What's changed
We reiterate our Conviction Buy on Swire Prop. on the back of the solidperformance of its HK commercial properties. Our Conglomerate teamattended the pre-blackout analyst briefing of its parent company SwirePacific (0019.HK; Neutral; last close HK$83.80) on Jan 5, which provided anumber of positive updates on its property operations.
Key takeaways: 1) HK office demand remains strong, with 98% occupancyfor Pacific Place and HK East and spot rent still on the rise for Pacific Placeand stable for HK East. 2) Incremental demand from China financial firmsis intact and management did not see much change to this trend despitestock market volatility in recent months. 3) On the retail side, slowingMainland visitation continued to drag Pacific Place Mall’s sales, butCityplaza in HK East where local demand is predominant is more resilient.
Implications
The update is in line with the picture we learned from the propertyconsultants in recent months – very resilient demand for office butchallenging retail sales dragging demand for retail space. Our model islooking for a 5% rise in office rents and a 5% decline in retail rents in 2016,but it is important to recall for Swire Prop. that its HK retail portfolio is lessthan 20% of our NAV estimate and 26% of rental income, and HK office(c.45% of NAV and 53% of FY2015E rental income) remains the key driver.
Valuation
At HK$21.90, the stock is at a 39% discount to our NAV est. of HK$36.15and 0.6X its BVPS of HK$36.50. The company is due to report FY2015results in March. We look for a 6% yoy rise in underlying EPS to HK$1.30.Retain CL-Buy and HK$30.70 12-mo TP, set at a 15% discount to NAV.
Key risks
Risks include abrupt economic slowdown in HK that dampens officedemand and worse than expected execution in new HK and China projects.