Insight | Under pressure, SWIREPROPERTIES aims to be an optimistic investor in mainland China

Despite no growth in revenue in the first half of 2024, Swire Properties has gained market recognition thanks to shareholder returns and a HKD 1.5 billion share buyback plan.

On August 8, Swire Properties announced its 2024 interim results, with revenue of HKD 7.279 billion, roughly flat year-on-year; attributable profit to shareholders at HKD 1.796 billion, down 19% year-on-year; and basic earnings per share at HKD 3.857 billion, down 1% year-on-year.

For investors, what is more encouraging is that Swire Properties continues to adhere to its dividend growth policy even in this situation.

Swire Properties Chairman Bradley White highlighted in the interim performance report, "In the first half of 2024, Swire Properties faced multiple challenges, mainly stemming from uncertainties in the global economy and tensions in geopolitical situations. Nevertheless, we maintain our strategy of making long-term investments in key markets to achieve sustained dividend growth."

In the interim performance announcement, Swire Properties mentioned that it will distribute an interim dividend of HKD 0.34 per share on October 9, 2024, a 3% increase from the same period last year.

At noon, following the performance announcement, Swire Properties' stock price quickly surged. It rose by over 13% at its peak, marking a record increase. By the afternoon close, Swire Properties was trading at HKD 14.5, with a daily increase of 11.71%.

Additionally, along with the interim performance announcement, a buyback plan was also released. Swire Properties stated that the Board of Directors has approved a plan to repurchase the company's ordinary shares on the open market, with a total repurchase amount of up to HKD 1.5 billion. The funds for the plan will be allocated from the company's available capital and cash reserves.

Later that day, Swire Properties announced that it had spent HKD 2.2447 million on August 8 to repurchase 217,500 shares at a repurchase price of HKD 10.2-10.44 per share.

Retail Pressure

In terms of the retail market, Swire's Hong Kong retail property portfolio mainly includes Pacific Place shopping mall, Cityplaza, and The Lee Gardens. Among them, Pacific Place and Cityplaza are wholly owned by Swire Properties, while The Lee Gardens project (including The Lee Gardens One) is 26.67% owned by Swire Properties, all managed by Swire Properties.

Although the occupancy rates of the projects in the Hong Kong retail property portfolio reached 100% in the first half of this year, especially with a 4 percentage point increase in the occupancy rate of Pacific Place shopping mall since the beginning of the year, rental income in this segment still decreased by 3% compared to the same period in 2023, totaling HKD 1.198 billion.

The retail sales of the three commercial projects decreased by 13%, 4%, and 3% respectively, while Hong Kong's overall retail sales fell by 7% in the first half of 2024.

Looking ahead, Swire Properties CEO Paul Pang Kwok-Pong pointed out that the weakening consumer sentiment and changing consumption habits in Hong Kong, coupled with increased cross-border consumption by Hong Kong residents and currency exchange rate effects leading to more outbound travel, have not had much impact on their shopping malls. He stated, "With greater integration with the Greater Bay Area, more Hong Kong people are exploring Shenzhen." With the continuous optimization of the merchant portfolio, strong marketing activities, member reward programs, and the hosting of a large-scale international event by the Hong Kong Special Administrative Region government, it is expected that the sales performance of the shopping malls will remain stable.

Bai De Li stated, "Despite the sluggish performance in our core markets, especially the weak performance of the Hong Kong office market, we remain confident in the long-term growth of our own business in Hong Kong and mainland China, especially optimistic about Beijing, Shanghai, and the Greater Bay Area."

In fact, while the retail market in Hong Kong remains challenging, retail sales in mainland China have returned to normal levels and are ahead of pre-pandemic levels.

Looking at the mainland, in the first half of this year, Swire Properties' total rental income from retail properties in mainland China increased by 10% to HKD 2.238 billion. Excluding the impact of the increased equity stake in Chengdu Taikoo Li in February 2023 and the change in the value of the Renminbi, the total rental income still saw a 2% increase.

The retail property portfolio in mainland China now includes three Taikoo Li projects located in Sanlitun, Beijing, Chengdu, and the Shanghai Bund, as well as Taikoo Hui in Guangzhou, Indigo in Beijing, Taikoo Hui in Shanghai, and Huifang in Guangzhou.

While rental income has increased, in the first half of 2024, Swire Properties' share of retail sales in mainland China (excluding automotive retail sales) still decreased by 7%.

CEO Stephen Ngan believes that this is mainly due to the strong performance in 2023, which raised the base. Compared to 2019, retail sales in mainland China are 69% higher. He emphasized that the income from their shopping malls is stable, with encouraging foot traffic growth, and there is no evidence to suggest that tenants in their shopping malls require lease restructuring.

Data shows that in the first half of 2024, retail sales at Sanlitun Taikoo Li in Beijing, Chengdu Taikoo Li, Guangzhou Taikoo Hui, Indigo in Beijing, and Taikoo Hui in Shanghai decreased by 4%, 17%, 9%, 4%, and 20% respectively compared to the same period in 2023, while Taikoo Li in the Shanghai Bund remained unchanged.

Compared to the same period in 2019, Sanlitun Taikoo Li, Chengdu Taikoo Li, Taikoo Hui, and Indigo in Beijing saw increases of 4%, 31%, 91%, and 1% respectively, while Taikoo Hui in Shanghai experienced a 14% decrease due to large-scale structural and renovation projects, and Taikoo Li in the Shanghai Bund had not yet opened in 2019. Overall retail sales in mainland China in the first half of 2024 increased by 4%.

