China / Hong Kong Company Guide Version 6 Bloomberg: 1972 HK Equity Reuters: 1972.HK Refer to important disclosures at the end of this report DBS Group Research. Equity 23 Mar 2017 BUY Last Traded Price (16 Mar 2017):HK$24.50 (HSI : 24,288) Price Target 12-mth: HK$26.70 (9% upside) Potential Catalyst: Higher office rents in Central & Island East Where we differ: Market has slightly higher earnings estimate for FY17 Analyst Jeff YAU CFA, +852 2820 4912 jeff_yau@dbs.com Andy YEE CFA, +852 2971 1773 andyyee@dbs.com What s New Strong office demand in Admiralty & Island East to support rental income growth amid a muted retail market New completed HKRI Taikoo Hui in Shanghai to augment retail income from China BUY with HK$26.7 TP Price Relative 29.1 HK$ Relative Index 221 201 Growing rental income stream Inexpensive valuation. We recommend investors to BUY Swire Properties. The stock, trading 39% below our appraised current NAV, is inexpensive given sound earnings quality. Improving rental income, better earnings quality. Positive rental reversion continues to work its way through its office portfolio. Office rents at Pacific Place should be well supported given tight vacancy and limited new supply in Central. Its Island East office portfolio stands to benefit from ongoing office decentralization. Portfolio expansion in Hong Kong, Shanghai and the US should further augment rental income growth, thus enhancing earnings quality. Beneficiary of major infrastructural development. Swire Properties key rental assets should benefit from improving infrastructural development in the long term. Admiralty MTR Station, where Pacific Place stands above, is set to become a transportation hub after the completion of Shatin-Central Link. Central Wanchai Bypass would significantly shorten travelling time to Island East - where the company has heavy office exposure - when completed in late 2018 or early 2019.. 27.1 181 161 25.1 141 23.1 121 21.1 101 19.1 81 17.1 61 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 (LHS) Relative HSI (RHS) Forecasts and Valuation FY Dec (HK$ m) 2015A 2016A 2017F 2018F Turnover 16,447 16,792 18,759 13,777 EBITDA 9,453 9,296 10,324 8,610 Pre-tax Profit 8,370 8,312 9,268 8,669 Underlying Profit 7,078 7,112 7,778 7,477 EPS (HK$) 1.21 1.22 1.33 1.28 EPS Gth (%) (1.0) 0.5 9.4 (3.9) PE (X) 20.2 20.2 18.4 19.2 P/Cash Flow (X) 13.5 13.3 10.8 17.7 EV/EBITDA (X) 19.1 19.4 17.5 20.9 DPS (HK$) 0.71 0.71 0.71 0.71 Div Yield (%) 2.9 2.9 2.9 2.9 Net Gearing (%) 15 16 14 13 ROE (%) 3.3 3.2 3.4 3.1 Est. NAV (HK$): 40.4 41.1 Disc. to NAV (%) (39) (40) Earnings Rev (%): (0) 2 Consensus EPS (HK$): 1.41 1.30 Other Broker Recs: B: 10 S: 2 H: 4 Valuation: Our TP for is based on a target discount of 35% to our Dec2017 NAV estimate. Key Risks to Our View: Any deterioration in leasing demand for commercial properties in Hong Kong could drag its earnings and share price performance. Any interest rate hike would lead to capitalisation rate expansion and in turn adversely affect its valuation. At A Glance Issued Capital (m shrs) 5,850 Mkt. Cap (HK$m/US$m) 143,325 / 18,456 Major Shareholders Swire Pacific (%) 82.0 Free Float (%) 18.0 3m Avg. Daily Val. (US$m) 5.4 ICB Industry : Financials / Real Estate Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX ed- JS / sa- CW
