Remaining conservative in new investments
- WHL reported an underlying profit of HK$526m in 1H22, reversing a loss in 1H21, due to lower impairment provision on DP yoy.
- Despite continued provisions on China DP (HK$2bn), management was right to halt land acquisitions in China since 2H18.
- Reiterate Hold with a higher TP of HK$28.0 (45% discount to NAV).
1H22: reversing underlying loss from 1H21
Wharf Holdings (WHL) reported an underlying profit of HK$428m in 1H22, reversing a net loss of HK$526m in 1H21, mainly due to narrowed impairment provision on development properties (DP). Interim DPS remained flat yoy at HK$0.20. Net gearing dipped to 7% at end-1H22, from 9% at end-2021; average borrowing cost was low at 2.1%.
DP is still the most challenging part of the business
Its revenue from China DP fell 29% yoy to HK$5bn, with an OP margin of 12% (1H21: 13%). Attributable contracted sales were down 60% yoy to just Rmb2.3bn in 1H22; it appears to us that management is not optimistic of achieving its Rmb9bn contracted sales target for FY22F. Its unbooked sales fell to Rmb14.8bn at end-1H22 because of slower pre-sales. Meanwhile, its attributable revenue from HK DP was HK$603m with an OP margin of 68% (1H21: 28%), as an apartment in Mount Nicholson was booked at JV level. It made attributable impairment provision of c.HK$2.5bn on DP: HK$2bn on China DP and the rest on HK DP.
Positive rental reversion at China malls, despite lower IP revenue
Investment properties (IP) in China have come to an inflection point of growth, with a 4% yoy decline in revenue in 1H22, due to lower turnover rents at malls and lower office occupancies. Its IFS series malls were still able to register double-digit positive rental reversions in 1H22, indicating low base rents in previous fiscal years. End-1H22 mall occupancies at Chengdu IFS and Changsha IFS stood at 94% and 98%, respectively.
Maintaining sizable equity portfolio
WHL’s listed equity investment portfolio was HK$45.6bn at end-1H22, consisting mainly of property stocks (45%) and new economy stocks (37%), and contributed dividend income of HK$0.9bn in 1H22. In view of the uncertainty in global economies and China DP market (more on p.2), we think WHL will still be very cautious on landbanking in 2H22F and maintain a similar size of equity portfolio.
Reiterate Hold with a higher TP of HK$28.0
We cut FY22-24F EPS by 19-23% on the back of slower recovery of its DP business in China and HK. Yet, in view of projection of a lower net debt, we lift its NAV by 3% to HK$50.9. Hence, we raise our TP for WHL to HK$28.0 while maintaining a 45% discount to NAV. Despite a much lower dividend yield compared to other developers, we think its low net gearing and its liquid investment portfolio supports the current valuation in an environment of rising interest rates. Reiterate Hold. Key downside risks: larger-than-expected provisions on DP assets. Resumption of revenue growth from China IP and reopening of HK’s borders are key upside risks.