Maintaining Hold on valuation; soft outlook in HK retail still an overhang
Wharf’s strong interim results highlighted that the rental performance from itsHK retail portfolio was stronger than expected. However, with occupancy coststill hovering at a high level, which has already exceeded the maximum levelthat retailers can generally afford, we anticipate a decline in rental affordabilitywill exert downward pressure on rental ahead. Moreover, slowing visitorarrivals and anticipated softening domestic spending as the next downward legin HK retail sales are likely to drag retail sales further ahead. Nevertheless, thecurrent valuation, at a 43% discount to NAV with a 3.5% dividend yield, mostlyreflects this soft outlook. Maintaining Hold.
Raising earnings by 1-23% in FY16-18E by factoring in new assumptions
By factoring in our revised price and rental assumptions for the HK propertymarket, we raise our earnings projections for Wharf for FY16-18 by 1-23%correspondingly. In particular, we marginally increase FY16E core net profit by1% to HK$12,060m, while raising FY17E/18E core net profit by 23%/7% toHK$13,810m/HK$11,635m respectively, despite reflecting negative rentalreversion from HK office and retail portfolios (as the China portfolio helps tooffset weakness from HK).
We expect residential price +5%/office rents -5%/retail rents -5% in 2H16
Against the backdrop of a low interest rate/ample liquidity environment, wheresellers’ holding power is relatively stronger, we anticipate the pace ofprice/rental decline to be more moderate ahead of our previous projection. For2H16, we expect HK residential prices to rise by up to 5% (implying flat for thefull-year), Grade-A office rents and prime retail rents to soften by 5% (+0%/-5%for FY16). For 2017/18, we expect residential prices to soften further by11%/7%, office rents and prime retail rents to decline by 10% per annum.Target price at a 45% discount to our NAV estimate of HK$97.9/shareWe factor our major assumptions on price and rent changes into our estimatedNAV of HK$97.9. When determining our HK$53.8/share target price, we applya 45% NAV discount – in line with the historical average, which we believe isappropriate. Downside/upside risks: weaker-than-expected economicconditions/prolonged low interest rates.