Wharf REIC (1997.HK)

25 April 2018 | 2:00AM HKT

Wharf REIC ( 1997.HK)

y Property giant with quality HK retail exposure; initiate at Buy u B

Justin Kwok, CFA +852-2978-0481 | [email protected] Goldman Sachs (Asia) L.L.C. Colin Yao +65-6654-5426 | [email protected] Retail rentals rising via giant and quality shopping malls Goldman Sachs (Singapore) Pte

Direct access to giant and quality retail assets in Hong Kong n Wharf REIC, the 3rd-largest listed retail-focused landlord globally, is an owner and operator of key mixed-use investment properties in Hong Kong, with aggregate GAV of c.HK$283bn and c.12mn sq ft GFA of properties. The ﬂagship retail malls in Key Data ______ Hong Kong (Harbour City, Times Square and Hollywood Plaza) !"#$ account for 62% of GAV and contributed c.70% to total HK IP %& %& %& %&'% ( revenue in 2017. )!* ______n In addition, their retail tenant sales together account for c.9.2% GS Forecast of total HK retail market sales in 2017, with tenant sales growth outperforming that of the overall market in most of the time during the past decade. !" !" ##$$%#&$' ()$*)!" Initiate at Buy with HK$65 12-mo NAV-based TP amid improving HK +,+%#&$'

retail sales backdrop n As HK retail sales growth quickens (our HK Retail team has

For the exclusive use of [email protected] revised up their 2018 forecast to 8% yoy; see Riding the GS Factor Proﬁle ______ recovery wave, near-term outlook still rosy, April 24), we see a positive outlook for retail landlords to move up their retail

rentals. In particular, given the recent retail market growth

largely led by tourist spending, we see more upside for prime-located malls with luxury offerings, including Harbour City and Times Square. We are modelling a 7% p.a. retail spot rental growth in n 2018E/2019E respectively, and we see upside potential to Source: Company data, Goldman Sachs Research estimates. Bloomberg consensus DPS forecast, which we stands at 2/3% See disclosures for details. above the aforesaid in 2018E/2019E respectively.

Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html . Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S. Goldman Sachs Wharf REIC (1997.HK)

Wharf REIC (1997.HK) Balance Sheet (HK$ mn) ______Buy Rating since Apr 25, 2018 ! Ratios & Valuation ______" #$$% # & '' '' '' '' ( ) " &') ! " " " " ! " " " " *! #$%$&'$ +'), ($)*$+,-) " .*(-($,),'$*$/*.* " +-.%.* " " -&'), .*0..%,'$*$.((1 / / " " &') ',($ ! " " " " ( &') ')(,-) 2-).1 !! !! !! !! "" # $ Growth & Margins (%) ______% $ &# $ ' ( &* )* !, ! " .#/ '' '' ! #$ " 0/$+12345 % & " " " "" % & " " " " Cash Flow (HK$ mn) ______#& '%% & Price Performance ______ ! "#$%&'( " !!!# "!# )*'& *+(% " # " # " # " # ,'(-'. " # " !# " # " # /. 0 .

)* ! 0 '" '+# "! # " # " # 1$"# )*+& *+(% " !# ! " !# " !# $ " # ## #### 2 *+(% " # ! !

Source: FactSet. Price as of 24 Apr 2018 close. Source: Company data, Goldman Sachs Research estimates. Income Statement (HK$ mn) ______

For the exclusive use of [email protected] !" #!$ %&'( ( )*+' ,, ,, ,, ,, - %+' ,, ,, ,, ,, $')(( !.(/( 0( ( )*+' 1 ).*.)( 2 (( + 3( (4( 2( ( ,, ,, ,, ,, !"#" !$%& 2,++)'( ,, ,, ,, ,, !"#%" !$%& '#(% ""&#)*+& '#, $-,"&#)*+& '#(% "%"&#)*+& '#, $-,%"&#)*+& '#, $-,"$'.&#)*+& $2 567

25 April 2018 2 Goldman Sachs Wharf REIC (1997.HK)

n Initiate at Buy with a HK$65 12-mo NAV-based target price.

Strong cash ﬂow + commitment to payout add clarity to shareholder returns

Company background - a spun-off as a giant property investor n Wharf REIC is an owner and operator of key mixed-use investment properties in Hong Kong, with aggregate GAV of c.HK$283bn and c.12mn sq ft GFA of properties. Their ﬂagship shopping malls include Harbour City (in Tsim Sha Tsui), Times Square (in Causeway Bay), and Hollywood Plaza (in Diamond Hill). HK investment properties (62% of GAV) is the key of its GAV (at c.HK$283bn), and its HK retail assets at HK$169bn are the largest in our coverage.

