Company Update: Apartments at Mount Nicholson fetched high prices
Despite sporadic COVID outbreaks, the growth momentum of tenants’ sales of Wharf’s China malls remained in 2H21. Occupancy cost ratio stays healthy at teens. This should bode well for reversionary growth. Chengdu IFS mall should record favourabe rental growth of >10% upon lease renewal and new letting. Changsha IFS is entering the second leasing cycle with positive rental reversions expected. Office occupancy at Changsha IFS stays steady at c.85%. Office reversionary growth at Chengdu IFS is largely neutral.
In 2021, Wharf did not buy any land for development in China. Given the challenging market conditions in 2H21, the company may miss the full-year sales target of HK$15bn for 2021.
Since Nov-21, Wharf Holdings has sold three apartments at Mount Nicholson on the Peak, a 50/50 JV with Nan Fung Group, for HK$1.78bn or HK$137,600psf. We estimate total attributable pre-tax earnings at c.HK$600m, which should add spice to the company’s bottom-line earnings. Currently, two houses and seven apartments remain unsold.
A consortium in which Wharf has a 30% stake is applying for pre-sale consent for a residential project in Kai Tak. Scheduled for completion in 2024, this development will offer >2,000 units with residential GFA of 1.08msf.
Foundation work of the Kowloon Tong luxury residential project is underway, with project completion scheduled for 2024. This luxury development comprises four residential towers with GFA of 0.44msf, and should be a medium-term earnings catalyst for Wharf. Wharf is in land premium negotiations for the Kowloon Godown redevelopment in Kowloon Bay. Should a favourable land premium be secured, this waterfront project would bring in good return for the company. Going forward, the company will focus on the Hong Kong property market.
The stock is trading 56% below our assessed current NAV. Valuation remains inexpensive in our view. While retail landmarks in China are benefitting from positive rental reversion, its unparalleled luxury land bank in Hong Kong should provide an impetus for long-term growth. By applying a target discount of 50% to our Dec 2022 NAV, we derive our TP at HK$31.70, suggesting a 17% upside potential from the current level. We recommend BUY.