In-line FY16 results, HK office & China retail growth offset HKretail weakness
Strong project pipeline to drive rental growth
Maintain Buy rating and target price of HKD31
Resilient performance from diversified rental portfolio. Swire Properties (SPL)’sFY16 results showed resilience from its diversified rental portfolio, achieving steady grossrental income, despite the adverse near-term impact of Taikoo Place redevelopment andtenant mix reshuffle at Pacific Place Mall. Going forward, SPL’s HK office portfolio shouldsee continued positive rental reversions, as we expect office rents at Admiralty and HKEast to hold up well, benefitting from the spill-over effect of Central office strength. In HKretail, management has noted improving tenant sales performance at Pacific Place Mall inJan-Feb 2017, compared to a mid-single-digit decline in FY16 (excluding the impact oftenant sales mix reshuffle). This should allow HK retail rental to stabilise after a 4%decline in FY16. Together with strong performance in the Mainland China rental portfolio,and a project pipeline that is gradually coming into fruition, we believe SPL is wellpositioned for steady rental income growth over the next few years.
Strength in China retail portfolio, project pipeline coming into fruition. Managementsees strong tenant sales growth achieved in FY16 at even the more mature Sanlitun inBeijing (+5.6%) and Taikoo Hui in Guangzhou (+9.9%) as encouraging signs for rentalgrowth in SPL’s portfolio in Mainland China. Going forward, growth in China should befurther supported by the opening of HKRI Taikoo Hui in Shanghai (1.7m sf attributableGFA), where the mall is expected to open in May 2017. Separately, the two officebuildings at Brickell City Centre in Miami have achieved 100%/61% occupancy sinceopening in Mar-16/Feb-17, while the shopping mall grand opened in Nov 2016 and is over90% leased.
In-line FY16 earnings. SPL reported FY16 underlying earnings of HKD7,112m, +0.5%y-o-y (after including the loss of disposal of hotels in UK in 2015), largely in-line with ourand consensus estimates. SPL declared a second interim DPS of HKD0.48, bringingtotal DPS to HKD0.71, flat y-o-y and implying a payout ratio of 58% (vs FY15’s 57%).SPL reported book NAV of HKD38.52, up 3% h-o-h, and gearing of 15.3%, -3pp h-o-h,as of end-2016.
Buy rating and TP of HKD31 unchanged. We revise our FY17-18 earnings estimatesby -3%/+4%, mainly reflecting FY16 results and updated property trading assumption.Our target price is based on a 30% NAV discount to our NAV estimate of HKD44.6 (fromHKD44.2, after rolling forward to FY17), benchmarked against Hongkong Land’s NAVdiscount at 0.5 standard deviations below the historical average, given the short tradinghistory of Swire Properties. SPL stock trades at 45% NAV discount. Key downside risksinclude lower-than-expected rental achieved, and/or higher HK commercial cap rates.