Exhibit 1: 62% of Wharf REIC is exposed to HK retail property, and 66% is from the crown jewel Harbour City complex Wharf REIC’s portfolio mix for our FY19E HK$283bn worth of assets

Total portfolio GAV by usage Total Portfolio GAV by projects HK Hotel China Harbour City 5% HK Others 3% 3% Plaza HK HK Hotel Hollywood Others 5% 4% 9%

HK Office Times Square 24% HK Retail 19% Harbour City 62% 66%

Plaza Hollywood Times Square

Source: Company data, Goldman Sachs Global Investment Research

Exhibit 2: Wharf REIC is the 3rd largest listed retail-focus landlord Exhibit 3: ... and 2nd largest listed HK landlord by size of investment

For the exclusive use of [email protected] globally properties Global retail landlords market cap, as of last close PropCos’ HK investment properties’ 1-year-forward GAV estimates; CP=Car Park

Market Cap (US$bn) (HK$mn) 50 45.7 HK retail HK office Hotels CP/Others 45 400,000 40 350,000 35 300,000 30 23.7 250,000 25 20.9 20.3 20 200,000 14.0 15 12.0 150,000 10 6.0 5.6 4.3 3.7 100,000 5 2.3 2.1 50,000 0 l l i l y y o d p n d T T C t l r I I a I a i a n o a

i 0 C e u r

b E i E s s t E a C l i M f l b l

y P t s R R A n

R a s y

a u t l H d i n f t e r l o k U e t e i r t M p o J f a n T

n L p a i a W a n u a m h L M t i h o C r C S W S e o A F

Source: Datastream Source: Company data, Goldman Sachs Global Investment Research

n It is a spin-off from Wharf Holdings (0004.HK, Buy , closed at HK$25.45 on Apr 24, 2018) back in November 2017. According to the company, its predecessor was

25 April 2018 3 Goldman Sachs Wharf REIC (1997.HK)

founded in 1886 and since then involved in a wide range of businesses including property development, rentals and ports among others. This spin-off exercise was a demerger to separate the Wharf group’s Hong Kong property investment business into a separate entity.

Exhibit 4: Wharf REIC is a spinoff from Wharf Holdings to focus on HK investment properties Wheelock, Wharf and Wharf REIC structures before and after Nov 2017’s spinoff

Wheelock and Wharf group structure Wheelock and Wharf group structure Before After spinoff

Woo Family Woo Family 60.99% 60.99% Wheelock and Wheelock and Company Company (0020.HK)* (0020.HK)*

61.03% 61.03% 61.03%

Wharf Holdings Wharf * Wharf REIC * (0004.HK)*

HK & China HK & China China IP HK IP Ports Ports China IP HK IP DP DP

* Denotes listed company. * Denotes listed company. Note: HK IP refers to Harbour City, Times Square, Plaza Hollywood, C Source: Company data, HKEx.

A REIC but not a REIT n Less restricted: The company is naming itself as a “real estate investment company” (REIC) rather than a “real estate investment trust” (REIT) which is under the speciﬁc code regulated by Hong Kong Securities and Futures Commission. Some of the differences among others for being a REIC rather than a REIT, are there is no - Minimum after-tax net income payout ratio of 90%;

For the exclusive use of [email protected] o

o Maximum asset allocations of 10% to under-development projects;

o Maximum leverage ratio of 45% gross debt to total asset.

n Payout commitment: Notwithstanding the aforementioned, we see the key difference for Wharf REIC to set themselves apart from other traditional non-REIT listed property companies is the commitment to a ﬁxed dividend policy — to payout c.65% of their realised recurrent proﬁt attributable to shareholders derived from Hong Kong investment properties and hotels.

n Greenfield possible: Management guided that their intended use of the remaining 35% of earnings are debt repayment (at 20% net debt to equity as of 2017) and growth capex. Standing at only 20% net gearing as of 2017, and with no regulatory ceiling for the aforementioned nor allocations to under development projects, management shall have the flexibility to continue to look for investment opportunities going ahead, with a focus on Hong Kong investment properties (including greenfield sites).

25 April 2018 4 Goldman Sachs Wharf REIC (1997.HK)

Exhibit 5: Wharf REIC had a 20% gearing ratio in FY17 Exhibit 6: We note that there are at least a few major commercial Companies’ net debt to equity ratio vs. ave ﬁnance cost, as of FY17 sites to be tendered in future Selected list of upcoming commercial sites potentially to be made available for tender by the HK government

