Company Reports

Narrow-moat Swire Properties’ first-half results are in line with our expectations. Recurring underlying profit declined by 8% year on year, given weakness across Hong Kong office and retail properties, partly offset by the full period contribution of Taikoo Li Chengdu and rental improvement in Taikoo Li Sanlitun in Beijing, given tenant mix improvement. We have updated the handover timing of residential properties in Hong Kong, leading to a 6% reduction in our 2026 adjusted net income forecast, offset by higher earnings in 2028.

Swire Properties' 50-year history in Hong Kong has been characterized by patience and transformation. The company's modus operandi is to acquire assets in less-than-prime areas. Over a span of several decades, the company gradually builds, manages, upgrades, expands, and eventually transforms the entire areas.

We lower our 2024-26 earnings estimates for narrow-moat Swire Properties by 5%-8% following a pre-blackout update with the company. 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. We also raised our cost of equity assumption to reflect Swire Properties’ higher operating risk given its exposure to China’s real estate sector, bringing our weighted average cost of capital to 7.5% from 6.8%. Consequently, we cut our fair value estimate to HKD 22.50 from HKD 28.50.

Swire Properties' 50-year history in Hong Kong has been characterized by patience and transformation. The company's modus operandi is to acquire assets in less-than-prime areas. Over a span of several decades, the company gradually builds, manages, upgrades, expands, and eventually transforms the entire areas.

Narrow-moat Swire Properties’ first-quarter operating performance was within our expectations, with continued weakness across its office and retail assets. Its Hong Kong offices generally registered a decline in headline rents compared with the fourth quarter of 2023, in line with the overall Grade A office market. The Pacific Place and Taikoo Place offices reported negative rental reversions of 17% and 13%, respectively, as leases are renewed at a lower market rate compared with the previous lease cycle. That said, we retain our view that Swire’s high-quality core office assets will remain resilient compared with peers, as end-March 2024 portfolio occupancy of 89% is unchanged from end-2023. Individual office occupancies—except Two Taikoo Place, which opened during the current downturn—also outperformed the respective submarket.

Swire Properties' 50-year history in Hong Kong has been characterized by patience and transformation. The company's modus operandi is to acquire assets in less-than-prime areas. Over a span of several decades, the company gradually builds, manages, upgrades, expands, and eventually transforms the entire areas.

Swire Properties' 50-year history in Hong Kong has been characterized by patience and transformation. The company's modus operandi is to acquire assets in less-than-prime areas. Over a span of several decades, the company gradually builds, manages, upgrades, expands, and eventually transforms the entire areas.

Narrow-moat Swire Properties' 2023 results are in line with our expectations. The 6% year-on-year revenue growth was mainly driven by the retail portfolio in Hong Kong and mainland China, given strong tenant sales growth as the pandemic wanes and the acquisition of the remaining interest of Taikoo Li Chengdu in early 2023. This helped offset softer contribution from the Hong Kong office portfolio.

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 31 for narrow moat Swire Properties after the planned disposal of 12 floors of One Island East to the Securities and Futures Commission. The SFC will acquire the nine floors it currently occupies by the end of 2023, and additional three floors by 2028. This will allow the SFC to cut rental expenses and save the need for future office relocation. As the disposed area is small in the context of the overall portfolio, we only expect a 1% decline in both revenue and net income from 2024. We are positive on this deal as the gross consideration of HKD 5.4 billion represents a 3% premium to the valuation as of the end of June 2023 and a decent post-tax net rental yield of 2.8%.

We maintain our fair value estimate of HKD 31 for narrow-moat Swire Properties following the company’s in-line third-quarter operating update. While the weak office market in Hong Kong and the high interest-rate environment have weighed on the share price's performance, we think shares are attractive with a 50% discount to our fair value estimate, as of the Nov. 3 close price, for investors willing to look past the current downturn. Our long-term view is unchanged and we continue to expect the Swire Properties’ flagship assets to benefit from the company’s development master plan, which gradually improves the overall attractiveness of the neighborhood. In the near term, we anticipate further tourism recovery to support the retail segment in the fourth quarter, partly offsetting the weakness in the office assets.

