initiation: time to position; price discovery awaits

See important disclosures, including any required research certifications, beginning on page 117

Hong Kong Real Estate

17 January 2019

Wharf Real Estate Investment

Initiation: time to position; price discovery awaits

Potential to become a premier global property play over time

Taken important steps along this path; we see others pending

Initiating with a Buy (1) rating and TP of HKD68.40

Wharf REIC (1997 HK)

Target price: HKD68.40

Share price (16 Jan): HKD48.55 | Up/downside: +40.9%

Jonas Kan, CFA(852) 2848 4439

[email protected]

See important disclosures, including any required research certifications, beginning on page 117

Hong Kong Real Estate

Investment case: In our view, the unusual path the Hong Kong stock market

has taken together with certain industry-specific issues have resulted in Hong

Kong property stocks being “mis-priced” relative to global peers. We see the

establishment of Wharf REIC as the start of a long journey to address the

longstanding valuation anomaly of Hong Kong property stocks and a credible

route by which this anomaly can be addressed. With Wharf REIC’s valuation

down 26% since May 2018, we believe now is the time to buy into this

promising opportunity for price discovery.

Catalysts: In our view, the nature of Wharf’s (4 HK, HKD22.70, Buy [1]) de-

merger exercise has not been fully understood by investors and presents a

price-discovery opportunity. We identify 5 factors that we see driving Wharf

REIC to be gradually viewed and priced as a premier global property stock.

1) Growing acceptance that Harbour City is a one-of-a-kind property asset

and should be priced as such.

2) Increasing recognition that Wharf REIC has discovered a differentiated

way to manage retail properties that excels in driving tenant sales and has

the potential to make it a beneficiary of e-commerce.

3) Rising awareness that Wharf REIC’s office portfolio is well positioned to

ride the current metamorphosis in the Hong Kong office market and will

evolve into a stronger supplementary growth engine for the group.

4) The development of the Greater Bay Area, which offers opportunities to

owners of HK commercial properties; and Wharf REIC’s willingness and

readiness to embrace the China demand, resulting in it being able

potentially to get the most from this once-in-a-century opportunity.

5) Rising investor confidence that Wharf Group has the credentials and

commitment to integrate further into the global capital markets, and will be

an important constituent in the modernised Hong Kong property sector, the

Greater H-REIT/landlord sector in Hong Kong, or the Pan-Asia

REIT/property sector.

Valuation: We initiate coverage of Wharf REIC with a Buy (1) rating and 12-

month TP of HKD68.40, based on a 30% discount applied to our end-2019E

NAV of HKD97.70. Based on its stated 65% payout ratio, our TP translates into

dividend yields of 3.4% for 2019E and 3.7% for 2020E, which we view as fair

given Wharf’s asset quality, the fact it has yet to fully utilise its dividend

payment ability, and its credentials to deliver sustained EPS and DPS growth in

the next few years.

Risks: Risks to our call include an inability to deliver sustained earnings and

DPS growth and further integrate into global capital markets; and global

investors’ inertia and scepticism in terms of accepting Hong Kong family

companies as core investing choices.

17 January 2019

Wharf Real Estate Investment

Initiation: time to position; price discovery awaits

Potential to become a premier global property play over time

Taken important steps along this path; we see others pending

Initiating with a Buy (1) rating and TP of HKD68.40

Source: FactSet, Daiwa forecasts


Target price: HKD68.40

Share price (16 Jan): HKD48.55 | Up/downside: +40.9%

Jonas Kan, CFA(852) 2848 4439

[email protected]

90

99

108

116

125

44

49

55

60

65

Jan-18 Apr-18 Jul-18 Oct-18 Jan-19

Share price performance

Wharf Real (LHS) Relative to HSI (RHS)

(HKD) (%)

12-month range 45.80-64.00

Market cap (USDbn) 18.79

3m avg daily turnover (USDm) 14.32

Shares outstanding (m) 3,036

Major shareholder Wheelock and Company (61.7%)

Financial summary (HKD)

Year to 31 Dec 18E 19E 20E

Revenue (m) 16,818 17,858 19,161

Operating profit (m) 13,036 13,932 15,003

Net profit (m) 10,130 10,860 11,730

Core EPS (fully-diluted) 3.337 3.577 3.864

EPS change (%) 6.6 7.2 8.0

Daiwa vs Cons. EPS (%) 4.8 6.6 13.6

PER (x) 14.6 13.6 12.6

Dividend yield (%) 4.4 4.8 5.3

DPS 2.150 2.350 2.550

PBR (x) 0.7 0.7 0.7

EV/EBITDA (x) 14.1 12.9 11.8

ROE (%) 4.8 5.1 5.4

2

Wharf REIC (1997 HK): 17 January 2019

Table of contents

Background – the brainchild of a re-organisation by a major Hong Kong

family business group ........................................................................................... 6

Investment thesis – price discovery awaits ..........................................................19

1. Harbour City is a one-of-a-kind property asset .............................................23

2. Value of its retail franchise to be increasingly recognised ..........................47

3. Its offices also look set for a transformation ................................................61

4. Well-positioned to ride on opportunities offered by the development

of the Greater Bay Area ................................................................................66

5. Solid credentials to integrate further into the global capital markets .........81

Forecasts and valuation ..........................................................................................93

Risks to our view ...................................................................................................105

Appendix 1: the 11 cities in the Greater Bay Area ..............................................106

Appendix 2: tenant breakdown – Harbour City, Times Square and

Plaza Hollywood .................................................................................................108

Appendix 3: retail sales in China and its major cities ........................................113

Appendix 4: scenes from Times Square ..............................................................114

3


How do we justify our view?

Growth outlook Valuation Earnings revisions

Growth outlook Wharf REIC: gross rental income

We see 3 factors underpinning Wharf REIC’s growth

prospects and providing it with buffers against headwinds:

1) its proven strength in retail property management,

allowing it to seize upon unusual opportunities facing the

Hong Kong retail property market, 2) the upgrade potential

of its office properties in Hong Kong, and 3) the quality of

its property assets, which are located in 4 key strategic

areas for commercial properties in Hong Kong – Tsim Sha

Tsui, Causeway Bay, Central and East Kowloon – which

places the company favourably to ride what we regard as a

once-in-a-century opportunity created by the development

of the Greater Bay Area.

Source: Company, Daiwa forecasts

Valuation Wharf REIC: 2019E NAV breakdown

After correcting by 26% from a peak of HKD65.45 on 14

May 2018, Wharf REIC is trading at a 50.3% discount to

our end-2019E NAV of HKD97.70 and offers dividend

yields of 4.8% for 2019E and 5.3% for 2020E higher than

Link REIT (823 HK, HKD80.05, Outperform [2]), but based

on a lower payout ratio (65% vs. Link REIT’s 100%) and

we see Wharf REIC’s property assets as higher quality.

Link REIT is trading currently at the highest valuation

among Hong Kong property companies, which we believe

is justified. For Link, we think the valuation it has sustained

for the past 13 years shows that there is room for a

valuation uplift for Hong Kong property stocks if they can

gain comparable trust and confidence of the global capital

markets in terms of transparency, governance, and

perceived alignment of interests. We see the formation of

Wharf REIC as an important first step by one of Hong

Kong’s major family business groups to address the

entrenched valuation anomaly of Hong Kong property

stocks.

Spot Cap Valuation

GFA Rent* rate Per sq ft Total

Per share

(sq ft) (HKD) (%) (HKD) (HKDm) (HKD)

Harbour City - Retail 2,068,000 240 4.0% 72,000 148,896 49.04

- Gateway 2,107,000 60 4.0% 18,000 37,926 12.49 - Harbour City 2,698,000 45 4.0% 13,500 36,423 12.00 - Serviced apartments 296,000 50 4.0% 15,000 4,440 1.46 - Hotels (794 rooms, or 0.57m sq ft, directly owned, at HKD5m/room) 1,115,000 6,989 3,970 1.31 - Pacific Club 138,000 5,000 690 0.23 - Ocean Terminal Extension 145,000 12,000 1,740 0.57 8,567,000 234,085 77.10 Times Square - Retail 943,000 160 4.0% 48,000 45,264 14.91 - Office 1,033,000 65 4.0% 19,500 20,144 6.63 1,976,000 65,408 21.54 Plaza Hollywood 562,000 70 4.5% 18,667 10,491 3.46 Crawford House 296,000 9,654 3.18 Wheelock House 108,000 3,600 1.19 71.6% stake in Harbour Centre 7,696 2.53 100% stake in The Star Ferry 120 0.04 Gross asset value 331,053 109.04 Net debt (34,409) (11.33) NAV 296,644 97.70

Source: Daiwa forecasts Note: *based on GFA

Earnings revisions Wharf REIC: revisions to consensus EPS forecasts

Our 2018-20E EPS are 5-14% above the consensus, likely

as we believe the market has underestimated: 1) the

resilience of Wharf’s retail malls against headwinds, 2) the

room for improvement in Wharf’s office rentals, and 3) the

positive impact of the Greater Bay Area will have on the

Hong Kong retail and office markets, especially prime retail

malls favoured by Mainland visitors and offices that are

seen as credible alternatives for companies moving out of

Central. We note that consensus EPS revisions for Wharf

REIC have generally been rising over the past 12 months.

Source: Bloomberg, Daiwa

0

5,000

10,000

15,000

20,000

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

E

2019

E

2020

E

(HKDm)

Harbour City Times Square

Plaza Hollywood Wheelock House and Crawford House

2.8

2.9

3.0

3.1

3.2

3.3

3.4

3.5

Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19

(HKD)

FY18E consensus EPS FY19E consensus EPS

4


Financial summary

Key assumptions

Profit and loss (HKDm)

Cash flow (HKDm)


Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E

Harbour City gross rental income

(HKDm)n.a. 8,096 8,567 8,960 9,444 10,556 11,297 12,262

Times Square gross rental income

(HKDm)n.a. 2,544 2,687 2,838 2,824 2,907 3,030 3,183

Plaza Hollywood gross rental income

(HKDm)n.a. 513 529 546 574 599 611 623

Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E

Property sales n.a. 4,361 3,930 2,482 5,907 108 88 80

Rental income n.a. 11,260 12,038 12,775 13,334 14,576 15,477 16,635

Other Revenue n.a. 1,816 1,608 1,594 1,663 2,135 2,292 2,446

Total Revenue n.a. 17,437 17,576 16,851 20,904 16,818 17,858 19,161

Other income n.a. 0 0 0 0 0 0 0

COGS n.a. (6,034) (4,965) (4,247) (4,494) (2,954) (3,017) (3,234)

SG&A n.a. (318) (371) (311) (361) (295) (302) (308)

Other op.expenses n.a. (669) (481) (469) (607) (533) (607) (616)

Operating profit n.a. 10,416 11,759 11,824 15,442 13,036 13,932 15,003

Net-interest inc./(exp.) n.a. (1,264) (1,302) (1,351) (1,029) (675) (690) (712)

Assoc/forex/extraord./others n.a. 268 485 184 20 105 107 111

Pre-tax profit n.a. 9,420 10,942 10,657 14,433 12,466 13,349 14,402

Tax n.a. (1,618) (1,957) (1,684) (4,267) (2,119) (2,269) (2,448)

Min. int./pref. div./others n.a. (338) (516) (267) (666) (217) (219) (223)

Net profit (reported) n.a. 7,464 8,469 8,706 9,500 10,130 10,860 11,730

Net profit (adjusted) n.a. 7,464 8,469 8,706 9,500 10,130 10,860 11,730

EPS (reported)(HKD) n.a. 2.458 2.790 2.868 3.129 3.337 3.577 3.864

EPS (adjusted)(HKD) n.a. 2.458 2.790 2.868 3.129 3.337 3.577 3.864

EPS (adjusted fully-diluted)(HKD) n.a. 2.458 2.790 2.868 3.129 3.337 3.577 3.864

DPS (HKD) n.a. 0.000 0.000 0.000 0.000 2.150 2.350 2.550

EBIT n.a. 10,416 11,759 11,824 15,442 13,036 13,932 15,003

EBITDA n.a. 10,598 11,948 12,000 15,586 13,334 14,234 15,309

Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E

Profit before tax n.a. 9,420 10,942 10,657 14,433 12,466 13,349 14,402

Depreciation and amortisation n.a. 0 0 0 0 0 0 0

Tax paid n.a. (1,634) (1,869) (1,833) (1,745) (2,119) (2,269) (2,448)

Change in working capital n.a. 2,673 2,610 2,203 (3,282) 667 473 436

Other operational CF items n.a. 806 621 1,329 1,060 602 615 634

Cash flow from operations n.a. 11,265 12,304 12,356 10,466 11,616 12,167 13,024

Capex n.a. (7,794) (1,097) (8,339) (2,560) (1,180) (1,080) (1,050)

Net (acquisitions)/disposals n.a. 1 1 (8) (50) 0 0 0

Other investing CF items n.a. 0 2,207 14,595 (10,003) 0 0 0

Cash flow from investing n.a. (7,793) 1,111 6,248 (12,613) (1,180) (1,080) (1,050)

Change in debt n.a. 1,856 (2,593) (2,396) 9,851 (1,500) (1,500) (1,500)

Net share issues/(repurchases) n.a. 0 0 0 1,000 0 0 0

Dividends paid n.a. (4,975) (8,423) (16,106) (10,374) (6,072) (6,831) (7,438)

Other financing CF items n.a. (1,288) (1,252) (1,297) (989) (1,177) (1,233) (1,290)

Cash flow from financing n.a. (4,407) (12,268) (19,799) (512) (8,749) (9,564) (10,228)

Forex effect/others n.a. (19) (286) (405) 352 0 0 0

Change in cash n.a. (954) 861 (1,600) (2,307) 1,686 1,524 1,746

Free cash flow n.a. 3,471 11,207 4,017 7,906 10,436 11,087 11,974

5


Financial summary continued …

Balance sheet (HKDm)

Key ratios (%)


Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E

Cash & short-term investment n.a. 5,273 6,501 5,212 3,076 5,668 8,143 10,884

Inventory n.a. 14 11 11 12 0 0 0

Accounts receivable n.a. 1,231 1,048 818 635 507 538 577

Other current assets n.a. 13,141 7,437 2,479 168 180 185 190

Total current assets n.a. 19,659 14,997 8,520 3,891 6,355 8,866 11,651

Fixed assets n.a. 235,028 241,797 251,375 262,376 263,258 264,036 264,780

Goodwill & intangibles n.a. 0 0 0 0 0 0 0

Other non-current assets n.a. 5,786 6,176 5,567 6,408 6,487 6,570 6,656

Total assets n.a. 260,473 262,970 265,462 272,675 276,099 279,473 283,088

Short-term debt n.a. 250 1,529 1,232 20,800 8,810 8,510 8,210

Accounts payable n.a. 7,639 7,285 7,932 8,805 9,245 9,708 10,193

Other current liabilities n.a. 5,081 5,313 15,969 2,829 3,611 4,147 4,658

Total current liabilities n.a. 12,970 14,127 25,133 32,434 21,667 22,365 23,061

Long-term debt n.a. 39,869 35,997 34,130 24,752 35,242 34,042 32,842

Other non-current liabilities n.a. 1,767 1,941 2,062 2,521 2,550 2,570 2,590

Total liabilities n.a. 54,606 52,065 61,325 59,707 59,458 58,977 58,493

Share capital n.a. 0 0 0 0 0 0 0

Reserves/R.E./others n.a. 200,194 205,134 198,910 207,318 210,921 214,646 218,635

Shareholders' equity n.a. 200,194 205,134 198,910 207,318 210,921 214,646 218,635

Minority interests n.a. 5,673 5,771 5,227 5,650 5,720 5,850 5,960

Total equity & liabilities n.a. 260,473 262,970 265,462 272,675 276,099 279,473 283,088

EV n.a. 183,731 180,547 179,550 192,231 188,135 184,215 180,007

Net debt/(cash) n.a. 34,846 31,025 30,150 42,476 38,384 34,409 30,168

BVPS (HKD) n.a. 65.940 67.567 65.517 68.287 69.473 70.700 72.014

Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E

Sales (YoY) n.a. n.a. 0.8 (4.1) 24.1 (19.5) 6.2 7.3

EBITDA (YoY) n.a. n.a. 12.7 0.4 29.9 (14.4) 6.7 7.6

Operating profit (YoY) n.a. n.a. 12.9 0.6 30.6 (15.6) 6.9 7.7

Net profit (YoY) n.a. n.a. 13.5 2.8 9.1 6.6 7.2 8.0

Core EPS (fully-diluted) (YoY) n.a. n.a. 13.5 2.8 9.1 6.6 7.2 8.0

Gross-profit margin n.a. 65.4 71.8 74.8 78.5 82.4 83.1 83.1

EBITDA margin n.a. 60.8 68.0 71.2 74.6 79.3 79.7 79.9

Operating-profit margin n.a. 59.7 66.9 70.2 73.9 77.5 78.0 78.3

Net profit margin n.a. 42.8 48.2 51.7 45.4 60.2 60.8 61.2

ROAE n.a. 7.5 4.2 4.3 4.7 4.8 5.1 5.4

ROAA n.a. 5.7 3.2 3.3 3.5 3.7 3.9 4.2

ROCE n.a. 8.5 4.8 4.8 6.2 5.0 5.3 5.7

ROIC n.a. 7.2 4.0 4.2 4.4 4.2 4.5 4.9

Net debt to equity n.a. 17.4 15.1 15.2 20.5 18.2 16.0 13.8

Effective tax rate n.a. 17.2 17.9 15.8 29.6 17.0 17.0 17.0

Accounts receivable (days) n.a. 12.9 23.7 20.2 12.7 12.4 10.7 10.6

Current ratio (x) n.a. 1.5 1.1 0.3 0.1 0.3 0.4 0.5

Net interest cover (x) n.a. 8.2 9.0 8.8 15.0 19.3 20.2 21.1

Net dividend payout n.a. 0.0 0.0 0.0 0.0 64.4 65.7 66.0

Free cash flow yield n.a. 2.4 7.6 2.7 5.4 7.1 7.5 8.1

Company profile

Wharf REIC holds a portfolio of 6 commercial assets in Hong Kong including Harbour City, Times

Square, Wheelock House, Crawford House, The Murray, and Plaza Hollywood, with a total GFA of

11.7m sq ft. Wharf REIC is a subsidiary of Wheelock and Co Ltd (20 HK). It was listed on the Hong

Kong Stock Exchange on 23 November 2017 after a spin-off exercise by The Wharf (Holdings) Ltd.

Subsequent to the de-merger, Wharf REIC became a separate and directly owned subsidiary of

Wheelock and Co Ltd (20 HK), which now has the same stake (62%) in both Wharf Holdings (4 HK,

1) and Wharf REIC (1997 HK, 1).

6


Background – the brainchild of a re-organisation by a major Hong Kong family business group

A major corporate re-organisation that is likely not yet well understood

Wharf REIC was created in November 2017 as a result of a de-merger exercise

undertaken by the Wharf Group, which, in our view, represents the second major corporate

re-organisation among Hong Kong’s major family business groups (the first being the

Cheung Kong Group’s re-organisation announced in January 2015, see our 9 February

2015 Special Report: Cheung Kong/Hutch’s Bold Move).

Wharf REIC: created as a result of the demerger

Source: Company Note: * The Marco Polo Hongkong Hotel within Harbour City, and The Murray in Central, are held through the 72%-owned subsidiary Harbour Centre

There are different interpretations of the nature and achievement of these 2 major re-

organisations of Hong Kong family business groups. For example, for the Cheung Kong

Group re-organisation, some investors viewed it as an exercise which achieved “nothing in

the end”, in that it created a pure property company right after its reorganisation (which

some viewed as a major step by a major Hong Kong family business group to fit into the

preferences and expectations of the global capital markets). However, Cheung Kong

Property later reverted to a company similar to the old Cheung Kong in less than 2 years

and even changed its name to CK Asset (1113 HK, HKD62.80, Buy [1]) instead of CK

Property. This left investors bewildered by the Cheung Kong group’s corporate strategy.

Likewise, many on the street argue that the main purpose of Wharf Group’s 2017 de-

merger was to create a new Wharf that had a weaker (compared with the original Wharf)

earnings and NAV growth outlook and therefore was more likely to become a candidate for

privatisation, which they believed was the ultimate objective of the whole de-merger

exercise.

We do not subscribe to the aforementioned interpretations. While we can see how these

arguments emerged, and agree that they sound convincing intuitively, we do not think they

capture the entire spectrum of reality associated with these 2 corporate re-organisations.

We see both as major corporate moves that would have been inconceivable without the full

support of the respective controlling families; and as such, they shed light on a number of

strategic aspects of the 2 groups, one of the most important being how these 2 families

position themselves in the corporate world in the years to come.

In our view, to fully understand the nature and implications of these 2 corporate events,

investors need to understand the background: 1) about the Hong Kong family business

groups in general, 2) the style and business philosophy of the Cheung Kong/Hutchison and

Wheelock/Wharf Group, and 3) how they have evolved and developed over the past few

Before demerger After demerger

Wheelock (20 HK)

Wharf (4 HK)

Wheelock (20 HK)

Wharf (4 HK)

- HK> Properties

> Logistics

- China

> IP> DP

- Hotel management


- 6 strategics commercial HKIPs

> Harbour City*> Times Square> Plaza Hollywood

> Crawford House> Wheelock House> The Murray*

- Includes 72% Harbour

Centre (51 HK)

62% 62% 62%

Wharf REIC was created

as a result of a major

corporate re-

organisation in 2017

We do not subscribe to

the mainstream

interpretations of the

Cheung Kong Hutchison

and Wharf Wheelock

group re-organisations

http://asiaresearch.daiwacm.com/eg/cgi-bin/files/CheungKongHutchsBoldMove_150209.pdf#page=1

7


decades. We think these 3 contexts are essential for understanding and interpreting both

events. Without this context, these 2 important corporate events could be misinterpreted by

the market rather than helping investors get closer to the truth of understanding and

valuing these companies.

Unfortunately, a market misunderstanding may also be the situation facing the Wharf de-

merger exercise. It appears there was a theory in the market that both corporate re-

organisations were to stimulate the share prices of these 2 business groups (ie, Cheung

Kong-Hutchison Group and Wheelock-Wharf Group) .However, as we do not see even a

remote chance that these 2 business groups would contemplate selling their businesses,

we cannot see why boosting the share price would have been the primary objective of

these exercises. Indeed, one frustration many global investors have about Hong Kong

family business groups is that they do not seem too concerned about the share prices of

their companies. And it follows that, if they have not been focused much on their share

prices for decades, why would they devote considerable management time and effort just

to stimulate their share prices?

In any case, the stock market’s favourable initial reaction to the Cheung Kong group re-

organisation led many market observers to speculate that other family business groups

would also look for ways to find similar stimulants for their share prices.

Indeed, there was a theory in the market that the purpose of Wharf Group’s de-merger

exercise was to stimulate the group’s share price through having a strong Wharf REIC

while making Wharf weaker in terms of share price and eventually an easier candidate to

privatise. The way to play this corporate action, so the argument goes, was an “event

trade” where investors ride the positive reaction at first and then get out once the

excitement related to the “event trade” has run its course.

In retrospect, we believe the market reacted favourably to this deal at the beginning.

However, as the excitement began to fade, Wharf REIC’s share price drifted lower, in some

ways, not dissimilar to how the stock price of CK Property (now renamed CKA) behaved

after its debut in mid-2015. As such, we think the market considered the de-merger of

Wharf an “event trade”, in that it triggered a rise in the group’s share price from November

2017 to May 2018; but subsequently, the situation returned to normal as if the whole event

had not taken place at all.

Share price performance of CK Property since listing (now renamed CK Asset)


We do not subscribe to the aforementioned mainstream views on the Wheelock/Wharf

Group de-merger. From the very outset, we see no compelling reason the Woo family

needs to privatise Wharf Holdings. As Hong Kong family business groups typically take

multi-decades or even multi-generational views on the businesses which they likely never

intend to sell, we also see no coercive reason they would come up with the determination

and commitment to devote so much management time and effort to undertake a major

corporate exercise just to stimulate the share price for a period of time.

30

40

50

60

70

80

Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18

(HKD)

Sell-off after the event is over

The Wharf Group de-

merger was priced as an

“event trade” by the

stock market

8


In our view, the mainstream interpretation of the Wharf group de-merger is probably

misguided and we do not think pricing it as an “event trade” accurately reflects the

underlying fundamentals and business reality. Like CK Property (now renamed CK Asset)

before it, we see the establishment of Wharf REIC as a serious attempt to explore an

alternative model to run the business. In the case of CK Property, while its share price

drifted lower soon after the listing as investors that bought the stock for an event trade

cashed out, its share price finally stabilised after most of the cashing-out-related selling

had been completed, with investors accepting that the evolution of its business model had

reached a critical mass level. We believe a similar situation is possible for Wharf REIC.

Wharf REIC: share-price performance since listing


In this light, we hold our view that Wharf REIC’s share price will require time to digest selling

pressure from investors that have taken an “event-trade perspective” on the Wharf de-

merger. We expect this situation to create a good opportunity for value-oriented long-term

investors, because as far as we can discern, a main objective of the Wharf de-merger was to

achieve an equity market valuation that the group believed it deserved. If the group can

become a Hong Kong property company like Link REIT, and break away from the “Hong

Kong discount”, this would only benefit the business over the long term, and reflects well on

what Wharf’s management has done over the past few decades, as discussed below.

In retrospect, 2005-17 was a period of investment for the Wharf Group, which saw the

group invest over HKD100bn in China and devote significant management time and effort

to its investment properties in Hong Kong, especially its shopping malls. We view Harbour

City and the group’s other retail property achievements (in terms of the rise in tenant sales)

over the past 15 years as impressive. While such an achievement (the achieved rise in

tenant sales in its malls) is something the world’s largest and most prestigious retail groups

may all agree upon, there was not much, if any, recognition from the capital markets.

This lack of recognition by the capital markets likely was a source of frustration for the

Wheelock/Wharf Group and the Woo family. As the Wheelock/Wharf Group is in the

process of passing the baton to the next generation, and given that the harvesting of its

investments made during 2005-17 has probably started, we think it is feasible that the

Wheelock/Wharf Group would focus more on getting its achievements recognised than risk

spending another HKD100bn in new markets. While Hong Kong property companies still

have significant borrowing capacity, property remains essentially a capital-intensive

industry. As such, if the “currency value” commanded by a business group’s stock rises,

that would only be helpful for the business in the longer term.

Against this background, we believe “getting the equity market valuation it deserves” will

be one of the Wheelock/Wharf Group’s main objectives in the next few years. In any case,

our long-stated view remains that the Wharf Group will be seen as a high-quality asset

play, and more importantly, that the de-merger has resulted in the creation of a vehicle

which arguably contains the best of the Wharf Group’s property assets, rendering it not

inferior to the property portfolios of any other listed companies in the world.

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Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18

(HKD)

Sell-off after the event is perceived to be over

We think the primary

objective of the de-

merger was to achieve

an equity market

valuation the group

thought it deserved

Wheelock/Wharf’s focus

in the next few years

likely to be more on

“value realisation” than

“new business

ventures”

9


Wharf group’s demerger did not involve raising any new equity capital, and we think the

assets it has put into Wharf REIC reflect the Wheelock/Wharf group’s and Woo family’s

determination and commitment to strive for an equity market valuation for this vehicle that

better reflects the business reality and its asset quality. In terms of earnings power, we

contend that the assets Wharf REIC owns are in no way inferior to any property company

in the world.

From the perspective of the evolution of Hong Kong family business groups, we see the

very establishment of Wharf REIC bearing some resemblance to various corporate moves

taken by Cheung Kong/Hutchison Group in 1991 and 1992, which involved the

privatisation of Cavendish (delisted) and 2 equity share placements whereby Cheung Kong

itself injected c.HKD4.6bn of new equity capital into Hutchison.

In hindsight, the corporate action taken by Cheung Kong/Hutchison in 1991-92 was a

prelude to a subsequent major strategic move, whereby Hutchison made a determined

drive to transform itself into a global conglomerate. By comparison, Wharf REIC’s resolve

may not be as strong as that of Cheung Kong/Hutchison in the early 1990s, which involved

a sizeable capital injection from Cheung Kong into Hutchison.

That said, we see a common theme linking Cheung Kong/Hutchison Group and Wharf

REIC, namely the global ambitions of both to bring their flagships out of the small port of

Victoria Harbour and into the global markets. For Cheung Kong/Hutchison Group, its

manoeuvres during 1991-92 were a prelude to Hutchison pushing for global expansion of

its ports, telecom, retail, infrastructure and other businesses. In the case of Wharf REIC,

we believe the establishment of this company is an attempt by the group to achieve a

valuation that is more in line with global names like Simon Property, Boston Properties

and Unibal Rodamco.

In our view, the creation of Wharf REIC is a serious attempt by one of the largest and most

important business groups in Hong Kong, and possibly Asia; and in this sense, it

constitutes an interesting and potentially important opportunity to the investing world.

On pages 23-92, we elaborate on the 5 main reasons we believe Wharf REIC will

eventually find its place in the investing world, but first we highlight the key assets Wharf

REIC owns.

Owning the “best of the best” property assets of the Wharf Group

Wharf REIC is arguably one of the simplest in terms of asset/corporate structure property

companies in Hong Kong. Essentially, it owns just 6 properties in 4 strategic locations in

Hong Kong: Tsim Sha Tsui, Causeway Bay, Central and East Kowloon, with a total GFA of

11.7m sq ft and a book value of HKD271bn (HKD89.30/share) as of June 2018. Of these 6

properties, 5 (Harbour City, Times Square, Wheelock House, Crawford House and Plaza

Hollywood) are held directly by Wharf REIC, with the Murray owned by its 72%-owned

subsidiary Harbour Centre Development (51 HK, Not rated).

In our view, Wharf

REIC’s asset structure

reflects the group’s

commitment to get an

equity market valuation

it believes it deserves

The Wharf Group owns 6

properties in 4 strategic

locations in Hong Kong

10


Wharf REIC: 6 properties in 4 locations

Source: Company Note: The Marco Polo Hongkong Hotel within Harbour City, and The Murray in Central, are held through the 72%-owned subsidiary Harbour Centre

We think the relationship between Wharf REIC and Harbour Centre Development is

important to note because it could result in corporate action over time. We think it is

debatable as to whether Harbour Centre Development need exist, as it does not serve any

major functions within the Wheelock/Wharf Group and its existence is probably the result

of a historical legacy and the existence of large minority shareholders in it, which made it

very difficult to privatise Harbour Centre.

Wharf REIC: asset structure

Wharf Serviced

REIC’s Retail Office apartments Hotels Resi Others Total

Property Location stake (sq ft) (sq ft) (sq ft) (sq ft) (sq ft) (sq ft) (sq ft)

Hong Kong investment properties

1. Harbour City**

- Ocean Terminal HK 100% 580,000 - - - - - 580,000

- Ocean Terminal Extension HK 100% - - - - - 145,000 145,000

- Ocean Centre HK 100% 356,000 631,000 - - - - 987,000

- Wharf T&T Centre HK 100% 13,000 244,000 - - - - 257,000

- World Commerce Centre HK 100% 14,000 240,000 - - - - 254,000

- World Finance Centre HK 100% 37,000 476,000 - - - - 513,000

- Ocean Galleries HK 100% 348,000 - - - - - 348,000

- Gateway I HK 100% 114,000 1,127,000 - - - - 1,241,000

- Gateway II HK 100% 434,000 1,551,000 296,000 - - - 2,281,000

- Gateway III HK 100% - 360,000 - - - - 360,000

- Marco Polo Hongkong Hotel* HK 72% 172,000 18,000 - 547,000 - - 737,000

- Gateway Hotel HK 100% - - - 289,000 - - 289,000

- Prince Hotel HK 100% - - - 279,000 - - 279,000

- Pacific Club Kowloon HK 100% - - - - - 138,000 138,000

2,068,000 4,647,000 296,000 1,115,000 - 283,000 8,409,000

2. Times Square HK 100% 943,000 1,033,000 - - - - 1,976,000

3. Plaza Hollywood HK 100% 562,000 - - - - - 562,000

4. Wheelock House HK 100% 4,000 211,000 - - - - 215,000

5. Crawford House HK 100% 85,000 104,000 - - - - 189,000

3,662,000 5,995,000 296,000 1,115,000 - 283,000 11,351,000

Other investments

6. Harbour Centre Dev Ltd HK 72%

7. The Star Ferry HK 100%

Source: Company, Daiwa Note: * held through the 72%-owned subsidiary Harbour Centre; ** among the GFA under Harbour City, the Marco Polo Hongkong Hotel (consisting 547,000 sq ft hotel GFA, 172,000 sq ft retail GFA, and 18,000

sq ft office GFA) is held by the 72%-owned subsidiary Harbour Centre

In retrospect, Harbour Centre Development has played mainly a financing role within the

Wheelock/Wharf Group in the past, in that the group has mainly used Harbour Centre

Development’s surplus capital to help share the financial commitments related to the

group’s investments. As such, it was used as a vehicle for taking some of the Wharf

Group’s property projects in China, and also for bidding for the government’s old building

on Murray Road, which it has now converted into a luxury hotel known as The Murray.

There are some

historical legacy

elements to Wharf

Group’s current asset

structure

11


While Harbour Centre Development is a small component within Wheelock/Wharf (with its

market capitalisation being just c.4% of Wharf’s as a whole), we believe it has importance

to Wharf REIC as it owns some interesting and important assets of the group, chief among

which is a small part of Harbour City and some legacy China projects of the Wharf group.

