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Morningstar | Swire Pacific's Focus on Organic Growth to Lift Profitability

As Swire Pacific is a conglomerate, its 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 recurring income. 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. 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. Both divisions were a drag on group return on equity in recent years. 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 Properties, Beverages, and Cathay Pacific are the core earnings drivers in the medium term. All three divisions are exposed to the rising consumption theme in the region. Swire Properties’ five retail malls are located in Tier 1 cities with two additional projects completing in 2019 and 2020. We expect volume and price growth for the Beverages division to sustain in the medium term, leading to rising profitability. A realignment of geographies will result in better operational efficiencies, supported by further investments in distribution centers and manufacturing facilities. Rising consumption has also underpinned travel demand in the region, though airlines have matched the rising demand with additional capacity. We expect load factors to remain resilient for Cathay Pacific, although the high level of competition should pressure passenger yields in the medium term.