Swire Properties (1972.HK)

Transcription

1 INSTITUTIONAL EQUITY RESEARCH Swire Properties (1972.HK) Improved Upside from Future Investment Properties Hong Kong Property Company report 28 March 2017 Investment Summary - Taikoo Place redevelopment project will provide an additional GFA of about 2,020,000 square foot of office and retail investment properties - High quality investment properties located at the heart of Hong Kong Business Overview Property investment segment continues to be strong: The FY2016 result of the property investment segment of Swire Properties remains strong and achieved a slight growth of 0.4% in its revenue. Operating profit from the segment however dropped 4.3%. The office property has performed particularly well in FY2016 and has achieved a growth of about 1.4%, despite the loss in rental income due to the phase 2 of Taikoo Place redevelopment project, which comprises the removal of tenants from two commercial buildings, Warwick House and Cornwall House. The following is the rental income of completed office investment properties and their GFA across years: Rental Income (In HK$`M) 5,386 5,707 5,972 6,053 GFA (Million Sq. Ft) Hong Kong China USA and Others The decrease in aggregate GFA, from 12.2 million square foot to 11.8 million square foot, is caused by the transfer of Cornwall House and Warwick House from `Completed Investment Properties` to `Investment Properties Under Development`. Moreover, Swire Properties handed over 10 floors of City Plaza Three, about 205,000 square foot, to Hong Kong Government in exchange for the properties in Cornwall House owned by the Hong Kong Government. Stable revenue and cash flow is expected to continue: Property investment segment regularly achieves almost full occupancy in its investment properties, such as Taikoo Place and Pacific Place. Swire Properties has also successfully maintained its rental reversion at a consistent rising rate because its investment properties have excellent geographical location. Moreover, property investment segment is expected to bring stable, recurring revenue and cash flow to Swire Properties, because of the fact that a majority of the lease contracts will not expire until 2019 or later. Lease Expiry Profile (As at 31/12/2016) Office Retail % 22.1% % 31.7% 2019 and later 68.7% 46.2% Neutral CMP: HKD (Closing price as at 24 Mar 2017) TARGET: HKD (+3.86 %) COMPANY DATA O/S SHARES (MN) : 5,850 MARKET CAP (HKDMN) : 143, WK HI/LO (HKD): / SHARE HOLDING PATTERN, % Swire Pacific Limited 82.0 PRICE PERFORMANCE, % 1M 3M 1Y Swire Properties HIS PRICE VS. HSI Source: Phillip Securities (HK) Research KEY FINANCIALS HKD mn FY15 FY16 FY17E FY18E Net Sales 16,447 16,792 18,452 16,049 Net Profit 14,196 15,209 16,759 15,898 EPS, HKD PER, x BVPS, HKD P/BV, x ROE, % Source: Company reports, Phillip Securities Est. Research Analyst John Wong johnycwong@phillip.com.hk Page 1 PHILLISECURITIES (HK) RESEARCH

2 Office Properties HK Occupancy Rate - Pacific Place 91% 94% 100% 100% - City Plaza 97% 100% 100% 100% - Taikoo Place 99% 98% 99% 98% - One Island East 100% 98% 99% 100% HK Rental Reversion - Pacific Place 27% 7% (1%) 14% - City Plaza 53% 25% 15% 9% - Taikoo Place 48% 27% 10% 15% - One Island East 85% 14% 8% 29% CN Occupancy Rate - Taikoo Hui Offices 89% 100% 100% 99% - One Indigo 97% 100% 92% 90% Although almost full occupancy has been achieved in both Hong Kong and China in the retail properties, the retail sales growth in Hong Kong continued its dropping trend in During the same period, China continues its rapid increase in retail sales growth. However, overall rental income from retail investment properties still had a slight drop of 1.4% in Retail Properties HK Occupancy Rate - The Mall Pacific Place 100% 100% 100% 100% - City Plaza 100% 100% 100% 100% - Citygate Outlets 100% 100% 100% 100% HK Retail Sales Growth - The Mall Pacific Place 0.7% (6.1%) (11.8%) (12.8%) - City Plaza 2.4% (0.4%) 0.7% (3.7%) - Citygate Outlets 13.5% 4.6% (10.0%) (8.0%) CN Occupancy Rate - Taikoo Li 94% 95% 94% 94% - Taikoo Hui 99% 99% 99% 99% - Indigo 96% 95% 97% 98% - Sino-Ocean Taikoo Li % 92% CN Retail Sales Growth - Taikoo Li 17.0% 18.8% 3.3% 5.6% - Taikoo Hui 24.9% 11.0% 16.2% 9.9% - Indigo % 30.3% 20.0% - Sino-Ocean Taikoo Li % Taikoo Place redevelopment project has high potential: The redevelopment project of Taikoo Place is divided into two phases. The first phase of the redevelopment project has already started and involves Somerset House. Substructure and superstructure work is currently in progress. Phase 1 redevelopment project is expected to be completed in 2018 and will provide 1,020,000 square foot of GFA. Page 2 PHILLISECURITIES (HK) RESEARCH