Besides, it also owns c.51,000 sq ft of retail GFA and c.5,000 sq ft of office GFA in Star

House, which is right next to Harbour City and is connected to Harbour City via a bridge.

In our view, Harbour Centre Development is a source of hidden value for Wharf REIC and

we believe that, at some point in the future, there could be some corporate action related

to addressing this historical legacy. In particular, we think the December 2018 passing of

the oldest member of the Hui family, who owned a sizeable amount of Harbour Centre

Development, suggests an increased likelihood of corporate action related to this company

might occur. Star House next to Harbour City

Source: Daiwa

Harbour Centre Development: share-price performance since 1990

Source: Bloomberg

Subsequent to the Wharf Group de-merger, Wharf REIC owns 5 key property assets

directly, namely, Harbour City, Times Square, Plaza Hollywood, Wheelock House and

Crawford House. Other than these 5 property assets, Wharf REIC mainly has 2

investments. One is its 72%-owned Harbour Centre Development; the other is the Star

Ferry, which operates ferry services between Tsim Sha Tsui and Central and is located

right next to Harbour City. As such, Wharf REIC can be seen as owning 7 major assets.

In terms of the Star Ferry, we see this asset offering some strategic value to Wharf REIC in

the long term given that it is a Hong Kong icon and is located right next to Harbour City. As

such, there could be a redevelopment angle to this asset at some point in the future.

That said, from a commercial perspective, we do not expect the ferry business itself to

make a meaningful contribution to Wharf REIC in the foreseeable future. As such, outside

the 5 main property assets, Wharf REIC’s main business is its 72%-held subsidiary,

Harbour Centre Development, which owns c.3.7m sq ft of investment properties in China

(including those under construction) and c.0.97m sq ft of development properties in

Shanghai, Suzhou, Chongqing and Changzhou. Shown below is a table outlining the

property assets Wharf REIC owns, including all the Hong Kong and China property assets

held under Harbour Centre Development.

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(HKD)

Harbour Centre

Development is a more

important company than

many realise, in our view

12


Wharf REIC: its principal assets plus those held under Harbour Centre

Wharf Serviced




Harbour City**

72-100% 2,068,000 4,647,000 296,000 1,115,000 - 283,000 8,409,000

Times Square HK 100% 943,000 1,033,000 - - - - 1,976,000

Plaza Hollywood HK 100% 562,000 - - - - - 562,000

Wheelock House HK 100% 4,000 211,000 - - - - 215,000

Crawford House HK 100% 85,000 104,000 - - - - 189,000

The Murray* HK 72% - - - 336,000 - - 336,000

Units at Star House* HK 72% 51,000 5,000 - - - - 56,000

3,713,000 6,000,000 296,000 1,451,000 - 283,000 11,743,000

Harbour Serviced

Centre’s Retail Office apartments Hotels Resi Others Total


China investment and development properties held through the 72%-owned subsidiary Harbour Centre

China investment properties*

Suzhou IFS Suzhou 80% 22,600 1,501,000 - 443,000 1,254,000 - 3,220,600

Marco Polo Changzhou Changzhou 100% - - 131,000 343,000 - - 474,000

22,600 1,501,000 131,000 786,000 1,254,000 - 3,694,600

China development properties*

Changzhou Times Palace Changzhou 100% - - - - 69,000 - 69,000

Suzhou Times City Suzhou 80% - - - - 9,000 - 9,000

The U World Chongqing 55% 3,000 - - - 4,000 - 7,000

Shanghai South Station Shanghai 27% 139,000 712,000 - - - 30,000 881,000

142,000 712,000 - - 82,000 30,000 966,000



While all the property assets owned by Wharf REIC are important commercial property

assets in their own districts and have over USD1bn in market value, we contend that at this

juncture, Wharf REIC is arguably a company mainly centred on Harbour City. This is not

because the other assets it owns are small or unimportant – each of them is over

USD10bn in market value and important commercial properties on a standalone basis.

Instead, the reason is simply because the market value and income-generation capacity of

Harbour City is so large.

Indeed, Harbour City is probably one of the world’s most valuable commercial property

assets, and alone generated HKD9.4bn in gross rental income in 2017 and was valued at

HKD178.6bn (HKD58.84/share) on its books as at end-2017. As such, Harbour City really

dominates Wharf REIC whether in terms of assets or earnings, accounting for 70.8% of its

gross rental income in 2017 and 67.4% of the carrying value of its investment properties on

the book (which reflects the value of its 3 hotels in Harbour City at historical cost minus

depreciation).

Wharf REIC: breakdown of gross rental in 2017

Serviced Total gross Hotels Total

Retail Office apartments rental & clubs Revenue

Property (HKDm) (HKDm) (HKDm) (HKDm) % share (HKDm) (HKDm)

Harbour City 6,627 2,492 325 9,444 70.8% 1,336 10,780

Times Square 2,112 712 - 2,824 21.2% - 2,824

Plaza Hollywood 574 - - 574 4.3% - 574

Wheelock House 19 187 - 207 1.5% - 207

Crawford House 160 75 - 235 1.8% - 235

Star House* 49 2 51 0.4% - 51

9,541 3,468 325 13,334 100% 1,336 14,670

Source: Company, Daiwa estimates Note: * held through the 72%-owned subsidiary Harbour Centre

Wharf REIC is arguably a

company mainly about

Harbour City and a few

others

13


Wharf REIC: ranking of its properties by gross rental

Source: Company, Daiwa estimates Note: Central Portfolio includes Crawford House, Wheelock House and The Murray

While the other assets of Wharf REIC are comparatively small relative to the company’s

current asset base, we think they cannot be ignored because they are all important

commercial property assets on a standalone basis. While their relative importance is

overshadowed by Harbour City under the current structure, we believe their value to

shareholders of Wharf REIC will be realisable over time in the event of say a disposal or

spin-off as a separately listed vehicle.

Wharf REIC: breakdown of valuation at end-2017

Serviced Hotels

Retail Office apartments & clubs Sub-total Others Total

Property (HKDm) (HKDm) (HKDm) (HKDm) (HKDm) (HKDm) (HKDm) % share

Harbour City 96,567 63,309 10,380 7,820 178,076 564 178,640 67.4%

Times Square 38,651 17,949 - - 56,600 67 56,667 21.4%

Plaza Hollywood 9,580 - - - 9,580 7 9,587 3.6%

Wheelock House 960 8,922 - - 9,882 - 9,882 3.7%

Crawford House 5,338 3,193 - - 8,531 - 8,531 3.2%

Star House* 1,632 60 - - 1,692 - 1,692 0.6%

152,728 93,434 10,380 7,820 264,362 638 265,000 100%

Source: Company, Daiwa estimates Note: * held through the 72%-owned subsidiary Harbour Centre

Moreover, they are all located in strategic areas in the Hong Kong commercial property

sector where we expect Wharf’s presence to be significantly larger over time. Note that

with the exception of Plaza Hollywood, these assets are all under 999-year leases (which

means they are like freehold leases), and hold much promise as a lot of possibilities could

apply to these assets over time.

Indeed, we view Wharf REIC as the Wheelock/Wharf Group’s flagship for commercial

properties in Hong Kong. As of December 2018, Harbour City represents the model for the

group’s commercial property assets, as it is at a stage aspired by the group’s other

property assets. Besides, we think it is possible that all the smaller property assets of the

group will become more important commercial property assets in their respective locations

over time.

Among the few other assets of Wharf REIC, the most important is Times Square in

Causeway Bay. Although Times Square looks small relative to the scale and value of

Harbour City, it is already the most valuable commercial property asset in the district and

valued at HKD56.7bn (HKD18.67/share) on its book at end-2017.

We see Times Square as Wharf REIC’s strategic asset in the strategic area of Causeway

Bay. We think another important aspect of Times Square is that it is a model that is easy to

replicate, given that the requirements to build a Times Square are easier to meet than a

Harbour City (it is about 25% of the size of Harbour City in terms of total GFA). We see this

property as Wharf REIC’s strategic foothold in the Causeway Bay area; it is the second

most important asset within Wharf REIC, accounting for 21.2% of its gross rental income

and 21.4% of the book value of its property assets at end-2017.

0

2,000

4,000

6,000

8,000

10,000

12,000

Harbour City Times Square Plaza Hollywood Central Portfolio*

(HKDm)

Compared to Harbour

City, all the other

property assets of Wharf

REIC look small …

… yet will be important

in their respective areas

over time, in our view

The “Big-2” account for

about 90% of the

company’s rental income

and asset value

14


Wharf REIC: ranking of its properties by valuation

Source: Company, Daiwa Note: Central Portfolio includes Crawford House, Wheelock House and The Murray

Other than Causeway Bay and Tsim Sha Tsui, another major area where Wharf REIC has

a presence is Central. As at December 2018, Wharf REIC was not a major player in the

commercial property market in Central. However, it does own 2 niche property assets in

Central (Crawford House and Wheelock House) plus one luxury hotel, The Murray (held

through 72%-owned subsidiary Harbour Centre Development).

In terms of scale and value, these property assets cannot match Times Square or Harbour

City. That said, we see them as quality niche property assets in Central with room to be

upgraded over time. We estimate that Wheelock House and Crawford House together

accounted for 3.3% of Wharf REIC’s gross rental income in 2017, and 6.9% of the end-

2017 valuation of its property assets.

Besides Causeway Bay and Central, Wharf REIC has a presence in Kowloon East, where

it owns Plaza Hollywood, which is part of a medium-sized residential development called

Galaxia in Diamond Hill in the eastern part of Kowloon. This property began as a

community mall serving mainly the residents living above it, but has evolved into a regional

mall serving a much wider community in the eastern Kowloon area.

Again, in terms of scale and value, Plaza Hollywood cannot be compared with Times

Square and Harbour City. That said, we see Plaza Hollywood as an interesting commercial

property asset operating in a market segment where it is much easier to find opportunities

to build a similar type of property asset. Also, we expect Kowloon East to become a much

more important area for commercial properties in Hong Kong over time. In 2017, it

accounted for 4.3% of Wharf REIC’s gross rental income, and 4.3% of the end-2017

valuation of its property assets.

Other than the above assets in Causeway Bay, Central and East Kowloon, Wharf REIC

also has some small assets, such as 56,000 sq ft GFA (held under 72%-owned subsidiary

Harbour Centre Development) in Star House, situated right next to Harbour City and the

Star Ferry. In terms of contribution to earnings and NAV, we do not expect these assets to

be of material significance to Wharf REIC in the foreseeable future. That said, given their

close proximity to Harbour City, we think these assets do offer some strategic value to

Wharf REIC in the long term.

Finally, Wharf REIC also has some “legacy assets” held under Harbour Centre

Development, which are its property assets in China. These consist mainly of Suzhou IFS

in Suzhou (3.2m sq ft), a 0.474m sq ft hotel in Changzhou and 0.97m sq ft residential GFA

in various projects in Shanghai, Suzhou, Chongqing and Changzhou. We expect Harbour

Centre Development to gradually sell these property assets over the next few years and

see their importance being mainly in providing Wharf REIC with a supplementary source of

profits and cash flow.

0

40,000

80,000

120,000

160,000

200,000

Harbour City Times Square Central Portfolio* Plaza Hollywood

(HKDm)

Other niche assets

outside the Big-2

15


A formidable player in Hong Kong commercial property

In terms of total gross rental income, Wharf REIC is one of the largest landlords in Hong

Kong and second only to SHK Properties, albeit the Wharf group’s de-merger resulted in

the group’s entire investment property portfolio in China and The Peak portfolio in Hong

Kong being separated from Wharf REIC.

Based on pure gross rentals from Hong Kong in 2017, the gap between Wharf REIC and

SHK Properties was not that large (HKD18.5bn versus HKD13.3bn), while the gap

between Wharf REIC and the others would become larger (HKD13.3bn versus below

HKD8bn for most others).

Wharf REIC: gross rental income vs. other major landlords in Hong Kong in 2017

Source: Companies, Daiwa estimates Note: *For SHK Properties and Link REIT, we have used the FY18 figures as their financial year-ends are June and March respectively.

Wharf REIC: gross rental income from Hong Kong vs. other major landlords in Hong Kong in 2017

Source: Companies, Daiwa estimates Note: *For SHK Properties and Link REIT, we have used the FY18 figures as their financial year-ends are June and March respectively.

Another salient point is that Wharf REIC does not own many assets, with Harbour City and

Times Square already accounting for c.70% and c.21%, respectively, of its gross rental

income. In terms of its gross rental income from a single property asset, Harbour City is far

higher than that from any other in Hong Kong, and the situation is much more pronounced

if we compare the gross rental income from its malls only.

0

5

10

15

20

25

SHKProperties*

Wharf REIC SwireProperties

Link REIT* MTRC HendersonLand

HongkongLand

CK Asset Hang LungProperties

Hysan

(HKDbn)

0

5

10

15

20

25

SHKProperties*

Wharf REIC SwireProperties

MTRC Link REIT* HongkongLand

CK Asset HendersonLand

Hang LungProperties

Hysan

(HKDbn)

The second-largest

landlord in Hong Kong in

terms of gross rental

income from Hong Kong

The largest in terms of

gross rental income

from one single property

asset and one single

mall

16


Gross rental income in Harbour City mall vs. other retail property assets in 2017

Source: Companies, Daiwa estimates

Furthermore, Times Square is the most dominant commercial property asset in the

Causeway Bay area, and we estimate it generates the highest gross rental income among

retail properties in the Causeway Bay area.

Gross rental income of Times Square vs other major properties in Causeway Bay


In comparison, Crawford House and Wheelock House are younger and smaller property

assets that were acquired by Wharf REIC (from Wheelock & Company) in 2014 and 2016,

respectively. These assets may not have the dominance Harbour City and Times Square

command in their respective districts, but we see a chance of them becoming important

niche property assets in their respective segments in terms of the commercial property

market in Central.

Queen’s Road Central is now the most important road in Central for retail. However, about

20 years ago, there was not a solid retail component in the Central commercial hub, as at

that time, Central was mainly for offices and there was little to do in core Central at night.

However, Hongkong Land’s determination to create a luxury retail flavour for Central and

what Alan Zeman has done in Lan Kwai Fong and the surrounding areas have gradually

resulted in the emergence of a retail sector in Central.

Crawford House and Queen’s Road Central

Source: Daiwa

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Har

bour

City

Tim

es S

quar

e

New

Tow

n P

laza

Sha

tin

IFC

Pac

ific

Pla

ce

Fes

tival

Wal

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un T

own

Pla

za

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ford

Pla

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mar

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Lang

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all

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an P

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all I

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Mar

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quar

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Pla

za H

olly

woo

d

(HKDm)

0

500

1,000

1,500

2,000

2,500

3,000

Times Square Hysan Place Lee Garden One Lee Garden Two Lee Theatre Lee Garden Six (111Leighton Rd)

(HKDm)

Office Retail

Times Square is the

largest commercial

property asset in

Causeway Bay

Both Crawford House

and Wheelock House are

interesting niche

property assets in

Central

17


Indeed, Queen’s Road Central was arguably one of the largest beneficiaries of the retail

market boom in Hong Kong from 2004-14 as the lack of prime high street shop space in

Hong Kong during that period resulted in Queen’s Road Central becoming a highly

sought-after location, especially for international brands seeking to establish a foothold

in Hong Kong. It was against this background that the entire retail space in Crawford

House was leased initially to H&M and subsequently to Zara, which allegedly paid

double the rent paid by H&M to secure the space, according to media reports. In any

case, as Crawford House is the largest retail property asset along Queen’s Road Central

and with the longest shop front, we see it potentially becoming a more important

commercial property asset over time.

Another case in point is Wheelock House. Its retail potential is much more limited

compared to Crawford House. However, as an office building, its location is arguably one

of the most convenient in Central, situated right at the heart of core Central and Pedder

Street. In its current form, Wheelock House looks dated. However, asset enhancement

initiatives (AEI) for offices are neither difficult nor costly to execute. Note that the spot rent

in Cheung Kong Centre has reached HKD200/sq ft, which is over 2x the passing rent in

Wheelock House. As such, we see room for a rental uplift at Wheelock House, especially

given the right AEI, which we believe could take place in the future.

Wheelock House and Pedder Street in Central

Source: Daiwa

And there’s The Murray in Central. This property does not have the dominance of Harbour

City or Times Square in their respective districts. But as a high-quality luxury hotel, we

believe it has the credentials to be an important niche asset in the special segment of

luxury hotels in Hong Kong.

The Murray in Central

Source: Daiwa

Meanwhile, although Plaza Hollywood is far from being the dominant commercial property

asset in Kowloon East, we see it as an important niche asset in the district. Given the

plethora of potential new developments in Kowloon East, it is not inconceivable to us that

Wharf REIC will over time establish a more important position in this strategic area of the

Hong Kong commercial property sector.

The Murray and Plaza

Hollywood are not

without potential

18


Plaza Hollywood in East Kowloon

Source: Daiwa

Apart from these strategic assets, Wharf REIC’s other main assets are the legacy assets in

China under Harbour Centre Development, which we expect the company to eventually

dispose of. We estimate their (legacy assets) market value at over HKD10bn and see their

importance lying mainly in providing the group with an extra source of cash flow for funding

the expansion of its core commercial property portfolio in the 4 strategic locations of Hong

Kong in which it has already established a presence (Tsim Sha Tsui, Causeway Bay,

Central and Kowloon East).

In the broadest sense, we think what Wharf REIC presents to the global investing world is

an example of what a company with such rich endowments and differentiated methods to

run shopping malls (and potentially offices and hotels as well) can do in the Hong Kong

commercial property sector over time, bearing in mind what is happening in China and the

Greater Bay Area. We believe that in China, we are witnessing a scale of urbanisation and

the rise of middle class which is unprecedented. As for the Greater Bay Area, our view is

that, under the best-case scenario, it could become the China equivalent of some of the

strongest and most vibrant cities in the USA/Europe such as New York, London, Las

Vegas, Silicon Valley, Chicago or Hamburg.

Greater Central area: major property assets

GFA (m sq ft)

Property Owners Office Retail Serv’d Apt Hotel Total

Hongkong Land's Central portfolio Hongkong Land 4.9 1.1 - 0.2 6.1

Swire Properties' Greater Pacific Place portfolio Swire Properties consortium 2.4 0.7 0.4 1.8 5.4

IFC SHK Properties / Henderson Land 1.9 0.6 0.3 0.3 3.1

Three Garden Road Champion REIT 1.6 - - - 1.6

Cheung Kong Center CK Asset 1.3 - - - 1.3

Hutchison House* CK Asset 0.5 - - - 0.5

China Building CK Asset 0.3 - - - 0.3

New World Tower New World Development 0.6 0.1 - - 0.6

Murray Road site redevelopment Henderson Land 0.5 - - - 0.5

AIA Tower AIA / Lai Sun 0.5 - - - 0.5

The Murray Wharf REIC / Harbour Centre - - - 0.3 0.3

Wheelock House Wharf REIC 0.2 - - - 0.2

Crawford House Wharf REIC 0.1 0.1 - - 0.2

CCB Tower China Construction Bank / Lai Sun 0.1 - - - 0.1

14.7 2.6 0.7 2.6 20.7

Source: Companies, Daiwa estimates Note: *Hutchison House to be re-developed

Wharf REIC represents

what a company with

rich endowments can

achieve in the Hong

Kong commercial

property sector over

time

19


Investment thesis – price discovery awaits

“Good businesses are the ones that in some way are reasonably sheltered from

competition. This gets to having what I call a franchise of some sort.”

- Warren Buffett

In our opinion, Wharf REIC is a Hong Kong-listed property company with demonstrated

strengths that warrant it a decent position in the arena of premier property companies in

the world. Chief among them is the sales productivity of Harbour City and its other malls;

but the list does not stop there. We believe Wharf REIC, in its day-to-day response and

adaptation to the special market environment it faces, has discovered a differentiated way

to manage retail properties that has not only led it to excel at driving tenant sales in the

past, but also puts it in a strong position to ride the opportunities created by e-commerce.

These qualities would make it a company with one of the strongest fundamentals among

retail landlords in the world, in our view.

At the same time, we see Wharf REIC as an innovative and dynamic landlord for

commercial properties and believe there are many opportunities it could capitalise on, not

least the scale expansion of the Hong Kong office market and opportunities brought about

by the development of the Greater Bay Area. With a foothold in 4 of what we see as the 5

main strategic locations for commercial properties in Hong Kong (Greater Central,

Causeway Bay, Island East, Tsim Sha Tsui, and Kowloon East) and backed by over

USD30bn in property assets and over USD1.5bn in annual operating cash flow, Wharf

REIC has many opportunities it can tap into in the Hong Kong commercial property sector,

in our view. As such, we see it as a stock with the credentials to eventually enter the

league of the world’s premier property stocks and be priced as such.

As we see it, the unusual development path the Hong Kong equity market has taken has

created a situation where its primary market has developed much faster than its secondary

market. As such, while the Hong Kong stock market’s total market cap has been lifted to a

level akin to the top-10 stock markets in the world for over 10 years now, according to the

CEIC, we do not think it yet has an adequate amount of investing capital focused on the

secondary trading of Hong Kong-listed shares. Overlaying this is a situation whereby the

management culture and business models of many Hong Kong-listed companies are

relatively different from the mainstream models in the West.

We believe this is one reason some stocks in the Hong Kong stock market have been

neglected by the global investing world and may not have been priced in the same way as

their counterparts in major international equity markets; hence the persistence of the “Hong

Kong discount” in the valuation of Hong Kong property stocks (see our The Hong Kong

Property Toolkit in Autumn 2013 and 24 March 2017 sector report: Beginning of the end or

end of the beginning?).

To the extent that the above argument is valid, we think it therefore follows that some Hong

Kong-listed companies that are well-respected in their own industries globally may not be

able to command a level of attention and recognition from the investing world that is

proportionate to their strength, reputation and relative position in their industry.

Credentials to enter the

premier league

A global market by size,

but with few stocks

priced similar to global

names

http://asiaresearch.daiwacm.com/eg/cgi-bin/files/TheHongKongPropertyToolkit_130916.pdf#page=1


http://asiaresearch.daiwacm.com/eg/cgi-bin/files/HongKongPropertySector_170324.pdf#page=1


20


Stock-market capitalisation in Hong Kong since 1986


Top-10 stock markets in the world based on market capitalisation

Rank Country Exchanges Domestic mkt cap (USDbn) Market share

1 US NYSE + NASDAQ 33,780 39.5%

2 China Shanghai SE + Shenzhen SE 6,530 7.6%

3 Japan Japan Exchange Group 5,679 6.6%

4 India BSE India + National SE India 4,086 4.8%

5 Hong Kong Hong Kong Exchanges 3,936 4.6%

6 UK London SE 3,767 4.4%

7 Canada TMX Group 2,095 2.5%

8 Germany Deutsche Börse 1,864 2.2%

9 Switzerland SIX Swiss Exchange 1,522 1.8%

10 S. Korea Korea Exchange 1,463 1.7%

Source: World Federation of Exchanges, Daiwa Note: as of end November 2018

HSI constituents: market cap by sector


That said, although the Hong Kong discount has existed for a long time, that does not

mean it must continue forever. In any case, our observation is that the “Hong Kong

discount” has widened in recent years despite the fact that the Hong Kong property

companies have kept on growing their recurrent income (one main source being rentals

from investment properties) and dividends, and that the ability of Hong Kong property

asset owners to realise their NAVs has probably never been better.

PBR trend of major property investors in Hong Kong

Source: Companies, Bloomberg, Daiwa

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

(HKDbn)

0

5

10

15

20

25

2003 2018

(HKDtn)

Real Estate Banks Casino & Gaming Conglomerates

Consumer Discretionary/Staples Electronic & Electrical Equipment Financial Services Information Technology

Life Insurance Media Mining Oil, Gas & Consumable Fuels

Pharmaceuticals Telecommunications Transportation Utilities

Average since 1990: 0.77x

+1SD: 0.96x

-1 SD: 0.58x

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Weighted average PBR of six major investorsPBR (x)

Current PBR: 0.53x

Growing rental income;

dividends and book

value but widening NAV

discount

21


Overall, we see Hong Kong as an equity market which is in transition (from a small and fringe

market in Asia in the early 1990s to one of the largest equity markets in the world and a proxy

for China equity markets). In terms of its primary market and overall market cap, its scale has

probably already reached a global level at c.USD4tn in size. However, the pace of progress

in the development of its secondary market has not been as fast; as such, during the

transitional period (mid 2000s to now), the overall market has been facing arguably a

situation of an oversupply of equities, with the size of the companies being too large relative

to the size of the investing capital that has anchored interest in the Hong Kong market. This

is especially the case when China stocks are not in favour with investors and there are major

uncertainties in the macro economy or geopolitical risks in major areas in the world.

We think one consequence of the aforementioned issue is that there is probably not yet a

critical mass of investing capital that prices Hong Kong property stocks primarily from a bottom-

up valuation perspective. With an aggregate market capitalisation of about USD260bn and over

USD120bn in free float, the listed real-estate securities sector in Hong Kong is not small, in our

view. For a sector of this size and scale, it probably needs tier-1 and tier-2 global investing

capital to sustain a reasonable level of interest. However, Hong Kong as a whole is still a

negligible component in the major global indices, accounting for less than 2% of the major

indices, and Hong Kong still looks far from being seen as a core market by global investors.

Furthermore, as the Hong Kong property companies are mostly tightly controlled by a

number of major families, we believe it is hard for private equity capital to enter the market

in a significant way to correct the large disconnect between physical market prices for the

property assets and the share prices of listed real-estate securities.

Indeed, being probably the most liquid market among the non-core markets for global

investors, the Hong Kong market is highly sensitive to global liquidity flows. As such, we

believe the way Hong Kong property companies’ share prices are priced is driven as much

by fluctuations in global liquidity flows and investor sentiment and perception about the

overall market, as fundamental changes at the corporate level.

We also think this issue is as much about the overall Hong Kong equity market as it is

about the property sector alone. Indeed, it appears to us that of a total of over 2,250 listed

companies on the Hong Kong stock market, only a handful of them are really seen and

priced like their global peers, although Hong Kong has a number of names that are already

sizeable and respectable in their own industries globally. At the same time, many stocks

are just neglected as institutional investors take little interest in how they are priced.

This disinterest in Hong Kong stocks is a source of frustration for value-oriented investors.

That said, our read is that the physical market values of the assets owned by Hong Kong

property companies are clear enough. In our view, Hong Kong companies are also

relatively prudent financially vs. their global peers with net gearing ratios generally below

20% which is among the lowest, if not the lowest, in the world. Meanwhile, the companies

saw rising rental income and have generally kept on raising dividends for over 10 years.

More importantly, investing capital from Mainland China, among others, seems to have

provided Hong Kong asset owners with an opportunity few in other overseas markets can

match, which is that they can sell non-core property assets at capitalisation rates, which

can be as low as 2% or even less.

Link REIT sets an example, in that although it owns lower-tier property assets in Hong

Kong, it is able to trade at valuations comparable with premier global property companies.

In our view, the case of Link REIT shows that the “Hong Kong discount” cannot be

attributed entirely to ownership of “Hong Kong property assets” and that the “Hong Kong

discount” is not totally unbreakable. If Hong Kong property companies are willing to

distribute their rental income as Link does, and offer over a 4% yield as the starting point

and keep on raising their DPS, could they trade at higher valuations?

Herein also lies an opportunity: there is significant investment value to be unlocked if such

“mis-pricings” can be corrected over time.

A case where the

primary market has

developed much faster

than the secondary

market

There are fundamental

factors working in favour

of Hong Kong property

companies

Link REIT shows what is

achievable for Hong

Kong property stocks

22


We take the view that over a period of time fundamental factors should prevail. We think it

is conceivable that such a “mis-pricing” will narrow or even be removed over time, as and

when: 1) global investors’ understanding of Hong Kong companies, as well as their relative

positon and strengths versus global peers deepens, 2) Chinese investing capital comes

out of China on a larger scale, 3) more Hong Kong-listed companies accept that it is both

legitimate and desirable to deploy a certain portion of their capital to back up the per-share

value of their business or simply take advantage of the disconnect between equity market

values and business/market values, and 4) the Hong Kong family companies come to see

that it is important for their business to integrate into the global capital markets.

Overall, we believe the Hong Kong equity market – or the Greater China equity market

including Shenzhen and Shanghai – provides considerable room for “price discovery” for

investors seeking long-term value. To reiterate, Link REIT is a case which illustrates that it

is possible for a Hong Kong-listed property company to break away from the “Hong Kong

discount” in its equity market valuation. Since its listing in November 2005, Link REIT has

generated a total return of about 770% for its shareholders (170% from dividends, and

about 600% from unit price appreciation), before taking into account the return generated

by re-investing the dividends (HKD38bn) it has provided to its shareholders over the past

13 years.

We take the view that Wharf REIC is a Hong Kong-listed company that can fit into this

“price discovery” theme of the Hong Kong stock market and property sector. We see it as a

high-quality name for investors to play on this theme for the following reasons:

1) Growing acceptance that Harbour City is a one-of-a-kind property asset and should be

priced as such.

2) Increasing recognition that Wharf REIC has discovered a differentiated way to manage

retail properties that excels in driving tenant sales and has the potential to make it a

beneficiary of e-commerce.

3) Rising awareness that Wharf REIC’s office portfolio is well positioned to ride the

current metamorphosis in the Hong Kong office market and will evolve into a stronger

supplementary growth engine for the group.

4) The development of the Greater Bay Area, which offers opportunities to owners of

Hong Kong commercial properties; and Wharf REIC’s willingness and readiness to

embrace the China demand, resulting in it being potentially able to get the most from

this once-in-a-century opportunity.

5) Rising investor confidence that Wharf Group has the credentials and commitment to

integrate further into the global capital markets, and will be an important constituent in

the modernised Hong Kong property sector, the Greater H-REIT/landlord sector in

Hong Kong, or the Pan-Asia REIT/property sector

We elaborate on each of these points in the following parts of this report.

There are factors which

should work for Hong

Kong over time

23


1. Harbour City is a one-of-a-kind property asset

“If steak were a religion, then this would be its cathedral.”

- Smith & Wollensky Steakhouse

Harbour City is a large-scale mixed development with a total area of 8.4m sq ft situated on

the waterfront on the western side of the Kowloon Peninsula. However, it’s not really a single

piece of property as there are as many as 14 property assets within it, completed at different

periods in the property’s over 50 years of history. In this sense, Harbour City is probably as

much an agglomeration of property assets as it is a single and uniformed property asset.

In our opinion, one salient feature of Harbour City is that it has continued to evolve over the

years, with new sections being added and continuous evolution in its usage, style and

positioning.

To understand Harbour City today, we think it is important to know how it has evolved since

the 1990s. Like all other retail property assets in Hong Kong, Harbour City faced

challenging times during the 6-year deflationary period in Hong Kong that started in 4Q97

and continued until 2003, although its rental income did manage to hold up notwithstanding

the difficult operating environment. That said, the outbreak of SARS in April 2003 led to an

almost total collapse of the Hong Kong retail sector and resulted in mounting pressure from

retailers for rents in Harbour City to be reduced.

Harbour City

Source: Company

Structure of Harbour City

Wharf Serviced



Harbour City**



- Ocean Centre HK 100% 356,000 631,000 - - - - 987,000





- Gateway I HK 100% 114,000 1,127,000 - - - - 1,241,000

- Gateway II HK 100% 434,000 1,551,000 296,000 - - - 2,281,000

- Gateway III HK 100% - 360,000 - - - - 360,000


- Gateway Hotel HK 100% - - - 289,000 - - 289,000

- Prince Hotel HK 100% - - - 279,000 - - 279,000


2,068,000 4,647,000 296,000 1,115,000 - 283,000 8,409,000

Source: Company, Daiwa Note: * Held through the 72%-owned subsidiary Harbour Centre;

** among the GFA under Harbour City, the Marco Polo Hongkong Hotel (consisting 547,000 sq ft hotel GFA, 172,000 sq ft retail GFA, and 18,000 sq ft office GFA) is held by the 72%-owned subsidiary Harbour Centre

Harbour City is a city for

shopping, situated right

next to Victoria Harbour

24


At the peak of the SARS outbreak in April 2003, Harbour City adopted a strategic decision

to tackle the crisis. Instead of yielding to market pressure to cut rents, which it believed

would only result in a vicious cycle, it decided to take the opposite stance, which was to

unite with all the tenants to strive for as much tenant sales as possible under a seemingly

hopeless environment to some.

In our view, the modern era for Harbour City probably began at the peak of SARS when

the mall worked with its tenants to figure out how to attract people to come out to shop

even when SARS was at its peak in April 2003. In hindsight, the measures taken by

Harbour City at that time were innovative and brave, like installing all kinds of safety

measures in the mall, and broadcasting to the whole of Hong Kong that it would still be

safe to visit Harbour City despite the SARS outbreak.

Whether the aforementioned measures taken by Harbour City really worked or were

merely luck, the crisis caused by SARS came to an end quickly and the efforts made by

Harbour City brought results in terms of boosting traffic and tenant sales in the mall. Most

importantly, China then declared the Individual Visitor Scheme (IVS) on 1 July 2003, which

for the first time allowed people from 9 cities in China to leave the country on an individual

basis. Many of the first generation of Chinese shoppers came to Harbour City as their first

stop, thanks to many media reports in China about a place called Harbour City in Hong

Kong many years before 2003.

