Wharf Real Estate Investments: Better Outlook for 2024 (Rating Upgrade) (OTCMKTS:WRFRF)

elevator pitch

Wharf Real Estate Investment Company Limited (OTCPK:WRFRF) (1997:HK) or Wharf REIC is rated Buy.

Wharf REIC bills itself on the company’s website as “one of Hong Kong’s largest real estate companies,” with “flagship properties” such as “Harbour City.”. Hong Kong Harbor City biggest Retail malls accounted for 73% of the company’s sales last year, according to fiscal 2023. Revenue Presentation Slides.

I previously analyzed Wharf REIC’s 2020 interim results in a post dated August 14, 2020. This latest article details the company’s financial outlook for this year.

My decision is to increase my rating on Wharf REIC from Previous Hold to Buy Now. I believe Wharf REIC’s 2024 financial results are likely to be better than 2023, given potential growth in mainland China. Expected decline in Hong Kong visitors and interest costs. The favorable 2024 outlook for the stock is largely not reflected in its valuation. This explains why I upgraded Wharf REIC’s rating to Buy.

Readers can buy and sell shares of Wharf REIC on the over-the-counter market and the Hong Kong Stock Exchange. Although trading liquidity for the company’s OTC shares is limited, the three-month average daily trading value for its Hong Kong-listed shares was quite high at around $12 million (source: S&P Capital IQ). Interactive Brokers is one of the US stock brokerages that provides trading services for Hong Kong-listed stocks.

Increasing mainland Chinese visitors will be key revenue driver in 2024

Wharf REIC’s primary asset, or assets, is Harbor City, a shopping center that contributed close to three-quarters of its FY 2023 sales, as mentioned earlier in this article.

According to the company’s fiscal 2023 results announcement, the company’s revenue reached HK$13.306 billion, up +7% from the previous year. Wharf REIC’s FY 2023 top line met market expectations. This is because the consensus revenue estimate was slightly (less than 1%) higher at HK$13,425 million. S&P Capital IQ data.

A key factor contributing to Wharf REIC’s strong 2023 performance was the +10% increase in revenue from Harbor City last year. As shown in the earnings presentation slides, Harbor City’s retail occupancy increased from 94% as of December 31, 2022, and 96% at the end of the first half of 2023 to 97% at the end of the previous year.

“Luxury (retail) is doing well in the Harbor City,” the company said in its FY 2023 earnings report in early March, “given the fact that certain luxury brands (with retail stores in the Harbor City) have already achieved double-high sales. As you can see”. -Single-digit sales growth compared to pre-COVID levels.

The performance of Harbor City and Wharf REIC in 2024 will be supported by resilient luxury retail demand.

consulting company Bane A January 24, 2024 press release noted that the proportion of luxury retail spending by Chinese consumers in overseas markets outside mainland China (e.g. Hong Kong) increased from less than 10% during COVID-19 to 30% last year.

In its latest fiscal 2023 earnings call, Wharf REIC specifically highlighted “Harbor City Mall’s ability to attract significant numbers of mainland (Chinese) visitors.” It is realistic to think that Wharf REIC’s Harbor City retail mall will perform even better in 2024 as more Chinese consumers travel outside mainland China to purchase luxury goods in overseas markets, including Hong Kong.

Hong Kong media release, March 5, 2024 standard It was announced that the individual visit system, which allows Chinese tourists to visit Hong Kong without a guided tour, will be expanded to Qingdao and Xi’an (additional Chinese cities). Accordingly, the number of mainland Chinese cities eligible for the individual visit system increased to 49. With hundreds of cities in China, there is room to further expand the individual visit system later in the year.

Wharf REIC noted in the company’s fiscal 2023 earnings presentation slides that visitor arrivals and retail sales in Hong Kong have only recovered to 52% and 84% of 2018 levels before the pandemic. It is therefore likely that Wharf REIC’s sales will continue to grow at a rapid pace this year as the number of mainland Chinese consumers and luxury shoppers visiting Hong Kong (and Harbor City Mall) increases.

The expected decrease in interest expense will boost earnings this year.

In contrast to the in-line revenue in FY 2023, Wharf REIC’s actual net profit attributable to shareholders last year amounted to HK$4.766 billion, a significant 22% lower than the market consensus net profit estimate (source: S&P Capital IQ). This is mainly due to high interest costs. The company’s interest expense (excluding changes in the fair value of interest rate swaps) increased sharply by more than 90% from HK$1.228 billion in FY 2022 to HK$23.33 billion in FY 2023, as shown in the results release.

There are two favorable factors that suggest Wharf REIC’s interest expenses are likely to be significantly lower this year.

One factor is the expected decline in Hong Kong’s benchmark interest rate, the Hong Kong Interbank Rate (HIBOR). As of year-end 2023, approximately 94% of Wharf REIC’s borrowings (Source: FY 2023 Earnings Report Disclosure) were floating rate debt. Chinese banking company Economists believe one-month HIBOR will decline from about 4.8% now to 4.0% by the end of this year. That said, Wharf REIC will most likely benefit from lower interest costs associated with current liabilities this year due to the decline in HIBOR.

Another factor is that Wharf REIC is expected to repay a portion of its debt in FY 2024 with funds generated from asset sales. The company said in its fiscal 2023 earnings briefing that it plans to sell one of its Singapore retail malls, known as Scotts Square, within the year, which could potentially generate sales revenue in the range of HK$2 billion to HK$3 billion.

The sell side is currently expecting a -19% decline (Source: S&P Capital IQ) Wharf REIC’s FY 2024 financing costs appear realistic considering the factors mentioned above.

main risk

My optimistic view on Wharf REIC is based on the assumption that the company will deliver good results in fiscal 2024, but there are notable risks.

The main risk is that the actual number of mainland Chinese visiting Hong Kong in 2024 is lower than the company expects. If the Chinese economy weakens or if the easing of outbound travel restrictions to mainland China (e.g. expanding the individual visit scheme highlighted above to more cities) is limited, Wharf REIC’s actual FY 2024 revenue could miss expectations.

Another risk factor is that Wharf REIC’s interest expenses remain high this year. This may be due to a smaller than expected decline in HIBOR or the inability to sell assets to finance debt repayment.

Closing Thoughts

Wharf REIC currently trades at a steep 60% discount to book value and offers an attractive dividend yield of 5.7% by our standards. S&P Capital IQ data. The stock’s undemanding valuation suggests that positive expectations for a better 2024 for Wharf REIC are not priced in. Therefore, I choose to rate the stock a Buy.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.