Resilient office rental underpinned by HK office portfolio: We expect resilientrental income from Swire Properties (SPL) in 1H16e. The company's HK office andChina rental portfolios showed robust operating trends in 2Q16, which should helpoffset headwinds faced by the HK retail rental portfolio from slowing retail sales. Inthe medium-term, SPL is well-positioned for rental and NAV growth with a pipeline ofnew investment properties scheduled for completions over the coming years,including HKRI Taikoo Hui in Shanghai and Brickell City Centre in Miami from 2016eand Taikoo Place redevelopment project from 2018e.
Good operating trends in 2Q16 for HK office and China retail portfolios: SPLreleased its 2Q16 quarterly update on 8 August 2016, which showed a steady officeportfolio in HK with high occupancy (99% as of 2Q16) and positive (9-30%) rentalreversions in 1H16. China retail rental portfolio also showed positive momentumincluding slightly higher q-o-q occupancy to 91-99% and positive retail sales (+4-113% y-o-y in 1H16). HK retail rental portfolio however saw softer trends, mostly atPacific Place (PP) mall where retail sales fell further to 17% y-o-y in 1H16 (from -15.4% in 1Q16). Retail sales trends were stable or slightly improved at other HKmalls in 2Q16. SPL continued to make progress with the Brickell City Centre project-EAST hotel opened in June 2016, following the handover of an office tower in 1Q16.
1H16e earnings lower y-o-y on property sales: SPL will report 1H16 results on 18August. We expect 1H16 underlying earnings (excluding revaluation gains) ofHKD3,628m, down 8% y-o-y mainly due to lower property sales recognitions. In 1H16,we expect steady net rental (+2% y-o-y) while property sales bookings will mostly comefrom 226 units at the REACH in Miami and six units at AREZZO in HK (vs 96 units atAREZZO in 1H15). We expect property sales bookings to be skewed towards 2H inFY16 when more contributions are expected from the Miami projects. We forecast 1H16DPS of HKD0.23, flat y-o-y and implying a payout of 37% (vs 34% in 1H15).
We have a Buy rating and target price of HKD31: Our target price is based on a 30%NAV discount to our NAV estimate of HKD44.4. SPL stock trades at a 50% NAVdiscount. Key downside risks include lower-than-expected rental achieved, shouldvolatility in financial markets persist, potentially dampening office demand, and/or highercap rates driven by rising US long-term bond yield.