Cities included in the Individual Visitor Scheme

Year Cities added

2003 Dongguan Foshan Jiangmen Zhongshan Guangzhou Huizhou Shenzhen Zhuhai Beijing Shanghai

2004 Guangdong province in full Nanjing Suzhou Wuxi Hangzhou Ningbo Taizhou Fuzhou Quanzhou Xiamen

2005 Tianjin Chongqing Shenyang Dalian Chengdu Jinan

2006 Haikou Nanning Kunming Guiyang Changsha Nanchang

2007 Shijiazhuang Changchun Hefei Zhengzhou Wuhan

Source: Hong Kong Tourism Commission, Daiwa

Tenant sales at Harbour City surged in 2004 and then continued to surge uninterrupted for

10 straight years, thus lifting tenant sales at Harbour City to HKD35bn (USD4.5bn) by 2014

from HKD4.7bn (USD0.6bn) in 2003, which we believe was the world’s largest for a single

commercial property asset. While CNY depreciation and escalation of the anti-corruption

campaign in China posed challenges to Harbour City from 2015-17, its tenant sales

seemed to broadly hold up even during such difficult times, with its lowest being HKD27bn

(USD3.5bn) in 2016, which was still high by global standards (as a rule of thumb,

malls/retail property assets achieving over USD1bn in tenant sales are considered among

the top malls in the US and Europe).

Most importantly, tenant sales at Harbour City staged a strong recovery once the market

environment improved. In 1H18, total tenant sales at Harbour City rose by 36.1%YoY (vs. a

13.4% rise for Hong Kong overall to HKD18.6bn), while the figure for 3Q18 was still

respectable, at 16% YoY (vs. 11.1% for Hong Kong overall) bringing the 9-month figure to

29% YoY, despite all the uncertainty surrounding the macroeconomic and geopolitical

sphere, as well as the super typhoon in September 2018.

Guangzhou

Beijing

Changsha

Wuhan

Haikou

Nanchang

Shanghai

Shijiazhuang

Tianjin

Jinan

Chengdu

Guiyang

Zhengzhou

Changchun

Shenyang

NanjingWuxi

Hefei

Hangzhou Ningbo

Xiamen

ShenzhenNanningKunming

Chongqing

Dalian

Fuzhou

Quanzhou

Taizhou

Suzhou

Dongguan

FoshanJiangmen

Zhongshan

Huizhou

Zhuhai

Cities added in 2003





Guangzhou

Beijing

Changsha

Wuhan

Haikou

Nanchang

Shanghai

Shijiazhuang

Tianjin

Jinan

Chengdu

Guiyang

Zhengzhou

Changchun

Shenyang

NanjingWuxi

Hefei

Hangzhou Ningbo

Xiamen


Chongqing

Dalian

Fuzhou

Quanzhou

Taizhou

Suzhou

Dongguan

FoshanJiangmen

Zhongshan

Huizhou

Zhuhai











The modern era for

Harbour City began at

the peak of SARS

Harbour City has

become the No.1 mall in

the world in terms of

tenant sales

25


Tenant sales in Harbour City mall vs. other major malls in Hong Kong


Tenant sales in Harbour City mall vs. other major malls in the US and UK

Source: Companies, Unibail-Rodamco-Westfield, CNBC

Completed in 1966, Harbour City is the largest and one of the oldest mixed-use property

assets in Hong Kong. While the sheer scale of it means it has always been an important

commercial property asset in Hong Kong, our read is that its positon has been elevated to

a much higher level since 2H03. We think it is arguable that Harbour City is no longer just

a Hong Kong property asset. Instead, we believe at least for the mall portion of Harbour

City, it has become an international-grade property asset, with its achieved tenant sales

having surpassed the record of any other retail property assets; and that the malls’

customers, tenants, are not limited to Hong Kong but include some of the strongest retail

brands the international sphere.

Harbour City mall’s achieved tenant sales, rental income and occupancy cost

Source: Company, Daiwa estimates

We see Harbour City as a one-of-a-kind commercial property asset that has entered

uncharted territory, likely because no other commercial property assets in the world face

the scale of tenant sales it is achieving now. Against this background, we believe there is

no precedence to judge how far it could go in terms of achieved tenant sales.

0

5

10

15

20

25

30

35

Harbour City IFC Mall TimesSquare

New TownPlaza Shatin

Pacific Place Festival Walk Elements Tuen MunTown Plaza

Telford Plaza LandmarkAtrium

(HKDbn)

0

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2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

(HKDm)

Tenant sales Gross retail rental income Blended avg. occupancy cost (RHS)

Moving from a Hong

Kong property asset to

an international-grade

retail property asset

26


Although Harbour City has probably already set the world record for malls in terms of

tenant sales and the total gross rental income generated by a single property asset, all of

this needs to be seen in the context of the scale of opportunities it is now facing, which we

believe is a once-in-a-century occurrence, and probably unprecedented in the history of

commercial properties. As such, although as astonishingly productive as it already is, we

would not say that Harbour City is peaking as a commercial property asset.

Harbour City: annual tenant sales vs. North America peers (2015)

Source: Company

Our views are predicated on the following observations and considerations.

1. During 2004-18, the mall of Harbour City did exceptionally well, but the mall only

accounts for 25% of the total GFA of the whole development.

2. We still see considerable room for potential improvements in the offices and other

components of Harbour City.

3. After our deep-dive analysis of its mall as well as the performance of other retail

property assets and districts in the world, we still see scope for the sales productivity

of its mall to improve further.

4. If we take a step back and see the evolution and development of Harbour City’s mall

from a broader perspective, we believe it can be seen as an “adventurous retail

property asset” in that it is arguably a kind of adventure into the potential limit in terms

of sales productivity of a mall in our modern times; and we think there are still

important structural factors working in its favour.

5. We take the view that management holds the key to the potential of a retail property

asset, and the most differentiating and defining characteristics of Harbour City are that

it has kept on learning, evolving and striving for ways to move beyond its existing

boundary. We also believe in the power of mixed-use developments and judge that a

virtuous cycle has already been set in motion to drive Harbour City into new and

uncharted territory. We believe as long as it retains its management culture and

execution capability, there is still considerable room for it to surprise on the upside in

terms of achieved rental income and sales productivity.

We elaborate on each of these points in the following paragraphs.

1. The mall represents only 25% of the total GFA of Harbour City

While the gross rental income of Harbour City has already reached a high level (HKD9.4bn

in 2017 excluding hotels and clubs), so far it is mainly its mall that is doing exceptionally

well (accounting for 70% of the total). However, Harbour City is more than just a mall, as

the mall only accounts for 25% of its total GFA. We propose to see Harbour City as a

mixed-use property asset and believe one defining characteristic of a well-managed mixed-

use development is that each part benefits the development of the other components, and

therefore progress in any part should feed through the whole asset over time. Such a

process can continue, as long its management is able to bring out the synergies and

leverage on them to drive the development of the asset.

3,6813,185

2,349 2,200 2,170

1,615 1,595 1,595 1,550 1,475 1,457 1,440

0500

1,0001,5002,0002,5003,0003,5004,000

Har

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City

Bal

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Average: USD1,828 psf

Harbour City’s achieved

sales need to be seen in

the context of the

opportunities it is now

facing

27


Gross rental income generated by Harbour City

Source: Company

GFA breakdown of Harbour City

(m sq ft) 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E

Retail 1.90 1.91 1.91 1.91 1.95 1.95 1.95 1.95 1.95 2.05 2.05 2.05 2.05 2.05 2.07 2.07

Office 4.45 4.44 4.44 4.44 4.44 4.44 4.44 4.44 4.44 4.26 4.26 4.26 4.26 4.26 4.29 4.65

Serviced apartments 0.67 0.67 0.67 0.67 0.67 0.67 0.67 0.67 0.67 0.67 0.67 0.67 0.67 0.67 0.66 0.30

Hotels 1.11 1.23 1.23 1.23 1.23 1.23 1.23 1.23 1.23 1.23 1.23 1.23 1.23 1.23 1.12 1.12

Pacific Club 0.14 0.14 0.14 0.14 0.14 0.14 0.14 0.14 0.14 0.14 0.14 0.14 0.14 0.14 0.14 0.14

Ocean Terminal extension 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.15 0.15

8.27 8.38 8.38 8.38 8.42 8.42 8.42 8.42 8.42 8.35 8.35 8.35 8.35 8.35 8.41 8.41

Source: Company, Daiwa forecasts

In the case of Harbour City, our read is that so far, it is mainly its mall that has taken off and

has done much better than the overall market. For many other components of Harbour

City, so far they have done well, but not to the extent that they have been able to beat the

overall market by a wide margin. However, in theory, if its mall continues to do well, this

should benefit other components eventually. At the same time, if the other components are

strengthened, the benefits should flow back to its malls, thus forming what we call a

“virtuous cycle” and such a virtuous cycle, once established, could continue for an

extended period of time, as it is not easy to determine a priori (Latin word meaning before

empirical observation) on when it cannot possibly progress further (see p60 for further

discussion).

This bring us to an important question: are the exceptionally strong tenant sales seen at

the Harbour City mall over the past 10 years a one-off phenomenon that can be attributed

to mainly luck or is it symptomatic of some unusual latent forces which Harbour City has

been able to capture better than most others?

Harbour City: YoY change in tenant sales vs. Hong Kong overall retail sales

Source: Company, CEIC, Daiwa

We do not yet have a conclusive answer to this question. However, we believe the

exceptional tenant sales performance of Harbour City cannot be attributed to luck alone.

Many retail property assets in Hong Kong and other parts of the world compete keenly for

the enviable sales achieved by Harbour City, and the very strong tenant sales at Harbour

City have lasted for over a decade. It had done very well in good times for about a decade

0

2,000

4,000

6,000

8,000

10,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

(HKDm)

Retail Office Serviced apartments

(20%)

(10%)

0%

10%

20%

30%

40%

50%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 1H18

Harbour City tenant sales YoY chg HK Overall retail sales YoY chg

It is not easy to

determine a priori on the

maximum tenant sales in

Harbour City

We think Harbour City’s

performance cannot be

attributed just to luck

28


since 2003; but even during difficult times like 2014-16, its tenant sales still held up

relatively well. When the overall market started to recover from 2H17, Harbour City’s tenant

sales rebounded strongly despite its much higher base versus others.

During the past 15 years, the Harbour City mall has faced many challenges, including: 1)

the sudden and rapid disappearance of some big-ticket consumers in the wake of the anti-

corruption campaign in China, 2) Chinese consumers finding the new TST, Tokyo-Seoul-

Taipei (not Tsim Sha Tsui), 3) the plunge in rents and surge in vacancy rates at high-street

stores in Hong Kong, 4) Occupy Central and the emergence of anti-mainland Chinese

sentiment and Hong Kong’s image being tarnished as a result, 5) the fall in the CNY

exchange rate, 6) some wealthy Chinese consumers shifting directly to Paris, Milan and

London, 7) competition from many malls in the Tsim Sha Tsui area and other districts, and

8) the obsolescence of various brands and consumer preferences. However, none of these

seems to have had a lasting and irrecoverable impact on its tenant sales. We think the

Harbour City’s mall’s ability to weather all these challenges cannot be attributed entirely to

luck.

In our view, another interpretation is that the tenant sales achieved by the Harbour City

mall can be seen as symptomatic of some important structural trends impinging on the

Hong Kong commercial property market. Besides, we think this might be described as

Chinese demand bringing critical mass to Hong Kong commercial property assets, and

elevating them to potentially international-grade levels – in some ways not dissimilar to

what Chinese companies have done to the Hong Kong Stock Exchange since the listing of

Tsingtao Brewery in 1993.

In this light, could it be that Harbour City’s sales performance merely reflects that it has

been better and earlier than others in terms of responding, adapting and driving such

structural trends? Importantly, if the development of the Hong Kong Stock Market is any

example to go by, such forces will continue to deepen, strengthen and evolve over time,

and we may have yet to see it ending even after 25 years since the listing of Tsingtao

Brewery in 1993.

Probably, only time will tell – and only time can tell – the answer; and we expect the

answer to depend a lot on how Hong Kong retail landlords see and react to such trends.

Will they aim to get as much as they can in terms of tenant sales and rental income before

such trends reverse? Or would they be more long-term-oriented and work on facilitating

such trends to continue? We take the view that this latter scenario is more far sighted and

sophisticated.

However, for our purposes, we only need to establish that such a possibility exists and

investors are advised to be mindful of it. If this is true, the mall at Harbour City could be just

the first part of this 8.4m sq ft development to feel the power and demand unleashed by

the scale of Chinese demand and the implications thereof for the internationalisation and

metropolitanisation of the Hong Kong property market. We think it is conceivable that the

other components of Harbour City will face similar, although probably not as intense, forces

in the years to come, which would provide a supplementary leg to the development of

Harbour City as a property asset – a subject we discussion in more detail below.

Could Harbour City’s

performance reflect that

it has been earlier and

more successful at

responding to latent

forces?

29


2. Offices could provide a supplementary leg for Harbour City

Gross rental income generated by Harbour City

Source: Company

In our view, the stellar tenant sales performance of the Harbour City mall reflects the power

that can be unleashed by the transformation of Hong Kong’s commercial property market

from essentially a market for only 7m people to one that can serve a much larger pool of

people, retailers and companies.

We reiterate our view that the current development of the Hong Kong office market

provides a favourable environment for commercial property assets which can be

strengthened to become credible alternatives to those in Central. While by now it looks

almost certain that Island East will be the first major beneficiary of such a structural trend

(see our 22 May 2014 report on Swire Properties: a large ‘nurturing reward’ awaits), our

read is that another district that will ride such a trend is Tsim Sha Tsui or the Greater

Canton Road cluster.

We estimate Tsim Sha Tsui is already the No.1 district in Hong Kong in terms of total retail

sales and think there are also several factors that are working work in its favour which

bode well for a potential transformation in the years ahead as an office hub.

First, in terms of unit rents, Tsim Sha Tsui is now notably cheaper than Central, Wanchai

and Causeway Bay. For many years, there was an entrenched perception in Hong Kong

that Hong Kong Island was a more prestigious area for corporates, and there was a

discount (in terms of rental level) attached to offices situated on the other side of the

harbour. However, the arrival of the China factor has changed these dynamics, resulting in

Kowloon probably being a more convenient and preferred area for people and companies

from the mainland and for those that travel to the mainland frequently.

Grade A office rents in different districts

Source: Savills

0

2,000

4,000

6,000

8,000

10,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

(HKDm)

Retail Office Serviced apartments

0

20

40

60

80

100

120

140

160

1Q01

3Q01

1Q02

3Q02

1Q03

3Q03

1Q04

3Q04

1Q05

3Q05

1Q06

3Q06

1Q07

3Q07

1Q08

3Q08

1Q09

3Q09

1Q10

3Q10

1Q11

3Q11

1Q12

3Q12

1Q13

3Q13

1Q14

3Q14

1Q15

3Q15

1Q16

3Q16

1Q17

3Q17

1Q18

3Q18

(HKD/sq ft, net effective)

Central Wanchai/Causeway Bay Island East

Tsim Sha Tsui Kowloon East Western Corridor

Current environment

favours commercial

properties which can be

strengthened to become

credible alternatives to

those in Central

http://asiaresearch.daiwacm.com/eg/cgi-bin/files/Swire_Properties_140522.pdf#page=1

30


Grade A office vacancy rates in different districts

Source: Savills

We reckon West Kowloon has already successfully emerged as a luxury residential

location in Hong Kong, contrary to the expectations of many local Hong Kong people back

in the early 2000s. In this light, we see the potential that the “Kowloon discount” in office

rents could well be reduced if more Chinese firms come to Hong Kong.

Second, the Tsim Sha Tsui district has some new buildings which will serve to set higher

benchmarks for achievable office rents in the area. Our read is that K11 and International

Commerce Centre (ICC) are among the 2 main examples, and we would not be surprised

if some space in these 2 buildings commands office rents at over HKD90 or even over

HKD100 per sq ft. within the next 18 months.

Importantly, outside ICC and K11, Gateway Towers in Harbour City qualify as 2 of the most

prime office buildings in the district. Besides, from a tenant’s perspective, Gateway Towers

is not necessarily inferior to K11 or ICC, especially if Wharf REIC decides to undergo AEI

to improve both the hardware and software of the property. As such, we see room for

Gateway Towers to achieve higher unit rent and note that there is now a wide gap between

the achieved unit rents in the Gateway portion and the other office spaces in other towers

(such as Ocean Centre, Wharf T&T Centre, World Commerce Centre and World Finance

Center) of Harbour City. Given the volume of office space in Harbour City (4.8m sq ft GFA

after the conversion of 1 serviced apartment tower into an office by mid 2019), even a

small rise of a HKD5-HKD10/sq ft rise in average achieved rent would amount to a material

sum, in our view.

Harbour City: sensitivity of office gross rental income to achieved unit rent

Average achieved unit rent for offices, gross (HKD/sq ft/month)

40 45 47 50 55 60 65 70

Annual gross rental (HKDm) 2,306 2,595 2,492 2,883 3,171 3,460 3,748 4,036

Source: Company, Daiwa estimates Note: HKD2,492m (highlighted) is the achieved gross rental income of Harbour City offices in 2017 based on 4.445m sq ft GFA (before the conversion

of the serviced apartments into offices). Harbour City's gross rental income from offices shall benefit from the conversion of one serviced apartment tower into offices from 2020 onwards. Such achieved rental level should have already included management fee, air-conditioning charges, and so on).

Third, we see the prospect of Chinese firms and financial institutions coming to consider

Tsim Sha Tsui as one of their preferred areas. Already, Chinese people have accepted

West Kowloon as a luxury residential location and Harbour City as their preferred shopping

destination in Hong Kong. Moreover, we think the opening of the Express Rail Link has

significantly reinforced the appeal of the Tsim Sha Tsui area to people from China, and we

would not be surprised if some Chinese financial institutions see Tsim Sha Tsui as one of

their preferred office hubs in Hong Kong.

0%

2%

4%

6%

8%

10%

12%

14%

16%

1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18

Central Wanchai/Causeway Bay Island East

Tsim Sha Tsui Kowloon East Western Corridor

ICC, K11 and Gateway

Towers are likely to lead

unit rents in Tsim Sha

Tsui

31


Mainland firms’ new leasing in the office market

Source: Savills Note: Core districts include Central, Admiralty, Sheung Wan, Wanchai, Causeway Bay and Tsim Sha Tsui

Fourth, we envisage new stimulus for the development of the office market of Tsim Sha Tsui,

with one major example being the new office space above the Express Rail Link.

Traditionally, the Tsim Sha Tsui office market has not housed many high-end corporate

tenants, with the bulk of firms located in Tsim Sha Tsui being SMEs engaged in trading,

servicing, purchasing, etc. The Tsim Sha Tsui area has only a handful of multinational firms,

and most of them are in insurance, trading, manufacturing and shipping. While it has some

banking and finance tenants, they are not the main types of companies in Tsim Sha Tsui.

West Kowloon Terminus set to become a higher-end office hub

Source: Savills

However, 3 developments have had, and continue to have, an important impact on the

Tsim Sha Tsui office market. One is the completion of Gateway Towers in Harbour City in

the late 1990s. These 3 towers are high-specification buildings that are not inferior to

buildings completed in Central and Causeway Bay at a similar time. We think the quality of

Gateway Towers has attracted some multinationals to Tsim Sha Tsui for the first time.

However, 3 towers alone do not have sufficient critical mass to have a significant impact on

the Tsim Sha Tsui office market. Nonetheless, our read is that the Gateway Towers has

successfully created a minor MNC flavour to the Tsim Sha Tsui office market.

Another major development in the Tsim Sha Tsui office market is ICC, which was

completed in the late 2000s. The leases for the building were negotiated and signed before

the GFC, with Morgan Stanley, Deutsche Bank and Credit Suisse all signing on as tenants.

This initial group of tenants created a financial and prestige image for the building, which

we believe subsequently enticed a number of Chinese firms as well.

While it is debatable whether or not ICC is located in the Tsim Sha Tsui area, we think it is

nevertheless relevant to the Tsim Sha Tsui office market in 2 senses. First, it is located in

Kowloon and represents the benchmark for office rents in Kowloon. Second, it has

prominent financial tenants and serves as a signal to the market that financial firms can

move their head offices across the harbour to Kowloon.

0

100,000

200,000

300,000

400,000

500,000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 1H18

(sq ft)

Core Non-Core

West Kowloon set to

have a number

prominent new office

sites for sale

The Tsim Sha Tsui office

market is undergoing

some metamorphosis

32


The third major development in the Tsim Sha Tsui office market, in our view, was the

completion of K11 in 2018. This development is important because K11 is a new building

with high specifications, and as such, is in a strong position to capture the opportunities

associated with Central tenants seeking credible alternatives. So far, it has attracted

Mizuho to set up its Asian headquarters in the building, and our read is that it has the

credentials to appeal to some tenants previously located in Central or other higher unit-rent

areas. Besides, since securing Mizuho as an anchor tenant, K11 has become more

aggressive in terms of its asking rents. Given the limited availability of new office space in

Hong Kong as a whole, we believe the building can fetch premium rents which will have

ramifications for expectations of achievable rents across the Tsim Sha Tsui office market.

Overall, we believe there is a case for the Tsim Sha Tsui area to command higher office

rents over the next few years. To be sure, the area also faces challenges as a commercial

hub, for example, it is debatable whether Tsim Sha Tsui is really an integrated district

because West Kowloon, Canton Road, Nathan Road and Tsim Sha Tsui East resemble

separate areas, although technically they are all located in the Tsim Sha Tsui district. At the

same time, unlike Island East, Central or Causeway Bay, where one or a few landlords

control the bulk of the most prime retail space, this is not the case in Tsim Sha Tsui, with

many major commercial properties in the districts under different owners and some even

strata-titled.

Tsim Sha Tsui and Hung Hom: major office property assets

Property Owner GFA (sq ft)

Gateway Towers Wharf REIC 1,609,000

Harbour City Wharf REIC 2,678,000

Gateway serviced apartments conversion Wharf REIC 360,000

ICC SHK Properties 2,495,000

The Harbourfront Tower 1 & 2 CK Asset 862,193

K11 ATELIER at Victoria Dockside New World Development 435,000

The Metropolis Tower Prosperity REIT 271,418

Source: Companies, REITs, Daiwa estimates

In our view, the Tsim Sha Tsui retail market is best analysed as a market comprising 2

components: Harbour City, and the rest of Tsim Sha Tsui. Similarly, for the office market,

we consider it to contain several separate sub-markets.

We think it highly unlikely that Tsim Sha Tsui would become like Island East, where a single

landlord dominates the whole area. That said, for Harbour City, we think the range of

landlords may not be a bad thing and this pitfall could be turned to its advantage.

In retrospect, location-wise, we think Canton Road is inferior to Nathan Road as the latter

has convenient MTR access and a much longer history as a street for retailing in Hong

Kong. That said, over the past 20 years, Harbour City has taken a leap forward and

become the centre of retailing within the Tsim Sha Tsui district, which may well be more

aptly described as Greater Canton Road from a retail perspective.

In our view, if the office space at Harbour City were revitalised (perhaps through AEI of

both its hardware and software), it is not inconceivable that Canton Road would become

the centre of the Tsim Sha Tsui office market, which has West Kowloon at the western end

as well as central and eastern Tsim Sha Tsui on the eastern side. Given that the amount of

office space Wharf REIC owns in Tsim Sha Tsui is as much as 4.65m sq ft, we believe that

offices could become a supplementary driver for Harbour City and therefore Wharf REIC’s

rental income in future.

Importantly, our read is that Wharf REIC has already taken some initiatives along those

lines and is on its way to convert one of its serviced apartments into offices, which should

boost the total size of its office portfolio in Harbour City to 4.65m sq ft.

Could the Harbour City

cluster become the

central part of the

Greater Tsim Sha Tsui

office market?

33


At the same time, we reckon Chengdu IFS has applied a hotel approach to the

management of its offices in Chengdu and believe a similar approach could well be applied

to its Hong Kong offices – we take the view that better services will always create value,

irrespective of the grading of the assets concerned. Given the right improvements in terms

of both hardware and software, we would see room for achieved rents at Harbour City

offices to rise and become a supplementary driver for rental income from Harbour City.

3. Harbour City still has room to improve as a retail property asset

Tenant sales in Harbour City

Source: Company

That Harbour City’s achieved sales productivity is outstanding is obvious. Having achieved

tenant sales of HKD35bn at the peak in 2014 (and now looking to test this all-time high in

2018, with tenant sales in 9M18 up by 29% YoY), we consider it one of the world’s most

productive malls in terms of tenant sales despite the debate that this property asset is not

really situated in the best location; and in terms of aspects such as physical structure,

appearance, layout, it may not look that outstanding when compared with many premier

malls in the world.

Admittedly, Chinese consumers have provided a boon to the development of Harbour City

and there is probably some “luck” element in the taking-off of Harbour City as a retail

property asset from 2003. “Harbour City just happened to be able to ride the Individual Visit

Scheme of China which started in 2H03. As and when the tide turns”, so the argument

goes, “Harbour City’s astonishing tenant sales figures would have to come back to levels

which match reality”. Such is our read of the arguments of many sceptics about Harbour

City’s performance.

While we can see why some observers would put forward such an argument, we do not

subscribe to the view that Harbour City’s tenant sales must come down sooner or later. In

any case, Harbour City’s mall’s performance over the past few years suggests that it has

held up against the backdrop of a plunge in luxury retail sales in Hong Kong and China.

Besides, its tenant sales rebounded strongly once the overall market environment

improved (up 36.1% YoY for 1H18 and 16% YoY for 3Q18 vs. 13.4% YoY for 1H18 and

11% YoY for 3Q18 for Hong Kong overall), despite its high base of tenant sales.

In our view, Harbour City is in uncharted territory in terms of tenant sales; as such, it is an

intriguing question as to how much further tenant sales at Harbour City can go up.

We do not have an answer to the aforementioned question. We are also mindful that

Harbour City’s share of total retail sales in Hong Kong (7.5% in 1H18) is already very high.

That said, in the case of Harbour City, we think its high tenant sales (USD3.9bn in 2017

and USD4.5bn in 2018, on our estimates) are not driven mainly by it taking market share

from other malls and retail property assets in Hong Kong.

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

(HKDm)

Harbour City’s sales

productivity has been

unusually high

Is Harbour City’s sales

growth driven more by

tapping into new

demand or taking market

share from peers?

34


Gross rental income in Harbour City vs. other retail property assets in 2017


Instead, we think it is probably driven more by taking the lead in getting tenant sales which

previously may not have been found in the Hong Kong market. In our view, Harbour City

has evolved like a brand, such that the Harbour City brand and the Harbour City

experience seem to be already enough to attract new shoppers from China and probably

other countries as well.

As such, Harbour City has probably been a pioneer in terms of attracting new spending in

the Hong Kong retail market, and as such, it is understandable that it has been able to

keep gaining market share in the Hong Kong retail market – because many of the

incremental new retail spending in Hong Kong has come to Harbour City first; and to a

certain extent, we think it is Harbour City which attracts such retail spending to come to

Hong Kong. In this light, we see 2 key issues determining how far Harbour City’s tenant

sales can go: 1) its ability to keep on getting new consumers to come to Hong Kong to

shop, and 2) its ability to retain these customers even after they have become much more

knowledgeable about the Hong Kong retail market with the passage of time.

Both the aforementioned questions have no conclusive answers. However, as far as we

can discern, there is still room for Harbour City to further expand its tenant sales, for the

following reasons.

First, we do not think retail sales in Tsim Sha Tsui or the Greater Canton Road Area have

reached their peak. Our observation is that competition in the retail property sector is often

more district-based than property-based. In our view, the relationship between retail

properties in the same district are arguably as collaborators as they are competitors, in

some ways not dissimilar to retailers of the same trade within the same mall. We believe

this is because they first “collaborate” to attract shoppers to come to their district instead of

other districts as it is in their common interest to see the district getting stronger versus

others, which would imply that the pie available to all of them would also become bigger.

As such, the competition among them kicks in more at the secondary level – after the

shoppers have come to the district, retail properties compete for the wallet of these

shoppers. As such, the maximum tenant sales a mall can achieve is ultimately set by the

maximum tenant sales of the whole district.

In this light, we tend to think there is still room for Harbour City’s tenant sales to expand

because our read is that the Tsim Sha Tsui area has likely not yet reached its maximum

limit in terms of tenant sales.

Tenant sales are commercially sensitive information for retailers and landlords, and it is not

easy to get retail sales figures about retail properties and retail districts. We believe the

world’s No.1 retail district is London’s West End, which had retail sales of GBP10.4bn (or

USD14bn) in 2017, according to Harper Dennis Hobbs and New West End Company. We

estimate Tokyo’s Ginza and Shinjuku are not far behind London’s West End, at over

USD10bn in tenant sales.

0

1,000

2,000

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7,000

Har

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City

Tim

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(HKDm)

Has Harbour City been

more successful than

others in terms of

getting new consumer

spending to come to

Hong Kong?

There is still a gap

between total retail sales

in Tsim Sha Tsui vs.

global retail hubs

35


We also estimate the total retail sales in Tsim Sha Tsui were in the USD7-8bn range for

2017, of which c.USD3.9bn came from Harbour City. Although our read is that Harbour

City’s market share in the Tsim Sha Tsui area is unusually high, we believe there is still a

gap between achieved tenant sales in the Tsim Sha Tsui district as a whole vs. first-tier

retail districts in other parts of the world, such as London’s West End or Tokyo’s Ginza and

Shinjuku.

Harbour City’s market share is high probably because it has been the most proactive of the

Hong Kong landlords in attracting new shoppers to the district and expanding the retail

sales pie of the whole district. While in the initial years, Harbour City relied considerably on

new consumers from China, we believe in recent years, it has been active in luring new

customers from other countries such as Korea, India, Indonesia and Russia. We estimate

a significant part of the incremental growth in tenant sales in the Tsim Sha Tsui area comes

from Harbour City, and this situation would automatically provide a boost to Harbour City’s

market share for tenant sales in the district.

Mainland visitors to Hong Kong vs. domestic travellers

Source: CEIC, Daiwa

Based on what we can ascertain from the statistics and our discussions with industry

participants, what is most unusual about Harbour City is that it seems able to retain a lot of

the shoppers it attracts – many of whom seem to stick to spending most of their money at

Harbour City in the end, even after they have become familiar with other shopping areas

over time. At the same time, for shoppers who are attracted by other retail property assets

to come to Tsim Sha Tsui, we believe a number of them have ended up spending most of

their money at Harbour City eventually.

Overall, our interpretation is that in the retail property sector the strongest player – by

being able to attract the strongest retailers and the shoppers with the highest spending

power – tends to continuously take market share from the weaker players. As such, we

think Harbour City’s dominance in the area is understandable and we do not foresee any

retail property asset in the Tsim Sha Tsui area replacing Harbour City’s position in the

district in the foreseeable future.

At the same time, Tsim Sha Tsui is strengthening as a retail district. One key reason is the

opening of the Express Rail Link which attracts about 50,000 passengers each day. As

such, we believe the opening of the Express Rail Link has significantly expanded the

catchment area of the Hong Kong retail property sector.

0

10

20

30

40

50

0

1,000

2,000

3,000

4,000

5,000

6,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

(m times)(m times)

China domestic travellers (LHS) Mainland visitors to HK (LHS) Mainland visitors to HK (RHS)

Mainlandvisitors to HK (based on RHS)

Mainlandvisitors to HK (based on LHS)

Harbour City has been

very active in terms of

getting new customers

Retail is an industry that

favours the strongest

player

36


West Kowloon Station for the high-speed rail

Source: MTRC, Google, Daiwa

We think one of the biggest impacts of the Express Rail Link is the freedom of travel it

affords Chinese nationals. In particular, people living in Changsha (Hunan), Wuhan

(Hubei), Nanchang (Jiangxi), Nanning (Guangxi), Xiamen (Fujian) [(the cities serviced by

the new rail link)] would previously have to allow at least 2 days to complete a trip to Hong

Kong. However, after the opening of the Express Rail Link, technically a person can

complete a day trip to Hong Kong and not be concerned about the limited direct flight

services between Hong Kong and these cities. Importantly, the population in each of these

provinces is over 40m and the 4 aforementioned cities represent the municipal capitals of

just 4 out of 31 provinces in China.

China’s 31 provinces and autonomous municipalities

Source: Daiwa

We reiterate our view that the impact of the High Speed Train on the China and Hong Kong

retail property sector (or the China property sector as a whole) will be transformational and

the market probably has yet to realise its full impact. The retail district in Hong Kong that is

probably the best positioned to benefit is Tsim Sha Tsui, in our view.

The high-speed railway network in China The Hong Kong-Shenzhen-Guangzhou portion of the network

Source: Wikipedia Source: MTRC

37


Therefore, the reason we think Harbour City’s tenant sales have not yet reached a peak is

that we see room for total retail sales in the Tsim Sha Tsui district to expand. Our

observation is that in the past few years, the strong tenant sales at Harbour City have also

been having a positive spill-over effect on the rest of Tsim Sha Tsui, with various streets in

Tsim Sha Tsui, such as Ashley Road and Peking Road, having become more vibrant as a

result, and probably supplementing Harbour City in terms of F&B offerings. Against this

background, we think that the opening of K11 may not be detrimental for Harbour City in so

far as it stands to enrich Tsim Sha Tsui (we expect K11 to house many tenants new to

Hong Kong and the Tsim Sha Tsui district) as a retail hub and attract more shoppers to

come to Hong Kong instead of to other cities.

Conversely, when we deep dive into the structure of Harbour City and the composition of

its tenant sales, we can still see pockets where there is room for further improvements.