Net debt/Equity finance cost (RHS) Name Location Use GFA(sqft) 70% 5.0% 4.5% 4.5% West Kowloon high speed rail Junction of Lin Cheung Road and Commercial/hotel 3,163,440 W, Austing Rd 60% 4.1% 4.5% 4.1% 3 sites at Kai Tak Kai Tak Area, Kowloon Commercial/hotel 2,553,348 3.7% 50% 3.6% 4.0% Old Electrical and Mechanical Caroline Hill Rd, Causeway Bay Commercial 1,076,400 3.5% 3.4% Services Department Headquarters 40% 3.2% 3.5% 2.9%3.0% 3.0% Total 6,793,188 30% 2.7%2.7% 3.0% 2.4% 20% 2.5% 10% 2.0% 64% 38% 23% 14% 18% 19% 9% 5% 5% 7% 43% 26% 6% 20% 0% 1.5% ) ) v n p p p T T A P D C d d $ I $ I I e o o o o i K K n n r r r S E S E W E D ( -10% p 1.0% a a

C H P P P

U R R N

L L

( n

m S

y e f g k e L a r a r r n o C i n r n s n a K i -20% h 0.5% n o u e i y C w u h s L t H C L r K S r S H

G e W o g d -30% M 0.0% F n n a

e -21% H H

Source: Company data, Datastream Source: HKET, HKEJ, HKSAR Gov’t

Stable cash ﬂow plus commitment to payout to add clarity to shareholder returns n We see a strong cash ﬂow proposition for the company, amid stable rental income plus and economies of scale and synergies deriving from its group of sizable mixed-use property rental projects in Hong Kong.

n We see the key difference for Wharf REIC to set themselves apart from other traditional non-REIT listed property companies is the commitment to a ﬁxed dividend policy — to payout c.65% of their realised recurrent proﬁt attributable to shareholders derived from Hong Kong investment properties and hotels.

n In our earlier regional real estate discussion ( Asia Paciﬁc Real Estate: Adapting to a new cityscape , Nov 14, 2016 ), we argue that by returning capital and generating visible income streams, developers can attract yield investors and beneﬁt from a re-rating of returns, thereby achieving better-than-peers valuation.

For the exclusive use of [email protected] Exhibit 7: Payout ratio vs dividend yield among PropCos, FY18E Exhibit 8: Payout ratio vs discount to 1-year-forward NAV estimates among PropCos

(%) Payout ratio (LHS) Div yield (%) (%) (%) Payout ratio (LHS) Disc to NAV 7.5 140 20 140 8 8 6.4 120 10 120 7 (4) 5.5 (9) 0 6 100 100 (19) -10 4.5 4.3 5 4.1 4.1 80 -20 80 3.8 3.7 (32) 3.4 3.6 3.5 (33) (35) (35) 4 60 (38) (39) -30 60 2.6 2.8 2.8 (44) 3 (46) -40 40 (51) 40 (57) (55) 2 -50 20 70 -60 20 1 133 115 106 97 69 61 58 56 53 53 42 39 35 26 133 115 106 97 70 69 61 58 56 53 53 42 39 35 26 0 -70 0 0

Source: Company data, Goldman Sachs Global Investment Research, Quantum Source: Company data, Goldman Sachs Global Investment Research, Quantum

25 April 2018 5 Goldman Sachs Wharf REIC (1997.HK)

Property portfolio review for the 3rd largest listed retail-focus landlord globally

Giant and pure HK investment properties owner Wharf REIC is an owner and operator of key mixed-use investment properties in Hong Kong, with aggregate GAV of c.HK$283bn and c.12mn sq ft GFA of properties. Their ﬂagship shopping malls include Harbour City (in Tsim Sha Tsui), Times Square (in Causeway Bay), and Hollywood Plaza (in Diamond Hill).

Exhibit 9: Wharf REIC’s portfolio details Wharf REIC’s portfolio details

Property name Location % owned by Attr LFA 2018E NAV - FY18E Passing rent FY18E (sqft) GSe (HK$/sqft) occupancy (%) Wharf REIC /no. rooms (HK$mn) Hotel ADR (HK$) Harbour City Tsim Sha Tsui 6,093,647 187,412 Retail 72-100 1,195,241 118,096 451 98 Office 72-1004,237,406 47,492 48 97 Serviced apartments 100 661,000 15,824 - - Times Square Causeway Bay 1,555,987 54,228 Retail 100 530,000 37,879 319 99 Office 100 1,025,987 14,249 60 96 Plaza Hollywood Diamond Hill 374,000 10,736 Retail 100 374,000 9,592 115 97 Crawford House Central 171,000 4,602 Retail 100 66,000 3,023 205 100 Office 100 105,000 1,580 65 99 Premises at Wheelock House Central 204,000 4,354 Retail 100 3,000 632 941 100 Office 100 201,000 3,722 80 100 Hotels and club 235,103 13,433 Existing at Harbour City Tsim Sha Tsui 72 1,050 8,987 1650-1855 81-85 The Murray Central 72 234,053 4,446 3,000 30

