Swire Pacific is a Hong Kong-based conglomerate with key operations in property and aviation. Other divisions include marine services, beverages, trading and industrials. Property accounts for more than 60% of its Enterprise Value and operating profit. Other key holdings include 44% of Cathay Pacific. The UK-based founding family John Swire & Sons owns 42% economic interest and 58% voting rights in the company.
• • The Wharf Holdings Cheug Kong (Holdings) Limited
Properties (listed in SEHK as Swire Properties, SEHK.01972)
Hong Kong Portfolio Key Holdings: Island East, Pacific Place, Citygate Outlets PRC Portfolio Key Holdings: Taikoo Hui (Guangzhou), Sanlitun Village (Beijing) and INDIGO (Beijing) Overseas/Hotels Portfolio Swire Properties is very active in United Kingdom and United States, and has a total 16 overseas investments. Underlying profit from Property Division was HK$12,673 million, a 164% increase over 2010. Excluding non-recurring items, e.g. the disposal of Festival Walk, the underlying profit of Property Division was HK$4,113 million, a disappointing increase of 6% over 2010 (The Wharf Holdings has an 18% increase over 2010).
• Disposal of Festival Walk – Festival was jointly developed by Swire Pacific and CITIC in 1998, then fully owned by Swire Pacific in 2006. In July 2011, Singapore co-operation Mapletree Investments acquired Festival Walk at a price HK $18.8 billion, incurring a profit of HK $8,615 million to Swire Pacific. • Buoyant Office Rental Market – Hong Kong office rental market demonstrates a strong growth, and it can be reflected in the high rental price. Pacific Place is virtually fully let in 2011. The overall gross rental income increased 9% from 2010. Analysts projected the average price psf of grade A office will be up over 20% from August 2010, office rental outlook remains positive for 2012. Decline in property sales and retail – The loss of retail income brought by the disposal of Festival Walk offsets the positive effect of the thriving retail market, along with a reduction in sales volumes in the property sale portfolio. A discouraging trading loss of HK$50 million was recorded in 2011.
Single Apartment Sale Tops HK Record – Recently, an apartment located in Opus, 53 Stubbs Road on the Peak, sold at the price $US 61 million, has topped the Hong Kong sales record. The price per sq. ft is approximately $US 10,000, the second highest in the world, after London’s One Hyde Park. The Peak is one of the loftiest neighbourhoods in Hong Kong. Opus holds positive prospect in bringing revenue to Swire Pacific. Prospects – A mixed-use development TaiKoo Hui (Guangzhou) is opened in Sept 2011 and retail component at INDIGO starts to open in March 2012. No figures has been released on both yet, but it is believed they will contribute to higher retail/rental income in 2012, and may compensate the lost caused by the divestiture of Festival Walk and reduction in sales volume. Underlying profit may note a modest increase next year (~10%).
Key Holdings: Cathay Pacific (SEHK.0293, 44.97%), Hong Kong Aircraft Engineering Company (HAECO, SEHK.0044, 75%) The Aviation Division has underperformed in 2011 and recorded an attributable profit of HK$2,999 million in 2011, compared to HK$8,901 million in 2010. Excluding the effect of nonrecurring items, the attributable profit of Aviation Division decreased by HK$2,305 million or 42%. • Addition of 27 new aircrafts – that includes 17 Airbuses and 10 Boeing 777s. It is expected to be in service before 2017. • Decrease Attributable Profit of Cathay Pacific – Swire Pacific’s share of profit of the Cathay Pacific group is HK$2,403 million in 2011, compared with HK$5,079 million in 2010, a decrease of 52.5% over 2010. In 2011 the core business of Cathay Pacific was affected by high jet fuel price and the natural disasters in Japan and Thailand. As a midhigh end airline, its main competitors are budget airlines, e.g. Hong Kong Airline.
• Improved performance of Hong Kong Aircraft Engineering Company (HAECO) – attributable profit was HK$615 million in 2011, an increase of HK$173 million of 39% compared with 2010. • Prospect – As jet fuel price is expected climb high in 2012, Cathay Pacific’s main obstacle will be reducing the operating cost. Coupling by the intensive competition with Hong Kong Airline, Cathay Pacific’s profit margin will narrow further in 2012; where as HAECO is expected to grow modestly in 2012 due to the high aircraft maintenance service demand.
