Leaving Swire Properties’ 2022 Earnings Fall Short

Our fair value estimate for narrow-moat-rated Swire Properties 01972 is unchanged at HKD 31. We fine-tune our assumptions to reflect pressure on the Hong Kong office sector in 2023, but we anticipate a gradual recovery in the Hong Kong and mainland retail segments as the borders reopen. We forecast dividend per share to increase to HKD 1.05 in 2023 from HKD 1.00 in 2022, in line with the company’s policy to deliver mid-single digit dividend growth. This implies a 5% dividend yield on the March 9 share price close. We think Swire’s current share price already reflects that its earnings recovery should lag that of retail centric landlords.

Swire Properties reported full-year revenue of HKD 14 billion, declining 15% year on year and falling short of our HKD 15 billion forecast, while underlying profit decreased 9% to HKD 8.7 billion. Notably, gross office rental income fell 3% in 2022, driven by an 18% negative rental reversion at Swire’s flagship asset Pacific Place that was partly offset by a positive rental reversion at One Island East and One Taikoo Place. Other than the recently opened Two Taikoo Place office, occupancy stands high at 96%. We expect a continued drag in 2023 as new leases are signed at a lower market rate.

Positively, gross rental income from its Hong Kong retail assets is recovering, with second-half 2022 up 16% half on half. As such, we forecast 10% growth for its Hong Kong retail rental income. We also expect recovery in the hotel segment in both Hong Kong and mainland China as travel rebounds.