9/F, 10 Des Voeux Road Central, Hong Kong. Dealing: 2308 8200 Research: 3608 8096 Facsimile: 3608 6113 HONG KONG RESEARCH Analyst: Carmen Wong 17 th March 2015 THE WHARF (HOLDINGS) LIMITED ( 九龍倉 ) Sector : Conglomerates Chairman : Peter WOO Kwong-ching HKSE Code : 00004 Market Price : HK$49.75 (17/03/2015) Deputy Chairman & : Stephen NG Tin-hoi HSI : 23,901.49 (17/03/2015) Managing Director Shares Issued : 3,031.0 million Market Cap. : HK$150,794 million 52-week Hi / Lo : HK$63.90 / HK$46.35 SUMMARY OF THE FINAL RESULTS FOR THE YEAR ENDED 31 ST DECEMBER 2014 Final Results Highlights HK$ million HK$ million Change Turnover 38,136 31,887 19.6% Operating profit 14,283 13,280 7.6% Increase in fair value of investment properties 28,293 18,739 51.0% Finance costs (1,930) (552) 249.6% Share of results after tax of associates 1,262 2,207 (42.8%) Profit attributable to shareholders 35,930 29,380 22.3% Earnings per share (HK$) 11.86 9.70 22.3% Final dividend per share (HK$) 1.26 1.20 5.0% Total dividend per share (HK$) 1.81 1.70 6.5% Wharf ( the Group ) reported a 22.3% year-on-year increase in net profit for the year ended 31 st December 2014, mainly boosted by higher fair value gains from investment properties. Stripping out i) revaluation gain of investment properties; ii) impairment provisions against its development projects in China and iii) disposal gains of investment properties, the Group s underlying profit declined by 7.3% year-on-year to HK$10,474 million. The results missed market estimates on lower-thanexpected profit margin of its China property development business. Revenue grew 19.6% year-on-year to HK$38.14 billion, driven by higher rental income (+20.3% yearon-year) as well as property sales (+35.0% year-on-year). Share of results of associates and jointly controlled entities tumbled by 42.8% year-on-year to HK$1,262 million in 2014, mainly attributable to a significant drop in profit contributions from its property development projects in China with lower profit margin. Earnings per share (EPS) leaped 22.3% year-on-year to HK$11.86/ share. The Group slightly lifted its final dividend from HK$1.20/ share in 2013 to HK$1.26/ share in 2014. Together with the interim dividend of HK$0.55/ share (2013: HK$0.5/ share), its full-year dividend rose 6.5% year-on-year to HK$1.81/ share, representing payout ratio of 15.3% (2013: 17.5%). As at 31 st December 2014, Wharf s net debt increased by HK$1.2 billion to HK$59.3 billion from a year ago (as at 30 th June 2014: HK$59.8 billion), comprising of HK$78.0 billion in debts and HK$18.7 billion in bank deposits and cash. Nonetheless, its balance sheet remained healthy, with a relatively low net debt to equity ratio of 18.9% (at the end of June 2014: 20.6%). This report has been prepared solely for information purposes and we, East Asia Securities Company Limited are not soliciting any action based upon it. Neither this document nor its contents shall be construed as an offer, invitation, advertisement, inducement or representation of any kind or form whatsoever. This document is based upon information, which we consider reliable, but accuracy and completeness are not guaranteed. Opinions expressed herein are subject to change without notice. At the time of preparing this report, we have no position in securities of the company or companies mentioned herein, while other Bank of East Asia Group companies may from time to time have interests in securities of the company or companies mentioned herein.