Financials of Swire Pacific 2011/12 Turnover Net Profit (Mn) Net Profit Growth (%) Net Profit Margin (%) Earnings Per Share PE (X) NAV Total Assets Current Ratio (X) Return on Equity (%) 36,286 32,210 -15.8 88.77 21.41 4.32 151.2399 292,663 0.81 14.15 2010/12 29,201 38,252 74.72 131 25.42 3.54 135.8826 270,575 0.65 18.71 2009/12 24,909 21,893 274.05 87.89 14.55 8.1 112.2381 217,403 0.95 12.96 2008/12 24,670 5,853 -77.71 23.73 3.87 23.66 89.55 197,430 1.15 4.34 2007/12 21,553 26,260 16.37 121.84 17.26 5.25 89.38 188,840 0.92 19.46
Financials of The Wharf Holdings 2011/12 Turnover Net Profit (Mn) Net Profit Growth (%) Net Profit Margin (%) Earnings Per Share PE (X) NAV Total Assets Current Ratio (X) Return on Equity (%) 24,004 30,568 -14.5 127.35 10.22 4.79 67.1037 317,973 2.73 15.04
2010/12 19,380 35,750 85.66 184.47 12.98 3.36 59.219 242,225 2.22 21.92
2009/12 17,553 19,256 208.24 109.7 6.99 5.55 46.6761 190,461 2.29 14.98
2008/12 15,940 6,247 -52.47 39.19 2.28 17.02 40.3322 168,554 2.74 5.62
2007/12 16,208 13,143 22.18 81.09 5.37 7.23 35.2794 146,171 1.33 15.22
SWOT Analysis Strength Long Standing History – Swire was founded in 1816 and it has been serving its loyalty to Hong Kong people since then. Its business spans across daily grocery (Taikoo Sugary, CocaCola), international airline (Cathay Pacific) etc. Swire Pacific is essentially a part of every Hong Kong citizen’s daily life. Diversity in Business – Swire Pacific is a conglomerate, encompassing property, aviation, beverage, marine services and trade and industrial divisions. Although individual division will be prone to market changes, in overall terms the effect will be lessen. Weakness High Leverage – it can be reflected in the relatively low current ratio. The current ratio is 0.84 in 2011, compared to The Wharf Holdings 2.73, implying a high leveraged financial status of Swire Pacific. In July 2011, he $HK 8.6 billion profit generated by the sale of Festival Walk reduces the company net debt over 15%. Another reason for the high leverage could be resulted by the investment projects INDIGO and Taikoo Hui taking place in Mainland, which will be expected in service in 2012.
Poor investment portfolio – recent investments, e.g. Puma, Campbell Swire Joint Venture both resulted in loss of $HK 69 million and $HK28 million respectively. Decline in profit over 2010 – the net profit in 2011 has dropped 16% over 2010, from $HK38,252 million to $HK 32,210 million. Main cause for such loss is attributed by the underperformance of property and aviation division. Loss Incurred by Disposal of Festival Walk – Hong Kong retail market performed well in 2011 with a growth of 25%. Hurt by the divestiture of Festival Walk, Swire Properties rental income dropped 2% this year, going against the market trend by a margin 27%. Opportunity Buoyant Rental Market in HK – benefited by CEPA, the demand of grade A office will be high in 2012. Office rental price is expected to be up at least 20% next year. Launch of INDIGO and Taikoo Hui – They are the two highly anticipated project developed by Swire Properties.
Located in Beijing and Guangzhou respectively, the launch of the multipurpose complexes will bring in rental and retail income. Deep NAV Discount – Current NAV discount is 38%, and has almost reached a historically low. Modest growth on ROE is expected in 2012. This will very likely boast the NAV discount and the stock price. Threat Declining Properties Sale – In 2011 the property sale market in Hong Kong has been rather active and this can be reflected in many other real-estate developers annual report. Under these favourable factors Swire Properties records a $HK 220 million loss. We are worried that Swire Properties might have lost its appeal to investors. Climbing Jet Fuel Price – The soaring et fuel price hasn’t yet showed a sign of slowing down, this will continue be one of the biggest problem faced by Cathay Pacific next year. Performance of Cathay Pacific is highly prone to occurrence of natural disasters. Prospect of Cathay Pacific lies with many uncertainties.
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