Brief
30th January 2018, Hang Lung Properties announced annual report results. I estimated based on underlying profit a fair value of about HKD 18.6 - 19.00 disregarding the revaluation of the properties. I did not sell immediately when the share price was at HKD 20.7 when the results were first issued. I have my own justification why I believe this company will do well in the long run.
Introduction
Hang Lung Properties Limited (00101.HK) is the operating arm of the Hang Lung Group (00010.HK) is in the business of real estate development, owns and manage world class commercial complexes in key cities in the Mainland since the 1990s.
Hang Lung Group was founded in 1960 by Mr Chan Tseng-Hsi. The business grew rapidly building residential complexes along the Mass Transit Railway (MTR). On January 1991, Mr Ronnie Chan took over as the Chairman of the company and venture into the Mainland. They took the opportunity, acquiring a lot of land and investment properties to position itself for the future.
Present Properties Portfolio
Hang Lung Properties owns Shanghai Plaza 66, Shanghai Grand Gateway 66, Shenyang Palace 66, Shenyang Forum 66, Jinan Parc 66, Wuxi Center 66, Tianjin Riverside 66 and Dalian Olympia 66 in the Mainland.
Hong Kong's leasing portfolio includes Kingston in Causeway Bay, the Peak Galleria, Kornhill Plaza in Hong Kong East, leasing properties in Mongkok includes Grand Plaza and Gala Place and Amoy Plaza in Kowloon East.
Offices are in Central, Causeway Bay and Mongkok. Residential and serviced apartments such as Kornhill Apartments. Properties for sale include The Long Beach, houses at Blue Pool Road and The HarbourSide.
Property Development and Capital Commitment
The total aggregated value of investment properties under development was HK$21,592 million. They comprised mainland China projects in Kunming, Wuhan and remaining phases in Shenyang and Wuxi. The portfolio consists of malls, office towers, hotel and serviced apartments.
The construction work for Kunming Spring City 66 is progressing, total gross floor area of the entire mixed use development is 432,000 square meters, comprising a world-class mall, a Grade A office tower, serviced apartments and car parking spaces. The mall is expected to open in min 2019.
Wuhan Heartland 66 covers a total gross floor area of 460,000 square meters. This prestigious commercial project will house a 177,000 square meter mall, a Grade A office tower, serviced apartments and car parking spaces. The project is planned for completion in stages from 2019.
The conversion of top 19 floors of the office tower at Shenyang Forum 66 into a Conrad Hotel is in progress. This five star hotel will be expected to open in 2019.
The construction work for the second office tower at Wuxi Center 66 is progressing as planned. In May 2017, Hang Lung Properties took a piece of land of 16,700 square meters for Wuxi Phase 2 development. This will be used to build serviced apartments.
With conversion of existing property into five star hotel, grade A offices and serviced apartment, I believe Hang Lung Properties is well-positioned for the rise of China in the next decade. The recurrent income will help to grow the company and allow it to acquire future lands in the inner China. The revenue from these will only be recognised in 2019 and 2020.
Financial Strength
Hang Lung Properties has a Net Debt ratio to Equity ratio of 1.9% and Debt to Equity Ratio of 17.4% which are both healthier than 2016 results. Net Assets Per Share is HKD 31.60.
Key Risks
This is an age of disruption, the co-working era is coming and grade A offices will face its challenges as well. I cannot predict whether co-working will replace the traditional office setting but I think this erosion factor will be slow.
Malls are challenged by eCommerce making traditional retail more difficult than previous era. Malls have evolved into social places for entertainment, services and food & beverage. The trend is to cater to experiential tenants such as cinemas, online to offline stores, mobile payment and smart parking to entice footfall and retail sales. Hang Lung Properties is said to be in talks with smaller eCommerce players to collaborate on some of the malls.
The progress in China's economy will continue to play an important role.
Conclusion
I will continue to hold on to this company, I have only 12,000 shares and my average price is about HKD 17.98. If share price drops below HKD 18.6, I will acquire more of this company. To review half a year later.
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