We expect strong growth in profits from property sales andmoderate rental growth to drive 1H15e earnings
Investors will likely focus on office rental and retail salestrends within the HK rental portfolio
We have a Buy rating with a fair value target price of HKD34
1H15e earnings growth driven by higher property sales. Swire Properties will report1H15 results on 20 August. We forecast 1H15e earnings (excluding revaluation gains) ofHKD4,252m, up 13% y-o-y, reflecting higher contributions from property sales in HKand a 4% y-o-y net rental growth. We forecast interim DPS of HKD0.36 (vs 1H14’sHKD0.22), assuming a payout ratio of 50% (vs. 34% in 1H14). In 1H15, we expectproperty sales to be mainly contributed by Arezzo in HK, which has accumulated sales of105 of 127 units, of which profits from the sale of 96 units will be recognized in 1H15.Other major property sales recognized in 1H15 will include Mount Parker Residences (9units) and Azura (3 units), compared to bookings related mostly to Dunbar Place andMount Parker Residences in 1H14.
Key investors’ focus during results briefing, in our view, will likely include: 1) managementoutlook for the HK office market, especially given the recent volatility in the stock market; 2)occupancy cost trends at the Pacific Place mall, where retail sales recorded a 12.7% y-o-ydecline in 1H15; 3) pre-leasing updates of upcoming projects such as HKRI Taikoo Hui inShanghai (completion from 2016) and the retail portion of Brickell City Centre in Miami(construction on Phase I scheduled for completion by end-2015); and 4) more details of theframework agreement announced in July 2015 regarding a JV retail project (c124k sqm GFA)in Qiantan, Pudong in Shanghai.
We have a Buy rating and a target price of HKD34. Our fair value target price is based on a26% NAV discount (or 0.25 standard deviations below average) to our NAV estimate ofHKD46. Swire Properties offers the most exposure to Hong Kong office (50% of GAV)among Hong Kong property companies (excluding REITs), making it a beneficiary of theexpected Hong Kong office upcycle. The weak performance of the Pacific Place mall willlikely remain a stock overhang; however, we believe this is reflected in the current share price.Its strong track record in building up the rental portfolio should support medium-term growthin Hong Kong rental income and NAV, in our view. Key downside risks include lower-thanexpectedrental achieved and/or higher cap rates driven by rising US long-term bond yield.