Swire Properties (1972.HK)

Transcription

1 INSTITUTIONAL EQUITY RESEARCH Swire Properties (1972.HK) Investment Property Sector Giant Hong Kong Property Company report 8 December 2016 High Quality Commercial & Retail Complex Swire Properties mainly engages in the investment property sector. In the 2015 financial year, investment property business contributes to about 65% of the total revenue. Swire Properties possesses large commercial and retail complex for leasing in the CBDs of Hong Kong. Well known commercial and retail complex includes Pacific Place, Cityplaza and Taikoo Place, which the commercial property leasing business in these complex achieves an occupancy rate of above 90% across years and in some cases, achieves 99% occupancy rate regularly. In particular, retail property leasing business in these complex regularly achieves 100% occupancy rate across years. The recent turbulent environment in global economy, caused by a variety of factors such as Brexit, would potentially place the investment property sector in pressure. However, we expect the effect of such environment on Swire Properties would be limited despite the fact that investment property business contributes to about 65% of the total revenue. Commercial & Retail Properties Expiry Profile Neutral CMP: HKD (Closing price as at 6 Dec 2016) TARGET: HKD (+4.66%) COMPANY DATA O/S SHARES (MN) : 5,850 MARKET CAP (HKDMN) : 131, WK HI/LO (HKD): 24.00/18.78 SHARE HOLDING PATTERN, % Swire Pacific Limited 82.00% PRICE PERFORMANCE, % 1M 3M 1Y Swire Properties (2.38) HIS 0.00 (4.67) 2.80 PRICE VS. HSI Source: Phillip Securities (HK) Research Source: Interim Report 2016, Swire Properties According to the diagram above, Swire Properties has long term leases in both its retail and commercial properties leasing businesses. The leases expiring in 2016 contribute to less than 10% of the total leases in both commercial and retail leases. On the other hand, the leases expiring in 2018 or later contribute to 76.3% and 63.2% in commercial property leases and retail property leases respectively. The long term leases in both retail property and commercial property guarantee Swire Properties to have stable income, and potentially higher income in the form of turnover rent, despite the current and future economic environment. KEY FINANCIALS HKD Mn FY14 FY15 FY16E FY17E Net Sales 15,387 16,447 16,194 14,627 Net Profit 9,723 14,196 14,038 12,020 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 Besides, the tenants of the retail and commercial properties are well diversified into different sectors. As at June 2016, both commercial and retails tenants can be broadly categorized into 7 different sectors and no single sectors contributes to more than 30%. Moreover, the top ten tenants in commercial and retail sectors contribute to 21% and 25% of the GFA of the investment properties respectively. These imply that Swire Properties` investment property business is less likely to be affected by a systematic downturn in one client as well as one segment, allowing the company to generate stable income each year. Retail Tenants by Industry Commercial Tenants by Industry Source: Interim Report 2016, Swire Properties Popular Premier Apartment Developer Swire Properties has strong presence in the premier apartment development sub-sector. Currently, Swire Properties has a number of projects in Hong Kong, China and USA. In particular, the two Hong Kong projects on pre-sales, Arezzo and Alassio, have majority of the apartments sold, and the revenue from the sales are expected to be recognised in 2016 or 2017 gradually. Sales Status of Constructed Flats Source: Data from Interim Report 2016, Swire Properties Page 2 PHILLISECURITIES (HK) RESEARCH

3 Besides, the projects in USA, Reach and Rise, have about 67% of the flats sold. In particular, Rise is expected to be completed in 2H2016 and the revenue arising from the pre-sale of Reach and Rise is expected to be recognised in 2016 or Swire Properties has switched the property development focus to Miami, USA. The company currently holds three land in Miami, with a total GFA of 1,898,000 square foot. Future Outlook In 1H2016, investment property business of Hong Kong, both commercial and retail segments, contribute to about 55% of the total revenue in the half year period. At the same time, they also contribute to about 81% of the total revenue of the entire investment property segment`s revenue. As shown from the graph below, we can see that Swire Properties`s investment property in Hong Kong are all high quality properties, with above market average yield. Yield of 1972`s Commercial Property vs Average Yield of HK Grade A Office Space Source: Data from Interim Report 2016, Swire Properties & Rating and Valuation Department Yield of 1972`s Retail Property vs Average Yield of HK Retail Space Source: Data from Interim Report 2016, Swire Properties & Rating and Valuation Department Page 3 PHILLISECURITIES (HK) RESEARCH

