Modest profit growth, mixed divisional performance. 1H15 core profit grew5% y-o-y to HK$5.3bn led by higher rental earnings, partially offset by lowercontributions from CME, logistics and hotel operations. First interim DPS wasunchanged at HK$0.55. Operating earnings from investment propertiesgrew 11% to HK$5.9bn reflecting positive rental reversion for HK office/retailportfolio and escalating contributions from Chengdu IFS. This was despitelower turnover rent which made up of 16% of total retail revenue from HK.
In 1H15, retail sales at Harbour City and Times Square fell 7.1% and 9.6%respectively. These resulted in occupancy cost ratio rising to 19-21% forthese properties from FY14’s 16-18%, which may restrain future reversionarygrowth. Thus, retail income growth for Harbour City/Times Square is likely tomoderate from 7-9% in 1H15.
Improving China property sales. Including joint ventures and associates,operating profit from property development in China rose 14% to HK$1.5bn.In 1H15, Wharf’s contracted sales increased 16% to Rmb10.3bn,representing 47% of its full-year target. The sell-through rate was high at89% in 1H15. Despite a slow start, China property sales have beenimproving since 2Q15 and Wharf expects a better 2H supported by itsproject launch schedule. As of Jun-15, net order book stood at Rmb24bn.Wharf has adopted a prudent and selective land banking strategy with theacquisition of five sites in Beijing, Foshan and Hangzhou YTD for Rmb3.92bn.Elsewhere, MTL recently sold 50% of its equity interest in Taicang containerport business to Ningbo Port Co. with disposal gains of c.HK$600m to bebooked in 2H15.
BUY with HK$53 TP. The recent Rmb depreciation is a further blow to thealready slowing inbound tourism and retail market in HK. This does not bodewell for Wharf’s two retail malls, and should continue to cast a shadow on itsearnings outlook. Nonetheless, following the recent share price decline, thestock is now trading at a 48% discount to our assessed current NAV, whichcompares favourably with its 10-year average of 28%. We see tradingopportunities given its low valuation, and hence we upgrade Wharf to BUYwith HK$53 TP. Parent Wheelock may increase its stake in the companyfollowing the result announcement which would also support the share price.