With this note, Perveen Wong assumes coverage of The Wharf (Holdings)
Resilient 1H15 performance but overhang remains.Wharf’s 1H115 results showed a solid performance, with +7%/+9% y-o-y retail rental growth at Harbour City (HC) and Times Square (TS), which should partly alleviate investors’ concerns amid slowing retail sales in HK. That said, we believe the ongoing challenging operating environment, as evident by -7%/-10% y-o-y in retail sales at HC/TS (partly affected by renovation at TS) in 1H15 and higher occupancy costs (19%/21% at HC/TS), will likely remainas a near-term overhang on the Wharf stock despite its steep 56% NAV discount.
Encouraging momentum in China in 1H15. China gross rental +34% y-o-y upon the ramp up of Chengdu IFS, partly offsetting the slowing rental growth in HK. China gross rental accounted for 16% of total in 1H15, up from 13% in 1H14. Separately, Wharf achieved contracted sales of RMB10.3bn in China in 1H15, up 16% y-o-y and representing 47% of FY15 target. Management sees a possibility of stronger h-o-h contracted sales in 2H15.
Solid 1H15 results.Wharf reported 1H15 underlying earnings of HKD5,258m, up 5% y-o-y. Net rental grew 11% y-o-y. 1H15 interim DPS was flat y-o-y at HKD0.55. Wharf reported book NAV of HKD101.91, up 1% h-o-h, and largely steady gearing of 19.6% as of June 2015 (+0.7pp h-o-h).
Maintain Hold rating with a revised target price of HKD52 (from HKD64). We assume coverage of Wharf from our conglomerate teamwith a fair value target price of HKD52, based on a 49% target NAV discount (from 25%) to our revised NAV of HKD101 (+18%). Our target discount is widened from 25% (historical average) to 49% (1 standard deviation below average), similar to NAV discounts we assume for HK retail landlords. Our higher NAV estimate reflects higher value assumed for completed investment properties (although still valued at 9% below company’s reported value) after assuming slightly higher HK retail rental growth in FY15e and lower HK cap rates, in-line with the property team’s assumptions. We revised down our FY15-17e earnings by 2-4%. Key downside risksinclude higher HK commercial cap rates. Key upside risksinclude resilient retail rental in HK and strong ramp-up in Wharf’s China malls.