20180425-高盛-九龙仓置业-01997.HK-Property_giant_with_quality_HK_retail_exposure__initiate_at_Buy_16页_622kb

Wharf REIC (1997.HK) Summary

Core Content

Wharf REIC (1997.HK) is a leading property investment company focused on Hong Kong, with a significant presence in retail and commercial real estate. As the third-largest listed retail-focused landlord globally, it owns and operates major mixed-use properties such as Harbour City, Times Square, and Hollywood Plaza. These properties contribute 62% of its GAV (Gross Asset Value) and c. 70% of total HK IP revenue in 2017. The company's retail tenant sales accounted for c. 9.2% of total HK retail market sales in 2017, outperforming the market in most periods over the past decade.

Key Highlights

• Market Cap: HK$165.6bn / $21.1bn
• Enterprise Value: HK$214.9bn / $27.4bn
• 12-month Price Target (NAV-based): HK$65
• Current Price: HK$54.55
• Upside Potential: 19.2%
• Dividend Yield: 4.0% (projected for 2019E)
• FCF Yield: 5.9% (projected for 2019E)
• Net Debt/EBITDA: 2.7 (2017) to 2.7 (2020E)
• Gearing Ratio (Net Debt/Equity): 20% (2017)
• NAV (FY19E): HK$81.10/share
• NAV Discount: 20%
• Rating: Buy (initiated on April 25, 2018)

Main Points

1. Strong Retail Exposure

Wharf REIC has substantial exposure to Hong Kong's retail market, with its flagship malls accounting for c. 62% of GAV and c. 70% of total HK IP revenue in 2017. The company’s retail tenant sales represent c. 9.2% of total HK retail market sales, and have historically outperformed the market.

2. Positive Outlook for Retail Rentals

With HK retail sales growth quickening (revised 2018 forecast to 8% yoy), the company is expected to benefit from rising retail rentals. Goldman Sachs models 7% p.a. retail spot rental growth for 2018E and 2019E, which is above the Bloomberg consensus DPS forecast of 2-3% for the same period.

3. Fixed Dividend Policy

Wharf REIC is unique in its commitment to a fixed dividend policy, paying out c. 65% of its realised recurrent profit from Hong Kong investment properties and hotels. This policy helps provide clarity for shareholder returns and differentiates it from other traditional non-REIT property companies.

4. Portfolio Overview

• Total GAV: c.HK$283bn
• Total GFA: c.12mn sq ft
• Key Assets:
  • Harbour City (Tsim Sha Tsui): GAV c.HK$187.4bn
  • Times Square (Causeway Bay): GAV c.HK$54.2bn
  • Plaza Hollywood (Diamond Hill): GAV c.HK$10.7bn
  • Crawford House (Central): GAV c.HK$4.6bn
  • Other HK IP: GAV c.HK$9.4bn
  • Hotels: GAV c.HK$13.7bn
  • China Assets: GAV c.HK$7.7bn (includes hotels and development properties)

5. Growth Drivers

• New Retail Spaces: The Ocean Terminal Extension at Harbour City, opened in late 2017, is expected to drive traffic and revenue, despite lower-than-average rental rates.
• Hotel Development: The opening of The Murray hotel in January 2018 is anticipated to boost revenue in the coming years due to increased tourist spending.
• Potential Divestments: The company is targeting the disposal of three legacy China assets, including the Changzhou and Suzhou hotels, and a joint venture with a c.HK$4bn valuation, which could generate one-off gains.

6. Valuation Metrics

• P/E Ratio: 8.9 (2017) to 16.9 (2020E)
• P/B Ratio: 0.7 (2017) to 0.8 (2020E)
• EV/EBITDA: 12.9 (2017) to 15.7 (2020E)
• NAV: HK$81.10/share (FY19E), with a 20% discount to current market price.
• NAV-based Target Price (12-month): HK$65, implying upside potential.

7. Financial Performance

• Revenue (2017): HK$20,904mn
• EBITDA (2017): HK$15,586mn
• EPS (2017): HK$5.67
• DPS (2017): HK$0.95
• Projected DPS Growth (2017-2020E): 4-5% p.a.
• EBITDA Margin (2017): 74.6%
• Net Income Margin (2017): 82.4%

8. Balance Sheet and Cash Flow

• Cash & Cash Equivalents (2017): HK$3,076mn
• Net Debt (2017): HK$42,476mn
• Free Cash Flow (2017): HK$-12,620mn
• Free Cash Flow (2020E): HK$10,086mn
• Capital Expenditures (2017): HK$-11,001mn
• Dividends Paid (2018E): HK$-5,878.3mn

9. Upcoming Events

• 1Q18 Operating Data Release: Expected to show improved tenant sales growth and OCR (Occupancy Cost Ratio) for its key properties.
• Potential Divestments: Management aims to monetize legacy China assets in 2018E.

10. Strategic Positioning

• Spin-off from Wharf Holdings (0004.HK): Separated in November 2017 to focus solely on Hong Kong investment properties.
• Leverage and Flexibility: The company operates with a gearing ratio of 20% (2017), and has no regulatory ceiling on leverage or under-development project allocations, allowing for strategic flexibility.

Key Information

• Company Type: REIC (Real Estate Investment Company), not a REIT, offering more flexibility.
• GAV Composition:
  • 62% from HK retail properties
  • 66% from the Harbour City complex
• Occupancy Cost Ratio (OCR): Improved to 17% (Harbour City) and 19% (Times Square) in 4Q17, suggesting potential for further rental growth.
• Dividend Policy: 65% payout of recurrent profit from HK investment properties and hotels, which is a key differentiator.
• Market Position: 3rd largest listed retail-focused landlord globally, and 2nd largest HK landlord by size of investment properties.

Conclusion

Wharf REIC is well-positioned to benefit from the improving retail market in Hong Kong, particularly driven by tourist spending and the growth of the Chinese middle class. With a strong portfolio of prime retail and commercial properties, a clear dividend policy, and a solid financial foundation, the company is viewed as a Buy with a 12-month NAV-based target price of HK$65, reflecting a 20% discount to its FY19E NAV. The combination of stable cash flow, dividend growth, and potential one-off gains from asset disposals makes it an attractive investment opportunity.