A leading conglomerate in Hong Kong. Swire Pacific is one of Hong Kong's leading listed conglomerate companies, with diversified interests in five operating divisions: Property, Aviation, Beverages, Marine Services and Trading & Industrial.
Business outlook. 1) Demand for office space in Central is likely to remain soft but rents at Pacific Place will be resilient. Four residential projects in HK will be completed during FY13-FY14 but FY13 profits from property trading will be lower. 2) Profitability of Cathay Pacific may be affected by the fluctuation of fuel price but industry leading position will remain unchanged. 3) Hong Kong and USA beverage business will continue doing well given their strong market positions. 4) Demand for offshore support vessels will improve with further increases in exploration and production commitments by energy companies. 5) Trading & industrial may see headwinds but impact on NAV remains mild.
Initiate ‘Accumulate’ with TP of HK$108.00. The share price is trading at 30% discount to NAV based on underlying property assets value on a see through basis, reflecting the holding discount like other conglomerate. We like its investment properties in commercial and retail, beverage, and aircraft engineering, which are resilient and defensive in the economic cycle. Also the fast expansion of marine service partially offsets lower profit contribution from aviation. Going forward, we expect Swire Pacific, with its solid business and financial position, to expand businesses with its diversified arms. We set TP at HK$108.00, representing an 18.5% discount to its FY13 NAV. Our discount is lower than its historical average, reflecting our expectations on the correction of office rents, fast growing marine services, and the profit recovery of Cathay Pacific (00293 HK). Our TP represents 16.8% upside potential from current share price. We suggest investors accumulating on dips.