Elevator Pitch

I maintain a Neutral rating for Hong Kong-listed property company Swire Properties Limited (OTCPK:SWPFF) (OTCPK:SWROY) [1972:HK].

This is an update of my prior article on Swire Properties published on March 30, 2020. Swire Properties’ share price has declined by -3% from HK$21.00 as of March 27, 2020 to HK$20.40 as of September 10, 2020, since my last update. Swire Properties trades at 0.42 times P/B, and it offers a consensus forward FY 2021 dividend yield of 4.5%.

Swire Properties’ interim dividend per share increased +3% YoY to HK$0.30 in 1H 2020, and its dividend payout ratio increased from 42% in 1H 2019 to 47% in 1H 2020. This came as a positive surprise, as many companies have chosen to either cut or omit their dividends as a result of COVID-19 headwinds. Swire Properties’ 2H 2020 financial performance is expected to remain resilient, and there could be further upside from capital recycling activities.

However, positives have largely been priced in at Swire Properties’ current valuations, with the stock’s forward dividend yields below 5% being unattractive compared to most of its Hong Kong property peers. As such, I see a Neutral rating for Swire Properties as justified.

Readers have the option of trading in Swire Properties shares listed either on the Over-The-Counter Bulletin Board/OTCBB as ADRs with the tickers SWPFF and SWROY, or on the Hong Kong Stock Exchange with the ticker 1972:HK. For those shares listed as ADRs on the OTCBB, note that liquidity is low and bid/ask spreads are wide.

For those shares listed in Hong Kong, there are limited risks associated with buying or selling the shares in terms of trade execution, given that the Hong Kong Stock Exchange is one of the major stock exchanges that is internationally recognized, and there is sufficient trading liquidity. Average daily trading value for the past three months exceeds $10 million, and market capitalization is above $15 billion, which is comparable to the majority of stocks traded on the US stock exchanges.

Institutional investors which own Swire Properties shares listed in Hong Kong include Schroder Investment Management, The Vanguard Group, BlackRock, Invesco Advisers, and MFS Investment Management, among others. Investors can invest in key Asian stock markets either using U.S. brokers with international coverage such as Interactive Brokers or Fidelity, or international brokers with Asian coverage like Hong Kong’s Monex Boom Securities and Singapore’s OCBC Securities.

Increase In 1H 2020 Interim Dividend

Swire Properties reported the company’s 1H 2020 results on August 13, 2020, and the key highlight was the increase in the company’s 1H 2020 interim dividend. In an environment where the majority of companies negatively impacted by COVID-19 are cutting or even omitting dividends, it came as a positive surprise that Swire Properties chose to increase its dividend payout in the first half of the year.

The company declared an interim dividend of HK$0.30 per share for 1H 2020, which represented a +3% YoY growth in absolute terms (as compared to 1H 2019 interim dividend of HK$0.29 per share), and an increase in the company’s dividend payout ratio from 42% in 1H 2019 to 47% in 1H 2020.

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Swire Properties emphasized at the company’s 1H 2020 results briefing on August 13, 2020 that it increased its interim dividend because “we believe that the COVID-19 impact is short term and our underlying strength of the business is still there” with “no change in our long-term investment plan and strategy.” It is noteworthy that Swire Properties increased its interim dividend by +3% YoY in 1H 2020, despite a -9% YoY decline in the company’s recurring underlying net profit (excluding fair value gains or losses and actual disposal gains relating to its investment properties) over the same period.

At its recent 1H 2020 earnings call, the company also reiterated its dividend policy, which is to “deliver sustainable dividend growth and to pay out approximately 50% of our underlying profit.” Also, Swire Properties’ net debt-to-equity ratio remains low at 5.9% as of June 30, 2020, which should support future dividend payouts.

Swire Properties offers consensus forward FY 2020 and FY 2021 dividend yields of 4.4% and 4.5%, respectively. Market consensus expects Swire Properties’ dividends per share to increase from HK$0.880 in FY 2019 to HK$0.898 in FY 2020 and HK$0.915 in FY 2021.

1H 2020 Financial Performance Was Better Than Expected

Swire Properties’ recurring underlying net profit declined by -9% YoY from HK$4,049 million in 1H 2019 to HK$3,702 million in 1H 2020, which was a decent financial performance and much better than what the market had expected. A +2% YoY increase in underlying net profit for Swire Properties’ core property investment business segment to HK$4,060 million in 1H 2020, was more than offset by losses of -HK$45 million and -HK$313 million for the company’s property trading and hotels businesses, respectively in the first half of the year.

For the company’s core property investment business segment, a -4% decrease in gross rental income to HK$6,101 million was partially offset by a reduction in operating and finance costs. Considering the negative impact of COVID-19 on property markets in general, it is impressive that Swire Properties’ gross rental income for its property investment business only declined by a mere -4% YoY. Swire Properties’ Hong Kong office property sub-segment, which accounted for around half of its total property investment rental income, was the key out-performer in 1H 2020.