4 The better than average yield is mainly caused by the excellent location of the investment properties, which are all located in the CBD area in Hong Kong, such as Admiralty, and Taikoo. At the same time, these investment properties are well served by the surrounding infrastructure such as the service apartment built and managed by Swire Properties, with GFA of 546,467 square feet and an occupancy rate of 84%. Swire Properties has announced a redevelopment plan for Taikoo Place, which two new office building, each with a GFA of 1,000,000 square foot, will be completed in 2018 and The investment properties business of Swire Properties in China is also growing rapidly. Currently, Swire Properties`s investment property business in China generates an impressive yield of 6.02%. Moreover, the HKRI Taikoo Hui in Shanghai is expected to be completed in 2017, and the project will provide additional GFA of 3,079,222 square foot, increasing Swire Properties`s total GFA in China by 41%, from the current GFA of 7,557,355 square foot to 10,636,577 square foot. The project Brickell City Centre in USA is also under development and gradually put into use. The total GFA provided by Phase 1 and Phase 2 of the project are 4,617,000 square foot and 6,584,000 square foot respectively. This project, along with Taikoo Place redevelopment and the Taikoo Hui project, is expected to provide sizable revenue to Swire Properties in the future. Turning to property development business, we expect the weight of the property development segment has on the total revenue will gradually decrease due to the fact that Swire Properties has limited land in the land bank as well as limited number of projects under development globally. Financial Outlook According to the chart below, the gross margin and EBITDA margin of Swire Properties have a decreasing trend across years. This is caused by the increasing contribution of revenue by the property development business. As shown from the chart below, as the contribution of the property development segment to total revenue increases, the gross margin and EBITDA margin decreases. Profit Margins and Their Relationship with Other Business Segment Source: Thompson Reuters Eikon Page 4 PHILLISECURITIES (HK) RESEARCH

5 The reason is property development is a capital intensive business and involves large number of workers and raw material, hence large cost. On the other hand, investment property is mainly a business with large initial outflow, followed by upgrade, which are usually recognised as capital expenditure instead of as cost of sales on income statement. Therefore it does not affect gross margin and EBITDA margin significantly. Since we expect the weight of property development business to get smaller gradually, we expect the gross margin and EBITDA margin will start going back up in the next few years, after the intense recognition of pre-sold properties in both Hong Kong and USA in 2H2016 and Valuation The peer engaging intensively in the investment property sector has an average P/E, P/B and P/S of 8.04x, 0.79x and 7.59x. Therefore, the target price for Swire Properties is set at $23.60, with the neutral rating. (Closing price as at 6 Dec 2016) Valuation Multiple across Years Source: Bloomberg Risk Systematic downturn of property industry Delay in completion of Brickell City Centre and Taikoo Place redevelopment Page 5 PHILLISECURITIES (HK) RESEARCH

6 Financials FYE F 2017F 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 (8.0) (1.5) (9.7) Operating Income (10.2) (4.4) Net Profit (33.7) (23.2) 46.0 (1.1) (14.4) Margins Gross Profit Margin Operating Profit Margin Net Income Margin Key Ratios ROE (%) ROA (%) Income Statement (HKD Mn) Revenue 12,935 15,387 16,447 16,194 14,627 - Cost of Goods Sold (3,531) (5,176) (5,781) (5,652) (4,551) Gross Income 9,404 10,211 10,666 10,542 10,076 - Operating Expenses (1,117) (1,175) (1,575) (1,341) (1,281) Operating Income 8,287 9,036 9,091 9,201 8,795 - Net Non-Operating Gain 5,712 2,333 7,162 5,963 4,903 Pretax Income 13,999 11,369 16,253 15,164 13,698 - Income Tax Expenses (1,344) (1,646) (2,057) (1,127) (1,677) Net Profit 12,655 9,723 14,196 14,038 12,020 Source: Company, Phillip Securities (HK) Research Estimates (Financial figures as at 6 Dec 2016) Page 6 PHILLISECURITIES (HK) RESEARCH

7 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 ). By receiving or reading this publication, you agree to be bound by the terms and limitations set out below. 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