• Wharf REIC: HK IP finally revving up
• WPL: Fuelled up on land bank
• FV increases to HK$67.70

After a Disappointing 1H17, Wheelock Sped Up During 2H17

Wheelock & Co (“Wheelock”, 20 HK) announced its FY17 results yesterday. FY17 revenue increased 17.1% YoY to HK$71.0b or 104% of our full-year forecast. FY17 PATMI increased 26.2% YoY to HK$20.6b, indicating an improvement over the weak 1H17 results. Excluding a HK$5.7b investment property revaluation gain and the HK$2.8b attributable gain from the disposal of 8 Bay East, core profit increased 2% YoY to HK$12.0b, or 109% of our full-year forecast which we consider slightly above expectations.

On a segmental basis, operating profit margins for investment properties (IP) remained steady at 83% while that for development properties (DP) dipped slightly from 20% to 19%. In particular, HK DP margins remained weak at 6% in FY17 (versus 28% in FY16, though slightly better than the 5% clocked in 1H17), while CN DP margin came in at 34% (higher than the 28% margins recorded in both FY16 and 1H17).

On the Road to Further Discount Compression

We would like to highlight three takeaways.

• First, recent data and Wharf REIC’s results give us reassurance that the recovery of the retail sector in Hong Kong is underway.
• Second, we are positive on Wheelock’s land plot purchases in Kai Tak and Kowloon Tong that build upon its 7.1m sq ft land bank as at end-2017.
• Third, given Wharf Holdings’ venture into listed equity investments, we note potentially greater volatility in the subsidiary’s book value and see a lower chance of Wheelock privatizing Wharf Holdings in the near-term.

This third point remains somewhat of a concern, though we believe it is outweighed by the first when analyzing the Holdco. Going forward, we see the recovering HK retail market as a key catalyst for the narrowing of Wharf REIC’s and consequently Wheelock’s discount to book.

Upon applying 0.55x P/B to our updated FY18F forecasts, our fair value increases from HK$63.20 to HK$67.70. As of the closing prices on 12 Mar 2018, Wheelock is trading at a HK$45bn discount (~27% discount) to the market value of its stake in its three listed subsidiaries.

Since our initiation on 28 Dec 2018, the stock has delivered a total return of 9.4%, outperforming the Hang Seng Index by 3.3 ppt. We maintain BUY on Wheelock.

Source: OCBC Research - 13 Mar 2018