What surprised us
Swire Prop (1972.HK) posted 4.3% yoy rise in 1H15 underlying profit to HK$3,938mn (GSe HK$3,895) backed by continuous positive rental reversions and higher occupancy at HK offices and China retail malls and new contribution from Taikoo Li Chengdu. 1H DPS rose by 4.5% yoy to HK$0.23. While its China retail malls saw good tenant sales (up 6.5%-36.1% yoy), HK retail malls saw a mixed picture with Pacific Place Mall reporting 12.7% drop in sales while Cityplaza was up 10.9% in 1H15. HK office/retail rental revenue was up 6.5%/1.4% yoy. China office/retail rental revenue was up 18.4%/11.1% yoy. Trading profit was up 25.7% boosted by the recognition of sales profit from AREZZO. BVPS was up 3.7% yoy or 2.8% hoh to HK$36.50 thanks to HK$4,610mn net investment property valuation gains.
What to do with the stock
We see Swire Prop more as an office play, as the group derives nearly half of its FY15E NAV or 52% of rental revenue from HK office. On the back of a tight supply outlook and steady pick up in office demand, the platform which underlies Swire Prop’s office rental growth should remain intact, in our view. While the 12.7% drop in Pacific Place Mall’s tenant sales could be a drag on market sentiment, it is worth noting the 10.9% rise in Cityplaza’s tenant sales demonstrates the positive result of management’s retenanting efforts (on the back of this, management is now planning to do similar re-tenanting exercises in Pacific Place Mall in due course) and the resiliency of malls targeting middle class local consumers. We raise our FY15E-FY17E EPS by 2.3%-2.7%. Maintain CL-Buy and 12-m FY15E NAVbased TP of HK$30.40. Key risk: Abrupt economic slowdown in HK that dampens office demand.