If you’re in Shanghai looking to buy everything under one roof, you won’t go farther than Plaza 66, the flagship shopping mall of Hang Lung Properties (00101.HK) on Nanjing Road.
It’s home to such high-end brands as Louis Vuitton, Chanel, Dior, Hermès, Prada, Valentino, Giorgio Armani, Dolce & Gabbana, to name a few.
Plaza 66 also houses the China headquarters of some of these companies.
And there you have a successful business model.
By developing and leasing high-end commercial properties, Hang Lung has been making a killing in Shanghai.
When it decided to replicate the strategy in Shenyang, capital of northeastern Liaoning province, it found an unfriendly market. Nonetheless, it went on to build Palace 66 and Forum 66.
In its annual report, Hang Lung said the 110,000 square meter Palace 66 had rental turnover of HK$160 million (US$20.64 million) in 2013, a stark contrast to the performances of its Shanghai flagships — HK$772 million by Plaza 66 and HK$1.07 billion by Grand Gateway.
By the time Forum 66 was up and running, there had been more than a dozen similar upscale malls in the area including The Mixc by China Resources Land (01109.HK).
Thinning leasing margins, coupled with a widening frugality campaign by the central government, exacerbated market conditions.
Also, Hang Lung has been having a hard time with its projects in Tianjin and Jinan.
It spent US$3 billion and nine years before it completed Riverside 66 this year amid concern Tianjin’s retail property market was facing oversupply.
In Jinan, retail sales at its Parc 66 mall rose 8 percent last year but rental income was up just 1 percent to HK$367 million, with catering contributing the bulk of sales growth. This type of tenants are generally charged lower rents than luxury fashion stores.
Hang Lung misjudged consumer spending and purchasing power in lower-tier cities in its eagerness to apply a one-size-fits-all business model, according to analysts.
Also, it failed to anticipate potential policy changes such as credit tightening and a widening crackdown on graft and extravagance given the time it takes to develop a shopping mall project.
Hang Lung relied on its partnerships with leading international fashion houses which worked well in big cities such as Shanghai but failed to generate sales in markets more disposed to local brands.
In 2019, the company is scheduled to open Olympia 66 in Dalian, Spring City 66 in Kunming and Heartland 66 in Wuhan.
A lot can happen in that time but Hang Lung appears unfazed.
Shareholders, however, are less optimistic. The stock closed at HK$23.60 on Friday, sharply down from its historic high of HK$40.
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