ESR Group Earnings: Cutting Fair Value Estimate by 18% on Softer Fee Income Growth

We lowered our fair value estimate of narrow-moat ESR Group to HKD 13.00 per share from HKD 15.80 after a disappointing first half that saw the group register a loss after tax and minority interest of USD 219 million. The loss was driven by an absence of promote fee income, noncash revaluation losses for its mainland China properties and noncash write-down of its investment in Cromwell Property Group and in both the ARA US Hospitality Trust's manager and the trust's units. Management shared that promote fee income varies depending on the lifecycle of its managed funds and the real estate cycle. Although we expect a pivot in the US federal-funds rate in September 2024, we think that any positive impact from this event will only help the group from 2025 onward. Hence, we expect no promote fee income for 2024 and assumed a gradual return in 2025-26. We also lowered our assets under management, or AUM, growth assumptions and fine-tuned our capital recycling projections as we expect pressure on real estate valuations to persist in the near to medium term.