Wharf REIC’s 2022 Core Profit Falls Short

We raise our fair value estimate for Wharf REIC 01997 to HKD 49.50 from HKD 46.00 as we factor in a stronger recovery in its retail property and hotel operations. We also assume further improvement in operating margins on the normalization of marketing expenses and the phased exit from the low-margin property development business. We forecast 2023 dividend per share to increase 6.9% year on year to HKD 1.40, implying a 3.2% dividend yield based on the closing price as of March 7. While we think Wharf REIC is one of the key beneficiaries of Hong Kong’s border reopening, we think its current share price already reflects part of the upside. As such, we believe Link REIT may be more attractive for investors looking for exposure to the retail landlords in Hong Kong.

Although the group reported a full-year net loss of HKD 8.9 billion on the back of a 22% year-on-year drop in Wharf REIC’s revenue and a noncash HKD 14.9 billion revaluation deficit, the results were broadly in line with our expectations. That said, excluding noncash items, core earnings declined by 5% year on year to HKD 6.2 billion, slightly missing our forecasts due to higher-than-expected finance cost.

We believe Wharf REIC’s operations have largely stabilized, with the decline in core recurring revenue from the investment properties and hotels segments narrowing to 1.1% in 2022 from 5.9% in 2021. With data from Hong Kong’s Immigration Department showing that the number of inbound visitors in February 2023 has risen to around 1.5 million, compared with less than 3,000 in the same period last year, we think that the worst is over for Hong Kong retail landlords. We expect Wharf REIC’s high-quality Hong Kong retail assets—especially the Harbour City mall—to ride on the recovery in tourist spending to register improving shopper traffic and tenant sales. This should attract higher demand for its retail space and set the stage for a recovery in rental income.