1H16 earnings largely in-line. Swire Properties (SPL) reported 1H16 results duringlunch on 18 August. 1H16 underlying earnings came in at HKD3,559m, down 10% y-o-yreflecting lower property sales bookings and flat y-o-y gross rental. 1H16 results came inlargely in line (-2%) with our estimate of HKD3,628m with lower-than-expected propertysales recognized and rental margin (74% vs our assumed 77%) offset by lower-thanexpectedtax expenses. SPL declared an interim DPS of HKD0.23 (flat y-o-y), implying apayout ratio of 38% (vs 1H15’s 34%). SPL reported book NAV of HKD37.32, up 1%h-o-h. Balance sheet remains healthy with a gearing of 15.9% as of June 2016 (vs. 15.3%as of end-2015). SPL will host a results briefing later today.
Resilient rental revenue; lower property sales bookings in 1H16. Gross rentalrevenue was flat y-o-y with stronger rental growth noted for residential (+2% y-o-y),followed by office (+1% y-o-y) while retail rental revenue was down 2% y-o-y. 1H16 grossrental revenue represented 48% of our full-year estimate (before results). Operatingprofits from property sales however declined 49% y-o-y, reflecting lower salesrecognitions from HK residential projects, partly offset by contributions from REACH inMiami. We expect property sales bookings to be skewed towards 2H in FY16 with morebookings from Miami projects. SPL management expects subdued office demand in HKin 2H16 although the high occupancy in SPL's portfolio will likely underpin rents.
Robust operating trends for HK office and China rental portfolios in 2Q16. The2Q16 quarterly update released by SPL earlier in August showed resilient trends from theHK office portfolio, including flat q-o-q occupancy at 99% as of 2Q16 and continuingpositive rental reversions (+9-30% in 1H16). Within the retail rental portfolio, highoccupancy rates of 91-100% were achieved as of 2Q16. Stronger retail sales trends werenoted in malls in China (up 4-113% y-o-y in 1H16) than malls in HK, where retail salesdeclined 4-17% y-o-y. In 1H16, SPL completed one office tower and the East hotel withinthe Brickell City Centre project in Miami. SPL is also busy with the completion of HKRITaikoo Hui in Shanghai in phases from 2016.
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. We expect SPL’s near-term operations to be underpinned by the resilient HKoffice portfolio (51% GAV) while SPL is well positioned for medium-term growth with apipeline of new investment properties, e.g. Taikoo Place redevelopment. Key downsiderisks include lower-than-expected rental achieved and/or higher cap rates driven by risingUS long-term bond yield. Potential catalysts include the completion of MTR South Islandline, which may boost footfall traffic in Admiralty where Pacific Place mall is located,sustainable office rental growth in Hong Kong and the opening of HKRI Taikoo Hui.