EUR 850.00 For Business Accounts Only

Morningstar | Sustained Recovery in Retail Sales Supports Positive Rental Reversion for Wharf Real Estate. See Updated Analyst Note from 07 Aug 2018

Wharf Real Estate Investment reported core profit of HKD 5 billion, up 8% year on year, or about 58% of our full-year estimate. The investment property portfolio achieved turnover and operating profit of HKD 7.1 billion and HKD 6.3 billion, respectively, up 8% and 7% over a year ago. The top-line run rate is 53% of our full-year estimate with slightly better margin. Interest expense was sharply lower as subsidiary loans were refinanced with bank loans, resulting in an effective interest rate of 1.5%. The company declared an interim dividend of HKD 1.05 per share, in line with the guidance of 65% of the core recurrent income. The recovery of retail sales seen at Harbour City looked to be sustainable, with the full-year amount likely surpassing the previous peak set in 2014. This should allow the company to achieve continued positive rental reversions ahead. We adjusted our leasing rate assumptions and revised our earnings estimate up by 9% and 10% for 2018 and 2019, respectively. We increase our fair value estimate from HKD 53 to HKD 57 and maintain the company’s narrow moat rating.

For the retail portion of Harbour City, the company’s flagship asset, revenue and operating profit were both up 15% year on year. Average passing rent was up 14%, owing to both positive rental reversion and improving turnover rent. Retail sales were up 36% to HKD 18.6 billion. Assuming the same run rate, retail sales for the year may top previous record of HKD 35 billion in 2014. With that, occupancy cost ratio has returned to more normalized level, falling to 18%. Performance at Time Square was more muted. Rental revenue for the retail portion was flat year on year. Retail sales growth turned positive with 22% growth, but that’s against the bottom of trough for the asset in first-half 2017. Occupancy ratio was lower year on year but still above 20%.

Retail sales for Hong Kong increased 13% during the first half, reaching HKD 248 billion. Assuming the same run rate, the city’s the full-year retail sales should slightly exceed the previous peak set in 2013. Given the rather sharp recovery seen year to date, coupled with the CNY depreciation pressure and higher comparison base in the second half, we expect more modest retail sales growth for the full year.

The company declared an interim dividend of HKD 1.05 per share, which is based on the stated dividend policy of 65% of core recurrent profit during the period. Given the modest payout rate, and the company’s limited capital expenditures, the net gearing was down slightly to 19% at the end of the period. While the company certainly has the capacity to take on more debt, however, it isn’t clear how such proceeds would be used as the company is limited to investment properties in Hong Kong. With the current portfolio, a sustained recovery of the Time Square asset should be key factors in determining the continued growth for now.