Morningstar | Lacking Strong Earnings Driver, but Shares Undervalued
Year to date, shares of Wharf Holdings dropped almost 27%, underperforming the market by more than 10%. The poor performance was attributed to a slowing residential market in China, coupled with a slowing retail sales growth in China. Further, the company holds a portfolio of listed equities of blue-chip Hong Kong property developers as a way to manage its excess cash. While the company seems to lack a strong growth driver at this point, we believe the degree of underperformance relative to its peer is unwarranted. We maintain our fair value estimate of HKD 25, along with the company’s no-moat rating.The company has small direct exposure to the Hong Kong residential sector with only Mount Nicholson project providing limited sellable resources. Indirect exposure through the portfolio of equity investments should be in line with the market.
In China, the company’s retail assets are centrally located and well managed with excellent long-term growth opportunities. Despite the recent slowdown in China’s retail sales, the long-term trend of accelerated consumption growth is unchanged, powered by urbanization and income growth. The continued emergence of a consumption culture and the rise of e-commerce are creating a pool of increasingly discerning consumers. Similar to that seen in the U.S., we expect a bifurcation of retail assets in China with top performing assets increasing commanding a larger share of retail sales owing to their competitive advantages in asset quality, tenant mix and marketing and promotion. We expect increasing contributions from Chongqing IFS (opened in September 2017) and Changsha IFS (opened in May 2018) for full-year 2018 and beyond.
On the China property development side, the picture is less bright. The company expanded its land bank this year. But as the market slows, contract sales may remain weak.
While the lack of strong earnings driver will likely cap the company’s share prices, a privatization effort from the parent company Wheelock is possible if share price remains weak. The parent company recently privatized its Singapore subsidiary.
Wharf is an investment holding company. Co. operates in five segemnts: investment property, which includes property leasing operations consisting of retail, office and serviced apartments; development property, which encompasses activities relating to the acquisition, development, design, construction, sale and marketing of Co.'s trading properties; hotels, which includes hotel operations in the Asia Pacific region; logistics, which includes the container terminal operations in Hong Kong and Mainland China; and media and entertainment, which comprises pay television, internet and multimedia and other businesses and the telecommunication businesses.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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