Source of opportunity
We are structurally positive on Hong Kong’s office property market andthink Swire Prop has the best of both worlds – a strong foothold in the CBDthrough its Pacific Place office complex （16% of FY18E GAV） and an IslandEast office portfolio （30% of GAV） that is set to transform further amidongoing redevelopment efforts and substantial infrastructure buildout. Inaddition, China （c.25% of attributable rental） continues to grow throughpositive reversions and ramp-ups of new openings. We look for a 5% CAGRof rental earnings between 2016-2019E, and think Swire Properties’ interimDPS 9% yoy growth （after a flattish 2016） echoes robust fundamentals.
Catalyst
Near term: Positive HK office rental reversions are likely to continue （welook for 3% p.a. CAGR for Swire Properties’ office spot rents）； more preleasingnews on One Taikoo Place （attr. 1.0mn sq ft） and further recovery inretail mall performance. Medium term: Strong new opening pipeline withfull-year contributions from HKRI-Taikoo Hui in Shanghai （attr. 1.7mn sq ftGFA, adding 4.5% rental pro forma） in 2018E and One Taikoo Place （adding7% rental pro forma） in 2019E. Longer term: Further appeal in Island Eastoffice portfolio, amid （i） active redevelopment efforts and （ii） the Central-Wanchai Bypass （2019E） that should substantially shorten travel time to theCBD. Management is also actively expanding its retail-led mixed-usedevelopment project pipeline, with the Qiantan shopping mall project （attr.600k sq ft） in Shanghai targeting potential openings in 2020E, along withother potential M&A activity in major Chinese cities.
Valuation
We reiterate our Buy rating on Swire Properties. The stock is trading at0.64X price-to-last-reported-BVPS vs. 5-yr. average/-1s.d. of 0.66X / 0.58X,and at an 33% discount to FY18E NAV vs. 5-yr. avg./-1s.d. of 30%/39%.
Key risks
An abrupt economic slowdown dampening HK office demand; project delays.
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