DBS Group Research13 Nov 2017
  • Less than 50% of total equity allocated to China properties

  • More colour on future capital redeployment strategy needed

  • We are reviewing our TP



What’s New
Following the separate listing of Wharf REIC (1997.HK) which holds six commercial properties in Hong Kong and a 72% stake in Harbour Centre Development (51.HK) by way of introduction, Wharf will position itself as a Hong Kong-based company with a balanced business strategy. The company has no intention to become a China property company with <50% of total equity allocated to China properties. In addition, Wharf does not intend to compete with Mainland developers in China in terms of scale and remains selective in the areas of city and type of projects when evaluating new investments.

As of Jun-17, Wharf sits on net cash of HK$25.2bn (or HK$32.8bn excluding non-recourse debts such as those owed by Modern Terminals). Even allowing for recent site acquisitions in China, Wharf’s balance sheet strength remains robust. With a strong cash pile, Wharf is well placed to pursue new investments. Besides China, the company will seek new investments in the Hong Kong real estate market. However, its parent Wheelock & Co and Wharf REIC are responsible for development projects for sale and long-term investments respectively in Hong Kong. We believe that Wharf will focus on its currently owned development projects including the Peak portfolio redevelopment and Yau Tong Bay redevelopment in the foreseeable future. Moreover, Wharf will also explore investment opportunities in logistics and other sectors. Overall, the redeployment of capital, which plays a crucial role in driving Wharf’s growth, does not appear very clear at this stage.

Wharf REIC has dividend payout ratio of 65% after listing. In order for the demerger to be “Dividend Neutral”, Wharf will pay 20-30% of its earnings as dividend. This payout ratio does not sound very attractive when compared with its peers.

The stock is trading at 31% discount to our assessed current NAV. Our analysis suggests that current NAV of Wharf REIC and Wharf stand at HK$66/sh and HK$46/sh following the de-merger. Uncertainty on the company’s future capital redeployment plans may have implications on its share price performance and hence our TP is under review. Having said that, we still opine that it makes sense for parent Wheelock & Co. to further optimise the group structure by privatising Wharf in the medium term. This exercise should help to sustain Wheelock & Co’s development pipeline for long-term growth

Operational update

Hong Kong
Currently, Wharf is selling Mount Nicholson on the Peak, a 50/50 jv with Nan Fung. This completed luxury development contains 19 houses and 48 apartments. Since its initial launch in 2016, the consortium has sold 11 houses and 22 apartments for a total of HK$15.5bn. It will offer another eight apartments for tender shortly. Overall, Mount Nicholson should continue to provide decent profit to Wharf in the near-term.

In Oct-17, Wharf agreed to sell the wholly-owned subsidary that owns 8 Bay East in Kwun Tung to Mainland developer, LVGEM (China). Total consideration is HK$9bn, translating into HK$15,095psf (or c.HK$17,000psf excluding public car-parks). Located near Ngau Tau Kok MTR Station, 8 Bay East provides GFA of 596,212sf. Superstructure works are currently underway with project completion targeted for 2019. This en bloc disposal is estimated to yield hefty gains of c.HK$4.5bn to Wharf.

Wharf also has a 15% stake in the sizeable Yau Tong Bay redevelopment which provides GFA of 4.1m sf with 6,300 residential units. The project is located close to Yau Tong MTR Station and commands spectacular Victoria Harbour views. Land premium negotiation is currently underway. Wharf will be the co-project manager with Henderson Land. This residential development should be the company’s earnings catalyst in the medium term.

Wharf is exploring various option for Kowloon Godown in Kowloon Bay. The company plans either to revitalise the existing warehouse with new industrial buildings erected on the open yard or redevelop the entire site into commercial use (depending on land premium), pending government approval.

The company is also exploiting the value of its Peak portfolio via redeveloping three luxury properties there with combined GFA of 179,000sf. They are scheduled for completion in 2017-2020.

China
Wharf sold Rmb8.2bn worth of properties in 3Q17. This brought total contracted sales in 9M17 to Rmb20.1bn, representing 84% of its full-year target.

In 3Q17, Wharf acquired nine development sites in Beijing, Suzhou, Hangzhou and Foshan with total attributable GFA of 0.76m sm for Rmb15.2bn. As of Sep-17, Wharf boasts land bank of 3.79m sm in China.

Opened for business in Sep-17, Chongqing IFS Mall (CQIFS) hosts a diversified tenant mix comprising over 150 brands (including 80 renowned global brands). Over 90% of the retail space has been leased or under offer. Developed by a consortium equally owned by Wharf and China Overseas Land, CQIFS is the largest mixed-used complex in Jiangbei District (often referred to as Chongqing’s new CBD). The entire project has a total development area of c.381,000 sm comprising retail (c.113,700 sm, 30%), hotel (c.36,800 sm, 10%) and office (c.230,000 sm, 60%). The hotel branded under “Niccolo” also commenced operations in Sep-17. This mixed-use development should augment Wharf’s recurrent earnings.




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