Stephen Ngan stated that the retail market in mainland China experienced a peak after the post-pandemic in 2023, and 2024 will enter a normalization phase. Demand for retail properties is expected to remain robust, but retail businesses will take a more cautious approach to expansion in the second half of 2024.

"We expect strong demand for luxury retail spaces in Guangzhou and Chengdu. Currently, we are optimizing projects in Sanlitun Taikoo Li in Beijing, Chengdu Taikoo Li, and Taikoo Hui in Shanghai to enhance the performance of our mainland China property portfolio."

In fact, to adapt to market changes, Swire Properties made many adjustments to its projects in the first half of this year.

In April of this year, Swire Properties announced the redevelopment of Beijing Yusha, located at the southern end of the North District of Sanlitun Taikoo Li, into a retail landmark that gathers flagship stores of international renowned brands. In addition, upgrades have also been initiated at Taikoo Hui in Shanghai and Chengdu Taikoo Li to expand the luxury retail section of the projects "At present, we are expanding our business in mainland China, planning to develop a total of 11 major retail-led large-scale commercial projects in six mainland cities by 2027. Despite uncertain economic factors, our planned investment projects and the upgrading projects of existing properties will help us increase our market share in the luxury retail market in mainland China."

Confidence in Mainland China

During the performance briefing in the afternoon, Swire Properties Chairman Guy Bradley pointed out that they continue to believe that Hong Kong and mainland China offer the best investment opportunities, but admitted uncertainty about whether the group is the most optimistic investor in mainland China.

The Hong Kong office market is currently facing the dual challenges of oversupply and weak demand. In an uncertain economic environment, companies are more cautious when leasing office space.

However, as an international financial center and a major gateway connecting mainland China to the world, Swire Properties expects market demand to rebound in the medium to long term, especially with the increase in initial public offerings driving the financial industry and the rise in leasing demand from mainland Chinese companies after the mainland China economy picks up.

Pang Kwok-Pong pointed out that the post-pandemic recovery of the Hong Kong office market is slower than expected, and the market conditions are expected to remain weak for the rest of 2024, with rental levels continuing to be under pressure.

"In terms of occupancy rates, our Hong Kong office property portfolio has always outperformed the market it is in."

He mentioned that in the Hong Kong office market, the current trend of companies seeking higher quality office spaces favors newly built premium office buildings, such as Two Taikoo Place and Six Taikoo Place. These two office buildings have had positive leasing responses, with the former already leasing out 67% of its floor area and the latter at 44%.

In this mid-term performance announcement, Swire Properties also mentioned the recently acquired project at 387 Tianhe Road in Guangzhou.

Connected to the Guangzhou Taikoo Hui shopping mall, the 387 Tianhe Road project was speculated by the market when it was first listed last year. After a price reduction of 230 million yuan, the final ownership has finally been confirmed. The total floor area of the 387 Tianhe Road project is approximately 655,000 square feet, and Swire Properties plans to renovate it and add it as a new part of the Taikoo Hui high-end retail property portfolio, increasing the building area of Guangzhou Taikoo Hui by 43%. It is revealed that renovation and refurbishment work will start before the end of this year and is expected to be completed by 2026.

It can be seen that perhaps influenced by the consumption trend from the Greater Bay Area, Swire Properties is expanding its investment layout in the area. They are currently collaborating with the Guangzhou Zhujiang Industrial Group to develop the retail portion of a large integrated development project in the Julong Bay area of Liwan District, Guangzhou. The project started in September 2022 and will have a Taikoo Li style.

Starting from the end of 2025, a series of exhibitions, events, pop-up stores, and various activities will be held successively to prepare for the completion of the first phase of the project.

Furthermore, Swire Properties' confidence in the long-term prospects of the mainland China market is also reflected in its planned investment projects.

"Our HKD 10 billion investment plan announced in 2022 has progressed well, especially in the mainland China market. The mainland China market is a key driver of revenue growth and also holds significant strategic importance in our long-term expansion plans." Brett Bradley said, "We will continue to seek project development opportunities in first-tier and emerging first-tier cities, and according to a HKD 100 billion investment plan, we aim to double the total floor area in mainland China by 2032."

Currently, Swire Properties has two major investments in Shanghai Pudong, including the Shanghai Qiantan Integrated Development Project and the Shanghai Yangjing Integrated Development Project.

Both projects are large-scale integrated development projects. With the addition of these two new projects, Swire Properties now holds four projects in Shanghai, making it the largest city in terms of business scale for the group in mainland China.

In particular, the Shanghai Yangjing Integrated Development Project was officially named "Lujiazui Swire Source" on August 1. This complex is a collaboration between Swire Properties and Lujiazui Group, and is planned to open in phases starting in 2027, featuring a mix of high-end residential units, Grade A office buildings, retail malls, cultural activity spaces, hotels, and serviced apartments.

Moreover, this project will also introduce Swire Properties' first upscale residential brand in mainland China, marking the company's official entry into the mainland Chinese residential property market.

Pang Guobang mentioned that the Lujiazui Swire Source project is scheduled to launch pre-sales in the fourth quarter of this year. Regarding the mainland residential market, he noted that based on the performance in the past period, the demand for high-end luxury residential properties in Beijing and Shanghai remains strong.

In addition, Brett Bradley mentioned that Swire Properties has set growth plans for its Southeast Asia business, with significant progress being made in establishing residential brands in the four major markets of Jakarta, Singapore, Bangkok, and Ho Chi Minh City