10 March 2017 Asia Pacific/Hong Kong Equity Research Conglomerates Wharf Holdings (0004.HK / 4 HK) Rating NEUTRAL Price (09-Mar-17, HK$) 62.25 INCREASE TARGET PRICE Target price (HK$) (from 56.10) 65.00 Upside/downside (%) 4.4 Mkt cap (HK$/US$ mn) 188,781 / 24,304 Stabilising Harbour City lowers the risk Enterprise value (HK$ mn) 209,702 Number of shares (mn) 3,033 ■ Slower reversion rate in 2017 as expected. Wharf achieved high single-digit Free float (%) 40.0 retail rental reversion rate and 14%/8% for HC/TS offices in 2016. For 2017, 52-wk price range (HK$) 63.00-39.25 ADTO-6M (US$ mn) 31.7 management is guiding for a single-digit rental reversion rate for retail and flat to Target price is for 12 months. low single-digit for offices. Occupancy cost somewhat stabilised in 2H16 but Research Analysts remained at high levels at 22% (HC) and 26% (TS). As retail sales stay sluggish Susanna Leung and office supply rises, we believe rents are still under pressure. 852 2101 6590 [email protected] ■ Harbour City stabilising. Decline in retail sales at HC and TS narrowed sharply from -14.7%/-15.7% YoY in 1H16 to -6.4%/-6.3% YoY in 3Q and -3.8%/-7.0% YoY in 4Q, with HC outperforming the market in 2H16 despite the high base. In January, retail sales of HC was +1% and -2.8% YoY for TS, though management was cautious about February due to the timing of CNY. ■ Strategic review on IP. It has just commenced a study to consider the possibility of listing some of the Group's IP assets under a separate entity by way of distribution in specie to shareholders. This could be a positive catalyst over time, though near-term impact may be more muted, given: (1) no details regarding the structure and assets; (2) no pre-set timetable and it is possible that the spin-off will not proceed; (3) appetite for interest rate sensitive asset class and slowing HK rental growth; and (4) the study currently does not involve Wheelock, hence, group reorganisation is unlikely at this stage. ■ Maintain NEUTRAL. Weaker organic rental growth should be compensated by new IP completions, while earnings in FY17-18E should still be supported by robust DP sales in the last two years. We raise FY17/18E EPS by 5.4%/0.3% and TP to HK$65 from HK$56.10 on higher China project ASP, diminishing downside risk for HC retail rent, and proactiveness to unlock asset values. Potential newsflow should give some momentum to the stock, but we believe it is facing slowing organic growth in the medium term, given weaker rental growth, depleting China DP landbank and a lack of reinvestment opportunities. Share price performance Financial and valuation metrics Year 12/16A 12/17E 12/18E 12/19E Revenue (HK$ mn) 46,627.0 35,713.2 34,785.3 29,898.7 EBITDA (HK$ mn) 18,742.4 19,823.4 20,606.5 19,216.0 EBIT (HK$ mn) 17,065.0 18,146.0 18,929.1 17,538.6 Net attributable profit (HK$ mn) 13,754.0 15,100.2 14,638.8 15,039.9 EPS (CS adj.) (HK$) 4.54 4.98 4.83 4.96 Change from previous EPS (%) n.a. 5.4 0.3 - Consensus EPS (HK$) n.a. 4.46 4.65 EPS growth (%) 25.4 9.8 (3.1) 2.7 The price relative chart measures performance against the P/E (x) 13.7 12.5 12.9 12.5 HANG SENG INDEX which closed at 23,501.56 on Dividend yield (%) 3.5 3.3 3.4 3.4 09/03/17. On 09/03/17 the spot exchange rate was EV/EBITDA (x) 11.3 9.9 9.2 9.7 HK$7.77/US$1 ROE (%) 4.4 4.6 4.4 4.6 Performance 1M 3M 12M Net debt/equity (%) 7.3 2.4 0.4 Net Cash Absolute (%) 7.5 11.8 43.1 NAV per share (HK$) - 104.00 - - Relative (%) 6.8 8.5 25.6 Disc./(prem.) to NAV (%) - 40.1 - - Source: Company data, Thomson Reuters, Credit Suisse estimates DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse 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. 