Company Reports

Trends within narrow-moat Wharf REIC’s first-half results were generally within expectations, with retail properties’ rental growth largely offset by weakness in the office segment. That said, the interim dividend declined 4% year on year to HKD 0.64 per share as the hotel segment's gross margin was weaker than expected. While the Harbour City and Times Square malls in Hong Kong showed resilient year-on-year revenue growth of 7% and 4% respectively, we adjusted our assumptions to reflect weaker retail and hotel performance in the near term. This is because we anticipate tourist spending leakage and weakness in the Chinese economy to continue to hit tenant sales and hotel demand. As such, we cut our 2024-26 core net income forecasts by 6%-10% and lowered our 2024 dividend-per-share forecast to HKD 1.24 from HKD 1.37. While Wharf REIC’s assets are mostly in Hong Kong, we believe the company is indirectly exposed to risks in the mainland China economy given its reliance on mainland tourist spending. We raised our weighted average cost of capital to 7.8% from 6.7% to reflect this. As a result, we cut our fair value estimate for Wharf REIC to HKD 31 from HKD 46.

Wharf Real Estate Investment Co., or Wharf REIC's, flagship properties are Harbour City and Time Square. They are well-known destinations for locals and tourists alike. Historically, the two properties collectively account for around 8%-10% of total retail sales in the city. As the company intends to hold Hong Kong investment properties exclusively, the China operation is progressively scaled down. Murray Hotel was added to the Hong Kong portfolio in mid-2018, but given the corporate mandate and the current real estate environment, Wharf REIC is unlikely to make significant acquisitions in the near term, in our view. Its rental revenue growth is limited to reversion of the existing assets. While asset enhancement opportunities exist for Times Square, the biggest driver is the state of retail sales in Hong Kong.

We keep narrow-moat Wharf REIC's fair value estimate at HKD 46 per share after a management update. We continue to expect Wharf REIC to fare better than peers amid the northbound traveling trend, given its focus on luxury retail. However, we believe that first-half tenant sales at Wharf’s flagship assets, Harbour City and Times Square, will be challenged, as more people opt to purchase luxury products outside of Hong Kong, given the strong HKD. We expect that to be partly offset by tenant mix management, which includes replacing the supermarket space in Harbour City with higher-rent-paying retail tenants, as well as the return of Louis Vuitton to the Times Square mall after its exit in 2021. Over the longer term, management anticipates a price harmonization by luxury brands across countries to mitigate the tourist spending leakage.

Underlying trends within narrow-moat Wharf Real Estate Investment’s 2023 results are within expectations. Revenue increased 7% year on year as the company benefitted from a recovery in Harbour City, albeit offset by a weaker office revenue amid a challenging Hong Kong office market. That said, dividends per share declined 2.3% year on year to HKD 1.28 due to elevated borrowing costs.

Wharf Real Estate Investment Co., or Wharf REIC's, flagship properties are Harbour City and Time Square. They are well-known destinations for locals and tourists alike. Historically, the two properties collectively account for around 8%-10% of total retail sales in the city. As the company intends to hold Hong Kong investment properties exclusively, the China operation is progressively scaled down. Murray Hotel was added to the Hong Kong portfolio in mid-2018, but given the corporate mandate and the current real estate environment, Wharf REIC is unlikely to make significant acquisitions in the near term, in our view. Its rental revenue growth is limited to reversion of the existing assets. While asset enhancement opportunities exist for Times Square, the biggest driver is the state of retail sales in Hong Kong.

Narrow-moat Wharf REIC remains our top pick for the Hong Kong real estate sector, as we continue to expect the retail sector to recover ahead of the residential and office sectors in Hong Kong. Among the retail-focused companies under coverage, we prefer Wharf REIC as we expect it to benefit from a stronger recovery in the luxury malls segment given a lower base during the pandemic.

Wharf Real Estate Investment Co., or Wharf REIC's, flagship properties are Harbour City and Time Square. They are well-known destinations for locals and tourists alike. Historically, the two properties collectively account for around 8%-10% of total retail sales in the city. As the company intends to hold Hong Kong investment properties exclusively, the China operation is progressively scaled down. Murray Hotel was added to the Hong Kong portfolio in mid-2018, but given the corporate mandate and the current real estate environment, Wharf REIC is unlikely to make significant acquisitions in the near term, in our view. Its rental revenue growth is limited to reversion of the existing assets. While some asset-enhancement opportunities may exist, the biggest driver is the state of retail sales in Hong Kong.