Turnover breakdown by business segments: HK$ million % HK$ million % Change Property investment Hong Kong 11,413 29.9% 9,872 31.0% 15.6% China 1,984 5.2% 1,261 4.0% 57.3% 13,397 35.1% 11,133 34.9% 20.3% Property development Hong Kong 113 0.3% 72 0.2% 56.9% China 15,426 40.4% 11,442 35.9% 34.8% 15,539 40.7% 11,514 36.1% 35.0% Hotel 1,600 4.2% 1,526 4.8% 4.8% Logistics 3,319 8.7% 3,226 10.1% 2.9% Communications, media & entertainment 3,616 9.5% 3,789 11.9% (4.6%) Inter-segment revenue (370) -1.0% (353) -1.1% 4.8% Segment total 37,101 97.3% 30,835 96.7% 20.3% Investment & others 1,035 2.7% 1,052 3.3% (1.6%) Group total 38,136 100.0% 31,887 100.0% 19.6% Operating profit breakdown by business segments: HK$ million % HK$ million % Change Property investment Hong Kong 9,905 69.3% 8,507 64.1% 16.4% China 991 6.9% 761 5.7% 30.2% 10,896 76.3% 9,268 69.8% 17.6% Property development Hong Kong 93 0.7% 68 0.5% 36.8% China 1,669 11.7% 2,565 19.3% (34.9%) 1,762 12.3% 2,633 19.8% (33.1%) Hotel 387 2.7% 377 2.8% 2.7% Logistics 1,051 7.4% 974 7.3% 7.9% Communications, media & entertainment 211 1.5% 212 1.6% (0.5%) Segment total 14,307 100.2% 13,464 101.4% 6.3% Investment & others 714 5.0% 750 5.6% (4.8%) Corporate expenses (738) (5.2%) (934) (7.0%) (21.0%) Group total 14,283 100.0% 13,280 100.0% 7.6% Property Investment: Revenue from property investment segment increased by 20.3% to HK$13,397 million from a year ago, as rental income from Hong Kong and China achieved solid growth of 15.6% and 57.3% year-on-year respectively. Rental margin in Hong Kong slightly expanded by 61 basis points year-on-year to 86.8%, whereas rental margin in China contracted by 10.4 percentage points year-on-year to 50.0% due to higher start-up costs for its newly opened Chengdu International Finance Square ( IFS ). Despite i) the anti-extravagance campaign in China, ii) strong Hong Kong dollar compared to other foreign currencies as well as iii) the Occupy Central Movement in 4Q14, turnover from Harbour City marked solid growth of 14% year-on-year to HK$8,096 million, with operating profit also up 14% year-on-year. Turnover from the retail section of Harbour City soared 16% year-on-year to HK$5,674 million on positive rental reversions, while the total retail sales of the mall rose 3.4% to its record high of HK$35 billion. On the other hand, turnover of its office segment grew 13% year-on-year to HK$2,121 million on positive rental reversions as well as an improvement of occupancy rate from 95% in 2013 to 98% in 2014. Turnover from serviced apartments marginally declined by 1.3% from a year ago to HK$301 million. Occupancy rate stood at 87%, against 88% as of December 2013. 2
Following the completion of renovation of the mall of Times Square in 2013, turnover and operating profit gained remarkably by 21% year-on-year to HK$2,544 million and 24% year-onyear to HK$2,276 million respectively. Turnover from the retail section of Times Square surged by 26% to HK$1,883 million with retail sales of the shopping mall up 11% year-on-year to its record high of HK$10.5 billion. The mall was fully let at the end of December 2014, same as that at the end of 2013. Turnover of its offices rose 9% year-on-year to HK$661 million, on the back of positive rental reversion and an improvement in its occupancy rate. Occupancy rate of its office segment stood at 98% (as of December 2013: 95%). In China, revenue jumped 57.3% year-on-year to HK$1,984 million, attributable to higher contributions from Shanghai Wheelock Square and the newly-opened Chengdu IFS. The Group completed and delivered Phase 1 of Chengdu IFS in 1H14, and scheduled its full completion by the end of this year. Property Development: Revenue from property development posted decent growth of 35.0% yearon-year to HK$15,539 million, mainly driven by the property development in China (+34.8% year-onyear to HK$15,426 million). In China, 1,662,000 square metres of GFA was completed and recognized in 2014 (+35.3% year-on-year), including i) Times City in Suzhou; ii) Ambassador Villa in Suzhou and iii) International Community in Chongqing. Contracted sales in 2014 modestly increased by 2.9% year-on-year to HK$21.5 billion, but fell short of its annual sales target of HK$23 billion. In addition, operating margin slipped from 