Source: Company data

Proven track record in delivering higher-than-market growth Their retail tenant sales together account for c.9.2% of total HK retail market sales in 2017, with their tenant sales growth outperforming that of overall market in most of the time during the past decade. We attribute the aforesaid of this outperformance in retail sales to -

n Prime and sizable one-stop offerings For the exclusive use of [email protected] n Active leasing management amid economies of scale and synergies

n Strong sales and marketing and proactive focus in tapping into tourist spending

n Active asset management to improve the premises

25 April 2018 6 Goldman Sachs Wharf REIC (1997.HK)

Exhibit 10: Wharf’s REIC portfolio tenant sales growth vs overall Exhibit 11: Wharf’s REIC portfolio retail revenue growth vs overall market market

(yoy) HK retail sales growth vs Wharf tenant sales growth (yoy) 35% 31% 30% HK retail sales growth vs Wharf retail revenue growth 28% 30% 25% HK retail Wharf REIC 25% HK retail Wharf REIC 20% 20% 18% 17% 16% 15% 20% 15% 13% 15% 15% 15% 7% 10% 5% 10% 5% 5% 5% 11% 5% 8% 5% 0% 0% -5% -10% -13% -10% -5% -15% -10% 8 8 7 8 0 1 2 4 5 6 7 8 0 1 2 4 5 6 9 3 7 9 3 7 1 1 0 0 1 1 1 1 1 1 0 0 1 1 1 1 1 1 0 1 1 0 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2

b b e e F F / / n n a a J J

Source: Company data, Goldman Sachs Global Investment Research, CEIC Source: Company data, Goldman Sachs Global Investment Research, CEIC

Better retail market backdrop YTD to bring even faster tenants growth for Wharf REIC n Back in March 2018’s results brieﬁng, management guided that they see a clear improvement in their tenant sales since 2H 2017, which was the ﬁrst meaningful uptick since 2014.

n They attribute this turnaround to positive currency impact (HKD depreciated against major currencies include RMB), rising Chinese middle class spending, and improvement of local wealth.

Upcoming focus - 1Q18 operating data release and potential divestments

Key beneﬁciary of rising HK retail sales especially from tourist spending n We expect the upcoming May release of 1Q2018 operating data to show a better-than-market tenant sales growth, and to further improve its occupancy-cost-ratio (OCR) back to mid-cycle levels.

n Back in early-March’s analyst brieﬁng, management guided that while their OCR For the exclusive use of [email protected] looks relatively high at c.20% and 23% for Harbour City and Times Square for CY2017, if we were to look at only 4Q17, the aforesaid ratios were improved substantially to 17% and 19% respectively. We see this as positive setup, amid further improvement in retail sales 2018YTD, for company to raise retail rentals going forward.

25 April 2018 7 Goldman Sachs Wharf REIC (1997.HK)

Exhibit 12: If we were to look at 4Q17, Harbour City and Times Exhibit 13: Tenant sales have already resumed positive growth for Square’s OCR are already lowered to 17% and 19%, respectively most of the shopping malls in Hong Kong Selected HK retail properties’ OCR Tenant sales for major retail malls

25% 23% 16.0% (%) 21% 12.0% 20% 20% 20% 12.0% 20% 9.0% 7.2% 7.6% 8.0% 5.5% 14% 3.9% 15% 13% 4.0% 2.2% 1.0% 0.2% 0.0% 10% -4.0% -3.0% l s k s c l s y e e a l l i e t t l f i c e z e a e i l a c a r r

5% a c a a c C l a a l g a e

l a W a m s r l p y v P

l P t

l l y u P i l o i P q s t a

’

i o a a m C S v t n T K i b

C a I t r M e a

0% e H h s r E a s g e m y R H Time Hysan retail Harbour Langham Festival SHKP Link REIT i n

F H T k a n Squares portfolio City Place Mall Walk L i

(ex-Apple L Store) Wharf Swire Properties Apr- Hysan CY17 Apr 17 - CY17 FY17 1H CY17 FY17 CY17 Apr-Jun 17 2H CY16 Apr 17 - CY2017 2H CY2017 Dec 17 FY2017 Dec 17 Dec 17

Source: Company data Source: Company data

AEIs and new openings to drive additional earnings growth n At Harbour City, its 94,207 sq ft GFA Ocean Terminal Extension was opened back in late 2017, and while the extension is likely providing lower-than-mall-average rentals amid relatively high food & beverages offerings, we see the importance in drawing more trafﬁc, to bring additional contributions.

n Opening of The Murry hotel in Jan 2018 will likely see a solid ramp-up amid strong overall visitor arrivals to Hong Kong, and will likely add growth to the bottom line in the next year or two.