Wharf Real Estate Investment Co., or Wharf REIC's, flagship properties are Harbour City and Time Square. They are well-known destinations for locals and tourists alike. Historically, the two properties collectively account for around 8%-10% of total retail sales in the city. As the company intends to hold Hong Kong investment properties exclusively, the China operation is progressively scaled down. Murray Hotel was added to the Hong Kong portfolio in mid-2018, but given the corporate mandate and the current real estate environment, Wharf REIC is unlikely to make significant acquisitions in the near term, in our view. Its rental revenue growth is limited to reversion of the existing assets. While some asset-enhancement opportunities may exist, the biggest driver is the state of retail sales in Hong Kong.

Narrow-moat-rated Wharf REIC’s first-half results were slightly below expectations. While we have anticipated the slow recovery in tourism to drag on the operating performance of the company’s malls and hotels, earnings were hit by higher-than-expected finance costs, with the first-half borrowing rate jumping to 4.7% from 2.5% in 2022. As such, first-half underlying net profit declined 9% year on year to HKD 3.1 billion. Consequently, Wharf REIC’s interim dividend of HKD 0.67 per share was 4.2% lower than HKD 0.70 in 2022. We adjusted our model to reflect the near-term impact of higher interest rates given Wharf REIC’s 100% floating debt portfolio. As a result, we lowered our 2023 and 2024 EPS forecast by 8% and 4% to HKD 2.30 and HKD 2.81, respectively, while our fair value estimate was lowered to HKD 48.50 from HKD 49.50.

We are transferring coverage of Wharf REIC with our fair value estimate of HKD 49.50 and narrow moat rating unchanged. While we anticipate labor shortages and constraints on air capacity to dampen the recovery of tenant sales, we continue to expect Wharf REIC to be one of the biggest beneficiaries of the border reopening. We expect some of these issues to be eased progressively through the second half of 2023, driving a full recovery in mall footfall and tenant sales in 2024. As such, we estimate 12% and 8% revenue growth for 2023 and 2024, respectively.

Wharf Real Estate Investment Co., or Wharf REIC's, flagship properties are Harbour City and Time Square. They are well-known destinations for locals and tourists alike. Historically, the two properties collectively account for around 8% of total retail sales in the city. As the company intends to hold Hong Kong investment properties exclusively, the China operation is progressively scaled down. Murray Hotel was added to the Hong Kong portfolio in mid-2018, but given the corporate mandate and the current real estate environment, Wharf REIC is unlikely to make significant acquisitions in the near term, in our view. Its rental revenue growth is limited to reversion of the existing assets. While some asset-enhancement opportunities may exist, the biggest driver is the state of retail sales in Hong Kong.

Wharf Real Estate Investment Co., or Wharf REIC's, flagship properties are Harbour City and Time Square. They are well-known destinations for locals and tourists alike. Historically, the two properties collectively account for around 8% of total retail sales in the city. As the company intends to hold Hong Kong investment properties exclusively, the China operation is progressively scaled down. Murray Hotel was added to the Hong Kong portfolio in mid-2018, but given the corporate mandate and the current real estate environment, Wharf REIC is unlikely to make significant acquisitions in the near term, in our view. Its rental revenue growth is limited to reversion of the existing assets. While some asset-enhancement opportunities may exist, the biggest driver is the state of retail sales in Hong Kong.

We raise our fair value estimate for Wharf REIC to HKD 49.50 from HKD 46.00 as we factor in a stronger recovery in its retail property and hotel operations. We also assume further improvement in operating margins on the normalization of marketing expenses and the phased exit from the low-margin property development business. We forecast 2023 dividend per share to increase 6.9% year on year to HKD 1.40, implying a 3.2% dividend yield based on the closing price as of March 7. While we think Wharf REIC is one of the key beneficiaries of Hong Kong’s border reopening, we think its current share price already reflects part of the upside. As such, we believe Link REIT may be more attractive for investors looking for exposure to the retail landlords in Hong Kong.

Wharf Real Estate Investment, or Wharf REIC, guided that the group may incur a loss in 2022, due to the revaluation deficit of its investment properties for full-year 2022, which may be more than twice the amount reported in first half 2022 (HKD 5 billion). We will issue an update pending more detailed information from the firm’s final results in March and we think the deficit is likely due to cap rates expansion on the back of the rising interest rate environment.

