Hong Kong Stock Market Review: Earnings Warning

WHARF REIC issued a profit warning, expecting a loss of no less than 900 million yuan in the first half of the year due to the drag of revaluation losses, while it made a profit of 1.805 billion yuan in the same period last year.

The company made significant impairments in 2020 and 2022, reaching 14 billion and 14.9 billion yuan respectively, mainly from the investment portfolio, with most of the impairments coming from office buildings. This loss is likely based on this.

According to the annual report, the rental of Hong Kong office buildings decreased from around 59 yuan per square foot in 2019 to around 52 yuan in 2023, a similar magnitude to shopping malls. However, the issue lies in the simultaneous decline in occupancy rates. The office rental rates of Times Square/Harbour City dropped from around 94-95% to 88%, causing an overall rental decrease of over 500 million yuan, while the company has been paying an average dividend of around 4 billion yuan annually in the past 3 years.

Although Hong Kong office buildings will continue to be under pressure due to oversupply and weak demand, optimistically speaking, the marginal impact on WHARF REIC is gradually decreasing. The company's dividend payout is based on 65% of the underlying net profit. If it can maintain a basic net profit of 6 billion yuan annually, the dividend yield is still at 6.6%.

In 2023, affected by interest rate hikes, the company's actual borrowing rate increased from 2.5% to 5.4%, and financial expenses grew from 1.86 billion to 2.17 billion yuan. Over 94% of the company's borrowings are floating-rate, so any future rate cuts will also bring significant benefits. However, compared to the long-term structural challenges faced by landlords, rate cuts are expected to significantly improve the Hong Kong residential market, benefiting developers more.

Of course, the biggest beneficiaries are local utilities. Last week, Power Assets announced its performance, with Hong Kong Telecom's financing costs increasing from 930 million to 1.09 billion yuan, but profits increased by 1.9% to 1.99 billion yuan, earnings per share at 0.2627 yuan, and dividends per share increased by 2.7% to 0.3292 yuan.

The Hong Kong telecom market is already saturated, with no new companies bringing competition, making the industry very stable. Although Hong Kong Telecom has been paying dividends in excess in recent years, this year it has sold some assets and, coupled with interest rate hedging, is likely to be able to maintain a dividend yield of over 8% annually.

As for PCCW, in addition to holding Hong Kong Telecom, it also has OTT and free TV businesses that require continuous investment. Therefore, the company's debt ratio is higher than Hong Kong Telecom's, and the EBITDA of the latter two is only about 5% of Hong Kong Telecom's, a small proportion.

As of the end of June, PCCW had cash of around 2 billion yuan and short-term borrowings of around 3.95 billion yuan. Without selling assets, it would be difficult to maintain an annual dividend of around 3 billion yuan. If it chooses to refinance, the cost will increase further. For example, next year, 500 million US dollars of 3.625% guaranteed notes will mature, with potential new rates reaching between 5.5-6%. Although the current dividend yield of the company is above 9%, it is not ruled out that further dividend reductions may be necessary, and this potential impact is believed to be significant