Wheelock and Co:Solid execution on property sales;fully valued without restructuring

What's changed.

After factoring in our Wharf target price (see “HK retail recovery; analyzingpotential IP spinoff; reinstate with Buy” on Mar 21) and updating itsproperty schedule, we revise our FY17-19E EPS for Wheelock by +10%/-1%/+3% and raise our 12-month target price to HK$61.4 (from HK$41.7),based on a narrower target NAV discount of 25% (vs. 30% previously) tobring it in line with other HK holdcos such as Jardine and Swire Pacific.

We remain Neutral on Wheelock and prefer its subsidiary Wharf (4.HK,Buy, last close HK$68.05), for which we see 15% upside to our target price.

Implications.

The 87% price appreciation in Wheelock’s share price since the beginningof 2016 has been mainly driven by a 58% rally in Wharf’s share price(representing 74% of group NAV) and narrowing of its holdco discountfrom 30% to 15% reflecting solid execution on property sales, havingachieved HK$22bn in FY16 ahead of its target of HK$10bn. For FY17, thegroup targets another HK$10bn, which is achievable in our view, as it stillhas HK$14bn saleable resources. It also plans to launch 3 new projects, i.e.,Monterey, Kai Tak, Lohas Park 5, offering 3,174 residential units in total.

This said, given full valuation and our property team’s projection of a 5%housing price decline till 2019, we see limited scope for its holdco to re-rate.

Aggressive bids by PRC developers also make it more difficult for Wheelockto replenish its landbank totaling 8.2mn sq ft (3-4 years landbank). While itmakes strategic sense to merge with Wharf as discussed in our prior report,we believe Wharf’s proposed IP spinoff may not necessarily be a precursor.

Valuation.

The stock is trading at 0.6x FY17E P/B, 10x P/E and a 25% discount to FY17ENAV of HK$82, which values Wharf at our 12m TP (vs. historical averages of0.6x, 10x and 30%). Every 10% change in housing price assumption wouldchange our NAV by 5%. Wharf remains the key stock driver.