JP Morgan: Lowered the target price for HANG LUNG PPT (00101) to HKD 10, with an attractive dividend yield of approximately 7.1%. Rating "Buy."

JP Morgan released a research report stating that HANG LUNG PPT (00101) saw a 10% year-on-year decline in core net profit for the first half of the year, primarily influenced by non-cash provisions related to Wuhan apartments. Excluding these provisions, the core net profit only dropped by 2%, which aligns with expectations. The bank believes that the market's outlook on HANG LUNG PPT is overly pessimistic, noting that the retailer's sales in mainland markets increased by 17% year-on-year in the first half (up 24% in Q1 and up 9% in Q2). Management expects to record a high single-digit growth in sales for the second half of the year, which is better than the bank's expectations and reflects strong performance from non-luxury brand tenants and a continued diversification of the brand mix. The target price was downgraded from HKD 12 to HKD 10, based on a forecasted discount of 63% to net asset value per share (lower than the historical average of 1.5 standard deviations), to reflect weak sentiment for global luxury brands, maintaining an "Overweight" rating. JP Morgan indicated that HANG LUNG PPT's retail rental income from mainland operations increased by 6% year-on-year in the first half, but the growth rate lagged behind the 17% rise in merchant sales. This was mainly due to the group converting a larger proportion of rental income to fixed rent (approximately 80%) during the downturn cycle in recent years, meaning that rental growth would inevitably lag during the recovery phase. Additionally, since sales growth was driven by non-luxury brands, which have lower percentage rent, this also slowed the growth of rental income. The bank believes that HANG LUNG PPT's efforts to secure rental income during the downturn cycle have been undervalued by the market; for example, at Shanghai Hongkou Henglong Plaza, while merchant sales fell by 19% in 2022, rental income only dropped by 1%, reflecting a defensive stance with a higher proportion of non-luxury brands. In terms of Hong Kong investment properties, overall rental income was roughly flat year-on-year in the first half (down 0.5%), with office and serviced apartments increasing by 1% and 7% respectively, while retail declined by 2%, mainly affected by flagship tenants relocating from Causeway Bay and new tenant renovations. Management noted that, compared to similar benchmarks, overall Hong Kong rental income saw a low single-digit growth year-on-year, and with tenant restructuring expected to be completed in the second half and a recovery in the Hong Kong office market, they anticipate rental income will turn positive year-on-year in the second half. JP Morgan expects HANG LUNG PPT's core net profit to decline by 5% year-on-year for the entire year, but operating profit (which the bank considers to be a more accurate assessment metric) has turned positive in the first half, predicting a compound annual growth rate of around 4% for rental operating profit from 2026 to 2028. The bank forecasts an 8% rebound in core net profit for the fiscal year 2027, benefiting from the growth in rental operating profit, the low base effect of property provisions in 2026, and contributions from the residential project at Yufeng on Stubbs Road. Regarding dividends, management indicated that the likelihood of further cuts is low, and stated that when earnings stabilize (normalizing the interest capitalization ratio and ceasing property provisions) and the contribution from Hang Lung Plaza in Hangzhou improves, there can be consideration for increasing dividends. JP Morgan anticipates dividends will remain stable from 2026 to 2028, expected to be maintained at HKD 0.52 per share, with an attractive dividend yield of approximately 7.1%.