Hang Lung Properties Valuation Is Attractive on Shanghai Reopening

Hang Lung Properties' shares underperformed peers', with the recent Shanghai lockdown and a removal from the FTSE EPRA Nareit Global Real Estate Index resulting in the stock being further sold down in the week ending June 3. Shares are trading at a 30% discount to our fair value estimate of HKD 22 and we believe the downside is priced in. Shanghai has gradually reopened and visuals on social media posts from the reopening were positive, with shoppers lining up outside luxury shops in Plaza 66. Current COVID-19 testing policies are likely to present a challenge for the general population to move around the city and may translate into a slower recovery in foot traffic and, in turn, retail sales. In our recent conversation with the company, no guidance on rental concessions was offered, but we note that rental subsidy was small in 2020. We estimate a 7% impact on our revenue and earnings per share forecasts as a worst case assuming 10 months of income for Plaza 66 and Grand Gateway. However, the magnitude of the decline is likely to be lower as rental concession should be amortized.