Maintain Buy; new TP HK$71.54; strong execution despite tough markets
In the past 12 months, the share price of Wharf has been affected by slowing economic growth and retail sales growth in China and HK, slowing tourist arrivals from mainland China, anti-corruption campaigns – mostly macro factors largely out of management's control. Despite a tough macro environment, Wharf has been able to achieve solid retail sales growth in HK and China via active management, e.g. creative promotion campaigns, tenant remix and asset enhancements. These reflect its strong management, and with the China's economy now stabilizing, we see current valuations as presenting good opportunities for a long-term investment into Wharf.
Harbour City and Times Square continue to outperform the overall market
In May 2014, Harbour City and Times Square outperformed the overall HK retail market by about 4%-pts and 27%-pts respectively, despite their already higher base than the overall HK market and the renovation/conversion work currently underway at Harbour City. In the first 5 months of 2014, Harbour City and Times Square outperformed the overall HK retail market by 5.6%-pts and 19.3%-pts respectively. We met management for an update. Overall, the retail sales performance for both Times Square and Harbour City have been better than expected, as the pro-active asset management initiatives of Wharf are working well. Retail sales growth of 15-20% for Times Square and high-single-digit to low-teens retail sales growth for Harbour City are achievable.
China property businesses also performing well
The Chengdu IFS shopping mall is 99% leased and 80% opened. When the mall is fully occupied, expected annual rental income (just based on current base rents) is expected to be about RMB600mn. Office tower 1 is about 34% committed/discussed and management’s target is 50% by end-2014. On property sales, Wharf achieved RMB7.7bn in 5M14, or 33% of full-year target, ahead of budget according to management. On pricing, Wharf will continue to adopt flexible pricing whenever needed to generate desired asset turnover.
Our target price is based on 30% discount to our NAV of HK$102.19
We have lowered our target price from HK$83.1 to HK$71.54 and our estimated earnings for 2014 and 2015 mainly as we cut our assumptions on ASPs in China and rental in both China and HK. Despite our more conservative assumptions, Wharf now trades at a 45% NAV discount – attractive in our view, especially as Wharf’s YTD performance has so far been better than market expectations. Key risks: stricter-than-expected tightening;
weaker-than-expected economic conditions; competition from other players, project delays.