CRITICAL DATA POINTS TO WATCH Earnings Drivers: Positive rental reversion working its way through office portfolio. Pacific Place Offices were fully leased in Dec-16. Spot rate for One and Two Pacific Place improved to HK$115-135psf in Dec-16 from HK$110-130psf in Sep-16 while that for Three Pacific Place stayed at HK$100-105psf. Healthy rental reversion of 14% was recorded upon renewals or new lettings in 2016. The Island East Office portfolio was 98-10 let in Dec-16. Cityplaza and Taikoo Place registered rental reversions of 9% and 15% respectively in 2016, while that for One Island East was much stronger at 29% during the same period. Office rents at Pacific Place should be well supported given tight vacancy and limited new supply in Central. Its Island East office portfolio stands to benefit from ongoing office decentralization. Slowdown in retail sales at the Mall at Pacific Place and Citygate Outlet Mall stabilizing. Retail sales declines at The Mall at Pacific Place and Citygate Outlet Mall showed signs of stabilising in 2H16. Retail sales of The Mall at Pacific Place fell 12.8% in 2016. While the decline compares unfavourably with the overall retail sales decline of 8.1% for Hong Kong, it is better than the 17% recorded in 1H16. Retail sales at 2- held Citygate Outlet Mall in Tung Chung, which targets mainly tourists, dropped 8% in 2016 (1H16: 13.). Cityplaza, a regional mall in Island East, performed better than the other two, with a 3.7% retail sales decline in the corresponding period. While weaker retail sales could limit future retail reversionary growth, the footfall at The Mall, Pacific Place has been improving since the beginning of 2017 after the tenant reshuffling has been largely completed. China rental business remains a bright spot. In FY16, China rental income grew 2% to HK$2.1bn, or 6% to HK$2.6bn if the JVs, such as Sino-Ocean Taikoo Li Chengdu and INDIGO are included. The growth would have been much stronger at 12% excluding Rmb depreciation impact. All retail properties registered positive rental reversions ranging from 6% to 78% which should support future reversionary growth. Retail mall at HKRI Taikoo Hui will open for business soon. For HKRI Taikoo Hui in Shanghai, construction of the shopping mall and one of the two office towers was completed in Aug- 16. The mall will have a soft opening in May-17. Pre-leasing is progressing well with 88% of retail area being pre-committed. For office portion, 64% of space has been pre-leased with another 1 under negotiation with prospective tenants. KEY ASSUMPTION Residential price - HK (%) -1% -2% -3% -4% -5% -6% -5% -5% 2016A 2017F 2018F Office rental - HK (%) 1 9% 8% 7% 6% 5% 4% 4% 3% 2% 2% 2% 1% 2016A 2017F 2018F Retail rental (High street shops) - HK (%) -1% -3% -5% -5% -7% -9% -11% -13% -15% -15% -17% 2016A 2017F 2018F Retail rental (Shopping centre) - HK (%) 2 18% 16% 14% 12% 1 8% 6% 4% 2% 2% 2016A 2017F 2018F Source: Company, DBS Vickers Beneficiary of major infrastructural development. Swire Properties key rental assets should benefit from improving infrastructure in the long term. Admiralty MTR Station, where Pacific Place stands above, is set to become a transportation hub after the completion of Shatin-Central Link. Central Wanchai Bypass would significantly shorten travelling time to Island East - where the company has heavy office exposure - when completed in late 2018 or early 2019. Page 2
