Swire Pacific Shares: Ready for a Turnaround?

After being hammered in 2020, are Swire Pacific Limited (SEHK: 19) shares on the cusp of a rebound? –

Some investors like growth stocks at reasonable prices while others like deep value stocks. There’s obviously no simple strategy that will work in all market conditions, especially in these unprecedented times.

That said, if you are a contrarian investor, or someone who simply believes in pricing reversal, you’d be interested to check out the worst Hang Seng Index stock of the first seven months of 2020: Swire Pacific Limited (SEHK: 19).

The company has performed terribly this year for some very good reasons.

The question to ask yourself is whether the market has overreacted to the negative news or if the company is indeed facing structural disruption to its business model and earnings growth.

Swire Pacific

Swire Pacific operates as a holding company and through its subsidiaries, mainly focuses on the property, aviation, and beverage sectors.

Its shares have been slammed this year, driven by the challenging outlook for both Swire Properties Limited (SEHK: 1972) and Cathay Pacific Airways Ltd (SEHK: 293).

Swire Properties

Let’s first focus on the property division of Swire Pacific, which is the largest contributor to the group’s profit.

Within the division, the retail segment has suffered the most and has been adversely affected by social unrest in Hong Kong and the Covid-19 pandemic.

For instance, according to the company’s announcement, retail sales of Pacific Place (one of Swire’s flagship malls) declined 47% for the first six months of this year.

Though, on the brighter side, Swire Properties has a defensive office-to-retail portfolio mix.

Its gross rental income from the Hong Kong office portfolio in 2019 was HK$6.1 billion (US$787 million) versus its Hong Kong retail portfolio’s gross rental income of HK$2.4 billion for the same period.

The occupancy rates at Taikoo Place and One Island East were 98% and 100% respectively at the end of June 2020.

Despite weaker demand for office properties in Hong Kong, rents were resilient and rental revisions were positive.

Furthermore, Two Taikoo Place is under construction and expected to complete in 2022, which will offer a boost of around 1 million square feet (sq ft) of gross floor area to the Hong Kong office portfolio.

Though the road ahead remains rough for Swire Properties, much of the negative sentiment seems to be priced in against its net asset value (NAV).

Cathay Pacific Airways

At the time of writing, Cathay Pacific estimates a net loss attributable to shareholders of approximately HK$9.9 billion for the first half of this year, which effectively translates to about a net loss of HK$4.5 billion to the shareholders of Swire Pacific.

That’s because Swire Pacific holds 45% of the shares in Cathay Pacific. The outlook for Cathay is very gloomy.

With the resurgence of Covid-19 cases in the Asia-Pacific region, we may not see normalisation of international travel in the near term.

If we assume a vaccination will be available in mid-2021 (that’s a big if), the critical question is whether the company has sufficient liquidity to sail through the crisis.

What was relatively positive was that Cathay Pacific announced a HK$39 billion recapitalisation financing plan.

The recapitalisation plan will help Cathay survive through the industry-wide downturn. And when the global travel market becomes more favourable post-Covid, Cathay Pacific (being one of Asia’s best airline operators) should recover fairly fast.

For investors with less risk appetite, Swire Pacific is perhaps a more defensive play to own the airline’s indirectly.

Foolish conclusion

From a broader view, the rebound of Swire Pacific depends a lot on the recovery of Swire Properties and Cathay Pacific.

It is too early to tell if the company will make a sharp U-turn, but if one believes China’s economic recovery (first-in-first-out) is a forward-looking proxy for Asia’s market, then I think it is still worth putting this out-of-favour stock back on your watch-list.

More reading

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Loonie Yen doesn’t own shares in any companies mentioned.

The Motley Fool Hong Kong Limited( 2020

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