EUR 850.00 For Business Accounts Only

Morningstar | 00004 Updated Forecasts and Estimates from 11 Sep 2018

Wharf reported core profit of HKD 2.5 billion, or 37% of our full year estimate of HKD 6.8 billion. The results are weaker than expected, mainly due to slow booking of China DP. The company declared an interim dividend of HKD 0.25 per share, a low payout ratio of 30%. The dividend amount is not comparable to that seen a year ago. We expect contract sales to pick up somewhat during the second half based on more project launches. In addition, the ramp-up of newer retail assets in China should provide a small boost to rental income. We maintain our fair value estimate of HKD 25, along with the company’s no-moat rating.

On the investment properties side, top line grew 27% while operating profit grew 21%. Margin was compressed a bit, driven by the preopening expenses associated with the ramp-up and opening of Chongqing IFS and Changsha IFS. As these new assets are not yet large contributors, Chengdu IFS accounted for the bulk of the rental incomes, at more than 40%. It remained a bright spot with revenue up more than 30% and operating profit up nearly 40%. Further, Chengdu IFS’ retail sales were up 23%, outpacing the market. Contributions from Chongqing IFS (opened in Sept. 2017) and Changsha IFS (opened in May 2018) should boost rental income during the second half of the year.

The property development segment underperformed during the period, mainly due to slowing contract sales in China, totaling CNY 7.2 billion during the period, down 36% year on year. This also represents a run rate of 33% against a full-year target of CNY 22 billion. The slow contract sales were a result of the company delaying project launches amid the price restrictions in some mainland cities, preferring margin over sales speed. The company indicated that it will speed up project launches during the second half. Revenue booking during the period was also slow with top line down 15% year on year. Operating profit grew 45% on higher margins, which was anticipated.

During the first half, the company expanded its landbank in China by acquiring 677,000 square meters for RMB 14 billion. In comparison, the company acquired 700,000 square meters for CNY 16 billion in 2017, and 117,000 square meters for CNY 3.7 billion in 2016. The expanded land bank may be a drag on the company's return under the weight of slowing contract sales.

In Hong Kong, Mount Nicholson project accounted for most of the contract sales and revenue booking. Contract sales were flat compared with a year ago at HKD 1.7 billion on an attributable basis. Booking and operating income were lower by 40% and 17%, respectively. The company has limited sellable resources going forward as the newly acquired Kowloon Tong site is still in the early planning stage.

The company continued to invest in listed equities of blue-chip Hong Kong property stocks as a means to manage its excess cash. During the period, equity investments amounted to HKD 37 billion, up from HKD 19 billion at year-end 2017. As a result, along with capital expenditures related to mainland development projects, net gearing rose to 20% from net cash at year-end.

We expect earnings growth to be better in the second half, but still overall a weak set of results for full-year 2018, as contract sales started to cool in mid-2017. The lack of a driver for strong earnings growth will likely cap the company's share prices. Given net debt amount of HKD 29 billion, along with HKD 37 billion in liquid equity investments, against a current market cap of HKD 75 billion with a free float of 37%, a privatization effort from the parent company Wheelock is possible, especially given the overlap in Hong Kong development properties with the parent.