Maintaining Buy and TP of HK$71.54; strong performance for core business
Despite the challenging economic and operating environment for investment property in both mainland China and HK in the past 12 months, Wharf has continued to deliver solid growth, outperforming the overall market. This reflects Wharf’s strong management execution. With China’s economy now showing recovering momentum and the central government's anti-corruption campaign making good progress, we see better stability ahead and the overall macro and market conditions should start to improve. We therefore expect stronger growth momentum for Wharf ahead.
1H14 underlying profit down 12% due to non-operating items
Wharf reported 1H14 net profit of HK$11.7bn, down 32% YoY on lower investment property (IP) revaluation surplus and absence of mark-to-market accounting gain on financial instruments. Underlying net profit fell by 12% YoY to HK$5.019bn (from HK$5.683bn in 1H13) due to the absence of non-operating and disposal gains in 1H14 vs. 1H13. An interim DPS of HK$0.55 was declared, up 10% YoY, reflecting management’s confidence on the earnings outlook for Wharf’s investment property portfolio – its core business. Financial positions remained strong with net gearing of 20.6% at end-1H14.
Strong growth for core business – IP core net profit up 18% YoY
While the weak performance in Wharf’s China development property business is unlikely to reverse anytime soon, its IP business has remained strong, with core net profit from IP up 18% YoY in 1H14. Rental revenue from HK IPs was up 15% YoY (retail up 18%, office up 11%), while revenue from China IPs was up 57% YoY (retail up 99%, office up 10%) given the new contribution from Chengdu IFS and the reopening of Shanghai Times Square. Retail sales growth in HK portfolio was 7.2%, outperforming the overall HK market by 9ppts.
Our target price is based on 30% discount to our NAV of HK$102.19
We now factor in a 20% fall in HK residential prices; a 5% p.a. drop in HK office rents; and flat rental growth for mainland China. Despite our more conservative assumptions, Wharf now trades at a 41% NAV discount – attractive in our view, especially as Wharf’s YTD IP performance has been better than market expectations. Key risks: stricter-than-expected tightening; weaker-than-expected economic conditions; competition from other players, project delays.