22.4% in 2013 to 10.8% in 2014, due to booking of projects with lower average selling prices. Hotel: Revenue of the hotel segment was slightly up by 5.0% year-on-year, as the occupancy rate of three Marco Polo hotels in Hong Kong improved from 85% as at 31 st December 2013 to 89% as at 31 st December 2014, with a 10% year-on-year increase in average room rate. Logistics: Revenue and operating profit of the logistic segment grew steadily by 2.9% and 7.9% year-on-year respectively, amid the continued economic recovery in the US and Europe. The Group s throughput in Hong Kong was 5.4 million TEUs (twenty-foot equivalent unit), compared to 5.5 million TEUs in 2013. In China, throughput at Da Chan Bay Terminal One in Shenzhen and Taicang International Gateway in Suzhou increased by 25% and 23% year-on-year to 1.3 million TEUs and 1.8 million TEUs respectively. Communications, Media and Entertainment: The segment revenue declined 4.6% from a year earlier, mainly attributable to i-cable (-14% year-on-year) on lower subscription and advertising income, amid intense market competition and weak local consumption. Operating profit of the segment fell 0.5% from a year ago to HK$211 million, as the net loss of i-cable widened from HK$93 million in 2013 to HK$139 million in 2014. Outlook & Prospect Hong Kong investment properties: The outlook of Hong Kong retail sales will likely turn challenging in 2015, amid i) slowing economic growth in China with less spending by tourists; ii) slowing growth in Hong Kong which dents local consumption; iii) strong Hong Kong dollar against other foreign currencies, which encourages visitors going to other countries such as Korea and Japan instead of Hong Kong; and iv) increasing political and social tension between local Hong Kong people and Mainland tourists. In January 2015, retail sales at Harbour City and Times Square fell 4.6% and 9.7% year-on-year respectively. Nonetheless, Management expected a 30% to 50% positive rental reversion for its Hong Kong malls this year, which would increase the occupancy cost to sales ratio to 20% or more, against 16.2% of Harbour City and 17.9% of Times Square in 2014. 3
China investment properties: Its five IFSs in China namely i) Chengdu IFS (full completion by end of 2015); ii) Chongqing IFS (to be delivered in 2016); iii) Changsha IFS (in phases from 2016); iv) Wuxi IFS (to be delivered in 2016) and v) Suzhou IFS (to be delivered in 2017), will be the key driver of the Group s rental income in China for the coming years. For Chengdu IFS, Management held a rather positive stance on its retail rental income, which is anticipated to grow from RMB483 million in 2014 and RMB600 million in 2015. Yet, office leasing may see slower growth, as only one-third of the office space of Tower 1 was committed as of December 2014, whereas Tower 2 will be launched for leasing in 2Q15. Separately, Chongqing IFS, a 50:50 joint venture with China Overseas Land, will be the Group s next new large-scale mall in China following Chengdu IFS. Retail pre-leasing activities of Chongqing IFS have seen good progress, with over 50% of the floor space currently under final negotiation with tenants. Development properties: The Group remained relatively cautious on the China property market and set its contracted sales target of HK$22 billion for 2015, against its actual contracted sales of HK$21.5 billion in 2014. For the first 2 months of 2015, Wharf only recorded contracted sales of less than RMB2 billion (vs. RMB2 billion achieved in 2M14), representing less than 10% of its 2015 sales target. Additionally, China development margin will likely continue under pressure in 2015. Valuation: The current valuation of Wharf shares is undemanding, as the counter is trading at 50.8% NAV discount to 2015E NAV (vs. the long-term average of 34% discount) and 0.49x 2015E P/B (vs. the long-term average of 0.75x). However, in view of potential margin squeeze of property development in China and the cautious outlook for Hong Kong retail market, we recommend Neutral on Wharf. Downside risks include weaker-than-expected rental performance and property prices, as well as any significant delays in China property project completions. Recommendation: Neutral 4
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