Challenging growth in near term
? Swire Prop’s 1H22 recurring underlying profit was down 2% yoy. We do not expect its HK office portfolio, with negative rental reversions, to recover soon.
? We believe its increasing exposure to China IP is a possible drag on its valuation, as investors are concerned about China’s property market.
? Reiterate Hold with a lower TP of HK$20.1 (45% discount to NAV).
Recurring underlying profit down 2% yoy
Swire Prop reported an 8% yoy decline in underlying profit in 1H22 to HK$4.1bn (52% of initial FY22F estimates) due to fewer booking of development properties (DP). On a recurring basis, underlying profit was still down 2% yoy on the back of lower rental income from HK office and retail space. Interim DPS was up 3% yoy to HK$0.32; management remains committed to mid-single-digit growth in DPS.
Hard time for HK office rental, with new completion in 2H22F
Swire’s attributable gross rental income (GRI) from HK office slipped 1% yoy to HK$3bn, due to negative rental reversion at Pacific Place (PP) and older Taikoo Place towers. End1H22 office occupancies in PP cluster/Taikoo Place cluster held up at 96%/97% respectively. On the back of new office completions, we expect office rental reversions to stay negative for the rest of FY22F. Two Taikoo Place, which will open by the end of this year, is now 50% pre-leased with new lease commitments from MNC.
No remarkable improvement in HK retail until borders reopen
Its HK retail reported a 9% yoy decline in attributable GRI in 1H22; excluding amortised rental concessions, GRI was down 2% yoy. On the back of HK Government’s consumption vouchers and Swire’s incentives offered to shoppers, we expect a moderate rebound in tenant sales in 2H22F. However, until a clear roadmap for HK’s border reopening and relaxation of quarantine measures for inbound visitors is launched, we believe a significant improvement in PP’s tenant sales is unlikely.
Increasing exposure to China IP a possible drag on its valuation
Its GRI from China retail, excluding rent concessions, was up 7% yoy in Rmb terms. Retail sales for all of its Taikoo Li portfolio, particularly in Shanghai, declined due to weak demand and lockdowns due to the Covid-19 outbreak. Management expects steady recovery in demand for retail space in 2H22F. However, it appears to us that its increasing exposure to China IP (24% of end-FY22F GAV) is not gaining traction from investors at the moment, who are very concerned with how Chinese developers’ liquidity problems will impact the economy and future demand for office and retail space in China.
Reiterate Hold with a lower TP of HK$20.1
We tweak FY22-24F EPS to reflect higher profit from car parking space disposal in HK in FY22F and shifts in DP booking in FY23, and cut its NAV by 4% to HK$36.6 as we raise cap rates for its China IP by 25bps. Hence, our TP for Swire is lowered to HK$20.1, still based on a 45% discount to NAV. Reiterate Hold. Key upside risks: stronger-than-expected recovery in HK office and China tenant sales. Prolonged lockdowns in HK and China and negative rental reversions are key downside risks.