Divestments in China to potentially present one-off gains n There are three legacy China assets, the Changzhou hotel, Suzhou hotel, and a JV on investment properties (c.HK$4bn valuation in our NAV) that management has said it aims to dispose of. Back in the early March analyst brieﬁng, management guided that they hopefully to monetize some of these in 2018E. For the exclusive use of [email protected]

NAV as primary valuation tool, and we see upside risks to consensus DPS forecasts

Our FY19E NAV at HK$79 with a target discount of 20% n Our FY19E NAV is HK$79/share, baking in 7% p.a. retail rental growth in 2018/19E, and 5.5-6.0% gross cap rate of its HK rental properties. Historically, book value growth has been the key driver for traditional HK property companies’ share prices, whereas dividend growth has been key for REITs. We believe BV (or NAV) growth is still the key valuation metric regardless of business mix.

n Our target NAV discount of 20% stands at about the midway discount between GS-covered traditional landlords and HREITs, as of current trading valuations.

n 12-mo NAV-based TP at HK$65, initiate at Buy.

25 April 2018 8 Goldman Sachs Wharf REIC (1997.HK)

Exhibit 14: Wharf REIC’s NAV summary Exhibit 15: Wharf REIC NAV discount and payout ratio versus peers

Wharf REIC FY19E NAV (%) (%) 160 Payout ratio (LHS) Disc to NAV 20 NAV Calculation HK$mn HK$/shr % of ttl 9 8 140 10

Harbour City 187,412 61.73 66.2%120 (6) (7) 0 Retail 118,096 38.90 41.7% 100 -10 Office 47,492 15.64 16.8% 80 (28) -20 (31) (31) Serviced apartments 15,824 5.21 5.6% (34) 60 (39) (37) -30 CP/ Others 6,000 1.98 2.1% (43) (43) 40 -40 Time Square 54,228 17.86 19.1% (50) (54) (53) Retail 37,879 12.48 13.4% 20 -50 136 116 106 79 60 61 61 55 54 52 46 45 31 62 35 Office 14,249 4.69 5.0% 0 -60 CP/ Others 2,100 0.69 0.7% Plaza Hollywood 10,736 3.54 3.8% Retail 9,592 3.16 3.4% CP/ Others 1,144 0.38 0.4% Other HK IPs 9,416 3.10 3.3% Hotels 13,666 4.50 4.8% China investment prop. 3,791 1.25 1.3% China development prop. 3,948 1.30 1.4%

Gross Asset Value 283,198 93.27 100%

Net (debt)/cash and others (36,974) (12.18)

NAV 246,224 81.10

Source: Company data, Goldman Sachs Global Investment Research Source: Company data, Goldman Sachs Global Investment Research, Datastream

Steadily growing and sizable rentals to drive dividend growth n We look for 7% p.a. growth in HK investment properties revenue and gross proﬁt respectively in 2018E to 2020E, on the back of a 7%/ 7%/ 5% p.a. growth in their spot retail rents.

n As such, we model a 4-5% p.a. growth in DPS between 2017 (from 2H17 annualized) to 2020E.

Exhibit 16: Wharf REIC’s Segment P&L and GSe vs Consensus Exhibit 17: Our estimates are slightly above the street consensus Our key estimates vs consensus

For the exclusive use of [email protected] Wharf REIC segment P&L analysis B HK$mn 2015 2016 2017 2018E 2019E 2020E 2018E 2019E 2019E Revenue (HK$mn) Investment properties 12,038 12,775 13,334 13,990 14,544 15,257 Gse Development properties 3,930 2,482 5,907 205 - - Hotels 1,359 1,342 1,403 1,609 1,855 1,966 Others 249 252 260 269 279 288 Revenue 16,072 16,677 17,512 Total 17,576 16,851 20,904 16,072 16,677 17,512 YoY% 1% -4% 24% -23% 4% 5% Underlying profit 8,811 9,244 9,790 Gross profit by segment DPS(HK$) 1.99 2.08 2.18 Segment GP for investment properties 10,559 11,281 11,825 12,428 12,928 13,584 Segment GP for development properties 1,162 514 3,725 129 - - Segment GP for hotels 453 421 458 525 605 642 BBG consensus Other GP 437 388 402 416 431 446 Gross segment GP 12,611 12,604 16,410 13,498 13,964 14,672 YoY% 11% 0% 30% -18% 3% 5% Revenue 15,960 16,395 17,178

Net profit to shareholders 13,787 9,917 17,218 8,811 9,244 9,790 Adj. Net income 9,058 9,308 9,608 Underlying profit 8,458 8,516 9,500 8,811 9,244 9,790 Recurring underlying profit from HK DPS(HK$) 1.95 2.01 2.11 IP/Hotel 7,031 7,325 6,447 9,148 9,696 10,197 YoY% 2% 4% -12% 42% 6% 5% updated on Apr 24, 2018 DPS (HK$/share) 0.95 1.99 2.08 2.18 YoY% 110% 4% 5% GSe vs consensus Revenue 1%2%2% Adj. Net income -3% -1% 2% DPS 2% 3% 4% note: in HK$mn except per share data

