Company Reports

Because Swire Pacific is a conglomerate, its earnings are dictated by the performance of its various divisions. While each division faces different competitive environments, the majority of the group’s earnings is underpinned by recurring income from Swire Properties' investment property portfolio in Hong Kong and mainland China, Swire Coca-Cola’s bottling business, and Haeco’s aviation maintenance and repair services. This compares with the group’s property trading business and 45% interest in Cathay Pacific, which are more cyclical and capital-intensive in nature.

Narrow-moat Swire Pacific’s first-half 2024 performance was below our expectations due to weakness in domestic consumer spending in mainland China dragging its beverage segment performance. This was partly offset by its Hong Kong and Taiwan beverage division, which saw better EBITDA margins attributable to good cost control and strong performance from its aviation segment. Swire Pacific’s property division also reported weaker recurring underlying profit, given the headwinds faced by its Hong Kong office and retail properties. However, this was largely in line with our expectations.

We lower the fair value estimate of narrow-moat Swire Pacific to HKD 75.00 from HKD 78.00, following a pre-blackout update with Swire Properties. This reflects weakness on the retail and hotel segments that are experiencing net tourist spending leakage as a strong Hong Kong dollar versus regional currencies weighs on mall foot traffic and hotel performance in the near term. Hong Kong and mainland China tenant sales will also see pressure given sporadic tenant upgrade works at Pacific Place mall, Taikoo Li Sanlitun North, and Taikoo Li Chengdu, but we anticipate the asset enhancement to lift tenant sales in the medium term as the stores gradually reopen from 2025 onward. Positively, management shared that the base rent portion for the mainland China malls continues to see positive rental reversion that we expect to help offset weaker turnover rent. For the office segment, we think softness in the Hong Kong office market is likely to persist before gradual absorption of excess supply in 2025 to set a stage for recovery in 2026. Overall, we anticipate Swire Pacific’s 2024 revenue to show a mild decline of 4.8% given weakness in its property segment and a lower contribution from its beverage segment due to the sale of Swire Coca-Cola USA.

Because Swire Pacific is a conglomerate, its earnings are dictated by the performance of its various divisions. While each division faces different competitive environments, the majority of the group’s earnings is underpinned by recurring income from Swire Properties' investment property portfolio in Hong Kong and mainland China, Swire Coca-Cola’s bottling business, and Haeco’s aviation maintenance and repair services. This compares with the group’s property trading business and 45% interest in Cathay Pacific, which are more cyclical and capital-intensive in nature.

Because Swire Pacific is a conglomerate, its earnings are dictated by the performance of its various divisions. While each division faces different competitive environments, the majority of the group’s earnings is underpinned by recurring income from Swire Properties' investment property portfolio in Hong Kong and mainland China, Swire Coca-Cola’s bottling business, and Haeco’s aviation maintenance and repair services. This compares with the group’s property trading business and 45% interest in Cathay Pacific, which are more cyclical and capital-intensive in nature.

Swire Pacific's 2023 results were largely in line with our expectations, with the sales of Swire Coca-Cola USA and nine floors of One Island East helping it to achieve a record underlying profit of HKD 36.2 billion. However, we lower our fair value estimate to HKD 78 from HKD 83 due to lower operating margins from its subsidiary, Swire Properties, that is ramping up its retail and hotel staffing as the pandemic wanes, and higher near-term financing cost given increased gearing level. Consequently, our fiscal 2024 and fiscal 2025 earnings forecasts were reduced by 8.8% and 6.2%, respectively. We expect the group to deliver a 5% dividend growth in 2024, implying a dividend yield of 5.1% based on the last closing price of HKD 67.2. While we think Swire Pacific is undervalued, we prefer Swire Properties, which is trading at a more attractive 2024 dividend yield of 6.7% and at a wider discount to our fair value estimate.

Our fair value estimates of HKD 31 for Swire Properties and HKD 83 for Swire Pacific are unchanged after Swire Properties’ profit warning. Swire Properties anticipates around a 70% decline in reported profit, given an expected HKD 4.5 billion fair value loss on investment properties for the full year. This implies a further HKD 3.2 billion fair value loss in the second half of 2023, mainly from office assets under development and lower fair value gains from mainland China retail assets. Swire Properties' share price rose 1.7% on Dec. 27 as weaker valuations were much within expectations. While the fair value loss is noncash and does not affect our fair value estimate or narrow moat rating, we have lowered our 2023 revenue forecast for Swire Properties by 5% to HKD 14.6 billion, given the challenging Hong Kong office market.