In our view, Lifestyle International (1212 HK, HKD11.44, Buy[1]) provides the market with

the best disclosure and framework for analysing tenant sales. Shown below is a

breakdown of Sogo HK’s achieved tenant sales in terms of footfall, stay-and-buy ratio and

average ticket size.

KPIs of Sogo’s Causeway Bay store

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Daily footfall 83,900 85,800 83,840 90,800 92,450 93,700 94,700 92,500 90,900 92,900 92,500 90,600 85,900 83,700 81,700 81,700 79,000

Stay-and-buy ratio % 27.2% 30.1% 28.9% 28.9% 28.3% 29.0% 30.4% 30.1% 29.6% 29.3% 31.2% 32.0% 33.4% 34.6% 34.9% 34.3% 34.1%

No. of tickets per day 22,821 25,826 24,230 26,241 26,163 27,173 28,789 27,843 26,906 27,220 28,860 28,992 28,691 28,960 28,513 28,023 26,939

Sogo CWB tenant sales (HKDm) 2,893 2,813 2,911 3,538 3,949 4,629 5,459 5,974 6,170 7,021 8,670 8,373 8,940 9,242 8,789 8,112 8,452

Avg. ticket size (HKD) - overall 349 300 331 371 416 469 522 591 632 711 828 796 858 879 849 797 864

Avg. ticket size (HKD) - ex-Freshmart ND ND ND ND ND ND ND ND ND ND ND ND ND ND 1,392 1,366 1,431

Sogo Sheraton ND ND ND ND ND ND ND ND ND ND ND ND ND ND 1,132 1,272 1,556

Source: Lifestyle Int’l, Daiwa estimates, ND = Non-disclosed

Our view is that Sogo’s Causeway Bay Store’s sales productivity is also a global anomaly

and we believe it is likely the No.1 department store globally in terms of achieved tenant

sales on a per sq ft basis. Importantly, we think Sogo Causeway Bay store’s performance

illustrates what is possible for retail property assets in Hong Kong, and believe there is still

some way before Harbour City gets there on a per sq ft basis.

Sogo Hong Kong has only about 400,000 sq ft in GFA, only about 20% the size of the

Harbour City mall. However, in terms of tenant sales, its achieved sales of HKD8.5bn for

2017 were 28% that of Harbour City. In terms of sales productivity on a per sq ft basis, it

means there is still a gap between Harbour City and Sogo Causeway Bay’s average

level. We note that Sogo Causeway Bay is arguably a “vertical mall” and estimate the

sales productivity of the ground floor and first floor of Sogo Causeway Bay is markedly

higher than the average for the entire department store. This means that the gap would

be higher when one compares the sales productivity of G/F-5/F of Sogo Causeway Bay

and Harbour City.

In our view, the Sogo Causeway Bay store is another one-of-a-kind retail property asset in

the world. It is a department store by format, with limited pedestrian areas for shoppers,

and therefore the efficiency of its retail areas is notably higher than for a mall. As such, its

sales productivity is not entirely comparable with that of a sizeable mall like Harbour City

(2m sq ft GFA). That said, we believe Sogo’s Causeway Bay highlights what competent

retail property managers can achieve in Hong Kong.

Shopping malls in Hong Kong do not have a centralised POS system like that of Sogo

Causeway Bay, and therefore even landlords do not know the total number of ticket sales

in their malls. As a result, we can only make our best estimates based on the available

information and via discussions with industry participants.

Retail is an industry

which favours the

strongest player

38


Given that Sogo’s Causeway Bay store’s GFA is only about 20% that of Harbour City’s

mall, in theory, Harbour City’s maximum number of sales tickets per day could reach about

5x of Sogo HK’s Causeway Bay store which would translate into 144,960 per day based on

Sogo’s maximum average daily ticket sales of 28,992 achieved in 2012. With over 500

retailers in the mall, this would translate into about 290 tickets per tenant per day, or about

30 tickets per opening hour per ticket, which we think is not inconceivable from an

operational perspective. As such, we think it is not inconceivable that the maximum

average number of sales tickets in Harbour City could reach 140,000 or more.

However, we believe the current average per day sales tickets for Harbour City is still far

from this level. Shown below are the annual tenant sales for Harbour City based on our

various assumptions for its average of daily sales tickets and average size per ticket.

Harbour City tenant sales sensitivity tables

Tenant sales (HKDbn) Average number of purchases per day

30,000 40,000 50,000 60,000 70,000 80,000

Ave

rag

e va

lue

per

pu

rch

ase

(HK

D)

1,000 10.9bn 14.5bn 18.2bn 21.8bn 25.4bn 29.0bn

2,000 21.8bn 29.0bn 36.3bn 43.4bn 50.8bn 58.1bn

2,500 27.2bn 36.3bn 45.4bn 54.5bn 63.5bn 72.6bn

3,000 32.7bn 43.4bn 54.5bn 65.3bn 76.2bn 87.1bn

3,500 38.1bn 50.8bn 63.5bn 76.2bn 88.9bn 101.6bn

4,000 43.6bn 58.1bn 72.6bn 87.1bn 101.6bn 116.2bn

5,000 54.5bn 72.6bn 90.8bn 108.9bn 127.1bn 145.2bn

6,000 65.3bn 87.1bn 108.9bn 130.7bn 152.5bn 174.2bn

8,000 87.1bn 116.2bn 145.2bn 174.2bn 203.3bn 232.3bn

10,000 108.9bn 145.2bn 181.5bn 217.8bn 254.1bn 290.4bn

Source: Daiwa Note: The shaded area is our estimate on the current situations in Harbour City

We estimate that the current number of sales tickets for Harbour City is in the 30,000-

40,000 range, while the average ticket size is in the HKD2,000-2,500 range. While these

numbers are high, we do not see them as unachievable figures based on what the Sogo

Causeway Bay store has achieved – it recorded 26,939 sales tickets per day in 2017 (the

record high was 28,992 in 2012), and excluding Freshmart (the supermarket in the

basement of Sogo), the average ticket size achieved was HKD1,431/sq ft in 2017. During

its Thanksgiving Day promotion, Sogo Causeway Bay achieved well over 40,000 ticket

sales per day, with a total GFA of just about 0.4m sq ft.

In our view, the best way to analyse a retail property asset is to look into how it achieved

on the above metrics. In this light, while Harbour City’s achieved tenant sales is very high

versus peers, we believe Harbour City has not reached the point where there is no longer

the room for further improvement in each of the above metrics.

As such, we do not see 40,000 sales per day as a level that is impossible to exceed.

Assuming that every paying shopper makes on average 2 purchases during each visit, it

would require the mall to have 20,000 paying customers, which we do not see as overly

demanding given that the average daily footfall at Harbour City was over 200,000 in 2017.

Besides, we also do not think that assuming HKD2,500-3,000 per ticket is too demanding.

We believe many luxury malls in China have average ticket sizes of well over several

thousand CNY and many items in Harbour City are over USD300, although we think one

attraction of Harbour City is that the items available cover nearly all price points ranging

from USD3 per item (such as a drink or an ice cream) to USD300,000 or more (such as

luxury watches and jewellery). More importantly, our understanding is that Harbour City

has been working on attracting the wealthy from other countries (such as India, the

Philippines, Korea) to come to shop in Hong Kong, and we expect Harbour City commands

at least a reasonable market share of the overseas spending of the wealthy in China.

The table above shows the implied aggregate tenant sales in Harbour City based on

different metrics on daily traffic and average ticket size. Our view is that there is room for

improvement in number of sales tickets and average ticket size for Harbour City. Based on

We think one may not

say that Harbour City’s

tenant sales must have

reached their peak

We believe there is still

room for Harbour City to

increase its tenant sales

further

39


the above table, a moderate rise in traffic and average ticket size (say 50,000 sales tickets

per day – translating into about 60 sales tickets per tenant per day – at an average ticket

size of HKD2,300-3,000) would be enough to take the property’s tenant sales to HKD40-

50bn, which would represent another level up from the current level of HKD30-34bn.

Based on the above metrics, we do not see figures higher than HKD40-50bn as

inconceivable.

Conversely, after a detailed look into the composition of Harbour City and its tenant sales

and rental income, we have come to the view that there should still be room for Harbour

City’s tenant sales to improve.

Shown in the table on pages 94-95 is the distribution of floor area and per sq ft rental for

various trades inside Harbour City since 2003. We think it illustrates a wide range in sales

per sq ft as well as rental per sq ft of its different trades. For example, in 2017, its achieved

sales per ft (gross) ranged from HKD3,847/sq ft for F&B to HKD41,205/sq ft for jewellery,

beauty and accessories. At the same time, in terms of achieved rent in 2017, it also ranged

from HKD52/sq ft for F&B to HKD642/sq ft for jewellery, beauty and accessories.

We think this illustrates that there should be room for Harbour City to drive its sales and

rental income through optimising the relative size of its different trades. For example,

through changing more area from F&B to more productive trades such as fashion or

jewellery and beauty, there could be a boost to the tenant sales and rental income in the

mall, in our view.

Indeed, as shown in the table on pages 94-95, the malls’ retail space allocated to 8 major

types of trades since 2003 has continued to evolve through the years. One conclusion we

can draw from the above table is that Harbour City has always been actively managed and

has continued to adjust and fine-tune the relative size of its different trades to suit the

prevailing need of the time to drive sustained tenant sales growth.

Importantly, as shown in the table on pages 94-95, during 2014-17, Harbour City added

retail floor area to trades such as F&B, sportswear as well as jewellery & beauty, while at

the same time, reducing the floor area allocated to leather goods and confectionary items.

We note F&B is below average in terms of sales productivity and rental, and our take is

that in recent years, Harbour City has been taking measures to boost vibrancy and build up

other strong clusters in the mall, in the wake of weaknesses in the luxury segments.

In this light, we do not think Harbour City has “maxed out” in terms of tenant sales. When

retail market sentiment returns, we see considerable room for it to increase its floor area

for fashion (already started to happen in 2017), leather, and jewellery & beauty, which are

above-average in terms of sales productivity and rental income contribution.

Overall, we believe Harbour City has been managed with an eye on achieving

sustainable growth in tenant sales and rental income in the long term, and that the retail

market weakness during 2014-16 was a blessing in disguise as it paradoxically provided

it with the room and time to fine-tune the mall so that Harbour City could be in a stronger

and more solid footing when the subsequent upturn came; which we think could be

exactly the case now.

Effectively, we see Harbour City not as a single mall but as one with several major clusters.

In the first few years after the commencement of the Individual Visit Scheme in 2003, the

surge in tenant sales at Harbour City could be attributed significantly to the tenant sales of

luxury retailers along the Canton Road cluster. However, our read is that over the past few

years, Harbour City has more or less finished the building up with a strong cluster for

cosmetics, children’s wear, and sportswear, in that it has a wide collection of virtually all the

major names in the respective industries.

A deep-dive analysis

would suggest the room

is still there for Harbour

City’s tenant sales to

rise further

40


More importantly, we think the completion of Ocean Terminal Extension helped to address

at least 2 main challenges facing the mall. One is that Harbour City previously did not have

many high-end restaurants for alfresco dining, which reduced its appeal to certain

customer segments. At the same time, Harbour City is structured like an L shape and the

Ocean Terminal portion of Harbour City has always been like a dead end as it is a long

walk and the original design has this part of Harbour City as a dead end.

However, with the opening of the Ocean Terminal Extension and the move to put various

prominent restaurants at the end of the Terminal, our read is that the appeal of Harbour

City to the shoppers has improved notably, and this should benefit the whole Ocean

Terminal cluster of Harbour City.

The high-end dining cluster at Ocean Terminal Extension The high-end dining cluster at Ocean Terminal Extension

Source: Daiwa Source: Daiwa

At the same time, the actual retail floor area in the mall could rise over time. Our read is

that Harbour City management has continued to fine-tune the structure of the asset and

done AEI work to create additional retail space. Indeed, a case in point is the group’s

payment of a land premium of HKD7.9bn to the government in 2012 for creating the Ocean

Terminal Extension.

Besides, the mall’s area has been expanding upward with the conversion of office space

into retail space. We note, for example, that the retail areas of GAP and Uniqlo were

formerly office space. With the construction of a staircase, the bottom floor of the former

office area has shifted to retail, and we believe the retail area in Harbour City might expand

further in the same fashion when the opportunity arises.

Harbour City: GAP and UNIQLO stores

Source: Daiwa

In larger-scale retail hubs such as Ginza and Shinjuku, many brands occupy the entire

building, and much of the upper floor space in older buildings has been converted into F&B

or other retail usage. We see vertical expansion of retail space as a hallmark of a strong

retail market, and note that the trend is quite evident in Causeway Bay, Mongkok and

some parts of Tsim Sha Tsui, such as the Ashley Road near Harbour City. Given the

difference in unit rent between retail and office spaces in Harbour City, it is logical to expect

that the group would convert office space into retail or semi-retail if the opportunity arises.

The total retail GFA in

Harbour City could well

increase over time

41


Overall, our view is that Harbour City has been an actively managed retail property asset

over the years and it continues to seek ways to boost tenant sales. This brings us to our

next point, which is that this approach represents a different paradigm in managing retail

property assets, which we consider to be a source of potential upside in Harbour City’s

achieved tenant sales.

4. Harbour City looks to have come up with a new paradigm in retailing

As we see it, Harbour City’s track record suggests that its approach to managing retail

assets is highly effective in boosting tenant sales.

There are different types of retail property managers. Some are at heart like pure

landlords, focusing on occupancy rates rather than constantly seeking to enhance the

value of malls. Even among retail property managers that do closely manage their property

assets, they often have different orientations — some focus mainly on scale as well as

their market share and ranking in the industry; others more on ensuring that the mall has

an elegant image; still others on what it takes to make shoppers feel comfortable and

hence likely to visit the mall repeatedly.

The “landlord business” vs. the “partnership business”

Landlord business Partnership business

Focus Minimising vacant space Maximising tenant sales

Tenant mix No special strategy, other than maximising the achieved rent

Creating an environment which is most conducive to repeat shoppers and to facilitate the malls becoming more popular and more relevant

Tenant sales No special attention. Caring mainly whether the tenants pay rent on time

Closely monitoring changes in tenant sales, their distribution, etc, to get a pulse on the most current situation of the mall

Positioning No special attention paid to fine-tuning the mall's positioning

Constant fine-tuning to search for an optimal positioning in the prevailing retail environment

Tenant relationship Getting tenants to pay the maximum rent Work as partners with tenants to create a larger pie for all

No special attention paid to the tenant or working team on major retail groups

Dedicated teams to work with major retail groups to facilitate the execution of their retail strategy

Customer traffic Wait passively for shoppers to come Using active promotions to attract its repeat visits by target shoppers

Source: Daiwa

At the same time, other retail property managers have certain targets in terms of the social

groups and retail tenants they want to attract, and they manage many aspects of their

malls in order to achieve these objectives. And others may concentrate instead on being

first movers and gaining scale before their competitors. These companies focus more on

standardisation and tend to have large, expanding portfolios where they can adopt almost

a “factory approach” to managing the shopping malls and their expansion.

In our view, the approach taken with Harbour City is quite different. It is a straightforward

and practical approach which is mainly about boosting tenant sales. Making tenant sales

growth a top priority, the property manager seeks to work with tenants as partners with the

goal of driving overall tenant sales in the mall. Other considerations appear to be

secondary to the idea of enhancing shoppers’ satisfaction in terms of convenience, service,

excitement, entertainment and value for money.

However, it does not appear to us that Wharf REIC has any special way to define

shoppers’ satisfaction. Instead, the approach is more about a commitment to keep on

searching for ways to improve so that the mall continues to offer new “things” that provide

customer satisfaction. In this light, we see Harbour City as more than merely a place to

shop. Instead, it is on its way to being a destination, where shopping becomes a form of

entertainment. Indeed, the company has coined the phrase “shoppertainment” to describe

the concept. We think Harbour City has excelled in the “software” side of the business.

As a mall, Harbour City does not seem particularly appealing in terms of its appearance;

there are many modern malls which are aesthetically more appealing. In fact, Harbour City

is not even a uniform mall, since it is comprised of several parts, each built in a different

period. But it so happens that they are all under the same physical “umbrella”, and

collectively they are all grouped under the roof of Harbour City.

Wharf REIC might

represent a new

paradigm in retail

In Harbour City, it

appears that there is a

single-minded focus on

driving tenant sales

42


It may not be exaggeration to say that Harbour City resembles a bundle of high-street

shops, but with a shelf on top and air-conditioning inside. More often than not there is

renovation work under way somewhere in the mall, but the orientation seems to be not so

much about enhancing its aesthetic appeal as coming out with practical improvements to

ensure that shoppers have a comfortable and convenient experience. Furthermore, when

customers next visit, they experience practical improvements, such as the provision of

lockers, new customer service centres, better rest-room and changing facilities, clearer

signage, and wider walkways.

While these incremental changes may not be that apparent to first-time visitors, more

frequent visitors to the mall can see that Harbour City is being actively managed and

continues to deliver tangible improvements to shoppers and retail tenants. Our view is that

Harbour City’s commitment to improve the shopping experience and drive tenant sales is

an important factor in ensuring that shoppers and tenants continue to view the mall

favourably.

Moreover, we believe this emphasis on driving tenant sales has created an atmosphere

and culture that is not readily found elsewhere. For many other malls, the managers seem

to favour and target certain social groups. In contrast, Harbour City’s approach is to

welcome people from all walks of life as long as they spend time in the mall.

Indeed, Harbour City’s management is arguably happy for people to visit the mall just to

get a burst of air-conditioning, on the basis that the ensuing vibrant atmosphere will compel

visitors to spend more time and money during their visit than they had originally intended.

Harbour City: The Gateway cluster Harbour City: The Gateway cluster


In the realms of consumer psychology, impulse buying is an important component. Such

impulses are rooted in human nature, and bringing out these impulses is as much an art as

a science. We contend that the following factors are conducive to the creation of the kind

of shopping experience we are referring to: 1) a vibrant and robust shopping atmosphere in

which everyone seems to be busy looking for things to buy, 2) a place where are new

things to see and experience, and 3) a place with an exciting ambience. It is hard to

quantify the shopping atmosphere of any given mall, and more difficult still to create a

robust, appealing environment. But we believe Harbour City ranks highly on this count.

From a purely commercial perspective, a well-run casino is a place where even non-

gamblers become gamblers. If we apply the same analogy to retailing, a well-run shopping

mall is one that turns window-shoppers into inveterate shoppers.

Harbour City is probably closest to what we define as a pure shopping destination, where

shoppers go to find products they want to buy and retailers have the best possible chance

of selling their goods. As we see it, Harbour City is committed to facilitating this process for

both parties.

To us, Harbour City

stands out for

welcoming people from

all walks of life and

hence creating a vibrant

atmosphere

Don’t underestimate the

importance of impulse

buying

Harbour City as a pure

shopping destination…

43


In many parts of the world, the image of luxury malls is as cold, unwelcoming places

targeting the well to do, rather than the general public. We do not get that sense with

Harbour City, however. In fact, it is arguably one of the few places in the world where going

into a luxury store to buy a HKD100,000 handbag feels much the same as buying a

HKD20 item in a supermarket. People queue outside the mall’s luxury stores in much the

same way as people line up for USD10 cinema tickets.

Harbour City: democratising luxury spending?

Source: Daiwa

In other words, visitors to Harbour City don’t have to worry about how they dress or speak

— everyone is welcome as long as they abide by the law and pay their bills. Even at top-

notch luxury stores, one does not feel intimidated when dressed casually. This

characteristic of the mall may not be good for its image and positioning, but it is good at

driving tenant sales.

This practical and down-to-earth approach retailing may not fit everyone and every asset,

but it is proven to boost sales productivity. Even the world’s top luxury brands can adapt

and accept alternative paradigms to retail property management when they see that it can

bring lasting results. Has Harbour City, in its practical day-to-day interactions with

consumers, hit upon a different paradigm. And, if so, does that make it a one-of-kind retail

property asset?

In any case, Harbour City is more than a luxury mall. It has over 800 tenants, of which

luxury fashion brands number no more than 20 (see the tables on pages 108-110 for a

breakdown of tenant sales in Harbour City). Luxury items account for no more than 20% of

the mall’s GFA and likely less than 50% of its tenant sales. As such, even if one strips out

the luxury component, Harbour City is still a highly productive mall.

Upon closer inspection, our read is that Harbour City excels in a number of areas. It is not

a uniform mall. Instead, it consists of different clusters and is a vibrant destination for many

other trades, such as kids, sportswear, and cosmetics. Indeed, it actually made up of a

number of clusters, with the Canton Road portion being the cluster for luxury brands, LCX

for cosmetics, and the Ocean Terminal portion for kids and sportswear.

Harbour City: the luxury cluster (Canton Road) Harbour City: the luxury cluster (Canton Road)


… that is democratising

luxury retailing

Harbour City is more

than a luxury mall

44


Harbour City: the sports cluster Harbour City: the jewellery cluster


Harbour City: the kids cluster Harbour City: the kids cluster


Harbour City: the beauty and accessories cluster Harbour City: the electronics cluster


Our view is that its trade mix has continued to evolve and the cluster inside Harbour City is

often among the most productive in Hong Kong for such trades. As the clusters within

Harbour City continue to expand, more shoppers are drawn to the mall’s strength in some

major retail clusters.

In our view, Harbour City is the No. 1 place in terms of the variety of options and achieved

tenant sales for many trades. While luxury fashion and leather brands are still a key

strength of the mall, it excels in many other trades, including kids, cosmetics, and

sportswear. As a result of the improvements continually made to the mall, it has the most

productive players in many retail segments.

This is a self-fulfilling process as the best customers attract the best retailers, establishing

what we call the virtuous cycle in retailing. We see the establishment of this virtuous cycle

as important because, once in place, it is a gift that keeps on giving.

We take the view that management holds the key to realising the potential of a retail

property asset, and the most distinctive characteristics of Harbour City is that it has kept on

evolving and striving for ways to move beyond its existing boundaries. We believe in the

power of mixed developments and judge that a virtuous cycle has already been set in

motion to drive Harbour City into new and uncharted territories. As long as it retains this

Harbour City is No. 1 in

tenant sales for many

different trades

Has a virtuous cycle

been established in

Harbour City?

45


management culture and execution capability, the mall has scope to surprise us and the

market on the upside in terms of achieved rental income and sales productivity, in our

opinion.

The sales performance of Harbour City cannot be explained by the luxury segment alone.

The mall may not be at the top of the pack in terms of aesthetic appeal, elegance or other

aspects, yet it excels in sales productivity.

So, is Harbour City a one-of-a-kind property asset that has yet to reach its full potential?

Does its approach have the potential to have a revolutionary impact on how retail malls are

run? And, if so, what kind of valuation should it command?

Based on the aforementioned analysis, our view is that tenant sales at Harbour City have

yet to peak — we believe it can achieve tenant sales of HKD40bn or more over time (vs.

HKD30.2bn in 2017 and HKD35bn in the 2014 peak). The table below shows a range of

scenarios and illustrates Harbour City’s gross retail rental to tenant sales and occupancy

cost, assuming it can achieve tenant sales of HKD40bn.

We currently value the Harbour City mall at HKD149bn, which implies an occupancy cost

of 15% based on a 4% gross cap rate and tenant sales of HKD40bn. We believe that our

base case valuation is conservative. Under our more optimistic scenario, Harbour City

alone may already be worth HKD70/share or more.

Harbour City: sensitivity of retail rental income to tenant sales and occupancy cost

Retail rental income Tenant sales (HKDm)

(HKDm)

25,000 30,200 35,000 40,000 45,000 50,000

Occ

up

ancy

co

st (

%)

15.0% 3,750 4,530 3,750 6,000 6,750 7,500

16.0% 4,000 4,832 4,000 6,400 7,200 8,000

17.0% 4,250 5,134 4,250 6,800 7,650 8,500

18.0% 4,500 5,436 4,500 7,200 8,100 9,000

19.0% 4,750 5,738 4,750 7,600 8,550 9,500

20.0% 5,000 6,040 5,000 8,000 9,000 10,000

21.0% 5,250 6,342 5,250 8,400 9,450 10,500

21.9% 5,486 6,627 7,680 8,777 9,875 10,972

22.0% 5,500 6,644 5,500 8,800 9,900 11,000

23.0% 5,750 6,946 5,750 9,200 10,350 11,500

24.0% 6,000 7,248 6,000 9,600 10,800 12,000

25.0% 6,250 7,550 6,250 10,000 11,250 12,500

Source: Daiwa estimates Note: The shaded area is Harbour City's achieved gross rental income in 2017

46


Harbour City: various scenarios for gross NAV

Occupancy cost (%)

15% 16% 17% 18% 19% 20% 21% 22% 23% 24% 25%

Implied gross rental, assuming tenant sales of HKD40bn (HKDm)

6,000 6,400 6,800 7,200 7,600 8,000 8,400 8,800 9,200 9,600 10,000

Implied gross market value (HKDm)

Cap

rat

e (g

ross

)

2.5% 240,000 256,000 272,000 288,000 304,000 320,000 336,000 352,000 368,000 384,000 400,000

3.0% 200,000 213,333 226,667 240,000 253,333 266,667 280,000 293,333 306,667 320,000 333,333

3.5% 171,429 182,857 194,286 205,714 217,143 228,571 240,000 251,429 262,857 274,286 285,714

4.0% 150,000 160,000 170,000 180,000 190,000 200,000 210,000 220,000 230,000 240,000 250,000

4.5% 133,333 142,222 151,111 160,000 168,889 177,778 186,667 195,556 204,444 213,333 222,222

5.0% 120,000 128,000 136,000 144,000 152,000 160,000 168,000 176,000 184,000 192,000 200,000

5.5% 109,091 116,364 123,636 130,909 138,182 145,455 152,727 160,000 167,273 174,545 181,818

6.0% 100,000 106,667 113,333 120,000 126,667 133,333 140,000 146,667 153,333 160,000 166,667

Implied gross NAV per share (HKD)

Cap

rat

e (g

ross

)

2.5% 79.0 84.3 89.6 94.9 100.1 105.4 110.7 115.9 121.2 126.5 131.7

3.0% 65.9 70.3 74.7 79.0 83.4 87.8 92.2 96.6 101.0 105.4 109.8

3.5% 56.5 60.2 64.0 67.8 71.5 75.3 79.0 82.8 86.6 90.3 94.1

4.0% 49.4 52.7 56.0 59.3 62.6 65.9 69.2 72.5 75.8 79.0 82.3

4.5% 43.9 46.8 49.8 52.7 55.6 58.6 61.5 64.4 67.3 70.3 73.2

5.0% 39.5 42.2 44.8 47.4 50.1 52.7 55.3 58.0 60.6 63.2 65.9

5.5% 35.9 38.3 40.7 43.1 45.5 47.9 50.3 52.7 55.1 57.5 59.9

6.0% 32.9 35.1 37.3 39.5 41.7 43.9 46.1 48.3 50.5 52.7 54.9

Source: Daiwa estimates Note: our current valuation for the Harbour City mall is HKD149bn, which implies a 4% gross cap rate and 15% occupancy cost if it can achieve HKD40bn in tenant sales

These figures raise another question: is Harbour City a “lucky asset” whose luck can only

normalise in the years ahead, or does it represent a new paradigm in the management of

malls, such that its best days are yet to come. We seek to answer this question in the

following section.

47


2. Value of its retail franchise to be increasingly recognised

“No artist is ahead of his time. He is his time. It is just that others are behind the time.”

- Martha Graham

We believe that the unusual sales productivity of the Harbour City mall is not attributable

simply to luck. While Mainland consumers’ initial preference for shopping in Harbour City

probably did have an element of luck, many shoppers from the Mainland and indeed

elsewhere continue to come back to Harbour City even after finding alternative malls. As a

result, overall tenant sales in Harbour City did not retreat significantly during 2015-17

despite the market environment at the time being challenging. Furthermore, when the

market environment improved from 2H17 onwards, Wharf REIC’s tenant sales rebounded

significantly despite the mall itself having a relatively high tenant sales base.

Harbour City: tenant sales vs Hong Kong overall retail sales


We contend that there must be something special about Wharf REIC’s way of managing its

retail properties. But it seems to us that the market is only in the early stages of

recognising the potential value of Wharf REIC’s franchise in retail properties; indeed, many

investors question whether the sales productivity of Harbour City can be sustained.

We do not think that Wharf devised a new way of running malls from the very outset.

Rather, we see the company’s differentiated approach as part and parcel of the

unprecedented retail environment it has faced since 2003 when the Individual Visit

Scheme started, allowing people from 9 cities in China to travel to Hong Kong on an

individual basis. Note that so far the Scheme only covers 36 of China’s 500-plus cities,

meaning that a very significant part of China’s population is yet to be able to travel freely to

Hong Kong. Being pro-active and also among the first malls in the world to see first-hand

what Mainland consumers could bring to the table, Wharf was in a position to appreciate

and understand the culture of Mainland shoppers and then tailor its approach to meet this

emerging trend.

Wharf REIC’s retail property management subsequently evolved and adapted to the

changing environment, a process driven more by day-to-day, practical experience than the

product of any grand theory.

Either way, we view Wharf as a pioneer and one of the world’s most experienced mall

managers in terms of serving Mainland consumers, which are clearly an increasingly

important component of the global retail sector.

(20%)

(10%)

0%

10%

20%

30%

40%

50%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 1H18

Harbour City tenant sales YoY chg HK Overall retail sales YoY chg

The unusual sales

productivity of Harbour

City isn’t down to “luck”

factors alone

Wharf’s differentiated

approach could be a

function of the

unprecedented retail

environment it has faced

since 2003

48


Hong Kong: Mainland cities included in the Individual Visit Scheme

Year Cities added

2003 Dongguan Foshan Jiangmen Zhongshan Guangzhou Huizhou Shenzhen Zhuhai Beijing Shanghai

2004 Guangdong province in full Nanjing Suzhou Wuxi Hangzhou Ningbo Taizhou Fuzhou Quanzhou Xiamen

2005 Tianjin Chongqing Shenyang Dalian Chengdu Jinan

2006 Haikou Nanning Kunming Guiyang Changsha Nanchang

2007 Shijiazhuang Changchun Hefei Zhengzhou Wuhan

Source: Hong Kong Tourism Commission, Daiwa

China: growth in population covered by Individual Visit scheme China: share of population covered by Individual Visit scheme

Source: Hong Kong Tourism Commission, CEIC, Daiwa Source: Hong Kong Tourism Commission, CEIC, Daiwa

Could it be that, Wharf, in its day-to-day efforts to accommodate the world’s “new wave of

consumer demand”, has created a differentiated way to run retail properties that stimulates

demand from Mainland consumers is stimulated and hence creates a win-win partnership

with some of the world’s most important retail brands?

It is important to note that the strong sales performance of Wharf retail property assets is

not confined to Harbour City. Times Square and Plaza Hollywood have also performed well

over the years in the face of less-than-ideal environments.

In our view, the success of Times Square as a retail property asset has probably come as

a surprise to some observers. It has faced many challenges as a retail property asset,

especially in the early days when Southern Causeway Bay was like an entirely new area

for shopping and the surrounding buildings old and run-down, often with ground-floor

shops run by hawkers selling meat, chicken and vegetables.

Besides, vertical malls seldom work in a global context. Indeed, our understanding is that

the mall failed to get any department stores as anchor tenants in the beginning (1993)

because many operators believed the concept of a vertical mall was fundamentally flawed.

However, through active promotion and continuous fine-tuning, the mall at Times Square

eventually took off and became the No. 1 mall in Causeway Bay and, along with Sogo

Hong Kong to the North, a dominant retail property asset in Causeway Bay.

Guangzhou

Beijing

Changsha

Wuhan

Haikou

Nanchang

Shanghai

Shijiazhuang

Tianjin

Jinan

Chengdu

Guiyang

Zhengzhou

Changchun

Shenyang

NanjingWuxi

Hefei

Hangzhou Ningbo

Xiamen


Chongqing

Dalian

Fuzhou

Quanzhou

Taizhou

Suzhou

Dongguan

FoshanJiangmen

Zhongshan

Huizhou

Zhuhai






Guangzhou

Beijing

Changsha

Wuhan

Haikou

Nanchang

Shanghai

Shijiazhuang

Tianjin

Jinan

Chengdu

Guiyang

Zhengzhou

Changchun

Shenyang

NanjingWuxi

Hefei

Hangzhou Ningbo

Xiamen


Chongqing

Dalian

Fuzhou

Quanzhou

Taizhou

Suzhou

Dongguan

FoshanJiangmen

Zhongshan

Huizhou

Zhuhai











0

100

200

300

400

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

(m)

Population of cities added in 2003 Population of cities added in 2004

Population of cities added in 2005 Population of cities added in 2006

Population of cities added in 2007

0%

5%

10%

15%

20%

25%

30%

0

200

400

600

800

1,000

1,200

1,400

200320042005200620072008200920102011201220132014201520162017

Individual Visit Scheme Total (LHS) All China Total (LHS) % (RHS)

(m)

Wharf’s approach has

excelled in driving

tenant sales

The success of Times

Square was not a given

49


More importantly, like Harbour City, the mall at Times Square was early in embracing

Mainland consumers which, along with the intensive AEI work it carried during the early

2010s, saw its tenant sales exceed HKD10bn in 2014 — perhaps the highest figure in the

world for a “vertical mall”.

