Swire Properties:Positive office rental reversion continued;pace of retail tenant sales decline moderated

On Feb 10, Swire Properties released its 4Q2016 operating statement. Overall, wesee positive office rental reversion continued at the company’s HK rental portfolio,for which the pace of retail tenant sales decline has moderated. We summarize afew key takeaways for each segment.

HK office rental portfolio: positive rental reversion momentum continues amid anoverall occupancy rate of 99% as of Dec 2016 vs. 99% in Dec 2015.

HK retail rental portfolio: the pace of decline in tenant sales has moderated,suggested by a narrowed retail sales decline at the end of 2016.

China retail rental portfolio: China retail tenant sales growth remains strong in2016, especially in the second half of the year.

Valuation: as of Feb 10 close, the company’s share price is HK$22.50, representing31.6% upside potential to our 12-month target price of HK$29.60 (based on 20%discount to FY17E NAV). Maintain Buy rating. Swire Properties is trading at 0.61XP/B vs. 5yr avg/-1s.d. of 0.66X/0.58X and at a 37.5% discount to 12m fwd NAV vs.

5yr avg/-1 s.d. of 28.6%/38.6%.

Key risks: Weaker-than-expected office demand; weaker-than-expected tenant salesat its shopping malls.

The following charts and details put recent data points in context.