1H22 results preview
- We estimate a mid-single-digit yoy decline in Swire’s recurring underlying
profit in 1H22 due to a decline in office rental and retail rent relief in HK. - Following its HK$100bn investment plan over FY22-31F, Swire is expediting
land investment in China and HK. - We expect Swire to recognise gains on disposal of car park spaces in FY22F
and commit to mid-single-digit growth in full-year DPS. Reiterate Hold.
Weak HK rental to result in decline in recurring underlying profit
We expect Swire to report mid-single-digit yoy decline in recurring underlying profit in 1H22, on the back of i) negative rental reversion at HK Pacific Place (PP) office towers, and ii) rent concessions to HK malls during the recent Covid-19 outbreak. Nevertheless, the positive rental reversion from malls in China should partially offset this negative impact. Meanwhile, we expect Swire to recognise gains in 1H22 on a new round of car park space disposals in Tai Koo Shing.
Expediting land investment in China and HK
Swire announced in Mar 22 that it will invest a total of HK$100bn over FY22-31F on projects primarily located in China and HK. We estimate that Swire spent c.HK$5bn in 1H22 on land acquisition in China and HK. In early Mar 22, it formed a JV with a local state-owned enterprise of Xi’an government and acquired a commercial site to be developed into Taikoo Li Xi’an, its seventh development in China with a total GFA of 3.0m sq ft. Three weeks ago, it acquired a site in Wan Chai in HK for HK$2bn (A.V. HK$16.9k/sf), which will be developed into high-end residential units. We also understand that Swire is planning to expand its commercial portfolio in Quarry Bay via compulsory bidding of two old buildings next to Lincoln House, which we estimate will be developed into an office tower with ~0.3m sf GFA.
What to look out for in 2H22F
Swire will deliver and recognise its residential project Eight Star Street (28 out of 37 flats pre-sold as of early May) in 2H22F and will continue the pre-leasing of Two Taikoo Place (GFA ~1m sf, to be completed in 2H22F) which has secured Julius Baer as an anchor tenant. We also expect Swire to secure more gains on disposal of car park spaces (to non-owners of Tai Koo Shing flats) in 2H22F. On an ongoing basis, we expect Swire to uphold its commitment to deliver mid-single-digit yoy growth in its full-year DPS: we
estimate a 3% CAGR in FY21-24F DPS.
Reiterate Hold
We reiterate our Hold call with a TP of HK$21.0, based on a 45% discount to NAV. Our NAV is based on cap rates of 5-5.75% for Swire’s investment properties in HK. Key downside risks include prolonged closure of HK’s borders and prolonged negative rental reversion of HK office. Relaxation of social distancing measures in HK and stronger-than-expected rental reversions in China are key upside risks