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Swire Properties-Second Largest Hong Kong Commercial Exposure

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Swire Properties-Second Largest Hong Kong Commercial Exposure Company write-up FIG Real Estate abc Equity – Hong Kong Global Research Swire Properties Not Rated Second largest Hong Kong commercial exposure Index Hang Seng Index Offering the second largest HK commercial exposure with a RIC 1972.HK long operational history, proactive asset management and decentralised focus Landbank dominated by HK (by region) and office assets (by type), accounting for 86% and 61% of total value, respectively Exposed to HK economic conditions and execution risks in China 18 January 2012 We do not rate nor are we commenting on the investment merits of the company’s securities. Perveen Wong* Analyst Overview. Swire Properties has more than 40 years of operational history in HK with a The Hongkong and Shanghai Banking demonstrated historical ability to create value through transformational projects such as Corporation Limited +852 2996 6571 Taikoo Shing, Pacific Place and Island East. It has been active in asset enhancement, and [email protected] is generally regarded as a premium asset manager. Swire Properties also focuses on Derek Kwong* organically growing its HK investment property portfolio, which has increased by an Analyst above-peer 56% in size over 2000-10, raising the critical mass of its decentralised office The Hongkong and Shanghai Banking Corporation Limited hubs in Admiralty and Island East. It is the second largest commercial landlord in HK by +852 2996 6629 landbank size and rental income. [email protected] Stanley Cheung* HK-focused landbank with China in the pipeline. Swire Properties had 33m sq ft of Associate attributable landbank as of September 2011, of which 19m sq ft was completed The Hongkong and Shanghai Banking Corporation Limited investment properties. Among these, 75% were HK assets with an office focus (71% of +852 2822 4395 completed investment properties in HK by attributable floor area). Swire Properties [email protected] reported a property portfolio value of HKD221bn as of September 2011 and pro-forma Ganesh Siva* Associate, Bangalore book NAV of HKD29.2 per share as of June 2011. China rental contribution rising. While the contribution from Swire Properties’ China View HSBC Global Research at: investment properties remains limited (6% of total revenue in 1H11 and 13% of landbank http://www.research.hsbc.com value as of September 2011), the company has publicly stated it expects completed *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not commercial landbank in China to rise 69% to 8.8m sq ft over 2012-15, providing an registered/qualified pursuant to FINRA additional rental income stream. regulations Issuer of The Hongkong and Risks. With 86% of property asset value tied to HK assets, Swire Properties is exposed to Company Shanghai Banking write-up: Corporation Limited changes in the local economic conditions as well as property-related measures taken by Disclaimer the HK government. The company faces execution risks in China, as it scales up This Company write-up operations there. must be read with the Appendix and the Disclaimer, which forms part of it Swire Properties Real Estate abc 18 January 2012 Contents Summary 3 Major investment property information 27 Business description 5 Pacific Place 28 Key operating data - Pacific Place 29 Risks 7 Taikoo Place 30 Key operating data - Taikoo Place 31 Peer operational comparisons 9 Cityplaza 32 Key operating data - Cityplaza 33 Sanlitun Village South & North 34 Landbank description 11 Key operating data – Sanlitun Village South & North 35 Dazhongli 36 Commercial projects under TaiKoo Hui 37 development 15 Indigo 38 Daci Temple, Chengdu 39 Historical financials 17 Disclosure appendix 40 Corporate background 21 Disclaimer 41 Appendix 23 Landbank summary 24 Financials 26 2 Swire Properties Real Estate abc 18 January 2012 Summary Offering the second largest HK commercial exposure with a long operational history, decentralised focus and proactive asset management Predominant HK commercial exposure (69% of property portfolio value and c90% of revenue); contributions from China growing Reported pro-forma book NAV of HKD29.2 per share as of June 2011 Overview Swire Properties has been a proactive landlord in HK on two fronts. 1) It has been active in asset Swire Properties has over 40 years of operational enhancement to improve recurring income stream history in HK, dating back to the transformation and returns, and is generally regarded as a of the Taikoo dockyard and sugar refinery into the premium asset manager. 