Attributable gross rental income (including contribution from joint ventures and associates) for Swire Properties’ Hong Kong office property business grew by +2% YoY to HK$3,277 million in 1H 2020, despite a decrease in gross rental income contribution from two office buildings in Taikoo Shing which were divested in April 2019. The company’s Hong Kong office property business benefited from positive rental reversions for the portfolio, and an increase in rental income for One Taikoo Place (new office property which commenced business operations in September 2018) on a YoY basis. The overall occupancy rate of the Hong Kong office property portfolio was a healthy 97% as of June 30, 2020, and Swire Properties’ key Hong Kong office properties, Pacific Place, Taikoo Place Office Towers and One Island East & One Taikoo Place 2 delivered positive rental reversions of +2%, +11%, and +12%, respectively in 1H 2020.

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Swire Properties’ attributable gross rental income for its Mainland China office and retail businesses both fell by -9% YoY in 1H 2020. Attributable gross rental income for its Mainland China office business would have declined by a lower -4% YoY in 1H 2020 in RMB terms. Nevertheless, the Mainland China office business still suffered from weak office demand as a result of the economic fallout brought about by COVID-19. Separately, attributable gross rental income for Swire Properties’ Mainland China retail business would have increased by +2% YoY, if adjusted for amortized rental concessions and RMB depreciation. However, the worst should be over for the Mainland China retail business, as Swire Properties noted in its 1H 2020 results announcement that “footfall and retail sales started to recover in March” for its retail malls in Mainland China.

The Hong Kong retail property business’ attributable gross rental income fell by -7% YoY from HK$1,444 million in 1H 2019 to HK$1,336 million in 1H 2020. Even if amortized rental concessions were excluded, the adjusted attributable gross rental income for Swire Properties’ Hong Kong retail property business would still have dropped by -6% YoY in the first half of the year. On the flip side, it is noteworthy that Swire Properties managed to keep its retail malls in Hong Kong at almost full occupancy, despite the difficult operating environment. As of June 30, 2020, the occupancy rates for Swire Properties’ key Hong Kong retail malls, The Mall Pacific Place, Cityplaza and Citygate Outlets were 100%, 100%, and 90%, respectively.

Market Is Expecting A Resilient 2H 2020

Sell-side analysts see Swire Properties’ recurring underlying net profit declining by -7% YoY from HK$7,633 million in FY 2019 to HK$7,108 million in FY 2020. This compares well with the -9% YoY decrease in the company’s recurring underlying net profit from HK$4,049 million in 1H 2019 to HK$3,702 million in 1H 2020.

There are several key factors that are likely to contribute to Swire Properties’ expected resilient financial performance in 2H 2020.

Firstly, Swire Properties’ office properties in Taikoo Place are beneficiaries of the decentralization trend in the Hong Kong office market, and the company expects to maintain positive rental reversions for its Hong Kong office property portfolio in 2H 2020. At the company’s recent 1H 2020 earnings call, Swire Properties noted that “achieving significant rental reductions and gaining in building specifications” as the key attractions for companies relocating to office locations outside of Central Hong Kong, such as Taikoo Place. The company added that positive rental reversions for its office properties in Taikoo Place will more than offset any potential negative rental reversions for its Pacific Place office property located in Central.

Secondly, Swire Properties’ Mainland China retail properties have shown signs of recovery since March 2020, and the positive momentum is expected to continue into 2H 2020. Swire Properties disclosed at its recent 1H 2020 results briefing that “the (positive) trends (for Mainland China retail malls) that we saw in the second quarter have continued into the third quarter.”

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Thirdly, although the Hong Kong retail property business is expected to remain a drag on Swire Properties’ overall financial performance, this is partly mitigated by the fact that only 4.5% of the company’s leases for its Hong Kong retail portfolio expires in 2H 2020.

Potential Upside From Further Capital Recycling

Swire Properties sold two office properties in Miami, referred to as Two and Three Brickell City Center, in July 2020 for $163 million, and the company is expected to recognize the disposal gain for these two US office properties in 2H 2020.

At the company’s recent 1H 2020 results briefing, Swire Properties referred to the divestment as “consistent with the disposal program of what we call our non-core assets” and “part of our capital recycling program.” Swire Properties also guided that “funds from that disposal will be retained in the US in Miami to support future growth of those opportunities in and around the Brickell area.”

Similar capital recycling activities going forward could potentially create more value for Swire Properties’ shareholders.

Valuation

Swire Properties trades at 0.42 times P/B based on the company’s net asset value per share of HK$48.52 as of June 30, 2020, and its share price of HK$20.40 as of September 10, 2020. In comparison, the stock’s three-year and five-year average P/B multiples were 0.58 times and 0.59 times, respectively.

Notably, Swire Properties’ net asset value per share declined from HK$49.05 as of end-FY 2019 to HK$48.52 as of end-1H 2020, largely due to revaluation losses on investment properties amounting to HK$2,621 million. This was mainly attributable to “the effect of adverse market conditions and COVID-19 on the valuation of investment properties in Hong Kong” as per the company’s 1H 2020 results presentation slides.

Risk Factors

The key risk factors for Swire Properties include lower-than-expected dividends going forward, further weakness in the Hong Kong property market, and a failure to realize value from capital recycling activities.

Note that readers who choose to trade in Swire Properties shares listed as ADRs on the OTCBB (rather than shares listed in Hong Kong) could potentially suffer from lower liquidity and wider bid/ask spreads.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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