Morningstar | Wharf Lacks a Driver for Strong Earnings Growth
Ahead of the interim results, we see divergent performance among Wharf’s various business segments. Contract sales in China have been slow at CNY 1.6 billion for the first quarter, out of a target of CNY 22 billion for the year. On the investment property side, Chongqing IFS and Changsha IFS are currently ramping up, but they are not yet large contributors to earnings. In Hong Kong, earnings from development properties are limited to ultra-luxury projects from the company’s high-end portfolio. The company’s portfolio of listed equities of blue-chip Hong Kong property stocks is likely to realize a fair value loss after the recent market decline. We maintain our fair value estimate of HKD 25, along with the company’s no-moat rating. Our fair value estimate reflects the company’s lack of a clear growth driver, justifying the valuation of 11 times price/earnings and 0.5 times price/book.In China, contract sales are running behind schedule, as the company slowed project launches amid the price restrictions in some mainland cities, preferring margin over sales speed. Among investment properties in China, Chengdu should remain a bright spot with strong uptake expected. But the ramp-up and opening of Chongqing IFS and Changsha IFS would likely incur a fair amount of preopening expenses. We expect earnings growth to be weak in 2018, as contract sales started to cool in mid-2017. The expanded land bank may be a drag on the company’s return.
The lack of a driver for strong earnings growth will likely to cap the company’s share prices. It is currently in a net cash position of HKD 9.3 billion. Along with HKD 19 billion in liquid equity investments, against a current market cap of HKD 79 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.
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.
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