Company Reports

Because Swire Pacific is a conglomerate, its earnings are dictated by the performance of its various divisions. While each division faces different competitive environments, the majority of the group’s earnings is underpinned by recurring income from Swire Properties' investment property portfolio in Hong Kong and mainland China, Swire Coca-Cola’s bottling business, and Haeco’s aviation maintenance and repair services. This compares with the group’s property trading business and 45% interest in Cathay Pacific, which are more cyclical and capital-intensive in nature.

Swire Pacific's first-half recurring underlying profit grew 48% year on year, largely driven by residential trading profits and retail rental growth in the property division, alongside strong results from Cathay Pacific. The interim dividend increased 15% to HKD 1.50 per Class A share.

Swire Properties' first-quarter operating update shows retail mall tenant sales growing year on year across its Hong Kong and mainland China mall portfolio. However, rental reversion for the Hong Kong office portfolio remains negative, despite improved leasing activity.

Swire Pacific's recurring underlying profit grew 5% in 2025, driven by 19% growth in the aviation segment, but partly offset by a decline in the property division. Dividends rose 13% to HKD 3.80 per share. Shares jumped 5% in the morning trading session.

Because Swire Pacific is a conglomerate, its earnings are dictated by the performance of its various divisions. While each division faces different competitive environments, the majority of the group’s earnings is underpinned by recurring income from Swire Properties' investment property portfolio in Hong Kong and mainland China, Swire Coca-Cola’s bottling business, and Haeco’s aviation maintenance and repair services. This compares with the group’s property trading business and 45% interest in Cathay Pacific, which are more cyclical and capital-intensive in nature.

We are revising our estimates for Swire Properties' and Swire Pacific's property trading business ahead of the companies' full-year earnings.

Because Swire Pacific is a conglomerate, its earnings are dictated by the performance of its various divisions. While each division faces different competitive environments, the majority of the group’s earnings is underpinned by recurring income from Swire Properties' investment property portfolio in Hong Kong and mainland China, Swire Coca-Cola’s bottling business, and Haeco’s aviation maintenance and repair services. This compares with the group’s property trading business and 45% interest in Cathay Pacific, which are more cyclical and capital-intensive in nature.

Swire Properties' Hong Kong office occupancy rose by 1 percentage point quarter on quarter to 89% as of end-September, while headline rents remained stable. The Hong Kong retail portfolio stayed fully let, with year-to-September sales showing improvement over the first half.

Because Swire Pacific is a conglomerate, its earnings are dictated by the performance of its various divisions. While each division faces different competitive environments, the majority of the group’s earnings is underpinned by recurring income from Swire Properties' investment property portfolio in Hong Kong and mainland China, Swire Coca-Cola’s bottling business, and Haeco’s aviation maintenance and repair services. This compares with the group’s property trading business and 45% interest in Cathay Pacific, which are more cyclical and capital-intensive in nature.

Swire Pacific's first-half 2025 underlying profit dropped 2% year on year. While its property and aviation divisions delivered higher contributions, these were offset by weaker performance in the beverage division, other businesses, and fair value losses.

Swire Properties has announced the sale of its 75% interest in Brickell City Centre retail asset to Simon Property, which owns the remaining 25%. The total consideration is up to USD 549 million, including a contingent component of USD 36 million tied to the cost of works on shared facilities.

We maintain our fair value estimate of HKD 22 for narrow-moat Swire Properties, as the company’s resilient first-quarter operations, despite market challenges, were within our expectations. For the Hong Kong office portfolio, end-March occupancy, including Two Taikoo Place and Six Pacific Place, which opened during the current downturn in 2022 and 2024, respectively, was 89%, unchanged from end-2024. Pacific Place and Taikoo Place office clusters reported negative 16% and negative 14% rental reversions, respectively, as leases continue to be renewed at lower market rents compared with the previous lease cycle. However, headline rents have stabilized at fourth-quarter 2024 levels. For the retail portfolio, Hong Kong malls remain fully leased, while occupancy for mainland China malls continues to be well above 90%. Declines in tenant sales generally narrowed compared with 2024, with select malls seeing year-on-year sales improvement as they benefit from tenant mix optimization.

We raised our fair value estimate of narrow-moat Swire Pacific to HKD 80 per share from HKD 75 after it delivered stronger-than-expected 2024 results, mainly driven by its aviation division. Recurring underlying profit fell 11% year on year, largely attributable to 11% and 42% declines in contributions from its property and beverage divisions, respectively. This was partly offset by a 31% increase in contribution from its aviation division, due to strong recovering demand for travel and cargo, as well as an increase in demand for maintenance and repair of airframes. We raised our 2025-27 earnings per share estimates by 6.8%-8.1% to factor in better operating margin assumptions for Cathay Pacific. This was slightly offset by lower contribution from the joint ventures and associates held by its property division. We expect the group to deliver 5% dividend growth in 2025, implying a dividend yield of 5.1%. While we think Swire Pacific shares are currently undervalued, we prefer Swire Properties, which is trading at a more attractive 2025 dividend yield of 7.1% and at a wider discount to our valuation.