Balance Sheet: As of Dec-16, had net debt of HK$35.4bn. This puts its gearing at 15.6%. In FY16, underlying cash interest cover was 6.3x. Interest cost for 63% of its debt has been hedged which mitigates interest rate risk. The company is financially sound and well placed for making new investments. Share Price Drivers: Portfolio expansion in Hong Kong, China and the US should boost rental earnings stream, thus improving earnings quality. This should enhance the stock s valuations. Key Risks: Market risk Any further deterioration in leasing demand for retail properties in Hong Kong could drag its earnings and share price performance. Interest rate risk Any interest rate hike would lead to capitalisation rate expansion that could, in turn, adversely affect its valuation. Company Background: is a major commercial landlord in Hong Kong. It boasts a completed investment property portfolio of 12.8m sf. Key properties include Pacific Place, Taikoo Place and Cityplaza. In China, has a variety of retail-led mixed-use developments, including Taikoo Hui Sanlitun and INDIGO in Beijing, Taikoo Hui in Guangzhou, HKRI Taikoo Hui in Shanghai and Sino-Ocean Taikoo Li in Chengdu. The company develops Brickell City Centre in Miami. 18% 16% 14% 12% 1 8% 6% 4% 2% HK$m 7,000.0 6,000.0 5,000.0 4,000.0 3,000.0 2,000.0 1,000.0 0.0-1,000.0-2,000.0-3,000.0 3.5% 3. 2.5% 2. 1.5% 1. 0.5% 0. % (5) (15) (25) (35) (45) (55) (65) Jan-12 Gearing 16% 15% 16% 14% 13% 2014A 2015A 2016A 2017F 2018F Net gearing ratio Net Capital Expenditure 2014A 2015A 2016A 2017F 2018F Capital Expenditure (-) ROE 2014A 2015A 2016A 2017F 2018F Discount to NAV +2SD: -16% +1SD: -25% Average: -35% -1SD: -44% -2SD: -53% Oct-12 Aug-13 May-14 Feb-15 Nov-15 Sep-16 Discount to NAV Band HK$ 40 35-13% 30 25 20 15-23% -32% -42% -51% Jan-12 Sep-12 Apr-13 Dec-13 Aug-14 Mar-15 Nov-15 Jun-16 Feb-17 Source: Company, DBS Vickers Page 3
Key Assumptions (%) FY Dec 2017F 2018F Residential price - HK (5) (5) Office rental - HK 2 2 Retail rental (High street shops) - HK (5) 0 Retail rental (Shopping centre) - HK 0 2 Segmental Breakdown (HK$ m) FY Dec 2014A 2015A 2016A 2017F 2018F Revenues (HK$ m) Property Investment 10,456 10,857 10,902 11,493 11,889 Property trading 3,842 4,463 4,760 6,012 601 Hotels 1,089 1,127 1,130 1,254 1,287 Total 15,387 16,447 16,792 18,759 13,777 Income Statement (HK$ m) FY Dec 2014A 2015A 2016A 2017F 2018F Turnover 15,387 16,447 16,792 18,759 13,777 EBITDA 9,412 9,453 9,296 10,324 8,610 Depr / Amort (360) (345) (374) (393) (412) EBIT 9,052 9,108 8,922 9,931 8,198 Associates Inc 648 413 437 517 615 Interest (Exp)/Inc (1,199) (1,179) (1,050) (1,180) (1,310) Exceptionals 29 28 3 0 1,166 Pre-tax Profit 8,530 8,370 8,312 9,268 8,669 Tax (1,172) (1,209) (1,162) (1,400) (1,102) Minority Interest (206) (83) (38) (90) (90) Underlying Profit 7,152 7,078 7,112 7,778 7,477 Sales Gth (%) 19 7 2 12 (27) Net Profit Gth (%) 13 (1) 0 9 (4) EBITDA Margins (%) 61 57 55 55 62 EBIT Margin (%) 59 55 53 53 60 Tax Rate (%) 14 14 14 15 13 Page 4
Balance Sheet (HK$ m) FY Dec 2014A 2015A 2016A 2017F 2018F Fixed Assets 226,658 236,692 243,839 252,130 256,113 Other LT Assets 19,938 21,091 27,550 28,346 28,925 Cash & ST Invts 2,874 4,386 1,681 7,355 9,903 Other Current Assets 10,885 10,555 8,638 7,034 6,986 Total Assets 260,355 272,724 281,708 294,866 301,928 ST Debt 4,201 7,260 7,499 7,956 7,956 Creditors 7,674 8,943 7,845 8,698 7,592 Other Current Liab 519 541 279 279 279 LT Debt 32,744 30,474 29,559 33,102 33,102 Other LT Liabilities 6,670 7,557 9,301 9,301 9,301 Minority Interests 856 1,702 1,856 1,829 1,802 Shareholder s Equity 207,691 216,247 225,369 233,701 241,895 Total Cap. & Liab. 260,355 272,724 281,708 294,866 301,928 Share Capital (m) 5,850 5,850 5,850 5,850 5,850 Net Cash/(Debt) (34,071) (33,348) (35,377) (33,703) (31,155) Working Capital 1,365 (1,803) (5,304) (2,543) 1,063 Net Gearing (%) 16 15 16 14 13 Cash Flow Statement (HK$ m) FY Dec 2014A 2015A 2016A 2017F 2018F EBIT 9,052 9,108 8,922 9,931 8,198 Tax Paid (760) (1,267) (1,413) (1,400) (1,102) Depr/Amort 360 345 374 393 412 Chg in Wkg.Cap 1,403 1,039 1,495 2,906 (508) Other Non-Cash (782) (1,055) (726) (1,326) (1,556) Operating CF 9,273 8,170 8,652 10,504 5,445 Net Capex (4,943) (3,667) (6,430) (3,977) 1,642 Assoc, MI, Invsmt (1,449) (758) (371) (583) (268) Investing CF (6,392) (4,425) (6,801) (4,560) 1,374 Net Chg in Debt 2,530 2,784 4,190 4,000 0 New Capital 0 0 0 0 0 Dividend (3,771) (3,930) (4,226) (4,271) (4,271) Other Financing CF (1,256) (1,033) (4,568) 0 0 Financing CF (2,497) (2,179) (4,604) (271) (4,271) Chg in Cash 384 1,566 (2,752) 5,674 2,548 Page 5
