,482mn. Instead, the bigger BVPS contribution came from the sell-down of Hang Lung’s HarbourSide inventory. This helped to generate HK$9.8bn in sales proceeds and HK$7.5bn in operating profit (76.5% development margin).

The release of the previous embedded development gain helped to boost Hang Lung Properties' BVPS to HK$29.5/share. As at end-2014, we estimate that the HK$4,046mn trading properties (at costs) generated sales of HK$11bn of sales. If and when Hang Lung decides to sell its Long Beach and Blue Pool road project, this could further boost HLP’s BVPS and further support its PB ratio, which now stand at 0.75x.

New assets dragging down China rental margins – For FY2014, China gross rentals grew 11.1% y/y to HK$3,916mn and net rentals increased by 4.4% y/y to HK$2,789mn. The slower net rental growth implies that Hang Lung Properties’ China rental margin declined by 4.6ppt y/y to 71.5%. Management attributed the decline to higher start-up costs and lower margins from new assets. As more new assets are added and until projects get past their initial gestation phases, China margins are likely to compress further.

Key project updates - In terms of new properties letting, Tianjin Riverside 66, which was opened in September, is now 90% occupied. The first office tower at Wuxi was completed in October 2014 is now 50% committed. As for upcoming projects, the first office tower at Shenyang Forum which is slated for completion this quarter, is now 20% let while pre-leasing of Dalian Olympia 66 mall (opening in 3Q 2015) is now 40% committed.

As for its two key Shanghai projects, while retail rental reversion remains positive, the retail sales take at Grand Gateway had slowed to 3% in 2014 and Plaza 66 dropped 4% y/y. There was more pressure on the office side as oversupply and competition for tenants in Puxi has resulted in a decline in Plaza 66’s office occupancy, down from 94% in 1H14 to 91% currently. As the market remains challenging, the company will spend time upgrading its assets through asset-enhancement-initiatives (AEIs). It should start AEIs in Plaza 66 beginning in summer this year.