3 The second phase of Taikoo Place redevelopment project involve Cornwall House and Warwick House. Demolition of Warwick House has started and the demolition of Cornwall House is expected to start in 2Q2017. The aggregate GFA of the new commercial building will be around 1,000,000 square foot and is expected to be completed in 2021 or The following is the per square foot rent of Taikoo Place in 2016: 1Q2016 2Q2016 3Q2016 4Q2016 Taikoo Place Mid-high 40s Low-high 40s Low-high 40s Low-high 40s Except Taikoo Place redevelopment project, Swire Properties has other investment properties under development, which will provide a large additional GFA to the investment properties portfolio. GFA (Sq. Ft.) Completion Date Hong Kong - One Tai Koo Place* 1,020, Tung Chung Town Lot No , New Kowloon Inland Lot No. 6312** 555, Wong Chuk Hang Road 382, Two Tai Koo Place* 1,000, /2022 China - HKRI Taikoo Hui, Shanghai 322,315 Sq. M. From 2016 Eqv. to 3,469,000 Sq. Ft. USA - Brickell City Centre 1,967,000 To Be Determined *: One Taikoo Place and Two Taikoo Place are part of Taikoo Place redevelopment project **: Swire Properties entered into a conditional sale and purchase agreement on 28/10/2016 for the 100% attributable interest held by the company With the per square foot rent remaining stable at the current level, Taikoo Place redevelopment plan, along with the investment properties under development, which all of the investment properties under development will provide an additional aggregate 8,868,500 square foot of GFA to the current investment properties portfolio, will bring sizable, stable and recurring revenue and cash flow to the company. Property trading reserve and land reserve start to dry up: The projects in Hong Kong, as at 9/2/2017, has almost been all sold except Whitesands. (As at 9/2/2017) Saleable Area (Sq. Ft.) Total Units Units Sold Hong Kong - Mount Parker Residence * - Arrezo * - Whitesands 60, * - Alassio ** USA - Reach, Brickell City Centre 73, *** - Rise, Brickell City Centre 301, **** *: All recognised in or before 2016 **: All 197 units are expected to be recognized in 2017 ***: 347 units were recognised in 2016 and 6 units are expected to be recognised in 2017 ****: 171 units were recognised in 2016 and 14 units are expected to be recognised in 2017 Page 3 PHILLISECURITIES (HK) RESEARCH

4 The land held for development are located in USA and there is no set date for construction completion. GFA (Sq. Ft.) Completion Date USA - Fort Lauderdale, Florida 825,000 N/A - South Brickell Key, Miami, Florida 550,000 N/A - Brickell City Centre North Squared Site 523,000 N/A Swire Properties has no set date for the development of the abovementioned land. Moreover, there are about 268 units remained unsold in both Hong Kong and USA, Therefore, without starting the development of the abovementioned land in the land reserve, we expect that the remaining 268 units unsold will likely not generate enough revenue to sustain the current level of property trading income. Investment Thesis, Valuation & Risk Our valuation model suggests a target price of HK$25.55: Swire Properties has achieved strong result in its property investment segment despite having lost some rental income due to the redevelopment of several of its major commercial buildings. We are also optimistic towards the future property investment projects of the company in Hong Kong, which most of them will start operating in either 2017 or Therefore, a target price of HK$25.55, corresponding to a P/E and P/B of 8.73x and 0.61x, has been assigned, with a `Neutral` rating maintained. (Closing price as at 24 Mar 2017) Downside Risks (1): Retail sales in Hong Kong continues to fall (2): Downturn in property industry for both Hong Kong and USA (3): Rent of new investment properties worse than expected Page 4 PHILLISECURITIES (HK) RESEARCH