We maintain our fair value estimate of HKD 31 following Swire Properties’ successful bid for 40% interest in two land parcels in Shanghai. The plots of land, known as New Bund and Yangjing, are expected to be developed into mixed-use projects including retail, office, and premium residential components with a total gross floor area of around 1 million square meters. Overall, we expect limited financial impact, as the investments are small at CNY 9.7 billion, relative to Swire Properties’ size and comfortable capital position, and we only expect contribution to commence from 2026 for the New Bund project and 2029 for the Yangjing project.

Swire Properties' 50-year history in Hong Kong has been characterized by patience and transformation. The company's modus operandi is to acquire assets in less-than-prime areas. Over a span of several decades, the company gradually builds, manages, upgrades, expands, and eventually transforms the entire areas.

We transfer coverage of Swire Properties with unchanged narrow moat rating and fair value estimate of HKD 31. We think shares are currently attractive, trading at a 41% discount to our fair value estimate, and 2023 forecast dividend yield of 5.7%. First-half 2023 revenue increased 6% year on year, within our expectation, with a strong retail recovery partly offset by a struggling office portfolio. However, operating profit was slightly below our expectations, dragged by a higher marketing expense, higher losses from trading properties and a higher-than-expected foreign exchange loss. These were partly offset by a lower-than-expected finance cost that brought recurring underlying net profit up 6% year on year. We increased our operating expense and reduced our finance cost assumptions to reflect the latest numbers, while also factoring in the redevelopment of Wah Ha Factory Building and Zung Fu Industrial Building, and the Bangkok residential joint venture project, assuming five-year and three-year development periods, respectively. As such, our 2023, 2024, and 2025 earnings per share forecasts are lowered by 7.5%, 7.3%, and 5.1%, respectively.

Swire Properties' 50-year history in Hong Kong has been characterized by patience and transformation. The company's modus operandi is to acquire assets in less-than-prime areas. Over a span of several decades, the company gradually builds, manages, upgrades, expands, and eventually transforms the entire areas.

The underlying trends within Swire Properties’ first-quarter operational update are within expectations, with office demand in the first quarter still weak, while retail was firmer. However, the 11% and 9% negative rental reversion for its flagship assets in Pacific Place and Taikoo Place, respectively, disappointed as leases continue to be renewed at a lower market rate compared with the previous cycle. That said, with headline rents remaining stable from the previous quarter, we retain our fair value estimate of HKD 31 per share after fine-tuning our assumptions to reflect the weaker-than-expected office rental reversion over the near term. We think that shares remain undervalued, with a 33% discount to our fair value estimate as of May 5 close price. We continue to see retail recovery in both Hong Kong and mainland China as a near-term catalyst for Swire Properties, and expect the office recovery and the completion of Six Pacific Place to drive the company’s performance from 2024.

Our fair value estimate for narrow-moat-rated Swire Properties is unchanged at HKD 31. We fine-tune our assumptions to reflect pressure on the Hong Kong office sector in 2023, but we anticipate a gradual recovery in the Hong Kong and mainland retail segments as the borders reopen. We forecast dividend per share to increase to HKD 1.05 in 2023 from HKD 1.00 in 2022, in line with the company’s policy to deliver mid-single digit dividend growth. This implies a 5% dividend yield on the March 9 share price close. We think Swire’s current share price already reflects that its earnings recovery should lag that of retail centric landlords.

Swire Properties' 50-year history in Hong Kong has been characterized by patience and transformation. The company's modus operandi is to acquire assets in less-than-prime areas. Over a span of several decades, the company gradually builds, manages, upgrades, expands, and eventually transforms the entire areas.

Swire Properties’ brief third-quarter update was within our expectations, with occupancy stable across the office and retail segments. In our view, this supports our thinking that Swire Properties’ high-quality assets underpin the resilient recurring operating income from the investment properties segment. Our fair value estimate of HKD 31 for Swire Properties is unchanged. We think the current share price presents an attractive opportunity for investors willing to look past the pandemic. We believe Swire Properties’ operations would benefit from the further lifting of border controls, which would encourage cross-border office leasing decisions, as well as tourist spending in Hong Kong.

Swire Properties' 40-year history in Hong Kong has been characterized by patience and transformation. The company's modus operandi is to acquire assets in less-than-prime areas. Over a span of several decades, the company gradually builds, manages, upgrades, expands, and eventually transforms the entire areas.