Source: Company data, Goldman Sachs Global Investment Research, Bloomberg Source: Company data, Goldman Sachs Global Investment Research, Bloomberg

25 April 2018 9 Goldman Sachs Wharf REIC (1997.HK)

... We see upside risks to consensus DPS forecasts n At the moment, we see upside revisions potential to consensus DPS for Wharf REIC, as the street is look for only HK$1.95/share DPS for 2018E, which is roughly double 2H17’s DPS of HK$0.95/share, without factoring-in much growth into the estimates.

n However, we think even the modest guidance of high-single-digit positive retail rental reversions could easily more than deliver the aforesaid consensus DPS growth, not to mention likely positive kick-in from turnover rentals (was at c.8% to retail revenue back in 2017 per management) amid broader markets retail sales growth at c.16% yoy growth 2018YTD (which we see Wharf REIC’s portfolio like to outperform this given their exposure to luxury tourist spendings).

Exhibit 18: Wharf’s FY18E div yield and payout ratio versus peers

(%) Payout ratio (LHS) Div yield (%)

140 7.5 8 6.4 120 7 5.5 6 100 4.5 4.3 4.1 4.1 5 80 3.7 3.8 3.6 3.4 3.5 4 60 2.6 2.8 2.8 3 40 2 20 1 133 106 70 69 61 58 56 55 53 53 43 42 39 35 26 0 0

Source: Company data, Goldman Sachs Global Investment Research, Datastream

Key risks: Interest rates, new supply, policy changes and evolution of tourist spending behavior n Interest rates: we see the potential impact from a change in interest rates as two-fold— (1) it would affect the P&L through ﬁnance costs, as Wharf REIC has

For the exclusive use of [email protected] 20% net gearing at the moment; (2) it would directionally affect the cap rate assumptions, impacting on NAV estimates (or BVPS).

n New Supply: A relatively large number of retail property completions is expected in 2018/19, of which NWD’s 1mn sq ft GFA shopping mall is also located in the Tsim Sha Tsui area where Harbour City is located; this may potentially increase the level of retail landlord competition in the district.

n Policy changes and new competition: One of the key drivers of fast retail sales growth was the opening up of the market to the broader Chinese visitors, until a policy reversal in 2013 amid local capacity constraints. If such a policy were to be instituted again, it would likely prove negative for Wharf. In addition, aside from existing regional competition, we could see new entrants; talks of a new free trade zone in Hainan, with possible new initiatives to promote tourism, could divert China competitors to Hong Kong over the longer term.

25 April 2018 10 Goldman Sachs Wharf REIC (1997.HK)

n Decline in tourist spending: Tourist spending behaviour continues to evolve, as seen in per capita spending and average length of stay, with both declining in recent years.

Exhibit 19: FY19E NAV sensitivity analysis Exhibit 20: FY19E EPS sensitivity analysis

FY19E NAV Retail/office rent yoy chg (p.a.) FY19E EPS Retail/office rent yoy chg (p.a.) (HK$shr) +0.0% +3.0% +5.0% +7.0% +10.0% (HK$shr) +0.0% +3.0% +5.0% +7.0% +10.0%

s e e g t 4% 87 89 91 93 95 -100bps 3.98 4.02 4.04 4.06 4.10 n a r a

h p c

a -50bps 3.48 3.52 3.54 3.56 3.60

5% 81 83 85 87 89 t C

s e o

c +0bps 2.98 3.02 3.04 3.06 3.10 6%767879 81 83 c i

f f e c o / n l +50bps 2.93 2.97 2.99 3.01 3.05

i 7%6971737577 a a t n i e

F +100bps 2.88 2.92 2.94 2.96 3.00

R 8% 63 65 67 69 71

Source: Company data, Goldman Sachs Global Investment Research Source: Company data, Goldman Sachs Global Investment Research

Exhibit 21: Relative largely large size of retail property completions Exhibit 22: ... Of which NWD’s 1mn sq ft GFA shopping mall is also is expected in 2018E/19E... located in Tsim Sha Tsui area where Harbour City is located HK retail property supply and take-up trend Major completions of retail properties

