Both Pacific Place and Taikoo Place portfolios benefitedfrom the HK office upcycle in 1H15
Good growth in China rental portfolio in terms of both rentaland retail sales
Maintain Buy with a fair value target price of HKD34
Central office upcycle in 1H15 benefited both PP and Taikoo Place offices. Swire Properties(SPL)’s HK office portfolio showed encouraging trends in 1H15 with improvements noted in bothPacific Place (PP) and Taikoo Place office portfolios. PP office occupancy was up 4ppt h-o-h to98% as of June 2015 and PP 1-2 spot rent rose HKD5psf q-o-q to HKD100-115psf. At TaikooPlace office, positive rental reversions and higher spot rent (mid-to-high HKD40s psf vs.low-to-high HKD40s psf six months ago) were achieved. SPL expects the pick-up in office demandin 1H15 to continue, which we believe could help narrow SPL stock’s steep 52% NAV discount.
Good growth in China rental portfolio. SPL’s China rental portfolio showed good growth in1H15, including 1) +26% y-o-y attributable gross rental (including JV and associates) and2) +7-36% y-o-y retail sales across malls in Beijing and Guangzhou, outperforming the respectivemarket averages. The latest addition to the China portfolio, HKRI Taikoo Hui in Shanghai(50% owned), is expected to open in phases from 2016.
1H15 earnings slightly up y-o-y. SPL reported 1H15 underlying earnings of HKD3,938m, up 4%y-o-y on higher property sales and +5% y-o-y growth in net rental. 1H15 results came in lower thanour expectations (-7%) mainly due to the lower-than-expected property sales margin. SPL declaredan interim DPS of HKD0.23, up 5% y-o-y and implying a 34% payout ratio (flat y-o-y). SPLreported book NAV of HKD36.5, up 3% h-o-h, and a gearing of 15.7%, -0.6ppt h-o-h, as of June2015. (More details can be found in our note 1H15 earnings slightly up y-o-y, 20 August 2015.)
Maintain Buy rating and target price of HKD34. We revise our FY15-17e earnings (largelyin-line with Bloomberg consensus) by -3% to +2% reflecting updated residential sales assumptions.Our fair value target price (unchanged) is based on a 26% NAV discount to our NAV estimate ofHKD46. SPL offers the most exposure to HK office (50% of GAV) among HK property companies(excluding REITs) we cover, making it a beneficiary of the expected HK office upcycle. The weakperformance of the Pacific Place Mall (c.9% of GAV) will likely remain a stock overhang;however, we believe this is reflected in the current share price. Key downside risks include lowerthan-expected rental achieved and/or higher cap rates driven by rising US long-term bond yields.