EUR 850.00 For Business Accounts Only

Morningstar | Soho China Interim Core Earnings in Line, but Rental Income Growth Weak

Soho China reported half-year 2017 results in line with our expectations. Excluding revaluation gain and disposal gain, core earnings were estimated to be CNY 129 million, compared with our full-year estimate of CNY 240 million. For the rental segment, performance was subdued, with turnover and gross profit up 4% and down 1% year on year, respectively. The spin-off of the 3Q business is expected to be the next driver to unlock value in the company. However, the company did not separately disclose the profit and loss of the business segment. We maintain our fair value estimate of HKD 4.10 and the company's no-moat rating is unchanged.

Excluding two assets disposed of during the past year, rental turnover was up 17% year on year, with the ramp-up of Soho Tianshan Plaza accounting for bulk of the increase. Removing that, mature assets recorded turnover up 6% from a year ago, and gross profit was down 1% year on year as the margin compressed from 80% to 76%. The company indicated large positive spot rate changes at most of its mature assets, indicating strong rental reversions. The company did not disclose the amount of floor space in its buildings that are taken up by Soho 3Q. We believe the fit-out expenses related to the business could be attributed to the margin compression while spot rents grew strongly.

The entire portfolio had an occupancy rate of 97% at end of the period, unchanged from year-end 2017. During the period, the company completed the disposal of Soho Sky in April 2018. The company intends to dispose one more asset, Soho Tianshan Plaza, but no update on the timing.

The company did not separately disclose the revenue and profit of 3Q. The average occupancy rate has further improved to 88%, from 87% seen at year-end 2017. The uptake is higher than our expectation of a 70%-75% occupancy rate. However, we are cautious about the sustainability of this occupancy level. For comparison, occupancy rates at mature Regus centers tend to reach a high of 85%-86% during the peak of an economic cycle. By the end of the period, the company rolled out 30,400 seats in 31 Soho 3Q centers, up from 26,000 at year-end. One positive data point is that most of the leases are with large clients taking up 100 seats or more, accounting for 56% of the revenue. Further, lease terms of between six and 12 months accounted for 46% of the revenue. However, short lease terms of less than one month also accounted for 40% of the revenue.