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, or SPO, are extremely capital-intensive and the high level of operating leverage can have a significant impact on the group's earnings, as losses are magnified during a cyclical downturn. This was the case in recent years as lower oil prices reduced demand for charters for the Offshore division, while competitive pressure and an adverse oil hedge hampered earnings at Cathay Pacific. We continue to forecast losses for SPO as oil prices need to be sustained over a period of time before oil majors invest in offshore projects. Swire Pacific's major divisions are listed entities, including Swire Properties and Cathay Pacific. HAECO was privatised at the end of 2018. Both Swire Properties and Cathay Pacific 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.Swire Pacific is a holding company. Co. operates in five divisions: property, which is engaged in developing, owning and operating mixed-use, principally commercial properties in Hong Kong and Mainland China; aviation, which comprises investments in the Cathay Pacific group and the Hong Kong Aircraft Engineering Company group; beverages, which manufactures, markets and distributes refreshing soft drinks; marine services, which invest in vessels and equipment and develop its services with a view to providing offshore support to the global oil and gas industry; and Trading & Industrial, which markets and sells internationally branded goods to consumers.
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