Operating challenges ongoing in the HK retail leasing marketwith HK retail sales yet to see stabilization
We expect Wharf’s HK retail rental growth in FY15e to remainsolid; rental outlook will likely be an investor focus
Lower target price to HKD44 (from HKD52)
HK retail leasing outlook remains uncertain. We expect the outlook for the HK retailleasing market to remain challenging in the near term, with retail sales in HK yet to seesigns of stabilisation. Anecdotal evidence includes operational updates released earlierthis week by some cosmetics and jewellery retailers, i.e. Sa Sa and Chow Tai Fook,which reported same-store sales decline of 19-22% y-o-y in HK/Macau during theChinese New Year (CNY) holidays in February 2016, while there were better CNY holidaysales (+13% y-o-y) reported by YATA department stores. Separately, we believe theslowing retail sales in HK could potentially come under additional pressure in 2016 fromdampened local consumption amid macro uncertainties year to date. Wharf, with c37% ofits gross asset value contributed by HK retail assets, will likely see ongoing operatingchallenges, which we believe are reflected in the stock’s 62% NAV discount. That said,improved visibility to Wharf’s HK retail rental growth trends upon stabilising retail sales willlikely be needed to narrow the NAV discount.
Solid HK retail rental expected for FY15; outlook will likely be an investor focus.Wharf reported solid HK retail rental growth of 9% y-o-y in 1H15, which the companyexpects to continue into 2H15. We forecast 6% y-o-y retail rental growth in FY15. Wharfwill report FY15 results in early March, during which we expect investors to look for morecolor on: 1) retail sales trends (-11%/-12.9% y-o-y at Harbour City (HC) and TimesSquare (TS) in 9M15); and 2) occupancy costs at HC/TS (19%/21% reported during1H15 results); both of which will affect rental growth momentum beyond FY15.Meanwhile, we see some mitigation from China’s rental growth (+34% y-o-y in 1H15),which will be supported in the medium-term by the completion of projects, e.g. Chongqingand Changsha IFS malls in 2017. Other factors investors will likely focus on during resultswill include China contracted sales and property sales margin trends.
Maintain Hold with a revised target price of HKD44 (from HKD52). We trim our FY15-17e earnings estimates by 1-5% mainly reflecting lower China residential sales margin inFY15e. We lower our target price from HKD52 to HKD44 after assuming a wider targetdiscount of 56% or 1.5 standard deviations below Wharf’s historical average (from 50% or1 SD) reflecting increased uncertainties in the operating environment faced by HK retaillandlords, such as Wharf. Catalysts could arise from stabilising retail sales and/or resilientoffice rentals in HK. Key downside risks include higher HK commercial cap rates and/orlower-than-expected retail rental achieved. Key upside risks include resilient retail rental inHK and strong ramp-up in Wharf’s China malls.