Solid 1H17 results underpinned by higher HK property salescontribution and robust China retail sales performance
Company is well placed for the next stage of growth from bothHK office and China retail rental business
Maintain Buy with a new TP of HKD32.5 (from HKD31.0)
More to come. Resilient rental uplift in its HK office portfolio, robust retailperformance in its China shopping malls and new completions should offer SwireProperties (SWP) a good value proposition in the next few years in our view. Its retailsales performance in Pacific Place mall is now returning to positive growth for the firsttime in three years, which should alleviate some investor concerns. We view its solidset of 1H17 results a beginning of a re-rating process and we expect more to come.1H17 underlying profit grew 30% y-o-y to HKD4.6bn, or 11% to HKD3.4bn if we stripout non-recurrent property development profit.Fast growing hubs in the North. SWP has been delivering meaningful growth interms of GFA, retail sales performance and rental income in China since 2011. Andwe expect the company to enjoy a further uplift in rental income in the next few years.
We expect its 16-19e CAGR rental income growth of 12.4% to HKD3.7bn. Its 1H17rental income rose 19% y-o-y to HKD1.5bn. It is backed by an impressive retail salesperformance, with four shopping malls delivering growth of 7%-69% y-o-y. Its fifthmajor commercial complex, HKRI Taikoo Hui in Shanghai completing this year,should fuel growth in the next few years. We could also see increased visibility in itsrental income growth if the company successfully secures another Shanghai project.Solid base from the South – HK office to benefit from de-centralization. Thecompany should be a key beneficiary from office tenants relocating from Central dueto cost saving considerations and insufficient space within the district, in our view.Positive rental reversion from its core Pacific Place office portfolio and One IslandEast reached 15% and 10% in 1H17. Its new office project One Taikoo Place inQuarry Bay, completing next year, should further drive its office rental income in HK.
Maintain Buy rating with revised target price of HKD32.5 from HKD31. We raise ourFY17-19e earnings by 5-12%, mainly reflecting 1H17 results and updated rental andproperty trading assumptions. Our target price is based on a 30% NAV discount to ourNAV estimate of HKD46.5 (from HKD44.6), benchmarked against Hongkong Land’s NAVdiscount at 0.5 standard deviations below the historical average, given the short tradinghistory of Swire Properties. SWP stock trades at 42% NAV discount. Key downside risksinclude lower-than-expected rental achieved, and/or higher HK commercial cap rates.