Hang Lung Properties Earnings: Dividend Cut Disappoints; Fair Value Cut by 26% on Weak Luxury Sales

We cut our fair value estimate for no-moat Hang Lung Properties by 26% to HKD 10 after its disappointing first-half results, which saw a 22% year-on-year drop in underlying net profit and a 33% fall in interim dividend. Property leasing revenue dropped by 7% due to weakness across the Mainland China and Hong Kong portfolio and was further dampened by a weak Chinese yuan. We have adjusted our forecasts to reflect weaker leasing demand and turnover rents, particularly in the China luxury retail segment, and higher marketing costs at malls to attract foot traffic. We revised our property sales assumptions based on the latest contracted sales. We reduce our 2024-26 adjusted net income forecasts by 15%-19%. We expect rental weakness to continue into 2025 before average rents pick up from 2026. Despite cutting our 2024 dividend per share forecast to HKD 0.52 from HKD 0.78, this still implies an attractive 2024 dividend yield of 9.2%. We have cut our payout ratio assumption to 66% from 81%, which is lower than 2023's 85%.