March 16, 2017 11:45 pm JST

Swire Pacific's property arm helps prop up sagging results

Asian group shrugs off fears over effect of US rate hikes on homes market

JENNIFER LO, Nikkei staff writer

Swire Properties is seeing an improvement in foot traffic at Pacific Place, its flagship mall in the business district of Admiralty, Hong Kong. (Photo by Jennifer Lo)

HONG KONG -- Swire Pacific has posted grim earnings for its businesses spanning the aviation, maritime and beverage sectors, although real estate remains a brighter spot for the Asian group.

The Hong Kong-based conglomerate, which is 55% owned by London's family-controlled John Swire & Sons, saw its net profit slump 28% on the year to 9.64 billion Hong Kong dollars ($1.24 billion) last year. Group revenue was HK$62.39 billion, up 2% from a year ago.

Its flagship property unit, Swire Properties, was the largest contributor to group profits. Underlying profit, excluding the impact of property revaluation, rose 1% to HK$7 billion. Its revenue edged up 2% as rental income from mainland China and the U.S. offset the loss from its upscale malls like Pacific Place in Hong Kong, which was hit hard by fewer affluent mainland shoppers coming to the territory.

"We are starting to see early signs of improvement in Hong Kong's retail sales," said Guy Bradley, chief executive of Swire Properties, on Thursday. "At Pacific Place, there's a lot more traffic and it's a bit of a buzz feeling now -- 2017 should build on that improvement."

Bradley said the decision by the U.S. Federal Reserve to hike interest rates by 0.25% on Thursday would have "little impact" on the resurgent property market in Hong Kong. "It's been expected for a while," he said. "There is a lot of buying demand [for homes] and supply seems like still an issue."

Still, earnings from Swire's property business would not make up for hefty losses from other struggling units.

In the red

The loss at its marine services business nearly doubled to HK$3 billion, owing to an oversupply of vessels and plunging oil prices discouraging exploration. While a recent rebound in oil prices would be a boost to the sector, the group might dispose of more old vessels this year but keep the young ones. "In the long-term, the world needs energy and the demand is not going to go away," said John Slosar, chairman of Swire Pacific.

Its flagship airline, Cathay Pacific Airways, slipped into the red for the first time since 2008 with a net loss of HK$545 million, thanks to competition from Chinese airlines and budget carriers. However, its aircraft engineering business fared better. Net profit of Hong Kong Aircraft Engineering Company (HAECO) more than doubled, largely due to gains from the disposal of its interest in a Singaporean unit.

The performance of its beverage division was mixed, with business growing in the U.S. but sales volumes slowing in Hong Kong, Taiwan and mainland China. The group is looking to accelerate its expansion on the mainland after acquiring Coca-Cola bottling assets for 5.9 billion yuan ($855 million) last November.

Standard & Poor's reaffirmed its A credit rating with a negative outlook for Swire Properties in late February. This implies Swire can withstand at least a 10% rental decline before a downgrade action by the rating agency, which is smaller than the 30% rating headroom of landlord peers like Hong Kong Land and Hysan Development.

"Swire Properties does have less buffer because of its substantial capital expenditure ramp-up in the next few years and weaker performance at its Pacific Place mall," said S&P's credit analyst Matthew Chow.

In addition to property investments in Shanghai and Miami, Swire Properties has announced a HK$15 billion redevelopment project to add two towers at Taikoo Place, its major office portfolio on the eastern side of Hong Kong Island.

High office rents in Hong Kong have prompted more businesses to move out from core business districts such as Central to decentralized locations such as Island East and Kowloon East. "The whole decentralization theme is really exciting for us," said Swire Properties' Bradley, who described the project as a "game changer" for the group.

Nonetheless, town planners rejected the group's proposals to raise building heights at the project and turn some of its office space into catering and retail facilities. Commenting on the setbacks, Bradley said a review of the project was underway. "We are not disappointed... It won't stop the general direction," he added.

Asia300

Cathay Pacific Airways Ltd.

Hong Kong

Market(Ticker): HKG(293)
Sector:
Industry:
Transportation
Airlines
Market cap(USD): 5,907.78M
Shares: 3,933.84M
Asia300

Swire Pacific Ltd.

Hong Kong

Market(Ticker): HKG(19)
Sector:
Industry:
Producer Manufacturing
Industrial Conglomerates
Market cap(USD): 14,450.91M
Shares: 3,896.65M

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