10 March 2017 Focus tables and charts Figure 1: Retail business contributes to 69% rental income in Hong Kong (HK$mn) 1H14 2H14 FY14 1H15 2H15 FY15 1H16 2H16 FY16 2H16 - YoY FY16 - YoY Retail rental 3,962 4,108 8,070 4,246 4,249 8,495 4,465 4,425 8,890 4.1% 4.6% HC 2,797 2,877 5,674 2,993 2,956 5,949 3,108 3,099 6,207 4.8% 4.3% TS 909 974 1,883 990 1,027 2,017 1087 1,050 2,137 2.2% 5.9% PH 256 257 513 263 266 529 270 276 546 3.8% 3.2% Office rental 1,351 1,431 2,782 1,474 1,513 2,987 1,556 1,582 3,138 4.6% 5.1% HC 1,027 1,094 2,121 1,145 1,172 2,317 1,208 1,229 2,437 4.9% 5.2% TS 324 337 661 329 341 670 348 353 701 3.5% 4.6% HK rental 5,560 5,853 11,413 6,053 6,112 12,165 6,447 6,492 12,939 6.2% 6.4% Retail as % of HK rental 71.3 70.2 70.7 70.1 69.5 69.8 69.3 68.2 68.7 -1.4pp -1.1pp Source: Company data, Credit Suisse Figure 2: Harbour City retail sales trend Figure 3: Times Square retail sales trend (HK$bn) (HK$bn) 40 12 35.0 10.5 33.9 35 9.4 30.8 30.7 10 9.3 9.1 27.7 9.1 30 9.6 2.8 27.2 9.8 8.1 9.2 8.1 8 7.3 2.7 2.9 2.4 25 2.7 7.8 20.3 8.3 2.2 8.6 2.5 20 8.1 6 2.2 7.0 2.0 7.5 2.3 2.2 2.2 6.4 6.6 1.9 15 6.9 1.8 7.7 4 2.4 4.9 7.5 7.0 2.0 2.1 10 6.7 6.3 2.0 2.0 1.9 5.9 1.5 4.2 2 5 9.1 2.8 7.4 8.5 8.6 7.0 2.1 2.4 2.3 2.6 2.1 4.8 6.1 1.8 0 0 2010 2011 2012 2013 2014 2015 2016 2010 2011 2012 2013 2014 2015 2016 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Source: Company data, Credit Suisse Source: Company data, Credit Suisse Figure 4: Occupancy cost (all-in) remained uncomfortable Figure 5: Occupancy cost comparison 30 Occupancy cost Hysan Langham Wharf 2014 15% 17.5% 16-18% 25 1H15 19-20% 19% 19-21% 20 FY15 21-22% 19% 19-22% 15 1H16 23-24% 20% 23-28% 10 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Harbour City Times Square FY16 23% 20% 22-26% Source: Company data, Credit Suisse Source: Company data, Credit Suisse estimates Figure 6: Wharf underperformed peers and the market Retail sales % YoY Harbour City Times Square PP Mall Citygate Cityplaza Lee Garden hub Hysan Place Lee Theatre Langham Mall HK overall FY16 (9.9) (11.0) (12.8) (8.0) (3.7) (7.0) (2.0) (5.0) (4.9) (8.1) 1H16 (14.7) (15.7) (17.0) (13.0) (4.1) (low-teens) (Mid-single digit) (Mid-single digit) (6.4) (10.5) 2015 (12.1) (12.8) (11.8) (10.0) (3.9) (10.0) (7.0) 5.0 1.8 (3.7) 1H15 (7.1) (9.6) (12.7) (5.3) 0.7 (single-digit) (1-2) 10.0 2.9 (1.6) Source: Company data, Credit Suisse Wharf Holdings (0004.HK / 4 HK) 2 10 March 2017 Figure 7: Wharf's FY16 results snapshot (HK$ mn) FY16 FY15 %YoY Turnover 46,627 40,875 14.1 Property investment 12,541 11,759 6.7 Hong Kong 11,288 10,516 7.3 China 1,253 1,243 0.8 Property development 3,650 2,241 62.9 Hong Kong 387 (25) n/a China 3,263 2,266 44.0 Hotels 289 278 4.0 TMT 59 112 (47.3) Pay TV and internet (313) (246) 27.2 Telecommunications 372 362 2.8 Others - (4) n/a Logistics 719 689 4.4 Container terminals 710 676 5.0 Other logistics 9 13 (30.8) Investment and others 455 464 (1.9) Corporate expenses (648) (690) (6.1) Total EBIT 17,065 14,853 14.9 Other net income/(charge) (528) 547 n/a Net finance credit/(cost) (1,598) (1,474) 8.4 Operating profit 14,939 13,926 7.3 Associates and JCEs 2,906 1,392 108.8 Property development 2,651 1,091 143.0 Terminals 255 301 (15.3) Pre-tax profit 17,845 15,318 16.5 Tax (4,084) (3,341) 22.2 Minority interests (7) (1,008) (99.3) Core underlying profit 13,754 10,969 25.4 Exceptionals 6,780 (1,176) (676.5) Underlying profit 20,534 9,793 109.7 Net revaluation gain 906 6,231 (85.5) Reported net profit 21,440 16,024 33.8 DPS (HK$) 2.15 1.90 13.2 Core payout ratio (%/ppt) 47 53 (5.1) Gearing (%/ppt) 7.5 15.3 (7.8) Source: Company data, Credit Suisse estimates Wharf’s FY16 core profit increased by 25% YoY to HK$13.8 bn, 3% ahead of our estimate of HK$13.3 bn and 7% above market consensus of HK$12.9 bn.