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Morningstar | In-Line Interim for Swire, With Modest Rental Growth Offsetting Lower Property Trading Earnings

For interim 2018, Swire Properties reported adjusted core earnings of HKD 3.7 billion, down 19% year on year due to a lower contribution from property trading. The interim core earnings were in line at about 47% of our full-year estimate. The company booked a gain of HKD 2.5 billion on the finalization of the disposal of the Kowloon East office project. Adjusted underlying earnings per share amounted to HKD 0.64, down 19% from the year-ago period. The company declared an interim dividend of HKD 0.27 per share, up 8% year on year. Overall, rental income and earnings were up 8% and 6% year on year. The top-line growth was attributed to the better-performing China retail assets and the recovery of Hong Kong retail assets, with the slightly lower margin reflecting the impact of tenant optimization. Earnings from property development were insignificant as the company has few projects in the pipeline. We make no changes to our narrow economic moat rating or our HKD 30 fair value estimate.

Total revenue and adjusted core earnings were down 37% and 19% year on year, respectively. On the property investment side, gross rental income totaled HKD 6 billion, up 8% from a year ago. The turnover from the office portfolio edged up 3%, while retail assets showed turnover up 13%. Contributions from the property trading side was negligible, especially comparing against the completion of Alassio project in Hong Kong a year ago. Net gearing edged lower to 11.1% from 13.6% at year-end. The lower gearing was attributed to the completion of the Kowloon East office project disposal, the deposit for the sale of Cityplaza Three and Four, and a large revaluation gain, offsetting the impact of a thin property sales pipeline and higher capital expenditures related to the Taikoo Place redevelopment in Hong Kong and the acquisition of the Qiantan project in Shanghai.

The Hong Kong office portfolio maintained full occupancy rate with slightly higher turnover during the period. The company expects the Hong Kong office market to remain firm due to limited supply in the Central District. It projects higher rent at Pacific Place and resilient rent at Island East. During the first half, Pacific Place saw positive rental reversion of 25% on a small amount of lease expiry. Taikoo Place had large amount of lease expiry but only saw 5% positive rental reversion. We expect gains from rental reversions to be modest in the near term, with the top line mainly driven by the completion of Taikoo Place in late 2018. That building is currently 90% preleased.

On the retail side, the Hong Kong portfolio maintained 100% occupancy with rental turnover up 4% year on year, attributed to higher turnover from Cityplaza, with The Mall at Pacific Place being flat. With lease expiry of 9% and 26%, respectively, in the second half of 2018 and 2019 by current rental turnover, we expect to see better top-line growth in 2019. A sustained recovery in retail sales at tourist-driven Pacific Place and Citygate (up 22% and 9% for the first half of year) should result in some moderate positive rental reversions.

In China, rental turnovers were 19% higher year on year. Excluding the impact of currency movement, better-performing retail assets led to a top-line increase of 10%. Most mature assets saw retail sales up 10%, in line with the overall market. New assets such as Taikoo Li Chengdu and HKRI Taikoo Hui continue to ramp up, but the company did not disclose their rental income separately.