Swire Pacific Evaluation

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  • Topic: Swire Group, Hong Kong, Cathay Pacific
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Swire Pacific (SEHK: 0019)
29 August 2012, Keiann Yeung

Business Description
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.

Key Competitors
• • 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%).

Aviation
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...
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