Result Analysis: Resilient rental income
Swire Properties’ 1H22 underlying profit was 8% lower, at HK$4.14bn, due to smaller gains on the disposal of investment properties. Excluding profit from divestment, the company’s core underlying earnings would have fallen slightly by 2% to HK$3.64bn, in line with our forecast. Yet, its first interim DPS rose 3% to HK$0.32.
Total attributable rental income was largely flat at HK7.18m. Lower retail revenue from Hong Kong was offset by higher income from China malls.
Attributable income from the Hong Kong retail portfolio declined 9%, reflecting the adverse impacts of the resurgence of COVID and amortisation of rental concessions given in earlier years. In a response to the Omicron variant outbreak at the beginning of the year, Swire Properties offered rental concessions to affected tenants. With the easing of social distancing protocols since Apr 22, tenants’ business has been on the path to recovery. In 1H22, tenant sales at Pacific Place Mall and Citygate Outlet Mall fell 1.6% and 1.8%, respectively (1Q22: -9.1% and -21.3%). This compared favourably with the overall retail market, which recorded a 2.6% drop in sales value in the corresponding period. On the other hand, retail sales of Cityplaza were 4.9% lower in 1H22.
The China retail portfolio showed a growth of 9% in attributable income to HK$2.31bn (or 7% if disregarding amortised rental concessions and currency movements). This was mainly fueled by new contributions from Taikoo Li Qiantan in Shanghai and Taikoo Li Sanlitun West in Beijing, which opened for business in 2H21. Excluding these two newly opened malls, total attributable retail sales fell 19% in 1H22. Due to lockdowns and other pandemic-led restrictions, tenant sales at HKRI Taikoo Hui in Shanghai tumbled 53%, while that of Taikoo Li Sanlitun and INDIGO in Beijing fell 26% and 25%, respectively. Taikoo Hui in Guangzhou and Sino-Ocean Taikoo Li Chengdu were less impacted, with modest retail sales drops of 7% and 8%, respectively.
Office income from Hong Kong remained broadly stable at HK$3bn. While Pacific Place Office suffered from negative reversionary growth, positive reversion was seen at some of the Taikoo Place properties.
Swire Properties is in acquisition mode. After securing a site in Xi’an for a retail-led mixed-use development, the company acquired a residential/retail site in Wan Chai in Jul-22. In Mar 22, the company acquired an additional 6.67% stake in Citygate development, bringing its stake to 26.67%.
Contributions from these investments should propel Swire Properties’ long-term earnings growth, allowing the company to deliver mid-single digit dividend growth.
To expand its hotel management business, Swire Properties announced two new, third-party-owned hotels under The House Collective brand in Tokyo and Shenzhen.
To leverage on its premium residential brands, the company is looking to build a residential presence in Singapore, Bangkok, Jakarta, and Ho Chi Minh City.
Net debt rose to HK$15.5bn in Jun 22 from Dec 21’s HK$10.3bn, mainly due to the acquisition of the Taikoo Li Xian site, construction expenses incurred for investment, and development properties in Hong Kong. This was despite taking into account the proceeds from the divestment of carparks in Taikoo Shing and the Fort Lauderdale site in Florida. Despite higher net debt, the company’s gearing remained comfortable at 5%. Even after allowing for the recent acquisition of the Wan Chai site, Swire Properties remains financially sound for pursuing new investment to bolster its long-term growth. Moreover, the company intends to sell the remaining 1,100 carpark slots at the Taikoo Shing residential development, and the capital generated will be recycled for new investment. This enables the company to pursue acquisition-led growth without stretching its balance sheet.
Trading 62% below our appraised current NAV, the stock is attractively valued. The company has embarked on its ambitious investment plan, which should set the stage for consistent earnings and dividend growth. This should justify a higher stock valuation over the long term. Reiterate BUY with HK$24.95 TP, based on a 50% discount to our Jun 2023 NAV estimate.
