Wharf REIC Earnings: Headwinds Priced In; Shares Attractive Despite 33% Fair Value Estimate Cut

Trends within narrow-moat Wharf REIC’s first-half results were generally within expectations, with retail properties’ rental growth largely offset by weakness in the office segment. That said, the interim dividend declined 4% year on year to HKD 0.64 per share as the hotel segment's gross margin was weaker than expected. While the Harbour City and Times Square malls in Hong Kong showed resilient year-on-year revenue growth of 7% and 4% respectively, we adjusted our assumptions to reflect weaker retail and hotel performance in the near term. This is because we anticipate tourist spending leakage and weakness in the Chinese economy to continue to hit tenant sales and hotel demand. As such, we cut our 2024-26 core net income forecasts by 6%-10% and lowered our 2024 dividend-per-share forecast to HKD 1.24 from HKD 1.37. While Wharf REIC’s assets are mostly in Hong Kong, we believe the company is indirectly exposed to risks in the mainland China economy given its reliance on mainland tourist spending. We raised our weighted average cost of capital to 7.8% from 6.7% to reflect this. As a result, we cut our fair value estimate for Wharf REIC to HKD 31 from HKD 46.