Times Square: achieved tenant sales, rental income and occupancy cost

Source: Company, Daiwa estimates

Times Square: YoY change in tenant sales vs. Hong Kong overall retail sales


As a general dictum, it is hard to attract shoppers to look beyond the 5th or 6th floor of a

retail property asset. Times Square, a vertical mall with over 15 floors located in an

unproven location, is an exception to this rule. Times Square’s record yearly tenant sales

of HKD10bn were achieved in 2014; but at its worst point, in 2017, they still came in at

HKD8.3bn, or more than USD1bn. Tenant sales level of over USD1bn put Times Square in

the same class as premier retail landlords such as Simon Property, Unibal Rodamco, and

the Centre Group. We are not aware of any other vertical mall, anywhere in the world, with

the same level of sales productivity.

Overall, the achieved tenant sales of Times Square are the highest for a vertical mall in

Hong Kong. In a Hong Kong context, the performance of Times Square is probably rivalled

only by Sogo HK, which as a department store is an altogether different kind of retail asset.

0%

5%

10%

15%

20%

25%

30%

0

2,000

4,000

6,000

8,000

10,000

12,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

(HKDm)

Tenant sales Gross retail rental income Blended avg. occupancy cost (RHS)

(20%)

(10%)

0%

10%

20%

30%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 1H18

Times Square tenant sales YoY chg HK Overall retail sales YoY chg

Times Square has

achieved the highest

tenant sales for vertical

malls

Vertical malls are a

challenge to operate

50


Russell Street in Causeway Bay Times Square the vertical mall


Meanwhile, in evaluating the performance of the Times Square mall, we think another

factor to bear in mind is that, in recent years, the mall at Times Square has been

undergoing intensive tenant repositioning, especially on its higher floors, with the

introduction of new tenants such as Lego and Facesss. At the same time, our read is that

Times Square has also been adding health & beauty elements to the mall, especially on

floors above the 13th floor.

While this repositioning has been disruptive for its traffic flow and tenant sales, we believe it

will strengthen its tenant profile in the lifestyle, family and affordable luxury segments.

Moreover, the tenant repositioning on its upper floors has now reached an advanced stage,

which implies that Times Square can take a more offensive stance in terms of driving tenant

sales. On the whole, while we believe Times Square’s position is not as strong as that of

Harbour City, we think its move to focus more on health and beauty, F&B and other outlets

on the upper floors will be beneficial for the mall longer term. Also, Causeway Bay still has

many strengths as a retail hub and we expect it to maintain its market share over time.

New tenants at Times Square Beauty and upper floor tenants at Times Square


Compared with Times Square and Harbour City, the scale of Plaza Hollywood on top of the

Diamond Hill subway station is notably smaller, at just 562,000sq ft, with a GFA that is

about half the size of the Times Square mall and about 25% that of the Harbour City mall.

Our read is that initially, Plaza Hollywood was mainly a neighbourhood mall that mainly

served the residents living above it. However, gradually, through active promotion and the

offering of free car parking, it was able to attract shoppers from people living in the vicinity,

and as a result, Plaza Hollywood was able to grow from a neighbourhood mall into more of

a regional mall whose catchment area has expanded from just Diamond Hill to include the

Kowloon East area, which has been undergoing a transformation in recent years.

Times Square has been

undergoing intensive

tenant repositioning in

recent years

Plaza Hollywood has

gone from a

neighbourhood mall to a

regional mall in Kowloon

East

51


Central-Eastern Kowloon: major property assets

Property Owner GFA (sq ft)

Festival Walk Malpletree 980,089

Hollywood Plaza Wharf REIC 562,000

Lok Fu Place Link REIT 642,803

Temple Mall Link REIT 476,942

Mikiki SHKP 205,000


Gross rental income in Plaza Hollywood vs. other comparable malls in the vicinity


Moreover, while the rental income contribution of Plaza Hollywood is small versus the mall at

Times Square and Harbour City, compared with other malls in similar categories, its gross

rental income level and achieved rent ranks high, in our view. We see this as an indication

that Wharf REIC can do well in terms of tenant sales and achieved gross rental income not

only in luxury malls; but even with malls with no luxury component, it has proved that it can

do better in terms of tenant sales and achieved gross rental income than most others.

Indeed, we would say Wharf Group has also done well in terms of tenant sales even for its

retail property assets in China. Although Wharf’s China malls are not under Wharf REIC,

they are both led by Doreen Lee, who heads up the investment property assets under

Wharf REIC and is on the boards of both companies. She has also been the key person for

developing and managing Wharf Group’s various IFS projects in China.

Note that in the span of just 4 years, Chengdu IFS has already become one of the top-15

malls in China and the No.1 mall in the whole of Central-Western China in terms of sales

productivity (reaching CNY5bn in 2017). Moreover, even Wharf Group’s outlet mall in

Chengdu has become a top-10 outlet mall in China.

In all, we believe Wharf Group can do well in terms of sales productivity in almost any kind

of retail property asset in Hong Kong and China, which underscores our view that Wharf

REIC possesses some unusual and world class retail management capability.

Meanwhile, we would note that retail property assets and retail management capability

tend to be more insulated from the competition relative to many other property assets.

After all, shopping behaviours are habitual to a certain extent, while shopping habits,

perceptions and preferences do not tend to change overnight. It takes some time for a

shopper to become familiar with the internal circulation inside a mall, and more time still to

form the habit to shop at certain malls or shops. Such behaviour does not tend to change

overnight, especially if the malls he/she frequents continue to upgrade and modernise to

accommodate his/her changing consumer tastes and preferences .

At the same time, Wharf REIC is working as a partner with chain stores, especially

international chain stores, which is very different from working with a mom and pop store.

Partnering with international chain stores requires a lot of co-ordination, discussion and

mutual adaptation, and requires considerable knowledge about each retailer’s internal

procedures and knowledge of their various different levels of management. This is not

something a new retail mall or new retail landlord can achieve right away.

0

100

200

300

400

500

600

700

Plaza Hollywood Temple Mall Lok Fu Plaza Mikiki

(HKDm)

Wharf REIC has done

well for all types of its

malls in Hong Kong

Retail property

management expertise is

a kind of valuable

franchise

52


As such, the very fact that Wharf REIC has an outstanding tenant sales performance track

record for many of its malls implies that it has built up considerable goodwill and

confidence among many of the most productive retailers in the world. Note that in the world

of global retailing, there are not many major groups, while only a handful of them own

many of the world’s most valuable luxury brands. Our observation is that working as a

close partner with these major groups across many different brands is not something any

property company in China or elsewhere can achieve right away.

This, in itself, gives Wharf REIC an important competitive edge and could have a self-

fulfilling tendency. For example, we believe the track record Wharf has built up at Harbour

City gave it considerable help in terms of securing support from major international brands

for Chengdu IFS when it first opened. The success of Chengdu IFS in the meantime, has

also strengthened further Wharf’s reputation in the global retail sector, in our view.

In our view, these are important and valuable franchises which investors should note.

At the same time, it is public knowledge that on the private side, the Peter Woo family, the

controlling shareholder of the Wheelock/Wharf Group, also has many retail related

businesses and investments. These include high-end department stores (such as Lane

Crawford), luxury fashion retail groups (such as Joyce), high-end supermarkets (such as City

Super), alongside other retail-related investments (such as Salvatore Ferragamo Italia).

In all, we see Wharf as a business group which has diverse and substantial exposure to

the retail space and has demonstrated capability to drive tenant sales across almost all

types of malls, be they large-scale like Harbour City, vertical malls like Times Square,

community malls like Plaza Hollywood, luxury malls like Chengdu IFS or outlet malls like

Chengdu Times New Outlet. In terms of the breadth and depth of exposure to the retail and

retail property sector and track record in the business, Wharf Group’s credentials rank high

globally and are matched by only a few in the world, if any, in our view.

More importantly, we believe Wharf Group’s differentiated approach to the retail property

business is not driven by any grand theory. Instead, we see it the result of continuous

evolution and adaptation as it strives to cope with the ever-changing retail landscape as

well as the impact arising from Chinese consumers’ rapid ascendency as an important and

formidable force in global retailing.

In this light, what Wharf Group has been doing could be viewed as continuously learning

and adapting to the ever-changing retail landscape and consumer preferences; and as it

goes along with this trend, it acquires and develops many insights about the ways to

manage malls in modern times. Wharf Group’s ability to manage malls has shown up

clearly in the sales performances of its Hong Kong retail property assets, and we believe

the group has been applying such expertise to the running of its malls in various cities of

China. As such, Harbour City could well epitomise a different paradigm to running retail

property assets and to ride on the emergence of a consumer class in China which is

probably a once-in-a-century phenomenon, and one which many retailers and mall

operators have yet to figure out the ways to handle it.

Against this background, we wonder whether Wharf’s retail management expertise will

help defend the company against the challenges posed by the Internet and e-commerce

which have had a significant impact on the share prices of many retail property stocks in

North America and Europe over the past few years.

We do not have the answer to this question. However, we take the view that the off-line

and on-line platforms could be as complementary to each other as they are competitive

with each other. As such, growing acceptance of the on-line platform may not necessarily

be harmful for the offline platform. Indeed, for those most prime retail property assets, they

could well leverage on the growing acceptance of e-commerce, digital payment and social

media to further strengthen their competitiveness (see our report on Hang Lung Properties:

comeback time? on 21 May 2018.

Close partnerships with

global retail chains serve

as an important entry

barrier

A group with abundant

retail property assets

Is Wharf REIC’s retail

management expertise a

product of day-to-day

adaptation to the special

retail environment?

Is the Wharf REIC

approach resilient to the

challenge posed by e-

commerce?

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=116ddc2b97d3781716f66b070af87d8859238b993dvc3sZZmbzX6ZZ1I5u5eLY0aLI6hu2MecUwYx9iTy7tq49Q7DR3dJAG12N48rG%2Fq6S4YqxWcmaD8iiMo80xcKV8AQkPkd2VCJz03eKNbEQV%2FR4xcYiMvh%2FRumgKu%2FHaer3%2FIphKtCE%2F5nzHz%2B13zbtd41zwZ4YcJ%2FKn6JgZEK7CggpGUPSfVmgPXwZqa4qO58ZVqNmPOgCwRw98uP6lQAQ%3D%3D

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=116ddc2b97d3781716f66b070af87d8859238b993dvc3sZZmbzX6ZZ1I5u5eLY0aLI6hu2MecUwYx9iTy7tq49Q7DR3dJAG12N48rG%2Fq6S4YqxWcmaD8iiMo80xcKV8AQkPkd2VCJz03eKNbEQV%2FR4xcYiMvh%2FRumgKu%2FHaer3%2FIphKtCE%2F5nzHz%2B13zbtd41zwZ4YcJ%2FKn6JgZEK7CggpGUPSfVmgPXwZqa4qO58ZVqNmPOgCwRw98uP6lQAQ%3D%3D

53


The threat from e-commerce to retail landlords has been a theme in the developed

markets and has affected the performance of many retail landlords in North America and

Europe since 2014. While acknowledging that e-commerce poses a considerable threat to

bricks and mortar property assets like malls, we think the issue needs to be put into the

context that the US probably has proportionately far more retail space than Hong Kong and

China to begin with.

Characteristics of different “retail property ecosystems”

Source: Daiwa

Retail space per capita of major retail markets in the world

Source: Matasii, GGP, Zero Hedge

Another point to bear in mind is that in China, malls have been facing threats from e-

commerce for probably 15 years or more already, while e-commerce started hitting US

retail landlords only in more recent years. Coupled with the fact that department stores still

have the largest market share of the retail spending pie in China, and that Hong Kong’s

special environment probably makes it a market more insulated from competition from e-

commerce, we think the threat posed by e-commerce to premier malls in Hong Kong and

China is notably less than their counterparts in other parts of the world.

China online retail transaction value as % of total retail value China e-commerce gross merchandise value (GMV)

Source: iResearch, Daiwa forecasts Source: iResearch, Daiwa forecasts

0

1

2

3

US Canada Australia UK China

(sq m)

4.2%

6.3%7.9%

10.7%

13.3%

15.5%

19.5%21.5%

23.6%25.4%

0%

5%

10%

15%

20%

25%

30%

2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E

757 1,311

1,848 2,815

3,877

5,156

7,148

8,654

10,410

12,279

200

2,200

4,200

6,200

8,200

10,200

12,200

14,200

2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E

(CNYbn)

Could e-commerce

actually enhance the

competitiveness of

Wharf REIC’s malls?

54


In any case, we take the view that the relationship between the on-line and off-line retail

platforms may not necessarily be a zero-sum game. Indeed, in at least Hong Kong and

China, we may see a convergence between the online and offline platforms over the next

few years, while the relationship between these 2 platforms could well become multi-

dimensional instead of a simple zero-sum game, in our view.

Suffice to say, we do not believe e-commerce will change the fundamentals of the retail

property business, which is about retailers making money from selling products to

consumers. And as such, we believe retailers will continue to pay whatever and whomever

(ie, advertisers, sales agents, movie stars, social media, key opinion leaders) they can to

help in the process of selling products to consumers. Our read is that in the future, strong

retailers will need to do well on both online and offline platforms. Meanwhile, malls have

become more than just a place to shop. As such, malls should continue to offer value as

long as they remain places where people with spending power go, whether to shop, meet,

dine, or for a different experience.

Fundamentals of the retailing business

Source: Daiwa

The present and future retailing pie?

Source: Daiwa

Against this backdrop, the real question is not whether online will replace offline altogether.

As pointed out by Professor Joseph Schumpeter, the capitalist process is driven by a

process of “creative destruction”.

As such, some offline retail property assets will likely be rendered outdated because of the

advent of e-commerce. Equally, some online platforms might become outdated, too. At the

same time, some offline assets might become stronger after taking on more online

elements, and vice-versa.

We believe that technology and the Internet are so pervasive that every property asset,

offline or online, will be affected one way or another. As such, perhaps the more pertinent

question is: which offline assets can constantly reinvent themselves and evolve with the

advent of technology?

The relationship

between on-line and off-

line may not be a zero-

sum game

55


In other words, we believe retail landlords need to face up to the fact that the development

of technology and use of the Internet will have lasting implications for retailing and

consumption habits. It is now a question of who can adapt best to these changing

circumstances.

Some property assets will be more insulated from the impact than others; those that can

leverage the resulting changes might do much better than others; and those that are

complacent may gradually lose relevance.

In this light, we think it is arguable that the emergence of Chinese consumers could be

seen as another factor driving “creative destruction” in the retail property industry. As such,

Wharf REIC could be seen as a retail landlord which was earlier than others in terms of

responding and embracing this trend, and that this enhanced its relative competitiveness in

the past. Going forward, the game could change into one that is about who can respond to

e-commerce earlier and better than others. In our opinion, these 2 drivers of “creative

destruction” in the retail property industry go hand-in-hand with others because Chinese

consumers are among the world’s most advanced users of the Internet.

In the ultimate analysis, we believe the debate between online and offline boils down to the

question of what retail property management is really about. Our view is that retail property

management is still a relatively young industry. We have seen many different models of

retail property management, and it is not yet clear which one will become the industry

benchmark – if indeed it is possible to have such a benchmark.

We like to view the retail property management industry as a 3-legged stool, with the retail

manager facing consumers on the one hand and retailers on the other. Seen in this light,

the role of the retail property manager is about creating 2 virtuous cycles: 1) between

consumers and the mall, and 2) between retailers and the mall.

Once these virtuous cycles have been established, a third virtuous cycle – one

encompassing retailers, the mall, and consumers – can be established, which should result

in a growing number of quality consumers and retailers gravitating to the mall. In turn, this

third cycle can continue to drive expansion of the overall retail pie in that market, allowing

the mall to take market share from other players.

We believe that an important part of the business involves the creation of a virtuous cycle

driving consumer spending in malls either directly (through direct spending in the malls) or

indirectly (through spending online after visiting the malls or developing trust and

confidence about the shop and products after visiting the mall).

The virtuous cycle driving consumer spending in a mall

Source: Daiwa

The Internet may serve

as a force driving

another round of

“creative destruction” in

the industry

China consumers and

the Internet could be the

2 key drivers of “creative

destruction” in the retail

property industry

What is retail property

management all about?

A 3-legged stool

56


In our opinion, the virtuous cycle involves 4 major steps and hence requires considerable

time and effort to establish. We envisage that in the future, more or less all retailers will

need to have both offline and online platforms. In the table below, we summarise what

retailers’ online and offline platforms can do.

The 4 major processes in the virtuous cycle

Offline dimension Online dimension

1. Getting potential customers to first try visiting the mall

- The attraction can come from the city and the districts they are in, the ambience inside the malls, as well as the variety and quality of the retailers

- The attraction comes from ease of access and time savings

- Still there are human needs which need to be satisfied by a social setting like malls (eg, dining, eating, friends, seeing and being seen)

- While one can chat and interact online, this is not a substitute for face-to-face meetings. Nor can one eat online

- Can appeal to the 5 senses of human beings - Cannot appeal to the 5 senses of human beings

- Looks a richer platform to offer some new products and experiences to consumers - Looks inferior in these respects. That said, once the consumer is familiar with the products (say, has tried them before) and has developed sufficient trust in the shops, it would be more convenient to place new orders online than taking the time to go to the physical shop to buy and then line up to pay

- Managers can launch promotional activities (say, performances by celebrities, special shows) to attract potential customers

- Hard to match the physical store in the area of launching promotional events and activities

- Offers many advantages in terms of launching new products - Looks more convenient to buy established and familiar products

2. Getting customers to shop in the mall

- Can make use of the environment, atmosphere and sales techniques of sales staff to stimulate sales

- More difficult to "create" demand. Spending likely to come more from people who already have desires to buy and some specific items to look for

- Can have impulse buying and emotional purchases - Harder to stimulate" impulse buying" and "emotional purchases"

- Can use "sales services" and persuasion to stimulate sales and leverage on sales techniques and customer-sales relationship to stimulate sales

- Hard to use services to stimulate sales

- Assurance of after-sale service and venues where customers can complain and change products are important to stimulate sales

- Online platform can make after-sales service more efficient and effective, but probably cannot completely replace human services

- Offer many ways to help consumers become aware of the product and develop interest in buying that product

- Useful platform for customers to place orders on products they are aware of and want to buy

3. Getting customers to come to the mall repeatedly to shop

- More ways to get consumers to develop sentimental attachment to/positive impression of the mall

- More difficult to get the customers to develop sentimental attachment. That said, the messages and reminders offered by offline platforms can help reinforce such feelings among consumers. If utilised effectively, the mall could become akin to another online friend of customers.

- More ways to get consumers to feel they are being taken care of - More difficult to get customers to develop such feelings. Again, the offline platform can have ways to reinforce such feelings after they have formed (messages, discount coupons, etc).

- More ways to get consumers to feel they can access the most trendy items and get a sense of the trends of the day by visiting the mall

- More difficult for this to be done. However, the offline platform can offer ways to reinforce such feelings.

4. Getting customers to get more of their friends to try visiting the mall

- The physical mall allows customers to meet and socialise with their friends - More difficult for this to be done. That said, messages, coupons and other offers can be forwarded by the offline platform to reinforce the socialising effects resulting from meeting in the mall.

- The mall becomes a place customers are familiar with and have an emotional attachment to - More difficult for this to be done. That said, there are many ways in which the offline platform can help in facilitating customers to introduce the place to his/her friends.

Source: Daiwa

Meanwhile, we believe another important part of the retail property management business

involves the creation of another virtuous cycle, whereby an increasing number of strong

retailers and up-and-coming retailers are compelled to enter a mall.

In our opinion, this virtuous cycle also involves 4 major steps and would likewise take time

and effort to establish. At this stage, we see the virtuous cycle between the mall and

retailers as being mainly about developing a strong partnership so that both parties

become long-term stakeholders in each other’s businesses.

The virtuous cycle driving retailers’ leasing demand for mall spaces

Source: Daiwa

57


While we think retailers will pay increased attention to the importance of offline platforms,

our take is that at this stage, the creation of this virtuous cycle is being driven more by the

interaction between the mall manager and the retailers, as well as the mall manager’s

ability to kick-start a virtuous cycle between the mall and the consumers.

As we see it, the impact of e-commerce and the advent of Internet technology on this part

of retail property management is not as pronounced on the consumer side. However, the

mall manager’s ability to leverage on technology to improve the competitiveness of the

mall and develop a virtuous cycle between the mall and consumers is of great significance

in terms of getting retailers to develop a long-term commitment to the mall and partner with

the mall to weather challenging times.

The virtuous cycle between the mall, consumers and retailers

Source: Daiwa

Based on the above factors, we believe that the impact of e-commerce on the retail

property sector is more multi-dimensional and complex than it may first appear, and that

both online and offline platforms have roles to play in the retail property management

process. While the online platform is powerful and will likely become more powerful over

time, we do not think that it will replace the offline dimension completely, on the 4 aspects

noted above, any time soon.

At the same time, we contend that the mall-retailer relationship will remain an important

part of the mall management business, which may not be directly impacted by e-commerce

and internet technology. In any case, we foresee the relative roles of online and offline

platforms continuing to evolve.

Reasons to visit the mall

Source: Daiwa

We reiterate our view that there is lasting value in malls, even in this age of e-commerce.

Based on the above analysis, the continued development of e-commerce has the potential to

make strong malls even more productive, with the online platform serving to strengthen the

appeal of the offline platform which has already been built up in the 4 aspects we have outlined.

The impact of

technology on the

relationship between the

mall manager and

retailers will not be as

pronounced as between

the mall and consumers

The impact of e-

commerce on the retail

property sector is more

multi-dimensional and

complex than it may first

appear

58


Indeed, one implication of the rise of e-commerce is that the number of physical malls is

likely to shrink considerably. Creating and then maintaining an offline platform is costly.

Given that some functions previously performed by a physical mall can now be taken up by

the online platform, and that it is costly and risky to develop and maintain a mall, we would

expect the strong physical malls that have also developed strong online platforms to

continue to erode the market share of weaker malls.

In other words, while the mall industry is inherently a “winner takes all” business, in that

there is a tendency for retail spending to gravitate to the strongest malls, we expect these

characteristics to become more pronounced in the age of e-commerce.

In this this light, strong physical malls that can also develop a strong offline dimension

have the potential to become even stronger. As such, we believe that the advent of e-

commerce could result in a redistribution of retail spending among different types of malls

on the offline platform. Hence, rather than merely thinking in terms of the online platform

gaining market share from the offline platform, we could see strong offline malls

accelerating their market-share expansion by expanding their online platforms. We outline

our preliminary thoughts on the future structure of the mall industry below.

Potential future landscape of the mall industry

Source: Daiwa

We expect the impact of e-commerce to be multi-dimensional, with the respective roles

and importance of online and offline platforms, as well as different types of offline and

online platforms, continuing to evolve in accordance with the retail property ecosystems

they operate in.

We believe that e-commerce may eventually result in the strong and well-managed premier

malls in major cities becoming even better positioned than before. Some could achieve an

even higher occupancy cost (rental income/ tenant sales) than they command today.

Meanwhile, our read is that the Wharf group values e-commerce and has been paying

considerable attention to social media and key opinion leaders, as well as the younger

generation of China for many years. We believe this was probably one factor which has

helped to cushion its tenant sales performance during 2014-16 despite the plunge in luxury

retail sales in Greater China. We would not be surprised if Wharf REIC and the Wharf

Group are among the pioneers in terms of penetrating the younger generation and

emerging customer groups in China.

The “winner takes all”

nature may become

more pronounced

The strongest malls may

be strengthened even

further

Wharf REIC appears to

be embracing e-

commerce

59


“Shoppertainment” in Harbour City

Source: Daiwa

In our view, the current market environment could enhance the relative bargaining power of

prime retail property assets, as offline platforms are likely to need these assets to access

quality customers; to enrich their product experience; and to stimulate their online sales.

We believe that Wharf REIC is at the forefront of the retailing business and could leverage

on e-commerce to become stronger. We note that, globally, retail landlords have been hit

by e-commerce. However, we expect that Wharf REIC will be able to withstand the

competitive threat posed by e-commerce. Indeed, if it can leverage on technology, its malls

could become stronger than before.

We believe that growing recognition of Wharf REIC’s retail management expertise and the

growing importance of Wharf in the global retail scene should augur well for investor

recognition of Wharf REIC’s value, in our view.

Overall, we believe that Wharf REIC’s demonstrated strength in retail property

management, partnerships with global retail chains, the franchise value related to its retail

management expertise and potential opportunities made possible by the advent of

technology and e-commerce are all factors that deserve investors’ attention, in our view.

60


What is the maximise tenant sales Harbour City can attain?

“We may insist as often as we like that man’s intellect is powerless in comparison

with his instinctual life and we may be right in this.”

- Sigmund Freud

One intriguing question about Harbour City is this: has it maxed out in terms of achieved

tenant sales? Or was 2014 more like “the end of the beginning”, in that Harbour City would

reach new heights over the coming years? We have addressed a variety of related issues

in this report, and we take the view that the HKD35bn tenant sales it achieved in 2014 is a

peak that will be broken in the future.

Regarding the longer-term competitiveness of the mall, we highlight 3 points:

First, we propose to see Harbour City not as a static mall or product, but rather

as an agglomeration of over 800 tenants (see page94 for its tenant profile). More

importantly, Harbour City has been very actively managed, such that the mix of these

800 tenants will continue to evolve. In this light, if the mall can keep on fine-tuning its

tenant mix so that the most productive and upcoming retailers in each major trade

continue to come to Harbour City, then it follows that Harbour City will remain the

market leader, its maximum potential being how far the overall Hong Kong retail market

can go.

This brings us to our second point. The above issue is partly a chicken-and-egg issue.

As expounded in this report, we do not think that Harbour City excels in tenant sales

because it can keep on getting market share from other malls in Hong Kong. Rather,

we think it excels because it is among the most successful malls in Hong Kong in

getting new shoppers from areas outside Hong Kong to come to Hong Kong to shop.

Against this backdrop, one key factor in how far Harbour City’s tenant sales can

go is the extent to which it can get market share from other places. Retailing is

often a highly fragmented industry. While Harbour City’s achieved tenant sales look

very high for a single mall, they are not very high relative to the total tenant sales a city

could get. Shown on page 113 are the historical retail sales for major cities in China,

together with Hong Kong’s estimated market share of the pie. As we see it, Harbour

City’s share of the spending pie of Mainland shoppers is still not particularly large and

the mall has been working hard to bring in non-Chinese shoppers for many years.

Last but not least, shopping behaviour features a considerable impulse element,

which could be amplified by the proliferation of smartphones. At the same time, e-

commerce goes some way in alleviating the physical constraints of store sizes.

Moreover, in this age of e-commerce and the Internet, the relevance of occupancy cost

to a mall could decline over time, in our view. As such, for strong malls that many

brands need to access, the achievable occupancy cost could conceivably become

notably higher than it is today. Any such development would likely provide a boost to

Wharf REIC’s bottom line.

In sum, our view is that it is too early to say that Harbour City’s achieved tenant sales

have ”maxed out”. If Hong Kong can continue to advance as an international retail hub

(see tables on 78) and Harbour City can find a way to ride on e-commerce (see pages 53-

60 for an in-depth discussion), and gain the acceptance and loyalty of China’s younger

generation, then it could be argued that Harbour City’s best days are still to come.

Jonas Kan, CFA, Head of Hong Kong and China Property

61


3. Its offices also look set for a transformation

“Most probably, of our decisions to do something positive, the full consequence of which

will be drawn over many days to come, can only be taken as the result of animal spirits – a

spontaneous urge to action rather than inaction, and not as the outcome of weighted

average of quantitative benefits multiplied by quantitative probabilities.”

- John Maynard Keynes

We believe that by embracing the wave of change in the global consumer industry, Wharf

REIC appears to have a differentiated approach to the management of malls which has

resulted in a dramatic surge in sales productivity – and hence rental income – across the

board for all its malls in Hong Kong.

This begs the question: could something similar occur to its office property assets? We

note that the impact of China demand in the Hong Kong office sector could also be large

and profound. However, the way things play out in the office market is likely to be different

than from the retail market.

Our view is that retail is a special kind of property asset which in theory has almost no

absolute limit to its income-generation capacity, as rental income is ultimately driven by

operating profit from retail sales in or facilitated by that retail premise. Given that the range

for product unit price (price) and sales intensity (volume) is wide, the range of possible

scenarios for tenant sales is wide-ranging – and hence unit rent – in a retail premise.

However, a repeat of this scenario in the office market would be more difficult as offices are

more of a commodity asset. Hence it is difficult for the unit rent for a building to be several

times higher than those in the same grade and located in the vicinity. That said, we do

believe that the office market is undergoing an important metamorphosis and that this

would also provide considerable opportunities to Wharf REIC’s portfolio.

We have long held the view that the Hong Kong office sector has entered into a new

chapter since 2014 (see our 25 May 2015 report: The Mutual Market: a new helping hand

for office landlords), with moderate new supply but demand strengthened by the gradual

emergence of mainland corporations as one main source of office demand in Hong Kong,

in addition to the expansion of existing firms in Hong Kong and the emergence of new

firms. We believe that such backdrop has created a favourable environment for office

landlords, especially those who own office properties which can be upgraded to become

credible alternatives to expensive offices in Central.

Hong Kong office property: completions, take-up and vacancy

Source: CEIC, Daiwa forecasts

0%

2%

4%

6%

8%

10%

12%

14%

16%

(1)

0

1

2

3

4

5

6

7

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

E

2019

E

2020

E

(m sq ft)

Net supply (LHS) Take-up (LHS) Vacancy (RHS)

Embracing China

demand has had

significant impact on

Wharf REIC’s retail

portfolio

Embracing China

demand could also have

significant impact on

Wharf REIC’s office

portfolio



62


One point that many investors may not realise is that Wharf REIC is actually the third-

largest office landlord in Hong Kong in terms of GFA, with a total portfolio of about 6m sq ft,

concentrated in Tsim Sha Tsui, Causeway Bay and Central.

Wharf REIC: asset structure

Wharf Serviced




1. Harbour City**



- Ocean Centre HK 100% 356,000 631,000 - - - - 987,000





- Gateway I HK 100% 114,000 1,127,000 - - - - 1,241,000

- Gateway II HK 100% 434,000 1,551,000 296,000 - - - 2,281,000

- Gateway III HK 100% - 360,000 - - - - 360,000


- Gateway Hotel HK 100% - - - 289,000 - - 289,000

- Prince Hotel HK 100% - - - 279,000 - - 279,000


2,068,000 4,647,000 296,000 1,115,000 - 283,000 8,409,000

2. Times Square HK 100% 943,000 1,033,000 - - - - 1,976,000

3. Plaza Hollywood HK 100% 562,000 - - - - - 562,000

4. Wheelock House HK 100% 4,000 211,000 - - - - 215,000

5. Crawford House HK 100% 85,000 104,000 - - - - 189,000

3,662,000 5,995,000 296,000 1,115,000 - 283,000 11,351,000

Other investments

6. Harbour Centre Dev Ltd HK 72%

7. The Star Ferry HK 100%



Major office landlords in Hong Kong

Source: Companies, Daiwa

Importantly, we believe that one of the greatest opportunities in the Hong Kong office

market lies in upgradable Grade A office buildings. This is because we expect Central to

continue to evolve into a high unit rent market. As a consequence, traditional Central

tenants may move out of Central. At the same time, companies which previously wanted to

be located in Central may now decide to look at alternative locations, or base a small

portion of the firm’s total amount of office space in the Central district.

We think it is important to note that, in terms of the range in office unit rent, Hong Kong’s

office rents are the highest in Asia, and possibly in the world. For the bottom tier office

properties in Hong Kong, unit rent is as low as USD2/sq ft or less. However, for top-end

office space at IFC, the current price is around USD25/sq ft or more for prime space in the

building, meaning that the range of rents could be over 10x.

0

2

4

6

8

10

12

14

Swire Properties SHK Properties Wharf REIC Hongkong Land CK Asset Henderson Land

(m sq ft)

The third-largest office

landlord in Hong Kong in

terms of GFA

Grade A office rent in

Central provides a

favourable “price

umbrella” for other

districts

63


Range of prices and rents of various property asset classes in Hong Kong

Source: Daiwa estimates

We believe that such a scenario is beneficial for landlords who own buildings which can

become credible alternatives to those in Central. In this light, it is important to note that the

achieved passing rent for Wharf’s offices is still relatively low, at about HKD50/sq ft (gross)

despite already including its offices in Central. As such, we do see considerable scope for

achieved unit rent in Wharf’s Hong Kong portfolio to further improve, given the right AEIs

and positioning.

Sensitivity of Wharf REIC’s gross rental income from offices to achieved unit rent


40 45 50 55 60 65 70 75 80

Annual gross rental (HKDm) 2,953 3,323 3,468 4,061 4,430 4,799 5,169 5,538 5,907

Source: Company, Daiwa estimates Note: HKD3,468m (highlighted) is the achieved gross rental income of Wharf REIC offices in 2017 based on 5.8m sq ft GFA (before the conversion of

the serviced apartments into offices). Wharf REIC's gross rental income from offices shall benefit from the conversion of one serviced apartment tower into offices from 2020 onwards

Also, we believe that Tsim Sha Tsui holds an interesting position in the current office cycle.

Overall, we see Island East as probably the largest beneficiary of the current office market,

a situation which should be reinforced by the fact that Swire Properties alone owns almost

all the Grade A office space in Hong Kong East. While the landlord factor for the Tsim Sha

Tsui area will not be as favourable as Island East, we do think there are many factors

working in favour of the Tsim Sha Tsui district over the coming years (see pages 29-33).

As such, we do see room for Tsim Sha Tsui to become a more important commercial hub

and expect that some China-based corporations and financial institutions could see

Greater Tsim Sha Tsui (including West Kowloon) as the next preferred office location

outside of Central.

