Shifting focus back to HK office portfolio. We believe the solid business trends ofSwire Properties’ (SPL) core operations are under-appreciated by the market amidinvestor concerns over the company’s HK retail rental portfolio, particularly PacificPlace mall that accounts for only 9% of gross asset value (GAV) on our estimates.SPL remains well placed to benefit from the resilience of the HK office rental portfolioand a strong project pipeline in the coming years. Trading at a 51% NAV discount, wesee attractive risk-reward for SPL stock.
Resilient HK office portfolio with a good growth pipeline. SPL's operations areanchored by the office portfolio in HK, accounting for 51% of GAV on our estimatesand 52% of gross rental income in 1H16. The portfolio has demonstrated solidoperating trends including positive rental reversions (+9-30% in 1H16) and a highoccupancy at 99% (flat q-o-q) as of 2Q16. While rental income in the short-term maybe impacted by the vacation of tenants from the remaining techno-centres(representing less than 5% of gross HK office rental income on our estimates), SPL'smedium-term office rental growth is well-supported by new projects. Completions ofWong Chuk Hang and Kowloon Bay projects (c746k sf attributable GFA in total) arescheduled from 2017e while, more importantly, Phase 1 of Taikoo Placeredevelopment (c1m sf GFA) will be completed in 2018e.
Two mixed-use project openings in 2016-17. HKRI Taikoo Hui in Shanghai (1.7m sfattributable GFA) will open in phases from 2H16, of which pre-leasing has been committedfor c67% for retail area (with another 6-8% under negotiations) and c50% for office area.We expect this project to build on SPL’s track record in China where the rental portfolio hasramped up, showing an 11% CAGR in consolidated gross rental income in 2013-2015(before JV contributions), and contributed to 19% of total rental income in 1H16, up from17% in 2013. In Miami, the shopping centre of Brickell City Centre will open by end-2016following the openings of one office tower and the hotel (East, Miami) in 1H16.
Maintain Buy rating and a target price of HKD31. We revise down our FY16e-18eearnings by 3-7% reflecting updated residential sales assumptions and rental income lossfrom the remaining techno-centres for redevelopment. Our target price is based on a30% NAV discount to our largely unchanged NAV estimate of HKD44.2. 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, andthe opening of HKRI Taikoo Hui. Please also refer to our note Buy: 1H16 results largely inline,dated 18 August 2016 for 1H16 results highlights.