We maintain our fair value estimate of HKD 83 for narrow-moat Swire Pacific following the group’s announcement of a share buyback program. Swire Pacific plans to use the group’s available capital and cash reserves to buy back up to HKD 6 billion of A and B shares before May 2025. This makes up approximately 9% of its market capitalization prior to the announcement. We are positive on management’s shareholder-friendly action to support the share price and narrow its trading discount to its net asset value. We also think the buyback is accretive, as the shares are trading at a 39% discount to our fair value estimate, as of the Dec. 5 close price. We raise our 2024 and 2025 earnings per share forecasts by 4% and 6%, respectively, to HKD 6.85 and HKD 7.67, given a smaller share base. We also increase our 2024 and 2025 dividend forecasts by 5% and 9%, respectively, to HKD 3.48 and HKD 3.77, implying a 2024 dividend yield of 6%.

Because Swire Pacific is a conglomerate, its earnings are dictated by the performance of its various divisions. While each division faces different competitive environments, the majority of the group’s earnings is underpinned by recurring income from Swire Properties' investment property portfolio in Hong Kong and mainland China, Swire Coca-Cola’s bottling business, and Haeco’s aviation maintenance and repair services. This compares with the group’s property trading business and 45% interest in Cathay Pacific, which are more cyclical and capital-intensive in nature.

We are reinitiating coverage of Swire Pacific with a fair value estimate of HKD 83 per share. We ascribe the conglomerate a narrow moat rating versus a no-moat rating previously. We think Swire Properties, the company’s property business and largest operating segment, benefits from an efficient scale moat source. We believe the Swire Coca-Cola beverages business benefits from an intangible assets moat source stemming from its long-term symbiotic relationship with Coca-Cola for the exclusive bottling rights in regions where it operates. We think the Cathay Pacific airline business does not benefit from an economic moat, as the industry is highly competitive and capital-intensive in nature. Nonetheless, the business environment for Hong Kong Aircraft Engineering Co. and Cathay Pacific has started to stabilize after the pandemic.

Because Swire Pacific is a conglomerate, its earnings are dictated by the performance of its various divisions. While each division faces different competitive environments, the majority of the group’s earnings is underpinned by recurring income from Swire Properties' investment property portfolio in Hong Kong and mainland China, Swire Coca-Cola’s bottling business, and Haeco’s aviation maintenance and repair services. This compares with the group’s property trading business and 45% interest in Cathay Pacific, which are more cyclical and capital-intensive in nature.

We are placing Swire Pacific under review pending a change in analyst. We will provide further updates on coverage resumption in January 2023.

Swire Pacific performed well in the first half despite its three core businesses in property, beverages, and aviation being hampered by the lockdowns and continued border closures in Hong Kong. First-half underlying profit was HKD 1.7 billion, compared with HKD 1.3 billion the same period last year. A more positive outlook sees the group launch a HKD 4 billion share buyback and lift its first-half dividend by 15% to HKD 1.15 per A share, and HKD 0.23 per B share. The share buyback will be balanced across both A shares and B shares, but management noted lower market liquidity for the B shares.

Swire Pacific is acquiring the Coca-Cola bottling operations in Vietnam and Cambodia from the Coca-Cola Company for USD 1.015 billion, or HKD 7.9 billion. In our view, the valuation appears fair against historic transactional multiples in Vietnam and trading multiples against listed peers in the region. While growth rates were not disclosed, both Vietnam and Cambodia are emerging markets with high economic and income growth. Personal disposable income growth ranged between 8% and 10% prior to the COVID-19 pandemic, based on data from Capital IQ. A report by VietnamCredit noted Coca-Cola and Suntory PepsiCo combine for 64% in market share in the nonalcohol segment in Vietnam. Also from the same report, annual revenue growth in the nonalcohol segment is forecast to be 6.5% between 2020 and 2023, supported by higher consumption per capita from a young generation. From an operational perspective, dominant market share for a beverage company should result in a cost advantage, stemming from distribution at scale and operational agility.