We think it is important to note that Wharf REIC has been embracing this trend, including

plans to change one of its serviced apartment towers at Gateway into offices. This could

allow it to achieve a higher unit rent and should have a spill-over effect to other, older

offices in Harbour City where the passing rent is much lower.

Meanwhile, we are also optimistic about the outlook for Causeway Bay Grade A offices.

This is because offices in the area are owned by two main landlords (Wharf and Hysan)

and our read is that the Causeway Bay area appeals to certain industries such as

technology (Alibaba’s Hong Kong office is at Times Square) and has been accepted as an

alternative office area for financial institutions. We think another point to note is that the

size of the Causeway Bay Grade A office market is not large, with just about 5m sq ft GFA

versus about 25m sq ft in Greater Central.

This means that it will not take a large outflow of tenants from Central to fill out the

available space in Causeway Bay, which should be conducive to unit rents in Causeway

Bay.

0

100,000

200,000

300,000

Residential Office Retail

Capital value

600,000

14x

100x

9x

(HKD/sq ft, based on GFA)

0

100

200

300

Residential Office Retail

Rental value

3,000

12x

200x

10x

(HKD/sq ft, based on GFA)

The Tsim Sha Tsui office

market is undergoing a

metamorphosis

We also think that

Causeway Bay is also

well-positioned

64


Major Grade-A office buildings in the Causeway Bay area


At the same time, we also see room for rental improvement for Wharf REIC’s 2 office

buildings in Central: Wheelock House and Crawford House where the passing rent is much

lower than most of the prime buildings. We believe rents in the prime buildings in Central

have risen significantly since 2012 and this should have a spill-over effect on other

buildings. We see Wheelock House and Crawford House as potential beneficiaries,

especially if given the right AEI.

Greater Central area: major property assets

GFA (m sq ft)

Property Owners Office Retail Serv’d Apt Hotel Total

Hongkong Land's Central portfolio Hongkong Land 4.9 1.1 - 0.2 6.1

Swire Properties' Greater Pacific Place portfolio Swire Properties consortium 2.4 0.7 0.4 1.8 5.4

IFC Hong Kong Properties / Henderson Land

1.9 0.6 0.3 0.3 3.1

Three Garden Road Champion REIT 1.6 - - - 1.6

Cheung Kong Center CK Asset 1.3 - - - 1.3

Hutchison House* CK Asset 0.5 - - - 0.5

China Building CK Asset 0.3 - - - 0.3

New World Tower New World Development 0.6 0.1 - - 0.6

Murray Road site redevelopment Henderson Land 0.5 - - - 0.5

AIA Tower AIA / Lai Sun 0.5 - - - 0.5

The Murray Wharf REIC / Harbour Centre - - - 0.3 0.3

Wheelock House Wharf REIC 0.2 - - - 0.2

Crawford House Wharf REIC 0.1 0.1 - - 0.2

CCB Tower China Construction Bank / Lai Sun 0.1 - - - 0.1

14.7 2.6 0.7 2.6 20.7

Source: Companies, Daiwa estimates Note: *Hutchison House shall be re-developed

Last but not least, we believe that the initiative taken by Chengdu IFS to manage offices as

hotels is an important move. We think the hardware of an office property is not easy to

change, but in terms of software, there is room for improvement and we expect this to be

valued by tenants. It remains to be seen whether Wharf REIC will apply this concept on a

wider scale, but we do see it as a factor that could help make offices a supplementary

driver for its rental income.

Overall, our view is that the Hong Kong commercial property market is being transformed

from a property market for mainly 7m people to one that could potentially serve a much

larger hinterland. We believe that this transformation will bring tremendous potential for the

Hong Kong commercial property sector and it would be up to the landlords how much they

get from such a transformation.

In our view, if the Hong Kong commercial property landlords keep the status quo, they will

likely reap some benefits as we view the overall stock of commercial property assets as

under-sized relative to the much larger scale of the economy they serve, and their future

increase looks rather constrained (see our sector report: Hong Kong Property Sector:

Beginning of the end or end of the beginning?, 24 March 2017).

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

Times Square Lee GardenOne

Lee GardenTwo

Hysan Place LeightonCentre

Lee GardenThree

One HysanAvenue

Lee GardenFive (18Hysan

Avenue)

Lee GardenSix (111

Leighton Rd)

(sq ft)

Bringing hospitality

concept to office

property management

Important trend for

commercial property

landlords to embrace



65


However, if the landlords are proactive and explore ways to fully embrace a transformation

in terms of moving from a regional property market to a metropolitan property market

serving the international and offshore dimensions of one of the world’s largest economies,

the potential benefits are immense. Indeed, we see the sales productivity exhibited by

Harbour City as a case illustrating what is possible, if or when a Hong Kong retail landlord

responds proactively to fully embrace such unusual opportunities facing the Hong Kong

commercial property sector.

For the office segment, we believe the nature of office property assets means that the

upside in terms of unit rent will not likely be as large as retail. That said, we note that many

things can still be done, especially for the most prime assets and lower tier assets which

can be upgraded to become credible alternatives to the prime assets.

We also believe it is important for investors not to underestimate what the scale factor

could mean for the Hong Kong commercial property sector, an issue which we will turn to

in the next section.

66


4. Well-positioned to ride on opportunities offered by the development of the Greater Bay Area

“The close connection between population size and the presence of, and benefits of,

certain evolved practices, institutions, and forms of human interaction is hardly a new

discovery.”

- F.A. Hayek

In the preceding sections, we establish that both the retail and offices of Wharf REIC are

differentiated property assets with real potential, the key being how large that potential is

and how well Wharf REIC taps it.

In our view, the changes and transformation to Hong Kong brought about by China are

significant. Chinese consumers have become an important force to be reckoned with for

the global retailing industry, and we see the dramatic surge in tenants sales and rental

income that Wharf REIC’s malls has achieved since 2003 as a vivid illustration of what is

possible if the landlord is proactive in embracing such structural trends.

For Chinese corporations that are not yet a major force in the office markets outside China,

we sense that it is a sector evolving quickly and will become increasingly a force to be

reckoned with. Meanwhile, we also believe the development of the Chinese economy will

have a stimulative effect on Hong Kong office demand, and will therefore have implications

for Wharf REIC’s portfolio.

In our view, one differentiating factor for Wharf REIC is that it looks more ready to embrace

new trends and adapt itself to tap opportunities associated with such trends. In this

connection, we believe that the development of the Greater Bay Area will have significant

implications on Wharf REIC’s portfolio as we believe that it is probably the commercial

landlord in Hong Kong which is most willing to embrace new opportunities, including the

rise of the post-1990s consumer groups in China, e-commerce, and probably the

development of the Greater Bay Area as well.

The Greater Bay Area is not a new concept

The idea of a Greater Bay Area is not something that has emerged recently. Since China

opened its doors in 1978, entrepreneurs from Hong Kong have worked on transforming

Guangdong Province into the world’s factory. As such, unlike other major plans in China or

other command economies, the Greater Bay Area is not a brand new idea that has come

from the drawing board. Instead, we contend that it is a new name given to a process that

has been set in motion for decades. In this sense, it can be seen as an attempt to build on

what is already happening in the market. Specifically, the Greater Bay Area is being coined

a “9+2” entity, with 9 cities within China (Guangzhou, Foshan, Zhaoqing, Zhonghsan,

Jiangmen, Zhuhai, Shenzhen, Dongguan, and Huizhou) and 2 special administrative

regions (Hong Kong and Macau).

The Greater Bay Area

development stands to

have significant

implications for the

Hong Kong commercial

property market

Wharf REIC has been

more proactive in

embracing China and the

changes

Greater Bay Area is a

new name given to a

process that has already

been in motion for

decades

67


"The Greater Bay Area”

Source: China Index Academy, Daiwa

We also note that while the Greater Bay Area occupies only a small area of China, it is far

from small in terms of economic importance. While it occupies only 1% of the land area in

China, it accounts for 5% of the country’s population and 13% of the country’s GDP.

The Greater Bay Area in context

Source: CBRE

Importantly, we see the development of the Greater Bay Area as part and parcel of the

overall national policy of the Chinese government. In this sense, it may provide the natural

market process with the rigor provided by the central planning platform of the Chinese

government. Overall, we believe the Greater Bay Area is an important development for the

Hong Kong commercial property sector for the following reasons.

1. The Greater Bay Area has the policy blessing of the Central Government

First, we see the idea of a Greater Bay Area as part of the national policy of the Chinese

government. China’s President Xi Jinping and Premier Li Keqiang have openly supported

the idea of the Greater Bay Area and President Xi has witnessed the signing of the

Framework Agreement on Deepening Guangdong-Hong Kong-Macao Co-operation in the

Development of the Bay Area on 1 July 2017, the 20th anniversary of the return of Hong

Kong to China sovereignty.

Subsequently, Mr Xingrui, Governor of Guangdong Province, promoted the idea at the

Boao Forum for Asia and on 15 August 2018, a leading group for development of the

Greater Bay Area was convened by the Vice Premier of the State Council, Mr Han Zheng.

Top government leaders

in China supported the

Greater Bay Area

68


The Greater Bay Area is part of China’s national policy agenda

Source: Qianhai International Liaison Services Ltd

A leading group for the Greater Bay Area is convened


Indeed, we see the development of the Greater Bay Area as part of the national policy to

develop a bay area comparable with the current 3 other major bay areas in the world (see

table below), and we expect that the experience of the Greater Bay Area to have

implications for national policies related to the development of the Yangtze River Delta and

Bohai Rim Bay areas.

Major bay areas around the world

New York Bay Tokyo Bay* San Francisco Bay Area Guangdong-Hong Kong-Macau Bay Area

Size (sq km) 21,500 13,556 18,000 56,100

No. of cities 31 10 12 Over 11 over time?

Population (m) 65 35 7.6 68

GDP (2016, USDtn) 1.5 1.3 0.8 1.34

GDP growth (%) 3.5% 3.6% 2.7% 7.9%

GDP per capita (USD) 23,077 37,143 105,263 19,705

Share of country's GDP 8% 26.4% 4.3% 12%

Tertiary industry output (%) 89.4% 82.3% 82.8% 64.9%

Main industries Finance Auto, Petrochem Internet, electronics, Hi-tech

Finance, Internet, trading, manufacturing, logistics, media and entertainment

Source: China Index Academy, CEIC, Daiwa Note: *For Tokyo Bay, there are 2 definitions: the narrower one includes only 3 prefectures (Chiba, Kanagawa and Saitama) while the broader

definition includes 7 prefectures (the 3 above plus Ibaraki, Tochigi, Gumma and Yamanashi). The Tokyo Bay data above is based on the narrower definition.

2. Beijing provides the key to overcome one main challenge faced by the Greater

Bay Area

Second, Beijing has come to play a leading role in the development of the Greater Bay

Area. We note that in October 2018, the central government established the leading group

for the development of the Guangdong-Hong Kong-Macau Greater Bay Area. The National

Development and Reform Commission will play a coordinating role in this group, with

support from the central government. The leading group helps facilitate communication

among cities and ensures compatibility in planning.

We see the development

of the Greater Bay Area

as part of Beijing’s

overall policy to develop

the national economy

Beijing presence should

help clear up any

differences between

various parties

69


In our view, one main factor which has hindered the development of the Greater Bay Area

in the past has been that there are 4 governments within the Greater Bay Area and they

are arguably as much competitors as they are collaborators. In this light, Beijing coming to

play a major role in the development of the Greater Bay Area can be seen as a

breakthrough for the whole area as its participation may be the key to overcoming such

differences.

3. There is excellent transport infrastructure linking up the whole area

Third, we think another characteristic of the Greater Bay Area is that the transport

infrastructure in the area has kept on improving and already attained major breakthroughs

in recent months, with the opening of the Express Rail Link as well as the Hong Kong-

Macau-Zhuhai Bridge. Effectively, the whole of Greater Bay Area is linked by modern and

efficient transport infrastructure and many major cities within the Greater Bay Area can be

reached within 1-hour travelling time.

Besides, we see China’s high-speed rail network as particularly important. We contend that

its impact on China will be transformational, yet the market may have yet to fully grasp the

full implications of such a highly efficient country-wide network covering over 1bn people.

Linking up the Greater Bay Area by rail, airports, roads and ports


The high-speed railway network in China

Source: Wikipedia

Many would argue that the US is linked mainly by roads. As such, we look to Japan as a

reference for the implications a country-wide efficient rail network can have on a country’s

development, especially its urbanisation process. Importantly, Japan’s rail network is

conducive to the emergence of mega-sized cities, and we believe the country’s rail system

is an important reason the Tokyo-Yokohama area has become the world’s largest

metropolitan zone, characterised by one mega-sized city surrounded by several satellite

cities.

The whole area is linked

by modern transport

infrastructure

The high-speed train

system in China is going

to be transformational

70


Indeed, we have long envisaged that there would be 5 major metropolitan zones in China

and believe the Greater Bay Area will become one of the main constituents.

The Greater Bay Area is set to have at least 10 vibrant industries

Importantly, besides being efficiently linked, the Greater Bay Area allows for economic

interactions among the 3 jurisdictions, which in turn should help many industries thrive and

reach a greater scale. Shown below we identify at least 10 major industries that already

have solid foundations in the Greater Bay Area and are poised to reach the next level in

future.

1. Technology

2. Trading, Commerce and Logistics

3. Financial sector, with both an onshore and offshore dimension

4. Manufacturing

5. Entertainment and Culture

6. Healthcare and Environment

7. Elderly and Retirement

8. Tourism and Leisure

9. E-commerce

10. Professional Services

In our view, technology constitutes an important sector in the Greater Bay Area. Shenzhen

is the city that is leading in this respect so far, with some of the most important technology

companies in China being located in the city. As Shenzhen continues to move up the value

chain and increasingly into technology, we expect medium and lower-tech industries to

migrate to other cities in the Greater Bay Area, particularly Donnguan and Huizhou, which

would help these cities overcome the challenges associated with low-end manufacturing

leaving these cities.

1. Technology sector in the Greater Bay Area

Source: Google, Daiwa

As for trading, commerce and logistics, our read is that Guangzhou has a long and rich

tradition in these industries. For many years, Guangzhou has been the wholesale centre

for the country in many types of merchandise, such as garments, toys, and all kinds of

consumer goods, and its role should only be reinforced by the development of Nansha as

a free-trade economic zone. We also note that the Panzhou Exhibition Centre in

Guangzhou is among the top-5 in the world in terms of scale. Being the municipal capital of

Guangdong Province, Guangzhou is better connected with the rest of China in terms of

both air and rail transport, while the city is home to some of the most prestigious

universities in the country.

Shenzhen on a path to

become a leading tech

city

Guangzhou poised to

become a leader in the

trading, distribution and

logistics sectors

71


2. Trading, commerce and logistics sectors in the Greater Bay Area


As for the financial sector, we believe Hong Kong will play a leading role, especially in the

realm of international finance. If China continues to grow its economy, our view is that its

scale would be large enough to accommodate 3 financial centres. At the same time, we

believe Hong Kong is in a unique position to take up the role of an off-shore international

financial centre of China, complementing Shanghai and Shenzhen, which we believe

would be the dominant on-shore financial centres of China.

3. Financial sector in the Greater Bay Area


For the manufacturing sector in the Greater Bay Area, we expect it to be taken up by a

number of cities close to the 3 aforementioned key cities in the Greater Bay Area. We note

that Foshan is currently home to some of the world’s largest manufacturers of white goods

and ceramics, and we expect Foshan to remain one of the most important cities within

China for white goods. At the same time, we see Dongguan remaining an important

manufacturing hub within China and expect to see various levels of manufacturing in

various other cities in Greater Bay Area, such as Huizhou and Zhongshan.

4. Manufacturing sector in the Greater Bay Area


Meanwhile, for the entertainment industry, we expect Macau to be the leading city,

especially in the realm of gaming. However, we envisage the entertainment industry in the

Greater Bay Area continuing to broaden and expect Hengqin to complement Macau in the

domain of sports and family entertainment.

Hong Kong stands to

lead in the realm of

finance, especially

international finance

We expect Dongguan to

be the manufacturing

hub within the Greater

Bay Area

Macau ready to be the

leading gaming and

entertainment city

72


5. Entertainment and Culture sector in the Greater Bay Area


The healthcare industry in China is not yet very developed. That said, we note that some

foundation for the healthcare industry can already be found in Zhuhai-Zhongshan, while

the country has the population and demographics to support a sizeable healthcare sector

over time. In general, we believe the western part of the Greater Bay Area is more leisure-

orientated and green, and as such suitable for the development of the healthcare and

environment sector in China.

6. Healthcare and Environment sector in the Greater Bay Area


Likewise, we foresee sectors revolving around the elderly and retirees to become

important in the Greater Bay Area. Admittedly, this industry is not yet well-developed in

China, but again we believe the country has the population and demographics to support

an Elderly and Retirement Sector over time. As the western part of the Greater Bay Area is

more leisure-orientated and green, we expect cities like Zhongshan to grow in importance

within China for the elderly and retirees, a bit like Florida and Arizona in the US.

7. Elderly and Retirement sector in the Greater Bay Area


We foresee tourism and leisure becoming another important industry in the Greater Bay

Area. Currently, Hong Kong and Macau are the 2 cities with the largest scale in terms of

tourist numbers. However, over time, we expect to see the emergence of many more

tourist spots in the Greater Bay Area, with a number to be found in cities like Huizhou,

Zhaoqing and Jiangmen.

Zhuhai-Zhongshan set to

lead in the field of

healthcare

Zhongshan to become a

leading city for the

elderly and retirees

Tourism and leisure set

to become another

important industry in the

Greater Bay Area

73


8. Tourism and Leisure sector in the Greater Bay Area


Conversely, given the Greater Bay Area’s legacy as the world’s factory, and with some of the

country’s strongest technology companies, we foresee a vibrant e-commerce industry

emerging in the Greater Bay Area. We expect Shenzhen and Guangzhou to be the 2 key

cities in the Greater Bay Area, in terms of the development of the area’s e-commerce sector.

9. E-commerce sector in the Greater Bay Area


With continued strengthening of economic activities within the Greater Bay Area, we

expect to see more cities there having larger tertiary components, which would result in

corresponding demand for services. We expect Hong Kong to be the leading city within the

Greater Bay Area as far as professional services are concerned.

10. Professional Services sector in the Greater Bay Area


Cities within the Greater Bay Area are complementary

An important aspect about the Greater Bay Area is that the 11 cities within it are highly

complementary. Many of these 11 cities have already established a competitive edge, and

it would probably work best for the Greater Bay Area if they were to specialise in the field in

which they have a clear comparative advantage.

For example, in the technology sector, the leading role is set to be taken by Shenzhen,

which is complemented by Dongguan, a city that has succeeded in upgrading from low-

end manufacturing to a mid-tech zone. Meanwhile, we expect Macau to play a leading role

in entertainment and gaming, complemented by Zhuhai and Zhongshan. As for

Guangzhou, we envisage it playing a leading role in trading, logistics and manufacturing,

complemented by Foshan as well as other cities in the Greater Bay Area.

E-commerce is a

burgeoning sector in the

Greater Bay Area

Hong Kong will likely

lead in terms of

professional services

The cities in the Greater

Bay Area complement

each other

74


We expect Hong Kong to play a leading role in professional services and international

finance, complemented by Shenzhen, which has a strong onshore financial sector.

The 11 cities in the Greater Bay Area

Area

Urban population as % of usual

residence Urban

population

Usual residence

population Population

density GDP GDP

per capita GDP

per sq km

Added value of tertiary

industry Container

throughput

Total import and export

trade

(sq km) (%) (m persons) (m persons) (per sq km) (CNYbn) (CNY/person)

(CNYbn) ('000 TEU) (USDbn)

Macau 30 100.0 0.6 0.6 21,151 291 453,447 95.7 259 150 12

Hong Kong 1,106 100.0 7.3 7.3 6,606 1,926 263,609 17.4 1,730 20,114 1,007

Zhuhai 1,732 88.1 1.4 1.6 943 203 124,706 1.2 97 1,338 48

Zhongshan 1,784 88.1 2.8 3.2 1,799 301 94,030 1.7 131 1,356 36

Shenzhen 1,997 100.0 11.4 11.4 5,697 1,750 157,985 8.8 1,029 24,205 443

Dongguan 2,460 88.8 7.3 8.3 3,355 628 75,616 2.6 333 3,363 168

Foshan 3,798 94.9 7.1 7.4 1,957 800 108,299 2.1 303 3,018 66

Guangzhou 7,249 85.5 11.5 13.5 1,863 1,810 136,188 2.5 1,215 17,625 134

Jiangmen 9,505 64.8 2.9 4.5 475 224 49,608 0.2 98 1,088 20

Huizhou 11,346 68.2 3.2 4.8 419 314 66,231 0.3 126 269 54

Zhaoqing 14,891 45.2 1.8 4.1 273 197 48,670 0.1 69 705 8

Rest of Guangdong 124,872 24.8 49.7 1,642 639 2,159 48

Total 180,771 82 116 10,085 6,030 75,388 2,042

Source: CEIC, Daiwa

Overall, we foresee 3 major clusters emerging in the Greater Bay Area. The first is

Guangzhou-Foshan, which we expect to be a hub for trading, manufacturing and logistics;

the second is Shenzhen-Dongguan-Huizhou, the hub for technology, finance and

manufacturing; and the third, Macau-Zhuhai-Zhongshan, the hub for entertainment,

healthcare, leisure and tourism.

The potential 3 clusters in the Greater Bay Area

Source: China Index Academy, Daiwa

The Guangzhou-Foshan cluster


We expect to see 3 major

clusters emerging in the

Greater Bay Area

75


The Shenzhen-Dongguan-Huizhou cluster


The Hong Kong-Macau-Zhuhai-Zhongshan cluster


Overall, we contend that among the 11 cities that make up the Greater Bay Area, some will

bear a resemblance to major world cities. For example, Hong Kong could resemble

Manhattan or London, while Macau is already the Las Vegas of China, and Shenzhen

resembles the Silicon Valley of China. At the same time, Guangzhou may take on a role

similar to Chicago or Dallas in the US given its transport links with the rest of China.

Therefore, under the most optimistic scenario, we would argue that one of the visions for

the whole Greater Bay Area is that it will encompass some of the most vibrant cities in the

US and the world, such as Silicon Valley, Las Vegas, Chicago and Dallas.

Manhattan + Silicon Valley + Las Vegas + Chicago


76


In our view, the whole of the Greater Bay Area is potentially beneficial for the development

of Hong Kong, in that it could add significant critical mass to the Hong Kong economy,

similar to what Chinese companies have done to the scale of the Hong Kong stock market.

Seen in this light, it could well be the catalyst that takes the Hong Kong commercial

property sector to its next level. This is because it covers a large area and population base

and within the whole area, we expect to see increasingly robust economic activities in the

years ahead.

Note that the area of Hong Kong is very small compared with the Greater Bay Area. In our

view, one rule in property is that when the peripheral areas are doing well, the core area

does better. We expect Hong Kong, Shenzhen and Guangzhou to be the 3 key cities within

the Greater Bay Area; among these 3 cities, the area of Hong Kong is the smallest.


Source: CBRE

China: economic structure of major districts

Source: Savills

At the same time, we see a number of distinctive roles that Hong Kong could take on in

terms of bridging what we call the “institutional gap” between China and the rest of the

world. While direct interaction between Chinese cities and the rest of the world is likely to

increase over time, our view is that in the grand scheme of things, this may not be

necessarily harmful to Hong Kong’s role as long as the city can continue to evolve and

progress as the place where the institutional gap between China and the rest of the world

can be bridged.

0%

20%

40%

60%

80%

100%

Macau Hong Kong Guangzhou Shenzhen Dongguan Zhuhai Zhongshan Jiangmen Huizhou Foshan Zhaoqing

Primary Secondary Tertiary

Hong Kong and the

Hong Kong commercial

property sector stand to

benefit from

developments in the

Greater Bay Area

77


Hong Kong, China and rest of the world

Source: Daiwa

Will a unifying institutional framework emerge in the Greater Bay Area?

At the deepest level, we see the development of the Greater Bay Area being about

innovation, creativity and imagination within the institutional framework guiding economic

and social behaviours. In the broadest sense, we believe China is the first example in the

world of a command economy trying to transform itself into a semi-command and semi-

market economy, and is likely to remain a command economy at heart, but with free-

market characteristics as certain free-market forces are allowed to operate.

For the Greater Bay Area, we believe it can be characterised as a region within 1 country,

but 2 special administrative regions (SAR) as well as 3 currencies and legal jurisdictions.

Would the above differences become narrow over time, and if so, which of the existing

institutional frameworks would prevail more?

In our view, Hong Kong occupies an interesting position in the grand scheme of things for

the above trends, by virtue of the fact that it is the city within China that is most connected

with the outside world, and as its institutional structure is arguably the most advanced and

well-developed among all cities in China. If Hong Kong can take on a more active and

leading role in the development of the Greater Bay Area, what would be the implications for

the Hong Kong commercial property sector?

We think the implications will be huge, but will depend on whether the players in Hong

Kong commercial property embrace the opportunity. Our read is that traditionally landlords

tend to be conservative and slow to adapt to changes. That said, Wharf REIC appears to

be an innovative and energetic landlord and what it has done in retail so far suggests that

the group has been taking a leading role in terms of embracing mainland demand; and that

of riding on such demand to achieve greater critical mass and to move up to the next level.

This bodes well for the company’s prospects in getting the most from the development of

the Greater Bay Area, in our view.

Can Hong Kong take on

an active and leading

role in the integration of

the various institutional

frameworks in the

Greater Bay Area?


will bring real

opportunities to Hong

Kong, in our view

78


In particular, in the following table we outline what we think the Greater Bay Area can bring

to the Hong Kong commercial property sector. On the retail front, we see the prospect of

Hong Kong being elevated to an international retail hub and becoming one of the main

trend-setting cities of China.

Opportunities for the Hong Kong retail and office property sectors brought by the Greater Bay Area

Sector Opportunities Implications

Hong Kong property as a whole

Notable scale expansion of the Hong Kong property market, as there would be a sustained and significant lift in the number of: 1) shoppers coming to HK, 2) companies setting up an office or operation in Hong Kong, and 3) the wealthy and professionals seeking a residence in Hong Kong.

We see upgradable districts and property assets as the largest beneficiaries. At the very top end of the market, we expect prices and rents to stay high but do not see significant room for a further expansion in volume. However, such a "price umbrella" provided by the prime assets would be favourable for those upgradable districts and property assets which could have a notable rise in both price and volume.

Hong Kong retail property sector

Becoming a market with much larger scale and potentially excelling in terms of efficiency (ie, having the largest range of offerings that are accessible within a limited time span spent on shopping), and reliability of products and services.

Hong Kong set to be seen as a large-scale shopping mall with 4 established districts (Tsim Sha Tsui, Causeway Bay, Mongkok and Central) supplemented by various suburban malls and other mid-end malls in the urban areas.

Hong Kong office property sector

Becoming a market with much larger scale, with companies from all around the world establishing some kind of presence.

Average office size could well come down but the total number of companies establishing a presence in Hong Kong would continue to increase, especially if more Chinese companies come to realise that Hong Kong is where they need to have some presence to explore international expansion and access international capital.

Source: Daiwa

The prospects for Hong Kong’s retail sector

Period Nature Positioning of Harbour City

Pre-2003 A retail market for 7m people plus some tourists One of the major malls in Hong Kong

2H03-2014 The retail market to penetrate Chinese consumers Takes a sizeable share of the expanded pie which significantly boosts its tenant sales and partnership relations with the world's major international brands

2015-2017 Hong Kong becomes one of the key markets for Chinese shoppers and the established retail districts (especially Causeway Bay, Central and Tsim Sha Tsui) run the risk of over-concentrating on luxury brands as well as watches and jewellery.

Has been preparing for the eventual slowdown of luxury consumption in China through building up high-level clientele in other parts of Asia and the strengthening of other clusters such as sports, kids, cosmetics and affordable luxury. Meanwhile, it is successful in gaining recognition and support from the younger generation and social media communities in China.

2018 An international retail hub with Chinese shoppers an anchoring force but also well-recognised and accepted by shoppers in Asia and indeed all other parts of the world

A leading force in terms of attracting new shoppers and retailers coming to Hong Kong

Hong Kong evolves into a large shopping mall with 4 established districts (Tsim Sha Tsui, Causeway Bay, Mongkok, Central) complemented by the suburban malls as well as other mid end malls in the urban areas

A leading force for enriching the Tsim Sha Tsui retail market which could evolve into a Greater Canton Road retail market

One of the trend-setting cities for Chinese consumers and one of the principal cities for Chinese consumers to meet with international consumer trends and retailers

Leveraging on its strong market position and partnership relations with the major retail brands to bring positive spill-overs to its other malls (Times Square and Plaza Hollywood) which could also become one major force in their respective districts in terms of attracting new shoppers and retailers?

Still one of the most important markets for international retailers to penetrate the China market; and for Chinese retailers to enter the international scene

Source: Daiwa

Under such a scenario, we envisage the strong players in the 4 established retail areas in

Hong Kong – Tsim Sha Tsui, Causeway Bay, Mongkok and Central – to remain strong, if

only because of continued new demand but very limited new retail space. We believe

Central will become a more important and established retail hub, while Kowloon East also

becomes a more important area for retail. Wharf REIC, by virtue of its dominance in the

retail property markets of Tsim Sha Tsui and Causeway Bay as well as its ownership of

Crawford House (which has the largest and longest frontage along Queen’s Road Central)

and Plaza Hollywood (one of the most productive malls in East Kowloon), should be well-

positioned for the opportunities related to the development of the Greater Bay Area, in our

view.

Established strong

players in Tsim Sha Tsui

and Causeway Bay

should be well-

positioned

79


The Hong Kong retail property sector – now and the future

Source: Daiwa

The Hong Kong Grade-A office property sector – now and the future

Source: Daiwa

As for the office property sector, we believe the Greater Bay Area will also create

significant opportunities – and the process could start in a matter of months (if it hasn’t

already). Chief among them, we see the continued development of the Greater Bay Area

creating considerable demand for professional services, many of which would have to be

provided in Hong Kong, especially those that involve an international dimension.

At the same time, we expect to gradually see more Chinese companies establishing a

foothold in Hong Kong, especially those with international ambitions or seeking

international finance. While we do not envisage them setting up a sizeable operation in

Hong Kong, if each of them has about 3-10 staff, this would already have a significant

impact on the Hong Kong office sector, especially given the current limited vacancy rate in

all sub-markets except Kowloon East.

Currently, many of the Chinese firms coming to Hong Kong are interested only in Central.

However, as Chinese companies’ knowledge of Hong Kong deepens and as the firms

coming to Hong Kong move away from finance to encompass other trades, we expect

them to eventually become interested in other sub-markets.

In the residential sector, we note that during 2004-10, Chinese demand transformed West

Kowloon into a luxury residential area, contrary to many locals’ expectations. Against this

background, we see the potential of Tsim Sha Tsui becoming a more important and vibrant

office hub, especially given it is close to West Kowloon and the Express Rail Station. We

believe Wharf REIC stands to benefit from this, given it is the dominant Grade A office

landlord in Tsim Sha Tsui. At the same time, Central’s evolution into a high unit-rent market

bodes well for rental upside for Causeway Bay, and Wharf REIC is also one of the largest

office landlords in that area.


should also bring

considerable

opportunities for the

office sector

We see the possibility of

Tsim Sha Tsui evolving

into a more important

office hub

80


In the retail sector, since 2003, Wharf REIC seems to have been the most proactive

landlord in building awareness and a favourable perception among Mainland visitors and

opinion makers. As such, we would not be surprised if it becomes one of the most

proactive office landlords to embrace office demand from Chinese corporations (it has

already decided to convert 1 tower of its serviced apartments in Harbour City into an office

tower). Besides, we note that Wharf pioneered the concept of using the hospitality industry

standards to manage office towers in Chengdu. We see this as potentially a good way to

upgrade office properties, and believe it represents a wild card for Wharf REIC’s office

portfolio in Hong Kong.

81


5. Solid credentials to integrate further into the global capital markets

“There are three classes of people: those who see, those who see when they are shown,

those who do not see.”

- Leonardo Da Vinci

As expounded at the beginning of this report and in previous reports (see our The Hong

Kong Property Toolkit, published in September 2013), the valuation of Hong Kong property

companies has long been an anomaly in the global capital markets. We think one key

reason for this anomaly is that the Hong Kong property companies are not yet viewed by

global investors as in the same category of investing choices as other global property

stocks.

Granted, the fact that a “Hong Kong discount” has persisted for so long implies that the

issues involved will not be easy to overcome. That said, we think the case of Link REIT

demonstrates that it is not impossible for Hong Kong property companies to be seen and

priced as among the most valuable companies in the global property sector.

Hong Kong: price to NAV of major property developers Hong Kong: PBR trend of major property developers

Source: Datastream, Daiwa forecasts Source: Companies, Bloomberg, Daiwa

Hong Kong: price to NAV of major property investors Hong Kong: PBR trend of major property investors

Source: Datastream, Daiwa forecasts Source: Companies, Bloomberg, Daiwa

Indeed, in terms of asset backing, financial strength, and operational expertise in

managing property assets, we believe that Hong Kong property companies are more than

qualified for a place in the global investing world. One can argue that the Hong Kong

property companies are among the world’s strongest in terms of financial prudency and

asset backing, and the way the premier Hong Kong property companies manage their

malls and offices is arguably not inferior to the approach of global names in property, in our

view. The main thing that the Hong Kong property names may lack, though, is the will and

determination to strive for a place in the global investing world, in our opinion.

