Wharf REIC: Transferring Coverage, HKD 49.50 Fair Value; Expect Full Retail Recovery in 2024

We are transferring coverage of Wharf REIC 01997 with our fair value estimate of HKD 49.50 and narrow moat rating unchanged. While we anticipate labor shortages and constraints on air capacity to dampen the recovery of tenant sales, we continue to expect Wharf REIC to be one of the biggest beneficiaries of the border reopening. We expect some of these issues to be eased progressively through the second half of 2023, driving a full recovery in mall footfall and tenant sales in 2024. As such, we estimate 12% and 8% revenue growth for 2023 and 2024, respectively.

Following the full border reopening of Hong Kong in February 2023, tourist arrivals in May 2023 have recovered to about 47% of the arrivals in May 2019. The recovery in tourist arrivals drove Hong Kong retail sales in May up 18% year on year (according to data from Hong Kong’s Census and Statistics Department) and is at 86% of that in May 2019. Fashion-related trades, which Harbour City and Times Square malls focus on, recovered slightly faster to 94% of that in May 2019, due to increased social activities. However, other trades continue to lag at about 60%-70% of prepandemic levels, which we expect to be a drag on Wharf REIC’s overall tenant sales recovery. Nonetheless, we think that the recovery in tenant sales at Wharf REIC malls will gradually restore retailer confidence and support retail leasing demand in the second half of 2023.