Target Price & Ratings History HK$ 26.0 25.0 24.0 23.0 22.0 21.0 20.0 19.0 Mar-16 Apr-16 1 May-16 Jun-16 3 2 Jul-16 Aug-16 4 5 Sep-16 Oct-16 7 6 Nov-16 8&9 Dec-16 10 Jan-17 Feb-17 11 Mar-17 S.No. Date Closing 12-mth Rating Price Target Price 1: 16-May-16 HK$19.94 HK$26.00 Buy 2: 14-J ul-16 HK$21.00 HK$26.45 Buy 3: 15-Aug-16 HK$22.40 HK$26.45 Buy 4: 19-Aug-16 HK$21.60 HK$26.20 Buy 5: 22-Aug-16 HK$21.40 HK$26.20 Buy 6: 31-Oct-16 HK$22.60 HK$26.45 Buy 7: 1-Nov-16 HK$22.30 HK$26.45 Buy 8: 14-Nov-16 HK$22.05 HK$26.45 Buy 9: 14-Nov-16 HK$22.05 HK$26.45 Buy 10: 18-J an-17 HK$22.15 HK$26.70 Buy 11: 13-Mar-17 HK$23.85 HK$26.70 Buy Analyst: Jeff YAU CFA, Page 6
DBSVHK recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>2 total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >1 for large caps) HOLD (-1 to +15% total return over the next 12 months for small caps, -1 to +1 for large caps) FULLY VALUED (negative total return i.e. > -1 over the next 12 months) SELL (negative total return of > -2 over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends Completed Date: 23 Mar 2017 16:53:24 (HKT) Dissemination Date: 23 Mar 2017 17:59:38 (HKT) GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Vickers (Hong Kong) Limited ( DBSVHK ). This report is solely intended for the clients of DBS Bank Ltd., DBS Vickers Securities (Singapore) Pte Ltd. ( DBSVS ) and DBSVHK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVHK. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd., DBSVS and DBSVHK, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the DBS Group )) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. 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Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) (b) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein. Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in marketmaking. Page 7
ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate 1 does not serve as an officer of the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or his associate does not have financial interests 2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the DBS Group. COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBSVHK and its subsidiaries do not have a proprietary position in the securities recommended/mentioned in this report as of 22 Mar 2017. 2. Neither DBS Bank Ltd, DBS HK nor DBSV HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report. 3. Compensation for investment banking services: DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. 4. Disclosure of previous investment recommendation produced: DBS Bank Ltd, DBSVS, DBSVHK, their subsidiaries and/or other affiliates of DBSVUSA may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBSVHK, their subsidiaries and/or other affiliates of DBSVUSA in the preceding 12 months. 1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst. 2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant. Page 8
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DBS Vickers (Hong Kong) Limited 18 th Floor Man Yee building, 68 Des Voeux Road Central, Central, Hong Kong Tel: (852) 2820-4888, Fax: (852) 2868-1523 Company Regn. No. 31758 Page 9