1H15 underlying earnings 5% below our estimate due tosmaller-than-expected rise in property trading profit
Rising rentals on improving office yields in Hong Kong andincreased rental footage
BUY with HK$28.2 TPModest profit growth, higher dividends. Swire Properties’ 1H15underlying profit grew 4% to HK$3.94bn, aided by increasedproperty rental earnings and trading profit. First interim DPS rose 5%to HK$0.23. Gross rental income rose 6% to HK$5.37bn largelyreflecting stronger office income in Hong Kong and retail income inMainland China. The Island East office portfolio was virtually fullyleased in Jun-15 with positive rental reversions of 8-17% in 1H15.This, coupled with higher average occupancy at Pacific Place,contributed to 7% growth in gross office rental receipts in HK.
Despite falling retail sales at Pacific Place Mall, gross retail rentalincome in HK still grew 1%. Increased contributions from Taikoo Huiand Taikoo Li Sanlitun in China also augmented the rental incomeexpansion. Newly opened Sino-Ocean Taikoo Li in Chengdu was87% committed with 70% of the shops opened for business.
Arezzo dominated property trading profit. Gross profit from propertytrading jumped 28% to HK$1.22bn. The bulk came from selling 96units at Arezzo in Mid-levels with the balance mainly from inventorysales at Azura, Argenta and Mount Parker Residences. About 85%of the total 127 units at Arezzo has been taken up as of Aug-15,while other said projects were almost sold out. In 2H15, tradingprofits from the sale of Pinnacle One (office portion of Daci Templedevelopment in Chengdu) and Reach & Rise in Miami are expectedto kick in. Swire Properties also plans to sell Whitesands in CheungSha on Lantau, which contains 28 luxury houses, in 2H15.
BUY with HK$28.2 TP. The stock is trading at a 41% discount to ourappraised current NAV. Valuation is attractive in view of theimproving office market in Hong Kong. Brickell City Centre Ph 1 inMiami is expected to be completed by end-15, while HKRI Taikoo Huiin Shanghai is scheduled to be opened in phases from 2016. In HongKong, the Kowloon Bay office project and Taikoo Placeredevelopment are anticipated to be completed in 2017 and 2018respectively. Portfolio expansion should further widen its rentalincome base in the medium term. This should enhance earningsquality and justify a higher stock valuation. Maintain BUY call withHK$28.2 TP, based on 30% discount to our Jun 2016 NAV estimate.