Your China Property Rebound Play

Erik@YWR on Swire Properties Limited (1972-HKG | swirepropert)

5/3/2025

Summary

Swire Properties offers the best risk/reward to take advantage of the distress in Chinese commercial real estate created by the bankruptcy of Evergrande and others. Swire went into the Chinese property downturn under leveraged, due to a fortuitous disposal in 2019, and now has the fire power to invest on the lows. Swire will invest and grow its property portfolio 32% from 2024 to 2027 with the addition of 8 million square feet of high end Taikoo Li brand shopping malls in mainland China. While others are trying to deleverage Swire is estimated to grow its portfolio and its dividend from HK$1.1/share to HK$ 1.25 by 2027. The shares offer a 6.4% yield on a defensive portfolio of high-end HK office properties with future growth in mainland China and a potential rebound in Chinese economic activity. Swire shares have upside to HK$ 25 or higher by 2027 (+47%). This would still be a 46% discount to Swire's 2024 NAV/share of HK$ 46.

Thesis

Swire is one of the best positioned property developers to take advantage of the downturn in mainland Chinese real estate. Swire went into the downturn, which started with COVID in 2020, with a debt/equity ratio of just 5% due to a fortuitous sale of City Plaza Towers 3&4 for US$ 1.9 billion in 2019. Swire had another fortuitous sale in 2023 of 12 floors of One Island East for US$ 750 million. To reinvest these proceeds and take advantage of the Chinese property downturn in 2022 Swire announced a HK$ 100 billion investment plan. HK$ 60 billion of the HK$100 billion would be invested in mainland China. Another HK$ 30 billion will be invested in their home market of Hong Kong and HK$ 10 billion in the rest of Asia (Bangkok and Indonesia). As part of the HK$ 60 billion investment plan in mainland China Swire has been increasing its stakes in existing assets such as Taikoo Li Chengdu and Taikoo Li Beijing. Swire has also been buying land in Shanghai for new luxury shopping-residential projects such as a 40% stake in the Shanghai New Bund Mixed Use project and 40% in the Shanghai Yangjing Mixed Use project. Swire's mainland China property portfolio will grow from 10 million square feet to 18 million square feet by 2027. The addition of new shopping malls and mixed use developments in mainland China, Hong Kong and rest of Asia will create incremental cash flow to grow the dividend. Swire should be able to grow the dividend from HK$1.1 share in 2024 to HK$1.25 in 2027 as the new projects are completed and leased. Hopefully, the Chinese economy will also have started a recovery in 2026. By 2026-2027 investors will be more positive on China and Swire's portfolio of high end malls across China and premium HK office portfolio will stand out as highly valuable.

Risks

Swire is forging ahead investing during a time of great uncertainty in China. The growth in new retail properties in China may be partially offset by further weakness in HK office properties. This is why the dividend is not expected to grow in 2025. Swire will also be trying to lease 8 million square feet of new retail properties mainly in 2026. If China's economy gets worse, instead of better, this may be a difficult time to bring on new supply into a weak market. Swire's balance sheet is healthy enough to withstand a lot of stress, but the share price may be weak and Swire might have to react defensively in such a situation by cutting the dividend until China can recover.

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