Because Swire Pacific is a conglomerate, its earnings are dictated by the performance of its various divisions. While each division faces different competitive environments, the majority of the group’s earnings is underpinned by recurring income from Swire Properties' investment property portfolio in Hong Kong and mainland China, Swire Coca-Cola’s bottling business, and Haeco’s aviation maintenance and repair services. This compares with the group’s property trading business and 45% interest in Cathay Pacific, which are more cyclical and capital-intensive in nature.

Narrow-moat Swire Properties’ guidance for 2024 recurring underlying profit attributable to shareholders of HKD 6.5 billion is in line with our forecast, but the company expects to record a loss attributable to shareholders of HKD 0.8 billion due to a larger fair value loss for investment properties compared with last year. We think a weaker property valuation is no surprise as Hong Kong office rents remain weak, while the elevated interest rates could imply capitalization-rate expansion pressure. That said, the noncash fair value losses do not affect our discounted cash-flow-derived valuation.

We maintain our fair value estimate of HKD 22.50 per share for narrow-moat-rated Swire Properties after its in-line third quarter operating performance. We see lingering pressure in the company’s Hong Kong office assets given weak leasing demand and elevated citywide vacancy rates, while retail assets across Hong Kong and China suffer from subdued tenant sales. That said, we continue to see long-term value in Swire Properties’ HKD 100 billion investment plan for 2022-32, of which 30% is planned for its development master plan in Hong Kong to continuously expand and improve the attractiveness of its Pacific Place and Taikoo Place asset clusters. Swire Properties is the top pick within our Hong Kong landlord coverage, as we think the 25% discount to our valuation and the estimated 6.7% 2024 dividend yield are attractive. Coupled with the ongoing share buyback program, we believe the firm stands out under the current interest rate cut cycle.

We maintain the fair value estimates of Swire Properties, CapitaLand Investment, Mapletree Pan Asia Commercial Trust, or MPACT, and Link REIT after visiting their office and retail assets in Shanghai. We think China’s slowing economic growth remains a key headwind for consumer spending and business expansion. For retail malls, we note that vacancy rates for Shanghai downtown retail districts remain healthy at 5.4% as of third-quarter 2024, according to Cushman & Wakefield. This should provide some support for market rents that are being weighed down by weak retail sales performance and supply of new retail malls, albeit in the secondary retail areas. On the other hand, office rents remain soft in Shanghai given the elevated central business district vacancy rate of 16.6% as of third-quarter 2024, according to Cushman & Wakefield. While the Chinese government is looking to revive its economy with a series of policy stimulus efforts, we think that business owners and consumers may still exercise caution until they are convinced of a durable economic recovery. For landlords and REITs with mainland China exposure, our preferred pick is Swire Properties that is trading at a 29% discount to our fair value. Swire Properties remains steadfast in its long-term plan to invest in China, allocating half its HKD 100 billion investment plan to China. We expect these projects to start contributing from 2026, with the bulk of it coming from 2027.

Because Swire Pacific is a conglomerate, its earnings are dictated by the performance of its various divisions. While each division faces different competitive environments, the majority of the group’s earnings is underpinned by recurring income from Swire Properties' investment property portfolio in Hong Kong and mainland China, Swire Coca-Cola’s bottling business, and Haeco’s aviation maintenance and repair services. This compares with the group’s property trading business and 45% interest in Cathay Pacific, which are more cyclical and capital-intensive in nature.

Narrow-moat Swire Pacific’s first-half 2024 performance was below our expectations due to weakness in domestic consumer spending in mainland China dragging its beverage segment performance. This was partly offset by its Hong Kong and Taiwan beverage division, which saw better EBITDA margins attributable to good cost control and strong performance from its aviation segment. Swire Pacific’s property division also reported weaker recurring underlying profit, given the headwinds faced by its Hong Kong office and retail properties. However, this was largely in line with our expectations.

We lower the fair value estimate of narrow-moat Swire Pacific to HKD 75.00 from HKD 78.00, following a pre-blackout update with Swire Properties. This reflects weakness on the retail and hotel segments that are experiencing net tourist spending leakage as a strong Hong Kong dollar versus regional currencies weighs on mall foot traffic and hotel performance in the near term. Hong Kong and mainland China tenant sales will also see pressure given sporadic tenant upgrade works at Pacific Place mall, Taikoo Li Sanlitun North, and Taikoo Li Chengdu, but we anticipate the asset enhancement to lift tenant sales in the medium term as the stores gradually reopen from 2025 onward. Positively, management shared that the base rent portion for the mainland China malls continues to see positive rental reversion that we expect to help offset weaker turnover rent. For the office segment, we think softness in the Hong Kong office market is likely to persist before gradual absorption of excess supply in 2025 to set a stage for recovery in 2026. Overall, we anticipate Swire Pacific’s 2024 revenue to show a mild decline of 4.8% given weakness in its property segment and a lower contribution from its beverage segment due to the sale of Swire Coca-Cola USA.