2) It has focused on 12,000-unit Taikoo Shing area in the 1970s. The growing its investment property portfolio in HK, company has done residential development as which expanded HK office and retail assets by well as flagship mixed-use development of 56% (by area) over 2000-10, outperforming sector properties such as Pacific Place, Festival Walk average of 1% decline over the same period. In and Island East, making it the second largest particular, Swire Properties engages in the commercial landlord in HK. redevelopment of properties close to its existing HK property companies comparison - office and retail HK landlords’ growth in investment properties over time landbank (June 2011) 25 25 (mn sq.ft) (mn sq. ft) 20 20 15 15 10 10 5 5 0 W harf 0 SH KP Hysan GE + Swire HK Land Properties Champion Link HLP Sino W harf Kerry SHKP Hysan HK Land HK 2000 2005 2010 Champion Henderson Swire Prop Swire Great Eagle Great Note: Swire Properties sold Festival Walk in July 2011 Source: Company data, HSBC Source: Company data, HSBC 3 Swire Properties Real Estate abc 18 January 2012 investment properties, which has enhanced the independent valuation by property appraisers and critical mass of its office hubs in Admiralty and internal valuation of amalgamation properties. Island East, making it the largest office landlord Historical financials by floor area, with a decentralised focus. China rental contributions Swire Properties’ existing investment properties helped contributed to 5-7% y-o-y growth in rising revenue over 2008-10, with rental income rising While contributions from Swire Properties’ China from HKD6.8bn in 2008 to HKD7.9bn in 2010, investment properties remain limited (6% of total (including HKD800m contributions from Festival 1H11 revenue and 13% of property portfolio Walk which was sold in July 2011), making it the value), the company has publically stated that it second largest landlord in HK by gross rental expects completed commercial landbank in China income. Swire Properties’ gross profit margin to rise 69% from 5.2m sq ft in 2011 to 8.8m sq ft improved from 73% in 2008-09 to 75% in 2010. in 2015, providing additional rental income Swire Properties had 22% gearing as of end-2010, stream. which management expects to fall to 15% Exposed to macro following the disposal of Festival Walk in July environment and execution 2011 and new share issue to Swire Pacific in risks in China November 2011 (source: company prospectus). As of June 2011, the company had a reported pro- With 86% of property portfolio value tied to HK forma book NAV of HKD29.2 per share. assets, Swire Properties is exposed to changes in the local economic conditions as well as property- Corporate strategy related measures taken by the HK government, According to management, the company plans to which could affect the operating environment and adopt growth strategies via 1) transformational competition landscape. With a relatively short projects and 2) reinforcement of existing operational history in China (only two investment investment properties via asset enhancement, properties are income-generating), Swire redevelopment or additions, principally in HK and Properties faces execution risks as it sets to scale China while adopting a conservative capital up operations there with three projects scheduled management approach. The company also plans to for full opening. build its luxury residential exposure (source: Landbank description company prospectus). Swire Properties had 33m sq ft of attributable landbank as of September 2011, of which completed investment properties made up 19m sq ft. Among the completed investment properties, 75% were HK assets with an office focus (71% of completed investment property in HK by attributable GFA). Investment properties under development are mainly located in China. As of September 2011, Swire Properties’ entire landbank was valued at HKD221bn, including 4 Swire Properties Real Estate abc 18 January 2012 Business description Offering the second largest HK commercial exposure HK office assets have a decentralised focus and demonstrated organic growth Long operational history in HK and experienced management Second largest exposure to Rental growth in Island East vs. Central vs. overall Grade A office HK office and retail with a 30% decentralized focus 20% (q-o-q%) 10% Swire Properties has the second largest 0% commercial (i.e., office and retail) landbank in -10% HK by floor area, with a 13m sq ft investment -20% properties portfolio as of end-2011. With 69% of -30% property portfolio value attributable to HK office 1Q95 1Q97 1Q99 1Q01 1Q03 1Q05 1Q07 1Q09 1Q11 and retail assets (according to independent valuers as of September 2011), Swire Properties provides Central HKE Ov erall pure commercial HK exposure. Source: Jones Lang LaSalle Within the HK completed investment properties, the 1990s (from the former Victoria Barracks) and office assets make up 71% (by floor area), Festival Walk in the 2000s, followed by the including properties located outside of Central, refurbishment of Pacific Place completed in 2011. such as Admiralty and Island East. According to Its retail properties, including Pacific Place and Jones Lang LaSalle, Island East rental fell 23% CityPlaza, have been positioned as destination compared to Central’s 43% fall and the overall malls in HK. Grade A office market’s 39% fall after the global financial crisis in 2008. Organic growth in HK Branding Swire Properties has demonstrated its ability to grow organically in HK by securing prime sites Swire Properties has over 40 years of operational close to its existing office hubs.
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