As Swire Pacific is a conglomerate, its earnings are dictated by the performance of its various divisions. While each division faces widely different competitive environments, close to 70% of the group’s earnings are underpinned by the group’s recurring income. These businesses are Swire Properties' flagship investment properties in Hong Kong; one of two Coca-Cola bottlers in China with Swire Beverages, and Haeco’s aviation maintenance. However, the steady businesses are offset by more the cyclical and capital-intensive Cathay Pacific division. The division’s high level of operating leverage magnified losses in recent years as revenue at Cathay Pacific was pressured from competition, poor fuel hedges, and the social unrest and the COVID-19 pandemic.

As Swire Pacific is a conglomerate, its earnings are dictated by the performance of its various divisions. While each division faces widely different competitive environments, close to 70% of the group’s earnings are underpinned by the group’s recurring income. These businesses are Swire Properties' flagship investment properties in Hong Kong; one of two Coca-Cola bottlers in China with Swire Beverages, and Haeco’s aviation maintenance. However, the steady businesses are offset by more the cyclical and capital-intensive Cathay Pacific division. The division’s high level of operating leverage magnified losses in recent years as revenue at Cathay Pacific was pressured from competition, poor fuel hedges, and the social unrest and current COVID-19 pandemic.

Swire Pacific’s fiscal 2021 overall result was largely in line with our expectation, underpinned by strength in its property and beverages divisions. Revenue and operating margins continue to improve for beverages while the property portfolio remained resilient. The latter is also diversified across property types in office and retail in both Hong Kong and mainland China. The key positive in the result was a higher than expected final dividend of HKD 1.60 for Swire A share, and HKD 0.32 for Swire B. The dividend policy was earlier revised to a payout of at least 50% of earnings, excluding income from Cathay Pacific.

Swire Pacific’s first-half result does not change our long-term view on the company. Excluding one-offs and revaluation losses, underlying profit was HKD 786 million, compared with a loss of HKD 123 million in the same period last year. While the dividend policy of delivering sustainable growth in dividends remains unchanged, the payout calculation will be amended going forward. Swire will now pay out at least half of recurring underlying profits, up from the previous policy of half of earnings, and will exclude earnings from Cathay Pacific but include dividends received from that company. Assuming the associate income is positive and all else being equal, the change on associate income should result in lower dividend on an absolute basis but better align cash flow received from the associate. First-half dividend of HKD 1 per share was higher compared with HKD 0.70 in the same period last year. Our full-year dividend forecast of HKD 2 per share is unchanged and represents a dividend yield of 4%.

As Swire Pacific is a conglomerate, its earnings are dictated by the performance of its various divisions. While each division faces widely different competitive environments, close to 70% of the group’s earnings are underpinned by the group’s recurring income. These businesses are Swire Properties' flagship investment properties in Hong Kong; one of two Coca-Cola bottlers in China with Swire Beverages, and Haeco’s aviation maintenance. However, the steady businesses are offset by more cyclical and capital-intensive divisions in Cathay Pacific and Swire Pacific Offshore, or SPO. Both division’s high level of operating leverage magnified losses in recent years as revenue at Cathay Pacific was pressured from competition, poor fuel hedges, and the social unrest and current COVID-19 pandemic. SPO saw a sharp decline in demand and charter rates as oil prices weakened. As such, return on invested capital was dragged below the group’s cost of capital.

As Swire Pacific is a conglomerate, its earnings are dictated by the performance of its various divisions. While each division faces widely different competitive environments, close to 70% of the group’s earnings are moaty and resilient, underpinning the group’s recurring income. These businesses are Swire Properties' flagship investment properties in Hong Kong; one of two Coca-Cola bottlers in China with Swire Beverages, and Haeco’s aviation maintenance. However, the steady businesses are offset by more cyclical and capital-intensive divisions in Cathay Pacific and Swire Pacific Offshore, or SPO. Both division’s high level of operating leverage magnified losses in recent years as revenue at Cathay Pacific was pressured from competition, profit from poor fuel hedges, and the COVID-19 pandemic. SPO saw sharp decline in demand and charter rates as oil prices weakened. As such, return on invested capital was dragged below the group’s cost of capital.