Residential sales realization and rental recovery in Hong Kong and Mainland China drive results above expectations; maintain Buy

Overview

Swire Properties reported 1H26 book net profit attributable to shareholders of HK$3.6bn. Excluding gains from non-core Hong Kong investment property disposals and the impact of investment property revaluation, recurring underlying profit increased 36% YoY to HK$4.7bn, mainly driven by profits from residential sales on Deep Water Bay Road in Hong Kong and improvement in the leasing business. Total rental income increased 2% YoY to HK$6.6bn, with the Mainland China property portfolio performing strongly while the Hong Kong business shifted from decline to stabilization. Goldman Sachs modestly adjusted its FY26-28E earnings forecasts and lowered the target price from HK$30.70 to HK$30.30, but maintained a Buy rating based on cash flow improvement, dividend growth capability, and low valuation.

Core views

First, Mainland China retail properties are the main growth engine, with mall tenant sales increasing 23% YoY, and Taikoo Li Sanlitun in Beijing and HKRI Taikoo Hui in Shanghai increasing 63% and 82%, respectively. Second, Hong Kong office occupancy improved and leasing demand for core projects recovered, but negative rental reversions remain a near-term pressure. Third, residential sales provide important support for earnings and cash flow, with the Deep Water Bay Road project in Hong Kong recognizing HK$2.2bn in sales revenue and cumulative presales at Shanghai Lujiazui Taikoo Yuan Residences reaching Rmb16bn. Fourth, the company can fund its HK$100bn long-term investment plan and sustained dividend growth through property sales and non-core asset disposals. Fifth, the stock trades at approximately a 52% discount to NAV, 0.4x P/B, and a 4.9% dividend yield, with valuation appeal remaining relatively high.

Analysis framework

The report starts with 1H26 profit and loss and recurring profit adjustments, combines rental income, occupancy, rental reversions, and tenant sales data for office and retail properties in Hong Kong and Mainland China, assesses residential project sell-through, capital expenditure, leverage, and dividend capacity, and uses an FY26E NAV discount method to determine the 12-month target price.

Methodology notes

• Valuation methodsNAV discount valuation method

  Based on FY26E net asset value and applying a target discount of 40%

  The 12-month target price is HK$30.30, applying an unchanged 40% target NAV discount; the current price corresponds to an approximately 52% NAV discount, indicating that market pricing is below the target valuation level.

• Earnings qualityRecurring underlying profit analysis

  Excluding non-recurring impacts such as asset disposals and property revaluations

  The report measures the sustainable profitability of core businesses such as leasing, property trading, and hotels by adjusting for gains from non-core investment property disposals and the impact of investment property revaluations.

• Multi-factor analysisGS Factor Profile

  Compare stocks based on growth, financial returns, valuation multiples, and composite scores

  This framework conducts standardized comparisons of the company's position relative to the market and industry peers based on forward-looking sales, EBITDA, EPS, ROE, ROCE, CROCI, and multiple valuation metrics.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Swire Properties (1972.HK)

  Hong Kong-listed stock directly covered by the report

  Strengths

  High-quality core commercial property portfolio, strong Mainland China retail growth, residential sales improving cash flow, prudent leverage, and sustained dividend growth.

  Weaknesses

  Hong Kong office rental reversions remain negative, the large-scale investment plan brings ongoing capital expenditure needs, and earnings may be affected by the pace of property sales recognition.

  Comparison

  The current approximately 52% NAV discount and 0.4x P/B are below the 40% target NAV discount used in the report, indicating a relatively low valuation level.

  Risks

  Increased office and hotel supply, uncertainty in retail recovery, project expansion execution, and capital investment risks.

• Mainland China retail property portfolio

  Main driver of rental growth and long-term expansion

  Strengths

  1H26 tenant sales increased 23% YoY, key projects recorded significant growth, and the new project pipeline is expected to nearly double the total GFA of investment properties.

  Weaknesses

  Some projects are still in opening ramp-up or construction stages, and INDIGO saw rental income decline due to disruption from development works.

  Comparison

  Rental income from Mainland China properties increased 13% YoY, clearly stronger than Hong Kong leasing business over the same period.

  Risks

  Slowing consumption growth, new supply from peers, slower-than-expected project ramp-up, and difficulty in scaling the portfolio.

• Hong Kong office and retail property portfolio

  Mature cash flow source and potential cyclical recovery target

  Strengths

  Office occupancy rose to 92%, Hong Kong retail rents increased 2% YoY, and high-end consumption and inbound visitor traffic drove sales at key malls.

