What surprised us
Swire Prop (1972.HK) posted a 1.0% yoy fall in 2015 underlying profit toHK$7,078mn, 7.6% below our estimate (HK$7,662), due to an unexpectedHK$229mn loss on disposal of four hotels in the U.K., pre-opening costs atnew hotels in Chengdu and Miami, and lower than expected contributionfrom HK retail portfolio. Excluding the disposal loss, underlying profitwould have increased by 2.2% yoy to HK$7,307mn. HK office/retail rentalrevenue was up 4.3%/0.7% yoy. China office/retail rental revenue was up8.8%/5.5% yoy. Trading profit was up 23.3% boosted by the recognition ofsales profit from AREZZO. The underlying profit from property investmentrose by 3%, thanks to good performances from HK offices and China retailproperties. 2H DPS was raised from HK$0.44 to HK$0.48, sending the fullyear payout to HK$0.71, up 7.6% yoy.
What to do with the stock
Despite a weaker retail rental outlook, we expect Swire Prop to deliversteady income growth in the coming years, backed by continuous positiverental reversions at HK offices and contributions from new projects (e.g.HKRI Taikoo Hui in Shanghai and Brickell City Ctr. in Miami.) Managementhas started re-tenanting exercises at Pacific Place Mall, though thepotential benefit will take some time to emerge and there would betemporary rental losses during the process. We trim FY16/17E EPS by 3.6%/4.1% to factor in weaker hotel and retail earnings, and introduce FY18EEPS of HK$1.35. Maintain CL-Buy and 12m NAV-based TP of HK$30.70. Keyrisk: Abrupt economic slowdown in HK that dampens office demand.