Development Location District GFA (sf) Developer (mn sqft) Completion Take-up Vacancy (RHS) 2018E 3.5 12.0% 97 Belcher’s St. & 20 Catchick St.HK Island Kennedy 19,565 SHKP Ocean Wings New Territories Tseung Kwan O 80,000 SHKP 3.0 Lime Gala HK Island Shau Kei Wan 55,435 SHKP 10.0% Victoria Harbour, North Point Ph.1HK Island North Point 7,000 SHKP 2.5 Eight Regency HK Island Tuen Mun 26,000 SHKP New World Centre Kowloon Tsim Sha Tsui 1,000,000 NWD 2.0 8.0% Ocean Pride, MTR Tsuen Wan West Station Tsuen Wan Tsuen Wan 436,476 CKP 1.5 Subtotal 1,624,476 6.0% 1.0 2019E Tai Wai Station - retail New Territories Tai Wai 652,514 NWD 0.5 4.0% Area 11, Mei Tung Street, Tung NewChung Territories Tung Chung 340,000 SHKP Nam Cheong Station HK Island Sham Shui Po 298,000 SHKP 0.0 Hend/HLP/Swire 2.0% Tung Chung commercial site Outlying Island Tung Chung 539,599 Prop/SHKP/NWD (0.5) KIL 11237, 15 Middle Rd. Kowloon Tsim Sha Tsui 339,712 Henderson Land Subtotal 2,169,825 (1.0) 0.0% 3 1 9 7 2 4 5 6 7 8 9 0 2 3 4 5 6 7 8 0 1 2 3 4 5 6 E E 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 1 8 9 1 1

Source: Rating & Valuation Department, Goldman Sachs Global Investment Research Source: Company data, Agencies, News reports, Goldman Sachs Global Investment Research

Exhibit 23: Tourist’s spending behaviour continues to evolve, as Exhibit 24: Aside from existing regional competition, there could be seen in per capita spending and average length of stay potentially new comers - talks on a new free trade zone in Hainan For the exclusive use of [email protected] Mainland Chinese tourist per capita spending and average length of with likely new initiatives to further promote tourism stay Highlight of recent Central Government strategies regarding Hainan * To establish a free trade zone in Hainan by 2020 (HK$) (# night) 10,000 per capita spending (LHS) 6.0 9,000 4.8 length of stay (nights) * To set up an investment fund to support the building of 4.5 5.0 8,000 4.3 4.2 a free trade port in Hainan by 2025 3.9 3.9 7,000 3.9 3.7 3.6 3.5 3.4 3.4 4.0 6,000 3.3 3.2 3.2 3.2 * 7RDLPIRU³PDWXUH´V\VWHPVHWXSE\ 5,000 3.0 4,000 * To encourage multinationals to set up their international 2.0 3,000 and regional headquarters 2,000 1.0 * To allow sports lottery games as well as horse-racing as 1,000 part of plans to promote tourism 0 0.0 4 1 5 2 3 5 6 7 8 9 0 2 3 4 6 7 0 0 0 0 0 0 0 1 1 1 1 0 1 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2

Source: CEIC Source: Xinhua, Reuters

25 April 2018 11 Goldman Sachs Wharf REIC (1997.HK)

M&A framework Across our global coverage, we examine stocks using an M&A framework, considering both qualitative factors and quantitative factors (which may vary across sectors and regions) to incorporate the potential that certain companies could be acquired. We then assign a M&A rank as a means of scoring companies under our rated coverage from 1 to 3, with 1 representing high (30%-50%) probability of the company becoming an acquisition target, 2 representing medium (15%-30%) probability and 3 representing low (0%-15%) probability. For companies ranked 1 or 2, in line with our standard departmental guidelines we incorporate an M&A component into our target price. M&A rank of 3 is considered immaterial and therefore does not factor into our price target, and may or may not be discussed in research.

The construction of our M&A framework reﬂects our view that the probability of M&A within our coverage increases for companies with the following attributes:

Can: a company can be easily acquired because of its size, a low risk of regulatory intervention and an absence of a majority shareholder (blocking stake).

Should : there should be a reason for an acquirer to bid, i.e. the attractiveness of the asset/market, and its value relative to its historical trading level.

Would: this aspect measures management’s relative willingness to accept a takeover and the presence/absence of M&A activity in the sector.

In light of this framework, we have assigned an M&A rank of 3 to Wharf REIC (i.e. low probability) based on the following scoring:

n Can : Wharf scores 2, given its relatively high single shareholder ownership status.

n Should : A score of 3; while it has attractive asset exposure, we estimate its valuation (PBR) is at a relative premium to peers

n Would : A score of 3 as we believe there is minimal management incentive to accept an M&A offer or to take it private, as the the spinoff of this entity has only

For the exclusive use of [email protected] recently completed.