  Weaknesses

  Rental reversions for major office projects still declined by 14% to 17%, and rental recovery has not yet been fully established.

  Comparison

  Retail properties outperformed office properties, with tenant sales at Pacific Place and Citygate Outlets increasing 15% and 16%, respectively.

  Risks

  Hong Kong office demand recovery falling short of expectations, competition from new projects in Island East, and volatility in high-end retail recovery.

• Property trading business

  Important source of profit, cash flow, and capital recycling

  Strengths

  Hong Kong, Shanghai, and Miami projects all made good sales or presales progress, providing funding for investment plans and dividends.

  Weaknesses

  Revenue and profit recognition are project-based and may fluctuate significantly year to year.

  Comparison

  Residential sales on Deep Water Bay Road in Hong Kong contributed HK$1.2bn in property trading profit in 1H26, becoming an important factor behind the period's results exceeding expectations.

  Risks

  Weakening real estate demand, delays in project launches, and sales prices or sell-through pace below expectations.

Key data

• 12-month target priceHK$30.30Lowered from HK$30.70, with the target NAV discount maintained at 40%.
• Current price and upsideHK$23.00; 31.7%Current price and upside implied by the target price as listed on the report cover.
• 1H26 book net profitHK$3.6bnIncludes impacts such as asset disposals and investment property revaluation.
• 1H26 recurring underlying profitHK$4.7bn; up 36% YoYAbove Goldman Sachs and market expectations, supported by profits from Hong Kong residential sales.
• 1H26 total rental incomeHK$6.6bn; up 2% YoYGrowth in the Mainland China property portfolio offset rental reversion pressure in Hong Kong offices.
• Tenant sales at Mainland China mallsUp 23% YoYExcluding sales from auto retailers; growth accelerated after asset enhancement works were completed at multiple projects.
• Hong Kong office occupancy92%Above FY25's 91%, with occupancy at Two Taikoo Place and Six Pacific Place rising to 80% and 70%, respectively.
• 1H26 interim dividend per shareHK$0.37; up 6% YoYIn line with the company's commitment to achieving mid-single-digit absolute dividend growth each year.
• Net debt-to-equity ratio14.8%Overall remained stable, with proceeds from residential sales and non-core asset disposals helping cover capital expenditure and dividends.
• Long-term investment planHK$100bnApproximately HK$69bn of capital commitments have been identified, including HK$46bn in Mainland China, HK$13bn in Hong Kong, and HK$10bn in property trading.
• Current valuation52% NAV discount; 0.4x P/B; 4.9% dividend yieldGoldman Sachs believes the valuation is undemanding and below mid-cycle levels.

Impact & implications

The results indicate that the company's growth drivers are expanding from a single source of leasing income to residential sales realization, retail consumption recovery, and hotel turnaround. Growth in Mainland China malls and improvement in Hong Kong retail are expected to support rents and cash flow, while a further narrowing of negative office rental reversions could lead to improved earnings expectations. Residential sales and asset disposals can reduce the pressure of large-scale investment plans on the balance sheet and support continued dividend increases. However, the slight reduction in the target price reflects that some earnings forecasts remain affected by the pace of sales recognition and leasing market pressure.

Risks

• New development projects in Island East may intensify competition in Hong Kong office properties.
• Execution uncertainty exists over whether the Mainland China property portfolio can scale up smoothly.
• Mainland China office and hotel markets may experience oversupply.
• Uncertainty remains over the recovery of retail sales in Hong Kong and Mainland China.
• The HK$100bn long-term investment plan may increase capital expenditure and financing pressure.
• The pace of residential project sales and profit recognition may lead to earnings volatility.

What to watch

• Whether the decline in Hong Kong office rental reversions can continue to narrow and turn positive in early FY27.
• The opening, occupancy, and ramp-up progress of Taikoo Li Sanya and Taikoo Place Beijing.
• Whether tenant sales growth at Mainland China malls can be sustained amid a slowing consumption environment.
• Subsequent sell-through and profit recognition for The Headland Residences, Lujiazui Taikoo Yuan Residences, and Miami projects.
• Trends in Hong Kong inbound visitor traffic, high-end consumption, and retail rental growth.
• The balance between capital expenditure, asset disposals, net gearing, and dividend growth from 2H26 to FY28.
• Whether changes in offshore insurance and trust tax policies affect Hong Kong office leasing demand.