Disposal of Kowloon Bay property for HKD6,528m; transactionprice implies an estimated 3.5% rental yield
Moderately accretive to our NAV estimate; growth pipelineremains strong after the disposal
　　We have a Buy rating with unchanged target price of HKD31Disposal of Kowloon Bay property for HKD6.5bn. Swire Properties （SPL）announced on 28 October 2016 after market close the disposal of its 100% interest inthe holding company of its Kowloon Bay property to Lucky Melody Limited （confirmedby the media （HKEJ） to belong to Pollyanna Chu, the CEO and major shareholder ofKingston Financial Group Limited （1031 HK, NR）） for HKD6,528m in cash. Thecompletion of the transaction is conditional upon receipt of the Occupation Permitand the Certificate of Compliance on or before 31 December 2018. According to SPL,the proceeds will be applied towards general working capital requirements.
　　0.6% accretion to our estimated NAV. The property is an office building in KowloonBay with total GFA of 555k sf, scheduled for completion at end-2017. The transactionprice of HKD6,528m is HKD1,662m above our appraised valuation of HKD4,866m forthe property. Consequently, we estimate NAV accretion of HKD0.28/share or 0.6% toour NAV estimate of HKD44.26/share upon completion of the disposal. Further, SPLexpects to record a disposal gain of HKD1,170m from the transaction. We estimatethat the transaction price of HKD6,528m or HKD11,761psf implies a rental yield of3.5%, assuming monthly rent of HKD40psf and an 85% efficiency.
　　Growth pipeline remains strong. We believe the sale should not come as asurprise to investors as SPL first announced that it is considering the possibledisposal on 30 August 2015. Rental income from Kowloon Bay property contributed0.3%/0.8% of our estimate of SPL’s 2017/18e revenue. More importantly, we believeSPL’s medium-term office rental growth pipeline remains strong, with the scheduledcompletion of Wong Chuk Hang （c191k sf attributable GFA） in 2017e and Phase 1 ofTaikoo Place redevelopment （c1m sf GFA） in 2018e.
　　We have a Buy rating with a target price of HKD31. Our target price is based on a30% NAV discount to our NAV estimate of HKD44.2. Our target discount isbenchmarked against Hongkong Land’s （HKL SP, current price USD6.72, Buy, TPUSD8.8） NAV discount at 0.5 standard deviations below the historical average, giventhe short trading history of Swire Properties. Our estimates are yet to reflect thedisposal, pending transaction completion. Potential catalysts include the completionof MTR South Island Line, which may boost footfall traffic in SPL’s Pacific Place Mallin Admiralty, and the opening of HKRI Taikoo Hui in Shanghai. Key downside risksinclude lower-than-expected rental achieved and/or higher cap rates driven by risingUS long-term bond yield.