Attractive valuation and yield,potential upside on parent support

Deutsche Bank Markets Research Rating Buy Asia Hong Kong Property Company Hang Lung Properties Date 29 January 2016 Company Update Attractive valuation and yield, potential upside on parent support Reuters Bloomberg Exchange Ticker 0101.HK 101 HK HKG 0101 ADR Ticker ISIN HLPPY US41043M1045 Forecasts And Ratios Year End Dec 31 2014A 2015A 2016E 2017E 2018E Sales (HKDm) 17,030.0 8,948.0 9,895.2 11,436.8 10,891.7 EBITDA (HKDm) 12,399.0 5,915.0 6,490.9 7,390.6 6,994.3 Reported NPAT (HKDm) 11,704.0 5,092.0 4,751.0 5,148.6 4,695.1 DB EPS FD (HKD) 2.33 1.03 1.06 1.14 1.04 Yield (net) (%) 3.3 3.6 5.1 5.1 5.1 Source: Deutsche Bank estimates, company data Maintaining Buy, new TP HK$22.66; 5.1% dividend yield with strong financials ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015. Price at 28 Jan 2016 (HKD) 14.50 Price target - 12mth (HKD) 22.66 52-week range (HKD) 26.30 - 14.14 HANG SENG INDEX 19,052 Tony Tsang Research Analyst (+852) 2203 6256 tony.tsang@db.com Foo Leung Research Associate (+852) 2203 6239 foo.leung@db.com Key changes Price target 23.16 to 22.66 ↓ -2.2% Sales (FYE) 10,108 to 9,895 ↓ -2.1% Op prof margin (FYE) 69.0 to 65.2 ↓ -5.5% Net profit (FYE) 5,163.7 to 4,751.0 ↓ -8.0% Source: Deutsche Bank Price/price relative 1216202428321/147/141/157/15Hang Lung PropertiesHANG SENG INDEX (Rebased) Performance (%) 1m 3m 12m Absolute -19.3 -25.7 -36.1 HANG SENG INDEX -13.9 -17.0 -23.4 Source: Deutsche Bank While we are expecting the HK and China property market to remain weak, and also have a cautious view on the Chinese economy, we believe the above have already been priced for HLP, given its current valuations at 52% NAV discount and 0.5x 16E PB. HLP also gives a high expected 5.1% dividend yield (well supported by its strong financial position) to weather through current market downturn. We also see potential upside surprises from the stake purchases by its controlling shareholder, Hang Lung Group. Looking further ahead, HLP's strong management team and financial positions should bring in new acquisition growth as land prices in HK and China normalize. Underlying net profit down but core operations remain solid FY15 underlying net profit was down 56% YoY, below market expectations, due to lower earnings from property sales and lower-than-expected margins from property leasing in China from higher cost ratios for newly malls during the initial years, declines in retail sales in Forum 66 and Center 66 and renovations of the Shanghai malls. On the other hand, the core HK IP portfolio and the two Shanghai malls have continued to show solid performance, with rental growths despite weak macro conditions. A final DPS of HK$0.57 was declared, bringing the total DPS for 2015 to HK$0.74, slightly down from HK$0.75 in 2014. According to the management, the very slight cut in DPS was to send a signal about the current tough macro environments in China and HK, which may take some more time before bottoming out. Blackout period ended, potential stake increase by controlling shareholders In addition to the high dividend yield that is supported by recurrent income and strong financial positions, the potential stake increases by HLG and Chan’s family, also provide some upside surprise to HLP’s share price. As a reference, in the past, when shares of HLP were attractively valued, we have seen more active stake increases by HLG. In our view, with the current low valuations of HLP, we see rising likelihood of more active stake increases by HLG, especially after the end of the results blackout period today (28 January 28 2016). Attractive valuations at 52% NAV discount and 0.50x PB Our HK$22.66 TP (down from HK$23.16) is based on 25% discount to our NAV of HK$30.22, cut from HK$30.88, as we factored in details from FY15 results. Our estimates included our latest prices and rents assumptions (residential prices -40%, office and retail rents -30-40% in 2016-18) and higher cap rates (5% for residential, 5.5% for offices, 6% for retail, 8% for car park). Risks: external economic shocks, liquidity outflow, bigger-than-expected rate hikes. 29 January 2016 Property Hang Lung Properties Page 2 Deutsche Bank AG/Hong Kong Model updated:28 January 2016 Running the numbers Asia Hong Kong Property Hang Lung Properties Reuters: