EUR 850.00 For Business Accounts Only

Morningstar | Swire Pacific is awaiting a turnaround in marine services and Cathay Pacific.

As the firm is a conglomerate, Swire Pacific's earnings are dictated by the performance of its various divisions. While each division faces widely different competitive environments, 45%-50% of the group's earnings are resilient, as they come from businesses with sustainable economic moats. We identify these businesses as Swire Properties' flagship investment properties in Hong Kong; Haeco's aviation maintenance, repair, and overhaul, or MRO, business; and Swire Beverages' Coca-Cola bottling operation. Certain divisions, Cathay Pacific and Swire Pacific Offshore, are extremely capital-intensive and can have a significant impact on the group's capital and cash flow during a cyclical downturn, resulting in a sharply lower return on invested capital. Because less than half of the operating income comes from businesses with economic moats, and because of the capital intensity of certain divisions, we believe that Swire Pacific as a group does not enjoy an economic moat. Swire Pacific's major divisions are listed entities, including Swire Properties, Cathay Pacific, and Haeco. Collectively, they account for 70% of the group's earnings. After partially spinning off the group's crown jewel, Swire Properties, in 2011, Swire Pacific has morphed from an operating company to a holding company. While both Swire Pacific and Swire Properties have similar turnover velocities, Swire Pacific has a free-float-adjusted market capitalisation that is twice as large. Hence, some degree of investor interest is driven by the relative liquidity of Swire Pacific shares. While Swire Pacific has not disposed of any shares in Swire Properties, should such a disposal occur in the future, the holding-company discount is likely to widen.