Trade Wars Will Weaken Rents Despite Resilient Malls

Key Takeaways

• Geopolitical tensions, demographic shifts, and rising e-commerce are undermining demand for Wharf's retail and commercial properties, pressuring revenue and occupancy rates.
  
• Heavy reliance on luxury retail and office sectors, coupled with high upgrade costs, threatens profitability and increases risks of future earnings volatility.
  
• Prudent financial management, resilient core assets, premium property positioning, ESG leadership, and disciplined capital allocation position the company well for stability and long-term growth.

Catalysts

Founded in 1886, The Wharf (Holdings) Limited (“Wharf”, Stock Code: 4) was the 17th company registered in Hong Kong and is currently the 7th with the longest history.

• Persistent geopolitical tensions, ongoing trade wars, and uncertainty around Hong Kong's status are likely to continue to depress investment and tourism flows, leading to suppressed demand for both commercial and retail properties and weighing on rental income and occupancy rates over the medium to long term, severely impacting top-line revenue growth.
  
• Aging populations in both Hong Kong and Mainland China are forecast to reduce consumer spending momentum and slow natural demand growth for both luxury retail and residential real estate, contributing to structurally weaker future sales, sluggish rental reversions, and ultimately lower long-term earnings visibility.
  
• The rapid acceleration of e-commerce and digital transformation continues to erode physical foot traffic and tenant sales in Wharf's flagship malls and older retail assets, while intensified retail competition from new mall supply in China places further downward pressure on occupancy rates, turnover rents, and net margin sustainability.
  
• Overexposure to the cyclical and structurally challenged luxury retail and commercial office segments in China and Hong Kong heightens the risk of further impairment charges, higher vacancy rates, and flat or declining rental income, making future earnings more volatile and pressuring net profit margins.
  
• Elevated capital expenditure requirements to modernize and green legacy assets in order to meet evolving ESG standards and tenant demands risk driving up operating expenses, compressing profitability, and leaving older properties exposed to obsolescence-especially given ongoing rental and value pressure from government regulatory changes and rising interest costs.

Wharf (Holdings) Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Wharf (Holdings) compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Wharf (Holdings)'s revenue will decrease by 0.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -26.6% today to 59.8% in 3 years time.
• The bearish analysts expect earnings to reach HK$7.2 billion (and earnings per share of HK$1.94) by about August 2028, up from HK$-3.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 9.0x on those 2028 earnings, up from -20.3x today. This future PE is lower than the current PE for the HK Real Estate industry at 11.6x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.16%, as per the Simply Wall St company report.

Wharf (Holdings) Future Earnings Per Share Growth

Risks

• The company is maintaining a prudent balance sheet with low gearing, effective treasury management, and a healthy interest cover, which gives Wharf (Holdings) significant financial flexibility for opportunistic investments or to weather downturns, helping to stabilize earnings and support potential long-term dividend growth.
  
• Despite headwinds in Mainland China retail and commercial property segments, flagship malls like Chengdu IFS and Changsha IFS continue to show very strong occupancy rates above 90 percent, underpinned by their scale and prime locations; this supports resilient rental income and could underpin future revenue.
  
• Premium Hong Kong residential assets continue to set record prices, as shown by the Mount Nicholson transaction, and the ongoing launch of high-end projects, together with a slowing new supply pipeline, could help support property values and margins if demand remains steady.
  
• The company has a strong focus on ESG with recognized green building certifications and significant green financing, which aligns with the growing tenant and investor demand for sustainable assets, potentially allowing for rent premiums and lowering long-term operating costs, supporting future profitability.
  
• Strategic capital discipline, with selective asset monetization and a willingness to accelerate asset sales while waiting for better investment opportunities, could result in capital gains and strong cash flows, enhancing both net margins and shareholder returns if market conditions improve.

Valuation

• The assumed bearish price target for Wharf (Holdings) is HK$16.3, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Wharf (Holdings)'s future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$25.0, and the most bearish reporting a price target of just HK$16.3.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be HK$12.0 billion, earnings will come to HK$7.2 billion, and it would be trading on a PE ratio of 9.0x, assuming you use a discount rate of 9.2%.
  
• Given the current share price of HK$21.42, the bearish analyst price target of HK$16.3 is 31.4% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.