5 Financials FYE FY2014 FY2015 FY2016 FY2017F FY2018F Valuation Ratios Price Earnings (P/E) Price to Book (P/B) Per Share Data (HKD) EPS Book Value Per Share Dividend Per Share Growth & Margins (%) Growth Revenue (13.0) Operating Income (5.2) 7.2 (5.8) Net Profit (23.2) (2.9) Margins Gross Profit Margin Operating Profit Margin Net Profit Margin Key Ratios ROE (%) ROA (%) Income Statement (HKD Mn) Revenue 15,387 16,447 16,792 18,452 16,049 - Cost of Goods Sold (5,176) (5,781) (6,486) (7,616) (5,825) Gross Income 10,211 10,666 10,306 10,836 10,224 - Operating Expenses (1,231) (1,381) (1,507) (1,408) (1,345) Operating Income 8,980 9,285 8,799 9,428 8,879 - Net Non-Operating Gain 2,389 6,968 8,821 9,748 9,469 Pretax Income 11,369 16,253 17,620 19,176 18,348 - Income Tax Expenses (1,646) (2,057) (2,411) (2,417) (2,450) Net Profit 9,723 14,196 15,209 16,759 15,898 Source: Company, Phillip Securities (HK) Research Estimates (Financial figures as at 24 Mar 2017) Page 5 PHILLISECURITIES (HK) RESEARCH

6 PHILL Swire Properties (1972.HK) Company report PHILLIP RESEARCH STOCK SELECTION SYSTEMS Total Return Recommendation Rating Remarks >+20% Buy 1 >20% upside from the current price +5% to +20% Accumulate 2 +5% to +20%upside from the current price -5% to +5% Neutral 3 Trade within ± 5% from the current price -5% to -20% Reduce 4-5% to -20% downside from the current price <-20% Sell 5 >20%downside from the current price We do not base our recommendations entirely on the above quantitative return bands. We consider qualitative factors like (but not limited to) a stock`s risk reward profile, market sentiment, recent rate of share price appreciation, presence or absence of stock price catalysts, and speculative undertones surrounding the stock, before making our final recommendation GENERAL DISCLAIMER This publication is prepared by Phillip Securities (Hong Kong) Ltd ( Phillip Securities ). 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7 PHILL Swire Properties (1972.HK) Company report SINGAPORE Phillip Securities Pte Ltd Raffles City Tower 250, North Bridge Road #06-00 Singapore Tel : (65) Fax : (65) Website: HONG KONG Phillip Securities (HK) Ltd Exchange Participant of the Stock Exchange of Hong Kong 11/F United Centre 95 Queensway Hong Kong Tel (852) Fax (852) Websites: INDONESIA PT Phillip Securities Indonesia ANZ Tower Level 23B, Jl Jend Sudirman Kav 33A Jakarta Indonesia Tel (62-21) Fax (62-21) Website: THAILAND Phillip Securities (Thailand) Public Co. Ltd 15th Floor, Vorawat Building, 849 Silom Road, Silom, Bangrak, Bangkok Thailand Tel (66-2) / Fax (66-2) Websitewww.phillip.co.th UNITED KINGDOM King & Shaxson Capital Limited 6th Floor, Candlewick House, 120 Cannon Street, London, EC4N 6AS Tel (44-20) Fax (44-20) Website: MALAYSIA Phillip Capital Management Sdn Bhd B-3-6 Block B Level 3 Megan Avenue II, No. 12, Jalan Yap Kwan Seng, Kuala Lumpur Tel (603) Fax (603) Website: JAPAN PhillipCapital Japan K.K. Nagata-cho Bldg., 8F, Nagata-cho, Chiyoda-ku, Tokyo Tel (81-3) Fax (81-3) Website: CHINA Phillip Financial Advisory (Shanghai) Co. Ltd No 436 Hengfeng Road, Greentech Unit 604, Postal code Tel (86-21) Fax (86-21) Website: FRANCE King & Shaxson Capital Limited 3rd Floor, 35 Rue de la Bienfaisance Paris France Tel (33-1) Fax (33-1) Website: UNITED STATES Phillip Futures Inc 141 W Jackson Blvd Ste 3050 The Chicago Board of Trade Building Chicago, IL USA Tel Fax AUSTRALIA PhillipCapital Australia Level 12, 15 William Street, Melbourne, Victoria 3000, Australia Tel (613) Fax (613) Website: