Swire Properties Earnings: Transferring Coverage; Retail Recovery To Support Growth

We transfer coverage of Swire Properties 01972 with unchanged narrow moat rating and fair value estimate of HKD 31. We think shares are currently attractive, trading at a 41% discount to our fair value estimate, and 2023 forecast dividend yield of 5.7%. First-half 2023 revenue increased 6% year on year, within our expectation, with a strong retail recovery partly offset by a struggling office portfolio. However, operating profit was slightly below our expectations, dragged by a higher marketing expense, higher losses from trading properties and a higher-than-expected foreign exchange loss. These were partly offset by a lower-than-expected finance cost that brought recurring underlying net profit up 6% year on year. We increased our operating expense and reduced our finance cost assumptions to reflect the latest numbers, while also factoring in the redevelopment of Wah Ha Factory Building and Zung Fu Industrial Building, and the Bangkok residential joint venture project, assuming five-year and three-year development periods, respectively. As such, our 2023, 2024, and 2025 earnings per share forecasts are lowered by 7.5%, 7.3%, and 5.1%, respectively.

Our long-term view for the company is unchanged, and we continue to expect the company’s flagship office properties to benefit as the company’s development masterplan gradually improves the overall attractiveness of the area. However, we think near-term headwinds remain for the Hong Kong office market, as the oversupply situation lingers. The recovery in corporate demand is also sluggish given global economic headwinds. We anticipate it will take around 12-18 months for the excess supply to be absorbed, and another 6-12 months for rents to recover on improved demand. In the near term, we expect Swire Properties’ performance to be driven by retail recovery in Hong Kong and China, and the increase in contribution from the acquisition of the remaining interest of Sino-Ocean Taikoo Li Chengdu in early 2023.