For more detail on our framework, please refer to: Introducing Hong Kong property M&A framework , July 1, 2016

25 April 2018 12 Goldman Sachs Wharf REIC (1997.HK) Disclosure Appendix

Reg AC

I, Justin Kwok, CFA, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs’ Global Investment Research division. GS Factor Profile The Goldman Sachs Factor Profile provides investment context for a stock by comparing key attributes to the market (i.e. our coverage universe) and its sector peers. The four key attributes depicted are: Growth, Financial Returns, Multiple (e.g. valuation) and Integrated (a composite of Growth, Financial Returns and Multiple). Growth, Financial Returns and Multiple are calculated by using normalized ranks for specific metrics for each stock. The normalized ranks for the metrics are then averaged and converted into percentiles for the relevant attribute. The precise calculation of each metric may vary depending on the fiscal year, industry and region, but the standard approach is as follows: Growth is based on a stock’s forward-looking sales growth, EBITDA growth and EPS growth (for financial stocks, only EPS and sales growth), with a higher percentile indicating a higher growth company. Financial Returns is based on a stock’s forward-looking ROE, ROCE and CROCI (for financial stocks, only ROE), with a higher percentile indicating a company with higher financial returns. Multiple is based on a stock’s forward-looking P/E, P/B, price/dividend (P/D), EV/EBITDA, EV/FCF and EV/Debt Adjusted Cash Flow (DACF) (for financial stocks, only P/E, P/B and P/D), with a higher percentile indicating a stock trading at a higher multiple. The Integrated percentile is calculated as the average of the Growth percentile, Financial Returns percentile and (100% - Multiple percentile). Financial Returns and Multiple use the Goldman Sachs analyst forecasts at the fiscal year-end at least three quarters in the future. Growth uses inputs for the fiscal year at least seven quarters in the future compared with the year at least three quarters in the future (on a per-share basis for all metrics). For a more detailed description of how we calculate the GS Factor Profile, please contact your GS representative. M&A Rank Across our global coverage, we examine stocks using an M&A framework, considering both qualitative factors and quantitative factors (which may vary across sectors and regions) to incorporate the potential that certain companies could be acquired. We then assign a M&A rank as a means of scoring companies under our rated coverage from 1 to 3, with 1 representing high (30%-50%) probability of the company becoming an acquisition target, 2 representing medium (15%-30%) probability and 3 representing low (0%-15%) probability. For companies ranked 1 or 2, in line with our standard departmental guidelines we incorporate an M&A component into our target price. M&A rank of 3 is considered immaterial and therefore does not factor into our price target, and may or may not be discussed in research. Quantum Quantum is Goldman Sachs’ proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for in-depth analysis of a single company, or to make comparisons between companies in different sectors and markets. GS SUSTAIN GS SUSTAIN is a global investment strategy focused on the generation of long-term alpha through identifying high quality industry leaders. The GS SUSTAIN 50 list includes leaders we believe to be well positioned to deliver long-term outperformance through superior returns on capital, sustainable competitive advantage and effective management of ESG risks vs. global industry peers. Candidates are selected largely on a combination of quantifiable analysis of these three aspects of corporate performance. Disclosures Coverage group(s) of stocks by primary analyst(s) For the exclusive use of [email protected] Justin Kwok, CFA: Hong Kong Property. Hong Kong Property: Champion REIT, China Lodging Group, CK Asset Holdings Ltd, eHi Car Services, Fortune REIT (Hong Kong), Hang Lung Properties, Henderson Land, Hongkong Land, Hysan Development, Kerry Properties, Link REIT, Mapletree Greater China Commercial, New World Development, Shangri-La Asia, Sino Land, Sun Hung Kai Properties, Swire Properties, Wharf REIC. Company-specific regulatory disclosures The following disclosures relate to relationships between The Goldman Sachs Group, Inc. (with its affiliates, “Goldman Sachs”) and companies covered by the Global Investment Research Division of Goldman Sachs and referred to in this research. Goldman Sachs had a non-securities services client relationship during the past 12 months with: Wharf REIC (HK$54.55) Distribution of ratings/investment banking relationships Goldman Sachs Investment Research global Equity coverage universe

Rating Distribution Investment Banking Relationships Buy Hold Sell Buy Hold Sell Global 35% 53% 12% 63% 57% 51%

As of April 1, 2018, Goldman Sachs Global Investment Research had investment ratings on 2,896 equity securities. Goldman Sachs assigns stocks as Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for the purposes of the above disclosure required by the FINRA Rules. See ‘Ratings, Coverage groups and views and related deﬁnitions’ below. The Investment Banking Relationships chart reﬂects the percentage of subject companies within each rating category for whom Goldman Sachs has provided investment banking services within the previous twelve months.

25 April 2018 13 Goldman Sachs Wharf REIC (1997.HK)

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25 April 2018 14 Goldman Sachs Wharf REIC (1997.HK)

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25 April 2018 15 Goldman Sachs Wharf REIC (1997.HK)

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25 April 2018 16