Core earnings up 5% YoY; Dividend payout stay unchanged
Wharf Holdings (Wharf) delivered 5% YoY growth in its core earnings of HK$10.97bn,or EPS of HK$3.62. The company raised its final dividend by 7% YoY to HK$1.35/sh.and full year dividend by 5% YoY to HK$1.90, representing a payout of 53% (flatYoY). Earnings growth is mainly driven by higher growth in China rental and the oneoffgain from the disposal of partial stakes in the Taicang container ports. Results cameto be 2%/3% below our forecast and consensus, respectively.
Management viewed HK retail market a multi-year downturn
Wharf's HK rental earnings dropped 1.8% HoH that marked the beginning of rentalfall, which is attributed to the reduction in rental reversion and falling retail sales of itstwo flagship malls (Harbour City & Times Square) by 12.3% YoY in 2015. Theoccupancy cost of its two flagship malls already rose to 20% of tenant sales.Considering the tenant sales continued the double digit fall for YT Feb' 16, we expectthere will be further downward rental pressure for Wharf's malls in '16. Managementviewed that it is a multi-year downturn that could last till 2018 and they consider HK isunlikely to experience a sharp rebound thereafter.
China rental on the rise but development margins down HoH in H2 15
China commercial rental earnings continued to increase but growth slowed to 11% inH215 (from 25% YoY in FY15). The slower growth in H2 is attributed to the ChengduIFS mall rental earnings maturing. The leasing of Chengdu office remained slow with33% of total GFA leased so far. China development earnings rose by 36% YoY butoperating margins down from 17% in H1 to 10% in H2. Management projected itsfuture development margins to remain tight.
Valuation: Currently trading at 44% NAV discount
We hold a Sell rating with a PT of HK$40.4/sh. based on a 44% target discount toNAV. The company intended to retain the current divi payout and reserve cash forpotential investment opportunities in HK and China. Also, management highlightedthat they are reviewing the strategic positioning of its CME (Wharf T&T & icable)business which could involve potential re-structuring. We believe the structural declineof HK retail sales will continue to depress the share price performance of Wharf.