Morningstar | Reverting back to rental, 3Q spin-off lacking progress
Ahead of the 2018 full-year results, we adjusted our model to reflect the lack of clarity about the spin-off of the third-quarter business and lack of asset disposal. Assuming there is a slower ramp up of the third-quarter business and newly completed assets will be positioned for rental instead of disposal, we reduce our fair value estimate from HKD 4.10 to HKD 3.40, and our no-moat rating is unchanged.The company’s main business is leasing offices in Beijing and Shanghai and this should remain resilient. However, the increasing office space in both cities will put pressure on the brand portfolio’s rental income. The fully completed Gubei SOHO, outside the central business district, is likely to see slower take up. Along with SOHO Leeza, expected to be completed in 2019, it will generate lower rental income compared with assets disposed earlier.
When it comes to the third-quarter business, the company has yet to provide specific information about the profitability of the operation. The lack of disclosure of information indicates a potential spin-off is still a long way off. The company’s plan to reach 50,000 seats in 2018 and long-term goal of 170,000 seats may be overly optimistic. Given the lack of visibility of a spin-off in the third quarter, the company is reverting back to landlord mode. With its current portfolio of assets, there is no strong earnings driver in the short term.
Soho China is engaged in property development and property investments. Co. operates within three segments: completed projects held for sale; completed investment properties; and projects under development.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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