Average since 1990: -30.6%

+1SD: -15.2%

+2SD: 0.2%

-1SD: -46.0%

-2SD: -61.4%

(70%)

(60%)

(50%)

(40%)

(30%)

(20%)

(10%)

0%

10%

20%

30%

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Weighted average (disc)/prem to NAV – four developers(Disc)/prem (%)

Current: -42.3%

Average: 1.16x

+1 SD: 1.58x

-1 SD: 0.75x

-2 SD: 0.34x

+2 SD: 1.99x

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

(x) Weighted-average PBR of four developers

Current PBR: 0.68x

Average since 1990: -37.1%

-23.7%

-50.4%

(80%)

(70%)

(60%)

(50%)

(40%)

(30%)

(20%)

(10%)

0%

10%

20%

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Weighted average (disc)/prem to NAV - 5 major investors(Disc)/prem

(46.5)Current NAV disc:

+1SD:

-1SD: Average since 1990: 0.77x

+1SD: 0.96x

-1 SD: 0.58x

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Weighted average PBR of six major investorsPBR (x)

Current PBR: 0.53x

The valuation of Hong


has long been an

anomaly in a global

context

The main thing that may

be lacking is the will and

determination to strive

for a place in the global

investing world



82


Perhaps this lack of determination to strive for a place in the global investing world is

understandable. This is because, unlike many of their counterparts overseas, the Hong

Kong property companies arguably do not really need the capital markets. In hindsight,

had the Hong Kong property companies foreseen the asset value boom in Hong Kong from

the mid-1980s, they might have been better off privatising years ago.

In any case, our read is that all along, the Hong Kong property companies seem to have

placed much greater emphasis on the commercial banks than on the capital markets. In

retrospect, the Hong Kong property companies have been financed principally by the

banks, although as they have become larger, they do need the bond market and USD debt

for larger-sized and longer-maturity financing.

However, overall, we believe the Hong Kong property companies do not see equity market

valuation as a central part of the business. It appears, in their eyes, that equity market

valuation is something that comes and goes — a factor over which they have no control.

As such, they would rather devote their time and effort to the business and hard assets. If

their stock prices surge, they would be faced with a lot of demand from investment bankers

to issue new equity, and some companies would do so on the grounds that the opportunity

to have “capital where one needs not pay interest” may not be there tomorrow.

Indeed, many of the companies appear to view their listed status as merely providing a

platform from which they can access equity capital when they need to. Some of these

companies view equity capital as something akin to “free money” that they can access

when there is a stock-market boom. As they do not intend to sell their businesses any time

soon, and they are not seeking to issue new equity any time soon, they are quite indifferent

to their stock prices. By extension, caring about share prices might be seen by

managements as “financial engineering” which would just distract them from managing the

hard assets to which they would rather devote their attention.

As such, entertaining the investment community, in a way, seems to them almost like a

service provided to the financial community to meet the expectations that society and the

financial community have of blue-chip listed companies. There are so many investors in

the world, and they come and go. As such, the thinking goes, management time might be

better deployed in projects and assets.

For many property companies, the view seems to be that the ability to stay in the business

and hold on to assets, even amid an adverse environment, and having the capital and

financial strength to buy even in downturns are central to the business. As such, Hong

Kong property companies tend to lean more towards the conservative side in terms of

dividend policy. After all, commercial bankers are not the most reliable in this world and

once dividends have been paid to shareholders, the company cannot get the money back

when it is in need of capital.

As such, some investors may get an impression that the dividends that minority

shareholders can expect from Hong Kong property companies are whatever the company

chooses to pay and there is a risk that the company could just cut the dividend when they

judge that it is in the long-term interest of the business to do so.

All things considered, we believe investors are under the impression that some Hong Kong

family property companies remain listed because they there is a perceived prestige

associated that comes with being a listed property company. In this sense, many Hong

Kong family property companies have come to be viewed as publicly traded but run

essentially like private companies.

The preceding paragraphs speak to some of the psychology surrounding perceptions of

Hong Kong’s family property companies. We can see where these perceptions come from.

After all, when the Hong Kong stock market was established over 100 years ago, listing

was an entry ticket to get “other people’s money”, so to speak.

The Hong Kong family

property companies do

not typically consider

equity market valuation

to be part of the

business

The Hong Kong family

property companies

seem to see holding

power as the key to the

business

Are Hong Kong family

property companies

more like publicly traded

private companies?

83


Many of the Hong Kong family property companies were listed during 1969-72, a window

in time prior to the oil crisis in 1973. Those that originated from British companies have

been listed for more than a hundred years; Wheelock and Wharf being among the

examples.

Not surprisingly, the expectations of publicly listed companies 40-50 years ago are very

different to the expectations of today. But many of Hong Kong’s family property companies

still seem to see their listed status as a fact of life. They will do what the others are doing to

comply with investors’ general expectations of listed companies, but they are not inclined

to do much more or are uncertain whether doing more would bring about a change in the

situation.

After all, paying more attention to the equity valuation of the company does not guarantee

that the valuation anomaly will disappear. It is quite clear that the valuation anomaly is an

industry-wide issue, and there is a limit on what any individual company within the sector

can do. As such, there is a view that management time is best spent focusing on hard

assets and the stock market can price the equities in whichever way it likes.

Does the preceding summary reflect reality? Given that the nature of the capital markets in

Hong Kong and globally has evolved over the years, are the companies’ views as relevant

today as they were 40-50 years ago? More importantly, will these views serve the

companies well in the capital markets and business world of the future?

In our view, the capital market is simply a place where issuers can get capital from

providers of capital from all over the world, all of which are essentially strangers to the

company. These providers of capital cannot be expected to know a lot about the families

behind these companies, or to have lots of trust and confidence in the families and the

companies’ management right from the get-go.

In a market like this, trust and confidence have to be earned. The way to earn that trust

from providers is through disclosure and governance, in our view. In our view, providers of

capital get to know about management and the families behind the companies through

what they can gather from the public arena as well as analysing the financial and other

data provided by the companies. Through this approach, providers can assess what these

companies have done over the years and how they have responded to the industry

environment during different periods of the cycle.

In our view, it requires a leap of faith for strangers to provide billions of dollars of capital to

a company based solely on information disclosed in the public arena. We are also of the

opinion that providers of capital at the secondary market level are not different in principle

from providers of capital to a company in its IPO. As such, listing is not a one-off exercise

but one that entails an ongoing obligation to the providers of capital to the company at the

secondary level, which also have a claim on the company’s assets, earnings and cashflow,

just like the families that own the largest proportion of the company’s issued shares.

These are the rules of the game in the global capital market. Companies seen as

safeguarding investors’ interests will be priced differently from those that have not earned

the market’s trust and confidence. At the same time, the global investing world remains

Western-centric, since the Western world is the main provider of capital (probably over half

of the c.USD60tn in global investing capital comes from the US alone).

In this light, it is inherently challenging for companies in Asia, or indeed outside the West,

to gain the same trust and confidence among the global investing world that is enjoyed by

Western companies. That said, we take the view of Benjamin Graham that while the stock

market is a “voting machine” in the short term, it is a “weighing machine” in the long term.

There seems to be a

cultural gap in Hong

Kong

We see the capital

market simply as a place

where issuers get capital

from providers of capital

But does the capital

market have its rules to

play by?

84


The rules are not easy to follow, in our view. But many of the largest companies in the

world do play by these rules, and with the pool of investing capital being as large as

USD60tn, companies that develop or master the ways to play by the rules of the capital

market can effectively remove capital constraints on the development of their business. As

such, equity market valuation has to be seen as part of the business — arguably no less

an important part of the business than managing property assets well or being able to

acquire quality sites at good prices.

Playing by the rules essentially requires building the trust and confidence of global

investors in many parts of the business, including capital allocation, governance standards,

alignment of interests, operational competency, and strategic orientation.

Now, there are companies in Asia and elsewhere that command a decent level of trust and

confidence from the global investing world. We think Link REIT is one such example

among property companies in Hong Kong.

In this light, the crux of the issue facing Hong Kong family property companies and family

business groups is this: how willing are they to integrate into the global capital market and

play by its rules? A related question concerns the extent to which the global investing world

is prepared to embrace the Hong Kong family property companies.

Another issue is that while the valuation of Hong Kong property companies is low by global

standards, their absolute market cap is not small — at about USD240bn, and with over

USD110bn in the value of their free float. We believe that a sector of this size needs a

decent sum of global investing capital to sustain its valuation. However, as Hong Kong is

far from being an important market for global funds – it is probably an ignorable market

compared with major indices – there needs to be a compelling investing case if the global

investing capital is to take a more serious look, in our view.

How willing are the Hong

Kong property

companies to integrate

into the global capital

market?

85


Hong Kong: listed real-estate securities

Bloomberg

No. of Share price Market cap Stake of major Free flow no. Free flow

code Name shares (m) (HKD) (USDbn) shareholder(s) (%) of shares (m) value (USDbn)

Property developers

1113 HK CKAsset 3,693 62.80 29.6 33.4 2,458 19.7

16 HK SHKProperties 2,897 123.50 45.6 50.1 1,446 22.8

12 HK HendersonLand 4,401 43.10 24.2 72.9 1,194 6.6

83 HK SinoLand 6,760 14.40 12.4 55.6 3,000 5.5

20 HK Wheelock 2,048 47.65 12.4 61.7 785 4.8

17 HK NewWorldDevelopment 10,204 11.62 15.1 44.7 5,641 8.4

139.4

67.6

Property investors

4 HK Wharf 3,047 22.70 8.8 64.1 1,093 3.2

1997 HK WharfREIC 3,036 48.55 18.8 62.0 1,153 7.1

1972 HK SwireProperties 5,850 28.20 21.0 82.0 1,053 3.8

HKL SP HongkongLand 2,353 USD6.95 16.4 50.2 1,172 8.1

101 HK HangLungProperties 4,498 15.74 9.0 58.8 1,853 3.7

14 HK HysanDevelopment 1,047 37.60 5.0 41.5 612 2.9

683 HK KerryProperties 1,455 28.50 5.3 59.7 586 2.1

41 HK GreatEagle 699 34.15 3.0 67.6 226 1.0

87.4

32.0

REITs

823 HK LinkREIT 2,109 80.05 21.5 0.1 2,107 21.5

87001 HK HuiXianREIT 5,757 3.23 2.8 42.7 3,298 1.6

2778 HK ChampionREIT 5,847 5.63 4.2 66.6 1,951 1.4

778 HK FortuneREIT 1,928 9.56 2.3 27.8 1,393 1.7

1881 HK RegalREIT 3,257 2.28 0.9 75.0 814 0.2

405 HK Yuexiu REIT 3,106 5.26 2.1 32.1 2,108 1.4

435 HK Sunlight REIT 1,647 5.30 1.1 39.6 995 0.7

1426 HK Spring REIT 1,272 3.45 0.6 38.6 781 0.3

808 HK Prosperity REIT 1,486 3.10 0.6 19.4 1,198 0.5

36.1

29.3

Niche property companies

878 HK Soundwill 283 11.08 0.4 73.4 75 0.1

173 HK K Wah 3,125 3.97 1.6 64.0 1,124 0.6

497 HK CSI Properties 10,037 0.34 0.4 50.1 5,005 0.2

201 HK Magnificent Estates 8,947 0.18 0.2 71.1 2,586 0.1

369 HK Wing Tai Properties 1,350 5.80 1.0 72.9 366 0.3

488 HK Lai Sun Development 606 13.02 1.0 72.3 168 0.3

4.6

1.5

267.5

130.5

Source: Bloomberg, Daiwa Note: prices at close on 16 January 2019

Bringing the discussion back to the company level, we highlight the importance of the de-

merger exercise of Wharf Holdings in December 2017. We see the move as an important

step taken by one of the major family business groups in Hong Kong in terms of moving

closer to the global capital market.

To put this corporate action into perspective, we contend that that there have been subtle

cultural changes taking place among the Hong Kong family property companies in recent

years. In general, the Hong Kong family property companies have been raising dividends,

and raising their stakes in the listed companies either through major shareholders or the

major listed flagships of the group buying directly on the open market. Our take is that

Hong Kong property companies have become more transparent and more willing to meet

with investors, and we believe some of them have come around to the view that share

buybacks are a legitimate way of deploying capital for all shareholders.

Hong Kong: buying by “insiders” in recent years

Family What they bought Amount involved

Lee Shau Kee Henderson Land - Over USD2bn

Kwok family SHK Properties - Over USD500m

- Over USD1.2bn for exercising their bonus warrants

Li Ka Shing Cheung Kong - Over USD2bn*

Cheng family New World - Over USD560m for the New World Development rights issue

Wheelock Wharf - Over USD2bn

Hang Lung Group Hang Lung Properties - Over USD400m

Source: Companies, Daiwa Note: *includes swap of stakes in Husky Energy

Subtle cultural changes

among Hong Kong’s

family property

companies in recent

years

86


Link REIT: unit buybacks

Period No. of units Avg. price Total cost Approx. % of (Year-end March) bought (m) (HKD) (HKDm) issued units

FY15 19.9 45.80 913 0.9% FY16 50.2 43.74 2,197 2.2% FY17 31.7 53.46 1,697 1.4% FY18 64.5 67.43 4,349 2.9% FY19 (YTD) 42.1 76.32 3,216 2.0% Total 208.5 59.33 12,372 9.41%

Source: HKEx, Daiwa

CK Group: share buybacks since its reorganisation

Date No. of shares Avg. price Total cost Approx. % of bought (m) (HKD) (HKDm) issued shares

CK Hutchison

Nov 2016 2.0 94.08 188 0.05% Sep 2018 1.4 90.41 130 0.04% Total 3.4 92.54 318 0.09%

CK Asset

Mar 2016 13.5 46.73 632 0.35% May 2016 0.6 45.24 29 0.02% Dec 2016 21.5 51.38 1,105 0.56% Jan 2017 23.8 51.17 1,218 0.62% Mar 2017 23.7 53.97 1,282 0.63% Apr 2017 33.9 53.60 1,819 0.90% May 2017 20.8 56.83 1,182 0.56% Jun 2017 24.2 61.17 1,481 0.65% Sep 2018 4.1 56.26 231 0.11% Total 166.3 54.00 8,979 4.40%

Source: HKEx, Daiwa

Hong Kong: DPS trend of property companies

Year DPS/DPU (HKD) Yield (%) Chg FY17/ CAGR

Company end FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY18E FY19E FY06 FY06-17

Cheung Kong Dec 2.20 2.45 2.45 2.70 2.95 3.16 3.16 3.48 3.65 na na na na na na na na na

CK Asset Dec na na na na na na na na na 1.40 1.53 1.70 2.00 2.15 3.7% 4.0% na na

SHK Properties** Jun 2.20 2.30 2.50 2.50 2.70 3.35 3.35 3.35 3.35 3.35 3.85 4.10 4.65 5.00 4.3% 4.6% 86% 6%

Sino Land** Jun 0.35 0.35 0.36 0.36 0.36 0.41 0.46 0.50 0.50 0.50 0.51 0.53 0.98 0.55 7.6% 4.3% 51% 4%

Wharf Dec 0.75 0.78 0.78 0.97 0.97 1.06 1.65 1.70 1.81 1.90 2.15 1.59 0.70 0.75 3.4% 3.6% 112% 7%

Henderson land* Dec 0.87 0.91 0.91 0.5 0.83 0.83 0.88 1.06 1.10 1.45 1.55 1.71 1.75 1.80 4.5% 4.7% 97% 6%

Hysan Dec 0.5 0.6 0.68 0.68 0.74 0.79 0.95 1.17 1.23 1.32 1.35 1.37 1.45 1.55 3.7% 4.0% 174% 10%

Link REIT^^** Mar 0.218 0.674 0.744 0.840 0.974 1.105 1.295 1.465 1.658 1.828 2.062 2.284 2.498 2.801 3.3% 3.8% 239% 13%

Hang Lung Prop Dec 0.51 0.56 0.66 0.66 0.71 0.71 0.74 0.75 0.76 0.75 0.75 0.75 0.77 0.78 5.0% 5.1% 47% 4%

Fortune REIT^ Dec na 0.351 0.370 0.302 0.244 0.263 0.324 0.360 0.417 0.469 0.492 0.508 0.549 0.570 6.2% 6.4% 45% 4%

MTRC Dec 0.42 0.45 0.48 0.52 0.59 0.76 0.79 0.92 1.05 1.06 1.07 1.12 1.20 1.30 3.0% 3.3% 167% 9%

Source: Companies, Daiwa forecasts Note: *Henderson declared a 1-for-10 bonus issue every year in FY12-17, **FY18E DPS for SHKP, Sino Land and Link REIT are actual reported DPS ^Fortune REIT’s DPU growth since FY07, ^^Link REIT’s DPU growth since FY07 as it was listed in November 2005

In a nutshell, we view the establishment of Wharf REIC precisely as an attempt by a major

family business group in Hong Kong to adapt to modern times.

How far can it go? Will it still be priced in the same old way or will the de-merger make a

difference? All things considered, we take the view that Wharf REIC has better prospects

than many other property players of being admitted into the league of premier global

property stocks. In the section below we expand on the reasons for our view.

1. Wharf REIC has a simple structure

Wharf REIC is a simple company, with 5 assets directly under it, along with a 72% stake in

Harbour Centre. We see a company with hidden value that can be unlocked by asset

disposals or corporate action (such as privatisation). In terms of asset structure, Wharf

REIC is a more straightforward proposition than most major Hong Kong property

companies which tend to own many different assets, as some of the companies also

engage in residential property development and own utilities businesses as well.

Our read is that the diversity of their businesses has affected the global investing world’s

acceptance of the Hong Kong family property companies, because in the Western world

many major players own just income-producing property assets and focus on one

particular segment, be it office, retail or logistics properties. As such, the mainstream

Wharf REIC is a simple

company

87


business model of Hong Kong family property companies does not readily fit into the global

template for property companies.

In this light, Wharf REIC is arguably a company designed to fit into the global template in

terms of asset structure. Wharf Group actually owns a diverse range of assets and the de-

merger exercise is about singling out only the Hong Kong investment properties to put into

Wharf REIC and let Wharf Holdings keep the rest. As such, in terms of asset structure,

Wharf REIC is as straightforward as could be. It is almost a 2-asset company, with Harbour

City and Times Square accounting for about 90% of its rental income and asset value.

Since Harbour City accounts for about 70% of Wharf REIC’s earnings and NAV, Wharf

REIC can almost be considered a one-asset company; and Harbour City is clearly a quality

property asset in terms of productivity, even by global standards.

2. Wharf REIC has the asset quality and retail credentials to be seen as another global play

The second reason we think Wharf REIC has the credentials to be admitted into the league

of premier stocks in global property over time is its asset quality. As highlighted on pages

23-46, our view is that Harbour City is a one-of-a-kind property asset. It excels in sales

productivity, and our view is that it may become one of the retail properties globally that not

only does well in the age of e-commerce but could actually benefit from the trend. At the

same time, Harbour City’s mall only accounts for 25% of Harbour City’s GFA, and we

believe that its office component has considerable upgrade potential. As such, Harbour

City could well be one of the most productive pieces of property assets globally. We

believe its asset quality will continue to gain attention from global investors.

Importantly, we believe that being seen as global plays – ie, being seen as important

companies in the global arena in any given industry – could be the path whereby Hong

Kong family property companies gain greater recognition from the global capital market.

We think 2 companies in Hong Kong have made notable progress along this path: Link

REIT and Swire Properties (1972 HK, HKD28.20, Buy [1]).

Apart from being a REIT, we think another factor which has helped Link REIT’s valuation is

that in the global REIT sector, there is probably no other REIT which can match its organic

DPU growth of a 12% CAGR since its listing in 2005. Indeed, in global property, few if any

players can match Link REIT’s record of delivering sustained DPU growth.

Meanwhile, another Hong Kong family property company that appears to be following the

same path is Swire Properties. We reiterate our long-held view that Swire Properties has

pioneered a unique business model to run commercial properties which revolves around

using large-scale mixed developments to transform locations. We believe the model has

worked in Hong Kong and, increasingly, in China and Miami. Importantly, the 2 Hong Kong

locations it has been nurturing for several decades – Admiralty and Island East – appear to

be on track for a major harvesting period over the coming years.

Swire Properties was the second-best-performing Hong Kong property stock in 2018,

which we see as evidence of the global investing world’s recognition of the company’s

asset quality and the merits of its differentiated business model.

We believe Wharf REIC could be the third Hong Kong property company to move along

this path towards being a global play.

Wharf REIC’s asset

quality and retail track

record should accord it

the credentials to be

seen as a global play

Link REIT has been

progressing on the path

to being a global play…

… and we think Swire

Properties has been

doing the same

88


Swire Properties: PBR since listing Hong Kong Property: share-price performance (2018)

Source: Company, Datastream, Daiwa Source: Bloomberg, Daiwa

Global investment universe forecasts

Global investing world by countries Global investing world by sectors

Source: Daiwa:

3. The REIT route offers promise

The third reason we are upbeat on Wharf REIC’s credentials to be admitted into the league

of premier stocks in global property is that it has gone the REIT route — or taken a path

closely resembling it. Wharf REIC is a real estate investment corporation rather than a

REIT, and so is technically not yet a REIT and not subject to the regulations under the

Hong Kong REIT code. We think it is noteworthy that Wharf REIC declared a payout ratio

of 65% when it was formed in November 2017 — a high ratio and uncommon for traditional

Hong Kong companies.

Although its payout ratio is not as high as those of some of the H-REITs (at least 90% of

distributable income), it is higher than those of traditional property companies in Hong

Kong. Since c.70% of Wharf REIC’s earnings are from Harbour City, we believe some

investors may view it a “Harbour City REIT”, in that all the dividends that shareholders get

come from the Harbour City component, meaning it is paying out 90% of its earnings or

distributable income as dividends (like the H-REITs). Seen in this light, buying Wharf REIC

is akin to paying for only a Harbour City REIT and getting the rest of Wharf REIC’s assets

(Times Square, Crawford House, Wheelock House, Plaza Hollywood and the 72% stake in

Harbour Centre) “for free”.

average since IPO: 0.66x

+1SD: 0.73x

-1SD: 0.59x

0.4

0.5

0.6

0.7

0.8

0.9

1.0

2012 2013 2014 2015 2016 2017 2018

Swire Properties PBRPBR (x)

Current PBR: 0.60x

(40) (35) (30) (25) (20) (15) (10) (5) 0 5 10 15

MidlandWharf

Hang Lung PropertiesGreat Eagle

Henderson LandCK Asset

SMALL/MID CAPSSHKP

DEVELOPERSHSI

HK LandProsperity REIT

HysanMTRC

Wharf REICRegal REIT

Fortune REITChampion REIT

Sunlight REITYuexiu REIT

INVESTORSSino Land H-REITs

Swire PropertiesLink REIT

(%)

Wharf REIC can be seen

as an important

constituent in the

Greater H-REIT/

Landlord sector

89


In our opinion, one issue faced by Hong Kong family property companies is that the Hong

Kong equity market as a whole is facing a temporary oversupply of equities. The situation

for the Hong Kong family property companies is exacerbated by the fact that their business

models look different from the global norm. As such, if the global investing world were a

department store, there would be no department for the Hong Kong family property

companies to fit into.

By contrast, in the global investment department store, there is already an established

REIT department. Link REIT and the H-REITs have successfully established a position in

this department. We believe that the H-REITs are collectively evolving into a Greater H-

REIT/ Landlord sector, which would benefit the H-REITs and landlord companies in Hong

Kong. Our view is that Wharf REIC could well be a vehicle to ride on this trend.

Our view is that there are 3 paths for Hong Kong family property companies to gain greater

recognition in the global capital market. The first is to be seen as a global play; the second

is to take the form of a REIT; and the third is through capital allocation (where the Hong

Kong family property companies qualify as global plays by virtue of their track records in

capital allocation, which results in their being viewed as similar to private equity firms

rather than traditional property companies. We believe that CK Asset is a leading stock

among Hong Kong property companies on this path).

As for Wharf REIC, we believe it qualifies for being on the first and second paths.

Global investment universe

Source: Daiwa

90


Global investment universe

Source: Daiwa

Structure of the Global REIT sector

Source: Bloomberg, EPRA, Daiwa

4. Offering transparency and good disclosure

The fourth reason we are optimistic about Wharf REIC’s credentials to be admitted into the

league of premier stocks in global property over time is that it looks to have a transparent

earnings structure and good disclosure. We note that tenant sales are viewed by many

landlords in Hong Kong as highly sensitive information and the Wharf group is the first –

and so far only landlord – which discloses tenant sales in systematic fashion. On the

whole, we believe Wharf REIC’s disclosure and transparency level ranks highly among

Hong Kong family property companies and this factor should enhance its appeal to global

investors. We believe that facts and figures do not lie and, over time, disclosure and

transparency are the best ways to address any of the market’s biases and distrust about

family companies.

5. A play on the Greater Bay Area

Last but not least, we expect the development of the Greater Bay Area to have significant

implications for Hong Kong and its commercial property sector. In our view, the Greater

Bay Area creates significant opportunities, but it takes an innovative and dynamic landlord

to tap into this potential to its fullest. We believe Wharf REIC is a retail landlord that has

been a pioneer in embracing Chinese consumer demand, and we expect it to remain a

leading force in this regard. Indeed, we believe its leading position could well extend to the

office sector. In terms of commercial districts in Hong Kong, we believe that Tsim Sha Tsui

and Causeway Bay are among the best positioned in terms of tapping the opportunities

associated with the Greater Bay Area, and hence see Wharf REIC as a good play on this

theme.

US 59%

Europe 17%

Japan 7%

Australia 5%

UK 4%

Singapore 2%

Hong Kong 2%Others 3%

Transparency and

disclosure level ranks

high among Hong Kong

family property

companies

Looks well positioned to

ride on the possibilities

offered by the Greater

Bay Area

91


Hong Kong: the metropolitanisation of the property market

Source: Daiwa

Hong Kong: book values of property companies are conservative

Achieved price Valuation Profit Achieved price vs Company Date (HKDm) (HKDm) (HKDm) book cost (x)

Sunlight REIT’s disposal of Palatial Stand Property Jan 2018 101 43 58 2.3 Wing Tai’s disposal of W Square Jan 2018 2,549 2,125 734 1.3 Fortune REIT’s disposal of Provident Square Dec 2017 2,000 1,061 939 1.9 Henderson Land’s disposal of Golden Centre Sep 2016 4,368 2,372 1,996 1.8 Sunlight REIT’s disposal of 3 non-core properties May 2015 920 586 333 1.6 Fortune REIT’s disposal of Nob Hill Square Feb 2015 648 438 210 1.5 Link REIT's 7 batches: Total 12 properties Dec 2018 12,010 9,088 2,922 1.3 Total 17 properties Nov 2017 23,000 15,165 7,835 1.5 Total 5 properties Dec 2016 3,636 2,818 818 1.3 Total 9 properties Mar/Apr 2016 3,652 3,060 592 1.2 Total 5 properties Oct 2015 1,716 1,317 400 1.3 Total 5 properties Sep 2014 1,716 1,593 123 1.1 Total 4 properties May 2014 1,240 896 344 1.4 Hang Lung Prop disposal of non-core assets 2013 6,800 4,652 2,148 1.5 Cheung Kong's disposal of Ginza Kingswood 2013 5,800 3,040 2,760 1.9

Source: HKEx, Daiwa

92


Major cases of NAV realisation in recent years GFA Price Psf price Implied

Date Property assets District (sq ft) Buyer Vendor (HKDm) (HKD/sq ft) cap rate* Remarks

Office property

Jun 2018 Cityplaza Three & Cityplaza Four Quarry Bay 769,636 A Mainland investor Swire Properties 15,000 19,500 2.3% En-bloc

Apr 2018 Far East Finance Centre (33/F) Admiralty 10,800 Local investor Local investor 660 61,111 nd Record high psf

Apr 2018 9 Queen’s Road Central (39/F) Central 8,570 Local investor Local investor 514 60,000 1.5% Top floor

Jan 2018 W Square Wanchai 128,600 Local investor Wing Tai 2,849 22,152 2.0% En-bloc

Jan 2018 18 King Wah Road North Point 329,752 China Create Capital & Taiping

Henderson Land 9,950 30,174 na En-bloc, newly completed

Nov 2017 The Center (~75% stake) Central 1,218,200 China Energy R&C consortium

CK Asset 40,200 33,000 2.0% En-bloc (~75% of the property)

Oct 2017 Fung Shun Commercial Building Mongkok 34,651 (GRA) Sunlight REIT Chong Hing Bank 658 18,990 3.0% En-bloc

Oct 2017 8 Bay East Kwun Tong 596,217 LVGEM Wheelock 9,000 15,095 nd En-bloc, under-construction

Sep 2017 The Center (79/F) Central 13,213 A Mainland investor Tai United 738 55,854 nd Top floor

Oct 2016 Junction of Wang Chiu Rd / Lam Lee St Kowloon Bay 555,035 Local investor Swire Properties 6,528 11,762 3.1% En-bloc, under-construction

Oct 2016 Junction of Wang Chiu Rd / Lam Lee St Kowloon Bay 555,035 Local investor Swire Properties 6,528 11,762 3.1% En-bloc, under-construction

Sep 2016 Golden Centre Sheung Wan 156,000 Local investor Henderson Land 4,368 28,000 2.0% En-bloc

Jul 2016 One HarbourGate (east tower) Hunghom 280,000 Cheung Kei Group Wheelock 4,500 16,071 <3.0% En-bloc

Jun 2016 The Center (79/F) Central 13,213 A mainland investor Hysan’s Lee family 500 37,841 nd 79/F

Feb 2016 770 Nathan Road Mongkok 284,829 Link REIT HKSAR Government 5,910 20,750 4.0% En-bloc

Feb 2016 Dah Sing Financial Centre Wanchai 400,113 China Everbright group SEA Holdings 10,000 24,992 nd En-bloc

Nov 2015 MassMutual Tower Wanchai 345,433 Evergrande Chinese Estates 12,500 36,186 2.0% En-bloc

Nov 2015 One HarbourGate (west tower) Hunghom 393,000 China Life Insurance Wheelock 5,850 14,885 3.0% En-bloc, under-construction

Jun 2014 One Bay East (east tower) Kowloon East 512,000 Citigroup Wheelock 5,425 10,595 3.3% En-bloc, under-construction

Dec 2013 9 Chong Yip Street Kowloon East 136,595 Prosperity REIT Hutchison Whampoa 1,010 7,394 3.0% En-bloc

Dec 2013 DCH Commercial Centre Island East 389,000 Swire Prop & an inv fund CITIC Pacific 3,900 10,026 3.8% En-bloc

May 2013 Kowloon Commerce Centre (5 floors) Kwai Chung 116,756 China Mobile SHK Properties 1,027 8,800 3.0% 5 floors

May 2013 Citibank Plaza (4 floors) Central 78,316 Champion REIT HKSAR Government 2,160 27,581 3.0% 4 floors

Apr 2003 One Bay East (west tower) Kowloon East 512,000 Manulife Wheelock 4,500 8,789 4.0% En-bloc, under-construction

Feb 2013 113 Argyle Street Mong Kok 328,866 Hang Seng Bank Nan Fung (unlisted) 2,900 8,818 3.4% En-bloc

Oct 2012 AIA Tower (formerly Stanhope House) Island East 299,615 AIA Hang Lung Properties 2,398 8,004 3.6% En-bloc

Dec 2012 Exchange Tower (7 floors) Kowloon East 195,875 Hang Seng Bank Sino Land 1,560 8,000 3.8% 7 floors

May 2012 50 Connaught Road Central 180,000 Agricultural Bank of China National Electronics 4,880 27,111 3.5% En-bloc

Jan 2012 CCB Centre Kowloon East 348,620 China Construction Bank Sino Land 2,510 7,200 4.0% En-bloc

Retail property

Dec 2018 A basket of 12 properties Various locations 578,720 (IFA) GAW Capital consortium Link REIT 12,010 20,753 (IFA) 2.9% En-bloc

Dec 2017 Provident Square North Point 180,238 (GRA) An independent 3rd party Fortune REIT 2,000 11,100 (GRA) 1.8% En-bloc

Nov 2017 A basket of 17 properties Various locations 1,201,105 (IFA) GAW Capital consortium Link REIT 23,000 19,150 (IFA) 2.8% En-bloc

Dec 2014 Laguna Plaza Kwun Tong 163,203 (GRA) Fortune REIT CLSA Property Fund 1,919 11,755 (GRA) 4.3% En-bloc

Aug 2014 Lions Rise mall Wong Tai Sin 126,319 Link REIT Kerry Properties 1,380 10,924 2.4% En-bloc

Jul 2014 Bigfoot Centre Causeway Bay 67,150 CLSA Property Fund Macau investor 1,600 23,827 nd En-bloc

Jan 2014 8 Russell Street Causeway Bay 81,000 Individual investors CLSA Property Fund 2,500 30,864 1.9% Strata-title sales

Jun 2013 Kingswood Ginza mall Tin Shui Wai 665,244 Fortune REIT Cheung Kong 5,849 8,792 4.1% En-bloc

Feb 2013 OLIV, 15 Sharp Street East Causeway Bay 37,500 Individual investors Local family 1,450 38,800 1.5% Strata-title sales

Jan 2013 The SHARP, Sharp Street East Causeway Bay 44,500 Individual investors Soundwill 1,500 33,576 1.8% Strata-title sales

Jul 2011 Festival Walk Kowloon Tong 1,195,248 Mapletree Investment Swire Properties 18,800 18,063 4.6% En-bloc

Source: Savills, CBRE, Hong Kong Economic Times, Daiwa Note: implied cap rate is based on estimated sport rent for comparable buildings in the area; nd = not disclosed

93


Forecasts and valuation

We see Wharf REIC as a high-quality commercial landlord in Hong Kong that is well

positioned to deliver sustained earnings growth in the coming years. Our positive view is

predicated on the following factors.

