EUR 850.00 For Business Accounts Only

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, close to 70% of the group’s earnings are moaty and resilient, underpinning the group’s recurring income. These businesses are Swire Properties' flagship investment properties in Hong Kong; one of two Coca-Cola bottlers in China with Swire Beverages, and Haeco’s aviation maintenance. However, the steady businesses are offset by more cyclical and capital-intensive divisions in Cathay Pacific and Swire Pacific Offshore, or SPO. Both division’s high level of operating leverage magnified losses in recent years as revenue at Cathay Pacific was pressured from competition and profit from poor fuel hedges, while SPO saw sharp decline in demand and charter rates as oil prices weakened. As such, return on invested capital was dragged below the group’s cost of capital. We expect organic growth to lift profitability in the medium term.Swire Properties, Beverages, and Cathay Pacific are the core earnings drivers in the medium term. All three divisions are exposed to the rising income and consumption theme in the region. Swire Properties’ five retail malls are located in Tier 1 cities, where income and consumption are at a higher relative to Tier 2 and 3 cities. The completion of two malls in the near term will also increase gross floor area by 10% by 2020. In its core market of Hong Kong, gross floor office will rise 10% as the projects under development are completed by 2023, maintaining the group’s strong position in the Hong Kong office market. We expect volume and price growth for the beverages division to sustain in the medium term with benefit from a realignment of geographies in China continuing to flow through. Growth is supported by further investments in distribution centres and manufacturing facilities. Rising consumption has also underpinned travel demand in the region, though airlines have matched the rising demand with additional capacity. For Cathay Pacific, we expect pressure on passenger yields to be offset by higher load factors in the medium term.