Morningstar | Wharf Real Estate: Retail Environment Benign, Shares Attractively Priced at This Point. See Updated Analyst Note from 19 Dec 2018
Shares of Wharf Real Estate Investment performed strongly during the first half of the year, owing to the recovery of retail sales in its key assets as well as the city as a whole. Since then, negative market sentiment over the Hong Kong property sector has dragged the stock lower. The shares declined 18% since June, underperforming the market. We believe the shares are undervalued at this point. The company’s retail assets in Hong Kong are largely stable, and the main issue facing the company is one of strategic direction. We maintain our fair value estimate of HKD 57 as well as the company’s narrow moat rating.Harbour City, the company’s key asset, reported retail sales growth of 16% during the third quarter, with year-to-September growth of 29%. Time Square reported retail sales growth of 6% during the third quarter, with year-to-September growth of 16%. The third-quarter results were likely affected by Hurricane Mangkhut, which affected tourist arrivals.
Retail sales for Hong Kong increased just over 9% year through October, comparing with near 12% during the first half. On a monthly basis, September showed weak sales growth of 1.4%, reflecting the impact of the hurricane. Sales growth rebounded to 5.2% in October. Year through October, retail sales totaled HKD 401 billion. Given the higher comparison base, impact of the trade war, and continued CNY depreciation pressure, we expect more modest retail sales growth for the full year. Full-year sales will probably fall short of the previous peak of HKD 495 billion set in 2013.
Strategically, with a strong balance sheet and stable earnings, it is unclear what investments the company will make given its mandate of investment properties in Hong Kong. However, at the current price level, a dividend of yield of more than 4% backed by recurrent income should provide downside protection.
Wharf Real Estate Investment Company Ltd. WHARF REAL ESTATE INVESTMENT COMPANY LIMITED is a company principally engaged in the investment and operation of properties. The Company's Harbour City is a mixed-use integrated complex with retail and office premises, serviced apartments, hotels and a club. Strategically located at the harbour front in Tsim Sha Tsui, it includes one of the largest shopping malls in Hong Kong with a contiguous mall, drawing shoppers and tourists to its entertainment, dining and hotel components. The Company's Times Square is a mixed-use integrated complex which is directly connected to the MTR station in Causeway Bay, with retail and office premises which house 16 levels of shopping mall, and housed international brands and other retailers, 20 restaurants and a cinema. The Company's main revenue is rental income from investment properties.
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