Chinese Mainland Expansion And Luxury Partnerships Will Drive Future Performance

Key Takeaways

• Strategic investment in the Chinese mainland and capital recycling efforts aim to drive significant revenue growth through high-growth markets and profitable capital reallocation.
  
• Commitment to shareholder returns and diversified development pipeline are positioned to enhance earnings and drive robust future revenue growth.
  
• Oversupply and market challenges in Hong Kong and Chinese Mainland could strain Swire Properties' revenue growth, occupancy rates, and liquidity, impacting net margins and dividends.

Catalysts

Develops, owns, and operates mixed-use, primarily commercial properties in Hong Kong, Mainland China, the United States, and internationally.

• Swire Properties has a strategic plan to invest HK$100 billion, aiming to double its gross floor area in the Chinese mainland by 2032, which should enhance revenue through expansion in these high-growth markets.
  
• The company's strong track record of capital recycling and the sale of noncore assets provide liquidity and support future revenue growth by reallocating capital to more profitable areas.
  
• A share buyback program and consistent dividend growth signal a commitment to enhance shareholder returns, potentially boosting earnings per share over time.
  
• The diverse development pipeline, especially the residential trading projects in key markets like Shanghai and Southeast Asia, is expected to drive future revenue and earnings growth.
  
• Luxury brand partnerships and trade mix upgrades in the Chinese mainland should support positive rental reversions and boost gross rental income through enhanced retail performance.

Swire Properties Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Swire Properties's revenue will grow by 6.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from -4.9% today to 44.3% in 3 years time.
• Analysts expect earnings to reach HK$8.5 billion (and earnings per share of HK$1.53) by about July 2028, up from HK$-766.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting HK$10.1 billion in earnings, and the most bearish expecting HK$5.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.3x on those 2028 earnings, up from -155.6x today. This future PE is greater than the current PE for the HK Real Estate industry at 11.2x.
• Analysts expect the number of shares outstanding to decline by 0.82% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.5%, as per the Simply Wall St company report.

Swire Properties Future Earnings Per Share Growth

Risks

• Oversupply and lack of new demand in the Hong Kong office market have resulted in negative rental reversions, which could impact the company's revenue growth from office rentals.
  
• Despite a resilient performance, the Hong Kong retail sector faced challenges such as changing consumer behaviors and reduced tourism activity, leading to a decrease in retail sales growth, which could affect overall revenue in this segment.
  
• The Chinese Mainland retail sales experienced a decline, due in part to increased outbound travel and lower opening rates from upgrading works, potentially affecting revenue recovery and future rental income.
  
• High vacancy rates and subdued market conditions in both Hong Kong and the Chinese Mainland office sectors could exert pressure on occupancy and rental income, impacting net margins.
  
• The potential need for capital allocation to manage increased CapEx requirements and maintain dividend growth amid challenging market conditions could strain liquidity and earnings.

Valuation

• The analysts have a consensus price target of HK$20.996 for Swire Properties based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$24.0, and the most bearish reporting a price target of just HK$18.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be HK$19.1 billion, earnings will come to HK$8.5 billion, and it would be trading on a PE ratio of 18.3x, assuming you use a discount rate of 9.5%.
• Given the current share price of HK$20.7, the analyst price target of HK$21.0 is 1.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.