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Morningstar | The Wharf's Full-Year Results a Slight Beat on Strong Margin on China Development Properties

The Wharf reported core earnings of HKD 6.5 billion, slightly better than our estimate, but below consensus. Compared with a year ago, excluding the impact of the demerger, core earnings were down 11% year on year, mainly due to lower booking of development properties in Hong Kong. The development properties segment in China, the biggest earnings contributor, performed well with much improved margin despite a decline in the top line. Investment property in China saw strong growth on the back of the opening of Changsha IFS. The company declared full-year dividends of HKD 0.65 per share, or around 30% of the core earnings. We maintain our fair value estimate of HKD 25, and the company’s no-moat rating.

In China, the development properties segment saw lower bookings during the year, resulting in a drop of 21% in revenue. However, with much improved margin, operating income was up 19% year on year. During the year, the company achieved contract sales of CNY 23 billion, up 4% above its target, but down 10% from a year ago. Net order book was at CNY 22 billion at year-end, compared with CNY 19 billion at end of 2017. The company acquired 0.81 million square meters for CNY 18 billion during the year, maintaining the land bank at 3.7 million square meters, compared with 3.9 million at the end of 2017. While the China property sector, as a whole, is slowing, we expect generally accommodating policy measures and the company’s high-end product focus should result in continued strong margin performance of its property development projects in 2019.

The investment property segment saw both top line and operating income grow at 30% and 28%, respectively, driven by both organic growth of mature assets as well as the ramping up of Changsha IFS during the second half of the year. Chengdu IFS saw revenue and operating profit up 27% and 59%, respectively. Retail sales were up 20% year on year.

While retail sales slowed in China during 2018, we remain positive on the long-term consumption trend. Recent government measures to stimulate domestic consumption should provide further tailwind. We believe, with Wharf being one of the few credible retail asset managers in China, its portfolio should outperform the market.

Hong Kong development properties segment saw lower earnings due to fewer bookings from the Mount Nicholson project. This segment is not expected to be a major earnings contributor given the existing pipeline. The logistics segment performed poorly with top line and operating profit down 4% and 9% respectively. The company’s shipping terminals were affected by intense competition from players in the Greater Bay area as well as the impact of trading tension.

The company declared a second interim dividend of HKD 0.40 per share, bringing full-year dividends totaling HKD 0.65 per share, keeping in line with the stated dividend policy of 30% payout ratio. The dividend amount is not comparable with a year ago due to the demerger. Net gearing was at 19%, compared with a net cash position after the demerger. The increase in gearing was due to higher investment in development properties as well as additional investments in the portfolio of blue-chip shares the company holds to manage excess cash.