Wharf Real Estate Investment Co., or Wharf REIC's, main properties are Harbour City and Time Square. They are well-known destinations for locals and tourists alike. Historically, the two properties collectively account for around 8% of total retail sales in the city. As the company intends to hold Hong Kong investment properties exclusively, the China operation is progressively scaled down. Murray Hotel, the recent addition to the Hong Kong portfolio, opened in mid-2018. Given the corporate mandate and the current real estate environment, Wharf REIC is unlikely to make significant acquisitions in the near term, in our view. Its rental revenue growth is limited to reversion of the existing assets. While some asset-enhancement opportunities may exist, the biggest driver is the state of retail sales in Hong Kong.

Wharf REIC’s first-half results showed signs of stabilization, with underlying net profit increasing by 3% against the same period last year to HKD 3.3 billion. Revenue from the core operation in investment properties edged 2% down from the same period last year as the operating environment remains challenging as borders remain closed. The decline in revenue was also attributable to the recognition of development property in the first half of last year. As expected, Harbour City performed well, with revenue edging higher by 1% against the same period last year, while Times Square struggled to a 15% decline in revenue. With Harbour City faring better than our expectation, we now assume rent to be flat on last year, compared with 5% decline previously. This is offset by a steeper decline in rents for both retail and offices at Times Square. For the full year, we assume Times Square’s retail rents to be HKD 110 per square foot per month and HKD 50 per square foot per month for office, representing year-on-year decline of nearly 20%. There is no change in our view that rents at Times Square won't recover to their previous peak.

Wharf Real Estate Investment Co., or Wharf REIC's, main properties are Harbour City and Time Square. They are well-known destinations for locals and tourists alike. Historically, the two properties collectively account for around 8% of total retail sales in the city. As the company intends to hold Hong Kong investment properties exclusively, the China operation is progressively scaled down. Murray Hotel, the recent addition to the Hong Kong portfolio, opened in mid-2018. Given the corporate mandate and the current real estate environment, Wharf REIC is unlikely to make significant acquisitions in the near term, in our view. Its rental revenue growth is limited to reversion of the existing assets. While some asset-enhancement opportunities may exist, the biggest driver is the state of retail sales in Hong Kong.

Wharf Real Estate Investment Co., or Wharf REIC's, main properties are Harbour City and Time Square. They are well-known destinations for locals and tourists alike. Historically, the two properties collectively account for around 8% of total retail sales in the city. As the company intends to hold Hong Kong investment properties exclusively, the China operation is progressively scaled down. Murray Hotel, the recent addition to the Hong Kong portfolio, opened in mid-2018. Given the corporate mandate and the current real estate environment, Wharf REIC is unlikely to make significant acquisitions in the near term, in our view. Its rental revenue growth is limited to reversion of the existing assets. While some asset-enhancement opportunities may exist, the biggest driver is the state of retail sales in Hong Kong.

While the COVID-19 restrictions in Hong Kong were eased in the second half of 2021 and overall retail sales benefited from government stimulus in cash handouts, Wharf REIC’s second-half result was weaker than expected, mainly due to Times Square in Causeway Bay. Group revenue of HKD 16 billion was 10% ahead on both our forecast and Refinitiv consensus estimates but this included one-off booking of a development project in Mainland China. Our fair value estimate is increased slightly by 2% to HKD 46 after factoring in the fiscal 2021 numbers. Time value of money is offset by lower rent assumption. We now expect a recovery in rent for both Harbour City and Times Square to be pushed out by a year, and we also assume rents at Times Square to be below their peak at the end of our explicit forecast period. While the company is trading at close to 20% discount to our fair value, the timing of a recovery remains uncertain as there is no clear indication on the relaxation of the COVID-19 restrictions after the mandatory testing at the end of March. The opening of borders with Mainland China and internationally remains unclear, and we expect the share price performance to remain subdued in the near term.

Wharf Real Estate Investment Co., or WREIC’s, main properties are Harbour City and Time Square. They are well-known destinations for locals and tourists alike. Historically, the two properties collectively account for around 8% of total retail sales in the city. As the company intends to hold Hong Kong investment properties exclusively, the China operation is progressively scaled down. Murray Hotel, the recent addition to the Hong Kong portfolio, opened in mid-2018. Given the corporate mandate and the current real estate environment, WREIC is unlikely to make significant acquisitions in the near term, in our view. Its rental revenue growth is limited to reversion of the existing assets. While some asset-enhancement opportunities may exist, the biggest driver is the state of retail sales in Hong Kong.