First, Harbour City is a one-of-a-kind property asset that appears poised to enter another

chapter in its development. We believe that Harbour City has responded to the retail

market downturn in 2014-16 by strengthening the non-luxury segment of its mall, which

has given the mall a solid platform to recover once the market environment improves.

In our view, Harbour City is more than just the luxury component of shops on Canton

Road. Instead, we view Harbour City as a mall consisting of various clusters. Apart from

luxury goods, our read is that it has built up a strong presence – arguably the strongest in

Hong Kong in some cases – in areas such as cosmetics, children’s wear, sportswear,

jewellery and beauty products. By building up a critical mass of among proven retailers in

each trade, the Harbour City mall is in a strong position to retain customers and attract new

ones to Hong Kong, which we believe bodes well for its ability to maintain or increase its

market share in the Hong Kong retail property sector, which in turn should be supported by

ongoing improvements in the city’s transport infrastructure and the continued development

of the Greater Bay Area.

Meanwhile, as shown in the tables below, a deep dive into the distribution of sales and

rental among different trades within both Harbour City and Times Square suggests that

there is a wide range. We think this shows there is considerable scope for an experienced

mall manager to use tenant optimisation and trade mix to drive tenant sales and rental

income, especially if it can succeed in compelling new and quality shoppers around the

world to shop at its malls.

Importantly, we see room for further increases in the achieved tenant sales of Harbour City.

The table below shows our analysis of the sensitivity of the gross rental income of Harbour

City to achieved tenant sales.

Harbour City: sensitivity of retail rental income to tenant sales and occupancy cost

Retail rental income Tenant sales (HKDm)

(HKDm)

25,000 30,200 35,000 40,000 45,000 50,000

Occ

up

ancy

co

st (

%)

15.0% 3,750 4,530 3,750 6,000 6,750 7,500

16.0% 4,000 4,832 4,000 6,400 7,200 8,000

17.0% 4,250 5,134 4,250 6,800 7,650 8,500

18.0% 4,500 5,436 4,500 7,200 8,100 9,000

19.0% 4,750 5,738 4,750 7,600 8,550 9,500

20.0% 5,000 6,040 5,000 8,000 9,000 10,000

21.0% 5,250 6,342 5,250 8,400 9,450 10,500

21.9% 5,486 6,627 7,680 8,777 9,875 10,972

22.0% 5,500 6,644 5,500 8,800 9,900 11,000

23.0% 5,750 6,946 5,750 9,200 10,350 11,500

24.0% 6,000 7,248 6,000 9,600 10,800 12,000

25.0% 6,250 7,550 6,250 10,000 11,250 12,500

Source: Daiwa estimates Note: Note: The shaded area is Harbour City's achieved gross rental income in 2017

We expect Harbour City

to enter another chapter

in its development

94


Harbour City: breakdown of mall’s tenant sales, GFA, and gross rental by major trades

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Tenant sales (HKDm) 4,700 6,800 7,780 8,950 11,400 13,400 15,500 20,300 27,100 31,000 33,800 35,000 30,700 27,700 30,200

Breakdown of tenant sales by trade (%)

Fashion nd nd nd nd nd nd nd nd nd nd 24.1% 25.0% 25.0% 25.3% 24.3%

Leather goods nd nd nd nd nd nd nd nd nd nd 26.7% 26.4% 26.4% 24.3% 24.7%

Jewellery, beauty & accessories nd nd nd nd nd nd nd nd nd nd 21.4% 21.7% 21.7% 21.9% 23.7%

Department store, confectionary nd nd nd nd nd nd nd nd nd nd 12.8% 12.1% 12.1% 13.2% 12.4%

F&B, entertainment nd nd nd nd nd nd nd nd nd nd 3.2% 3.1% 3.1% 4.7% 5.4%

Children's wear, toys nd nd nd nd nd nd nd nd nd nd 2.2% 2.3% 2.3% 2.8% 2.7%

Sportswear nd nd nd nd nd nd nd nd nd nd 1.3% 1.5% 1.5% 2.1% 1.9%

Electrical, audio-visual equipment nd nd nd nd nd nd nd nd nd nd 7.6% 7.0% 7.0% 5.0% 4.4%

Others nd nd nd nd nd nd nd nd nd nd 0.7% 0.9% 0.9% 0.7% 0.5%

100.0% 100.0% 100.0% 100.0% 100.0%

Breakdown of GFA by trade (%)

Fashion 26.6% 21.6% 24.7% 26.3% 22.2% 25.2% 26.8% 29.9% 29.9% 29.1% 27.6% 30.0% 29.1% 27.1% 29.8%

Leather goods 8.2% 8.1% 7.7% 8.4% 13.0% 12.0% 11.8% 11.3% 12.0% 11.0% 16.6% 12.1% 13.1% 12.5% 11.5%

Jewellery, beauty & accessories 6.2% 5.5% 6.2% 5.5% 5.8% 6.5% 20.6% 7.8% 7.8% 7.7% 8.0% 7.7% 7.8% 7.7% 8.4%

Department store, confectionary 13.9% 13.7% 16.4% 21.7% 22.3% 21.8% 7.4% 17.6% 19.4% 22.1% 19.6% 19.7% 19.6% 23.8% 17.3%

F&B, entertainment 23.6% 24.4% 20.2% 14.0% 15.8% 15.3% 15.5% 14.0% 13.6% 13.8% 14.8% 14.7% 15.4% 15.5% 20.5%

Children's wear, toys 8.9% 7.7% 8.3% 8.7% 7.3% 7.2% 6.6% 6.7% 6.7% 6.4% 6.2% 5.2% 5.1% 4.9% 5.0%

Sportswear nd 5.5% 4.3% 4.1% 3.6% 3.0% 3.0% 3.5% 2.8% 2.6% 2.2% 2.2% 2.2% 3.0% 3.6%

Electrical, audio-visual equipment nd 3.8% 3.1% 3.0% 2.5% 2.2% 2.3% 2.4% 2.9% 2.1% 1.9% 2.0% 1.9% 1.6% 1.6%

Others nd 9.7% 9.1% 8.3% 7.5% 6.8% 6.0% 6.8% 4.9% 5.2% 3.1% 6.4% 5.8% 3.9% 2.3%

100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Breakdown of rental by trade (%)

Fashion 41.8% 35.7% 35.4% 38.8% 36.9% 35.7% 36.4% 34.2% 32.8% 31.0% 34.0% 34.4% 37.8% 38.8% 37.9%

Leather goods 15.8% 16.8% 16.9% 18.0% 18.8% 23.2% 23.9% 24.6% 24.8% 24.1% 24.7% 23.7% 21.9% 21.4% 20.5%




Children's wear, toys 4.1% 4.8% 5.1% 4.8% 4.2% 3.3% 3.5% 3.2% 2.7% 2.7% 2.8% 2.8% 3.0% 3.1% 2.8%

Sportswear nd 5.0% 5.2% 4.9% 3.6% 3.2% 2.8% 2.3% 2.2% 2.0% 1.8% 1.9% 2.1% 2.2% 2.1%

Electrical, audio-visual equipment nd 3.1% 3.2% 3.2% 2.7% 2.5% 2.2% 2.1% 2.9% 2.5% 2.5% 2.2% 2.2% 1.9% 1.7%

Others nd 5.3% 5.4% 4.4% 3.7% 3.1% 2.5% 2.0% 1.5% 1.7% 1.2% 1.7% 1.7% 1.7% 1.5%

100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Breakdown of tenant sales by trade (HKDm)

Fashion na na na na na na na na na na 8,146 8,750 7,675 7,008 7,339

Leather goods na na na na na na na na na na 9,025 9,240 8,105 6,731 7,459

Jewellery, beauty & accessories na na na na na na na na na na 7,233 7,595 6,662 6,066 7,157

Department store, confectionary na na na na na na na na na na 4,326 4,235 3,715 3,656 3,745

F&B, entertainment na na na na na na na na na na 1,082 1,085 952 1,302 1,631

Children's wear, toys na na na na na na na na na na 744 805 706 776 815

Sportswear na na na na na na na na na na 439 525 461 582 574

Electrical, audio-visual equipment na na na na na na na na na na 2,569 2,450 2,149 1,385 1,329

Others na na na na na na na na na na 237 315 276 194 151

4,700 6,800 7,780 8,950 11,400 13,400 15,500 20,300 27,100 31,000 33,800 35,000 30,700 27,700 30,200

Breakdown of GFA by trade (HKDm)

Fashion 506,198 413,208 472,511 503,119 432,456 490,896 522,064 582,452 582,452 596,259 565,524 614,700 596,259 555,279 616,264

Leather goods 156,046 154,953 147,301 160,692 253,240 233,760 229,864 220,124 233,760 225,390 340,134 247,929 268,419 256,125 237,820

Jewellery, beauty & accessories 117,986 105,215 118,606 105,215 112,984 126,620 401,288 151,944 151,944 157,773 163,920 157,773 159,822 157,773 173,712

Department store, confectionary 264,517 262,081 313,732 415,121 434,404 424,664 144,152 342,848 377,912 452,829 401,604 403,653 401,604 487,662 357,764

F&B, entertainment 449,108 466,772 386,426 267,820 307,784 298,044 301,940 272,720 264,928 282,762 303,252 301,203 315,546 317,595 423,940

Children's wear, toys 169,367 147,301 158,779 166,431 142,204 140,256 128,568 130,516 130,516 131,136 127,038 106,548 104,499 100,401 103,400

Sportswear na 105,215 82,259 78,433 70,128 58,440 58,440 68,180 54,544 53,274 45,078 45,078 45,078 61,470 74,448

Electrical, audio-visual equipment na 72,694 59,303 57,390 48,700 42,856 44,804 46,752 56,492 43,029 38,931 40,980 38,931 32,784 33,088

Others na 185,561 174,083 158,779 146,100 132,464 116,880 132,464 95,452 106,548 63,519 131,136 118,842 79,911 47,564

1,903,000 1,913,000 1,913,000 1,913,000 1,948,000 1,948,000 1,948,000 1,948,000 1,948,000 2,049,000 2,049,000 2,049,000 2,049,000 2,049,000 2,068,000

Breakdown of rental by trade (HKDm)

Fashion 431 426 456 571 655 773 928 1,001 1,171 1,309 1,669 1,952 2,249 2,408 2,512

Leather goods 163 200 218 265 334 503 609 720 886 1,018 1,213 1,345 1,303 1,328 1,359

Jewellery, beauty & accessories 97 118 144 124 190 243 293 442 600 684 879 1,061 1,142 1,272 1,339

Department store, confectionary 103 112 120 160 234 264 306 351 457 693 565 641 512 416 616

F&B, entertainment 100 119 107 97 110 121 133 132 125 144 177 187 208 230 265

Children's wear, toys 42 57 66 71 75 71 89 94 96 114 137 159 178 192 186

Sportswear na 60 67 72 64 69 71 67 79 84 88 108 125 137 139

Electrical, audio-visual equipment na 37 41 47 48 54 56 61 104 106 123 125 131 118 113

Others na 63 69 65 66 67 64 59 54 72 59 96 101 106 99

1,032 1,193 1,287 1,472 1,775 2,166 2,550 2,928 3,571 4,223 4,909 5,674 5,949 6,207 6,627

Source: Company, Daiwa estimates; nd=Non-disclosed

95


Harbour City: breakdown of mall’s tenant sales, GFA, and gross rental by major trades (cont’d)

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Rental per sq ft - gross (HKD)

Fashion 71 86 80 95 126 131 148 143 168 183 246 265 314 361 340

Leather goods 87 108 123 137 110 179 221 273 316 376 297 452 404 432 476

Jewellery, beauty & accessories 69 94 101 98 140 160 61 242 329 361 447 560 596 672 642



Children's wear, toys 21 32 34 35 44 42 58 60 62 72 90 124 142 160 150

Sportswear na 47 68 77 76 99 102 82 120 132 163 199 231 185 156

Electrical, audio-visual equipment na 42 58 68 82 105 104 110 153 204 263 254 280 300 284

Others na 28 33 34 37 42 45 37 47 56 77 61 71 110 174

45 52 56 64 76 93 109 125 153 172 200 231 242 252 267

Sales per sq ft (HKD)


Leather goods na na na na na na na na na na 26,532 37,269 30,195 26,281 31,366



F&B, entertainment na na na na na na na na na na 3,567 3,602 3,016 4,099 3,847

Children's wear, toys na na na na na na na na na na 5,853 7,555 6,757 7,725 7,886

Sportswear na na na na na na na na na na 9,748 11,646 10,216 9,463 7,707


Others na na na na na na na na na na 3,725 2,402 2,325 2,426 3,175

2,470 3,555 4,067 4,679 5,852 6,879 7,957 10,421 13,912 15,129 16,496 17,082 14,983 13,519 14,603

Implied occupancy cost (%)


Leather goods nd nd nd nd nd nd nd nd nd nd 13.4% 14.6% 16.1% 19.7% 18.2%




Children's wear, toys nd nd nd nd nd nd nd nd nd nd 18.5% 19.7% 25.3% 24.8% 22.8%




22.0% 17.5% 16.5% 16.4% 15.6% 16.2% 16.5% 14.4% 13.2% 13.6% 14.5% 16.2% 19.4% 22.4% 21.9%


Meanwhile, Harbour City’s office rental income from 2H19 should be boosted by the

conversion of one of its serviced apartment towers into offices, in our opinion. With Central

evolving into a high-unit rent market, we expect a positive spillover to other buildings in

Central (such as Wheelock House and Crawford House) and other sub-markets such as

Tsim Sha Tsui and Causeway Bay. Passing rent in Wharf REIC’s Tsim Sha Tsui offices is

only c.HKD47/sq ft on average, and hence we see considerable scope for a rental uplift in

its offices.

Harbour City: sensitivity of office gross rental income to achieved unit rent


40 45 47 50 55 60 65 70

Annual gross rental (HKDm) 2,306 2,595 2,492 2,883 3,171 3,460 3,748 4,036

Source: Company, Daiwa estimates Note: HKD2,492m (highlighted) is the achieved gross rental income of Harbour City offices in 2017 based on 4.445m sq ft GFA (before the conversion

of the serviced apartments into offices). Harbour City's gross rental income from offices shall benefit from the conversion of one serviced apartment tower into offices from 2020 onwards

Wharf REIC: sensitivity of gross rental income from offices to achieved unit rent


40 45 50 55 60 65 70 75 80

Annual gross rental (HKDm) 2,953 3,323 3,468 4,061 4,430 4,799 5,169 5,538 5,907

Source: Company, Daiwa estimates Note: HKD3,468m (highlighted) is the achieved gross rental income of Wharf REIC offices in 2017 based on 5.8m sq ft GFA (before the conversion of

the serviced apartments into offices). Wharf REIC's gross rental income from offices shall benefit from the conversion of one serviced apartment tower into offices from 2020 onwards

We expect to see upside

in Wharf REIC’s office

rentals

96


Harbour City: KPI

GFA (sq.ft.) 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Retail 1,903,000 1,913,000 1,913,000 1,913,000 1,948,000 1,948,000 1,948,000 1,948,000 1,948,000 2,049,000 2,049,000 2,049,000 2,049,000 2,049,000 2,068,000

Office 4,445,000 4,435,000 4,435,000 4,435,000 4,435,000 4,435,000 4,435,000 4,435,000 4,435,000 4,263,000 4,263,000 4,263,000 4,263,000 4,263,000 4,287,000

Serviced apartments 670,000 670,000 670,000 670,000 670,000 670,000 670,000 670,000 670,000 670,000 670,000 670,000 670,000 670,000 656,000

Hotels 1,113,000 1,225,000 1,225,000 1,225,000 1,225,000 1,225,000 1,225,000 1,225,000 1,225,000 1,229,000 1,229,000 1,229,000 1,229,000 1,229,000 1,115,000

Pacific Club 139,000 139,000 139,000 139,000 139,000 139,000 139,000 139,000 139,000 139,000 139,000 139,000 139,000 139,000 138,000

Ocean Terminal extension - - - - - - - - - - - - - - 145,000

8,270,000 8,382,000 8,382,000 8,382,000 8,417,000 8,417,000 8,417,000 8,417,000 8,417,000 8,350,000 8,350,000 8,350,000 8,350,000 8,350,000 8,409,000

Occupancy rate % (avg)

Retail 96% 98% 99% 96% 100% 95% 95% 96% 97% 98% 98% 98% 99% 97% 96%

Office 86% 92% 97% 95% 92% 95% 93% 91% 94% 96% 96% 96% 98% 97% 96%

Serviced apartments 70% 78% 84% 75% 87% 89% 79% 86% 88% 84% 78% 74% 71% 73% 95%

Hotel and Club 67% 91% 89% 90% 90% 86% 82% 85% 85% 85% 85% 89% 85% 83% nd

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

HKDm HKDm HKDm HKDm HKDm HKDm HKDm HKDm HKDm HKDm HKDm HKDm HKDm HKDm HKDm

Rental income nd nd nd nd nd nd nd nd nd nd nd 5,171 5,388 5,607 nd

Management fee nd nd nd nd nd nd nd nd nd nd nd 262 265 274 nd

Other charges nd nd nd nd nd nd nd nd nd nd nd 241 296 326 nd

1,032 1,193 1,287 1,472 1,775 2,166 2,550 2,928 3,571 4,223 4,909 5,674 5,949 6,207 6,627

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017


Retail 1,032 1,193 1,287 1,472 1,775 2,166 2,550 2,928 3,571 4,223 4,909 5,674 5,949 6,207 6,627

Office 981 945 1,002 1,104 1,336 1,585 1,662 1,553 1,614 1,710 1,885 2,121 2,317 2,437 2,492

Serviced apartments 186 193 220 202 245 275 255 275 300 310 305 301 301 316 325

2,199 2,331 2,509 2,778 3,356 4,026 4,467 4,756 5,485 6,243 7,099 8,096 8,567 8,960 9,444

Hotel and Club 533 730 823 944 972 1,042 889 1,056 1,150 1,265 1,372 1,454 1,315 1,286 1,336

Revenue 2,732 3,061 3,332 3,722 4,328 5,068 5,356 5,812 6,635 7,508 8,471 9,550 9,882 10,246 10,780

Retail 768 881 997 1,160 1,441 1,796 2,199 2,565 3,154 3,700 4,384 5,066 5,312 5,491 5,896

Office 820 775 843 934 1,139 1,381 1,461 1,342 1,365 1,450 1,594 1,793 1,977 2,148 2,204

Serviced apartments 110 120 155 135 167 198 180 197 215 217 211 195 195 208 211

Hotel and Club 105 218 256 345 320 351 231 329 361 390 393 420 362 335 365

Operating profit 1,803 1,994 2,251 2,574 3,067 3,726 4,071 4,433 5,095 5,757 6,582 7,474 7,846 8,182 8,676

Retail 74.4% 73.8% 77.5% 78.8% 81.2% 82.9% 86.2% 87.6% 88.3% 87.6% 89.3% 89.3% 89.3% 88.5% 89.0%

Office 83.6% 82.0% 84.1% 84.6% 85.3% 87.1% 87.9% 86.4% 84.6% 84.8% 84.6% 84.5% 85.3% 88.1% 88.4%

Serviced apartments 59.1% 62.2% 70.5% 66.8% 68.2% 72.0% 70.6% 71.6% 71.7% 70.0% 69.2% 64.8% 64.8% 65.8% 64.9%

Hotel and Club 19.7% 29.9% 31.1% 36.5% 32.9% 33.7% 26.0% 31.2% 31.4% 30.8% 28.6% 28.9% 27.5% 26.0% 27.3%

Operating margin % 66.0% 65.1% 67.6% 69.2% 70.9% 73.5% 76.0% 76.3% 76.8% 76.7% 77.7% 78.3% 79.4% 79.9% 80.5%

Properties 31,382 38,058 45,118 48,765 55,225 56,268 62,581 80,312 93,550 125,370 137,770 159,700 163,300 164,540 170,256

Hotel and Club 3,409 3,762 4,264 4,640 5,270 5,040 5,160 6,130 6,940 7,960 8,340 8,420 8,020 7,570 7,820

Other assets nd nd nd nd nd nd 393 494 641 892 1,067 954 972 744 564

Total business assets nd nd nd nd nd nd 68,134 86,936 101,131 134,222 147,177 169,074 172,292 172,854 178,640

Implied cap. rate (properties - gross rental)

7.0% 6.1% 5.6% 5.7% 6.1% 7.2% 7.1% 5.9% 5.9% 5.0% 5.2% 5.1% 5.2% 5.4% 5.5%

Retail

Occupancy rate % (avg) 96% 98% 99% 96% 100% 95% 95% 96% 97% 98% 98% 98% 99% 97% 96%

Passing rent nd nd nd nd nd nd nd nd nd nd 368 400 415 436 430

Tenant sales 4,700 6,800 7,780 8,950 11,400 13,400 15,500 20,300 27,100 31,000 33,800 35,000 30,700 27,700 30,200

Area 1,903,000 1,913,000 1,913,000 1,913,000 1,948,000 1,948,000 1,948,000 1,948,000 1,948,000 2,049,000 2,049,000 2,049,000 2,049,000 2,049,000 2,068,000

Gross rental 1,032 1,193 1,287 1,472 1,775 2,166 2,550 2,928 3,571 4,223 4,909 5,674 5,949 6,207 6,627

Retail 1,903,000 1,913,000 1,913,000 1,913,000 1,948,000 1,948,000 1,948,000 1,948,000 1,948,000 2,049,000 2,049,000 2,049,000 2,049,000 2,049,000 2,068,000

Office 4,445,000 4,435,000 4,435,000 4,435,000 4,435,000 4,435,000 4,435,000 4,435,000 4,435,000 4,263,000 4,263,000 4,263,000 4,263,000 4,263,000 4,287,000


Hotel and Club 1,252,000 1,364,000 1,364,000 1,364,000 1,364,000 1,364,000 1,364,000 1,364,000 1,364,000 1,368,000 1,368,000 1,368,000 1,368,000 1,368,000 1,253,000

Ocean Terminal extension - - - - - - - - - - - - - - 145,000

8,270,000 8,382,000 8,382,000 8,382,000 8,417,000 8,417,000 8,417,000 8,417,000 8,417,000 8,350,000 8,350,000 8,350,000 8,350,000 8,350,000 8,409,000

Retail 11,319 13,444 15,931 17,022 19,146 20,565 24,311 34,504 41,869 69,644 80,185 94,602 96,639 96,001 96,567

Office 15,756 19,514 23,187 25,743 29,859 29,933 31,840 38,368 43,881 47,336 49,115 55,108 56,481 58,259 63,309


Hotel and Club 3,409 3,762 4,264 4,640 5,270 5,040 5,160 6,130 6,940 7,960 8,340 8,420 8,020 7,570 7,820

34,791 41,820 49,382 53,405 60,495 61,308 67,741 86,442 100,490 133,330 146,110 168,120 171,320 172,110 178,076

Source: Company, Daiwa; nd=Non-disclosed

97


Harbour City: KPI (cont’d)

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Cap. rate (%) on the book

Retail 6.8% 6.6% 6.3% 6.8% 7.5% 8.7% 9.0% 7.4% 7.5% 5.3% 5.5% 5.4% 5.5% 5.7% 6.1%

Office 5.2% 4.0% 3.6% 3.6% 3.8% 4.6% 4.6% 3.5% 3.1% 3.1% 3.2% 3.3% 3.5% 3.7% 3.5%

Serviced apartments 2.6% 2.4% 2.6% 2.3% 2.7% 3.4% 2.8% 2.6% 2.8% 2.6% 2.5% 2.0% 1.9% 2.0% 2.0%

Blended (%) 5.2% 4.8% 4.6% 4.8% 5.1% 6.1% 6.0% 5.1% 5.1% 4.3% 4.5% 4.4% 4.6% 4.8% 4.9%

Valuation on the book (HKD/sq.ft.)

Retail 5,948 7,028 8,328 8,898 9,829 10,557 12,480 17,713 21,493 33,989 39,134 46,170 47,164 46,853 46,696

Office 3,545 4,400 5,228 5,805 6,733 6,749 7,179 8,651 9,894 11,104 11,521 12,927 13,249 13,666 14,768


Hotel and Club 2,723 2,758 3,126 3,402 3,864 3,695 3,783 4,494 5,088 5,819 6,096 6,155 5,863 5,534 6,241

4,207 4,989 5,891 6,371 7,187 7,284 8,048 10,270 11,939 15,968 17,498 20,134 20,517 20,612 21,177

Office

Gross rental (HKDm) 981 945 1,002 1,104 1,336 1,585 1,662 1,553 1,614 1,710 1,885 2,121 2,317 2,437 2,492

Passing rent (HKD/sq.ft.) nd nd nd nd nd nd nd nd nd nd nd 37 39 41 43


Renewal retention rate (%) 78% 75% 84% 72% 64% 73% 67% 68% 69% 62% 65% 83% 76% 69% 66%

Area 4,445,000 4,435,000 4,435,000 4,435,000 4,435,000 4,435,000 4,435,000 4,435,000 4,435,000 4,263,000 4,263,000 4,263,000 4,263,000 4,263,000 4,287,000

Implied achieved gross rent per month (HKD/sq.ft.)

18.4 17.8 18.8 20.7 25.1 29.8 31.2 29.2 30.3 33.4 36.8 41.5 45.3 47.6 48.4

Services apartment

Gross rental (HKDm) 186 193 220 202 245 275 255 275 300 310 305 301 301 316 325


Area 670,000 670,000 670,000 670,000 670,000 670,000 670,000 670,000 670,000 670,000 670,000 670,000 670,000 670,000 656,000


23.13 24.00 27.36 25.12 30.47 34.20 31.72 34.20 37.31 38.56 37.94 37.44 37.44 39.30 41.29

Average effective monthly rent (HKD/sq.ft.)

nd nd nd nd nd nd nd nd nd nd nd 51 53 54 nd


As for Times Square, we are upbeat on its office rental income, given the rising rent in

Central and very limited new supply of offices in the Causeway Bay area. As for the mall at

Times Square, tenant re-positioning on the upper floors is almost complete, which should

help underpin tenant sales and rental income for the upper floors of the mall. While we

expect the situation faced by Times Square to be more challenging compared with Harbour

City, we believe Times Square’s mall performance will be able to track the overall Hong

Kong retail sector, as we continue to see Causeway Bay as a strong retail district in Hong

Kong with no new supply of retail space in the foreseeable future.

We believe Times

Square’s performance

can track that of the

Causeway Bay market

98


Times Square: breakdown of mall’s tenant sales, GFA, and gross rental by major trades

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Tenant sales (HKDm) 3,200 3,800 4,160 4,713 5,297 5,867 6,200 7,200 9,100 9,300 9,400 10,500 9,100 8,100 8,200



Leather goods - - - - - - - - - - - - - - -




Children's wear, toys - - - - - - - - - - - - - - -




100.0% 100.0% 100.0% 100.0% 100.0%


Fashion 15.0% 16.9% 18.7% 18.5% 18.0% 18.7% 19.7% 21.4% 21.2% 24.8% 23.2% 24.4% 23.7% 22.9% 21.7%

Leather goods - - - - - - - - - - - - - - -





Sportswear 4.0% 6.5% 5.2% 5.2% 5.2% 6.5% 5.4% 4.5% 4.0% 4.8% 3.9% 3.8% 3.4% 3.4% 4.2%

Electrical, audio-visual equipment 13.9% 14.8% 13.8% 13.4% 13.1% 12.6% 25.9% 13.0% 12.3% 9.0% 6.4% 6.3% 5.4% 5.1% 5.2%

Others 8.4% 5.3% 5.9% 5.7% 5.5% 4.3% 4.1% 3.9% 3.7% 4.0% 2.9% 3.0% 3.9% 4.2% 4.3%

100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%


Fashion 27.0% 29.6% 31.3% 30.5% 30.8% 30.4% 32.0% 35.3% 33.1% 34.8% 33.1% 35.6% 34.3% 34.0% 31.0%

Leather goods - - - - - - - - - - - - - - -





Sportswear 4.5% 8.7% 7.4% 7.2% 7.7% 9.3% 8.0% 6.9% 5.9% 6.5% 5.3% 5.0% 4.6% 4.2% 4.2%

Electrical, audio-visual equipment 10.0% 10.5% 11.2% 11.2% 11.2% 10.7% 10.3% 10.1% 10.2% 9.0% 7.2% 6.6% 5.0% 5.1% 5.4%

Others 9.0% 4.7% 4.4% 3.9% 3.7% 2.3% 2.1% 1.8% 1.6% 1.3% 0.9% 1.2% 1.5% 2.0% 2.1%

100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%



Leather goods - - - - - - - - - - - - - - -



F&B, entertainment na na na na na na na na na na 536 714 692 713 738


Sportswear na na na na na na na na na na 404 389 346 308 271

Electrical, audio-visual equipment na na na na na na na na na na 1,560 1,344 1,147 883 836

Others na na na na na na na na na na 94 105 73 57 90

3,200 3,800 4,160 4,713 5,297 5,867 6,200 7,200 9,100 9,300 9,400 10,500 9,100 8,100 8,200


Fashion 140,400 158,184 175,032 173,160 168,480 175,032 184,392 200,304 198,432 232,128 217,152 228,384 221,832 214,344 204,631

Leather goods - - - - - - - - - - - - - - -

Jewellery, beauty & accessories 65,520 76,752 87,048 88,920 96,408 100,152 105,768 99,216 116,064 142,272 138,528 138,528 155,376 151,632 159,367

Department store, confectionary 232,128 198,432 192,816 193,752 193,752 194,688 120,744 194,688 193,752 220,896 199,368 205,920 197,496 203,112 188,600

F&B, entertainment 251,784 253,656 248,040 252,720 254,592 247,104 193,752 241,488 240,552 174,096 257,400 240,552 242,424 248,040 261,211


Sportswear 37,440 60,840 48,672 48,672 48,672 60,840 50,544 42,120 37,440 44,928 36,504 35,568 31,824 31,824 39,606

Electrical, audio-visual equipment 130,104 138,528 129,168 125,424 122,616 117,936 242,424 121,680 115,128 84,240 59,904 58,968 50,544 47,736 49,036

Others 78,624 49,608 55,224 53,352 51,480 40,248 38,376 36,504 34,632 37,440 27,144 28,080 36,504 39,312 40,549

936,000 936,000 936,000 936,000 936,000 936,000 936,000 936,000 936,000 936,000 936,000 936,000 936,000 936,000 943,000


Fashion 158 178 197 215 238 265 306 380 416 470 494 670 692 727 655

Leather goods - - - - - - - - - - - - - - -





Sportswear 26 52 47 51 60 81 76 74 74 88 79 94 93 90 89

Electrical, audio-visual equipment 59 63 71 79 87 93 98 109 128 122 107 124 101 109 114

Others 53 28 28 28 29 20 20 19 20 18 13 23 30 43 44

585 600 630 706 774 871 956 1,076 1,258 1,352 1,492 1,883 2,017 2,137 2,112


99


Times Square: breakdown of mall’s tenant sales, GFA, and gross rental by major trades (cont’d)

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017


Fashion 94 94 94 104 118 126 138 158 175 169 190 245 260 282 267

Leather goods - - - - - - - - - - - - - - -





Sportswear 59 71 80 87 102 111 126 147 165 163 181 221 243 235 187

Electrical, audio-visual equipment 37 38 46 53 59 66 34 74 93 120 149 176 166 190 194

Others 56 47 42 43 46 41 44 44 48 39 41 67 69 91 91

52 53 56 63 69 78 85 96 112 120 133 168 180 190 187



Leather goods na na na na na na na na na na na na na na na



F&B, entertainment na na na na na na na na na na 2,082 2,968 2,853 2,874 2,825

Children's wear, toys na na na na na na na na na na na na na na na

Sportswear na na na na na na na na na na 11,073 10,923 10,866 9,672 6,832


Others na na na na na na na na na na 3,463 3,739 1,994 1,442 2,224

3,419 4,060 4,444 5,035 5,659 6,268 6,624 7,692 9,722 9,936 10,043 11,218 9,722 8,654 8,696


Meanwhile, with a passing rent of just about HKD52/sq ft in 2017, our view is that there is

considerable scope for office rents in Times Square to increase, given that we expect

Central to evolve into a high-unit rent market, with offices in major single-landlord buildings

likely to be over HKD100/sq ft. This should also bode well for achieved rental income in

both Wheelock House and Crawford House, in our view.

Wharf REIC: sensitivity of gross rental income from its Central office portfolio to achieved unit rent


60 65 70 80 90 100 110 120 130

Annual gross rental (HKDm) 226 245 264 302 339 377 415 452 490

Source: Company, Daiwa estimates Note: HKD264m (highlighted) is the achieved gross rental income of Wharf REIC Central offices in 2017 based on 0.314m sq ft GFA. Wharf REIC's

gross rental income from offices should benefit from the conversion of one serviced apartment tower into offices from 2020-

Outlook for Causeway

Bay offices appears

promising

100


Times Square: KPI

GFA (sq.ft.) 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Retail 936,000 936,000 936,000 936,000 936,000 936,000 936,000 936,000 936,000 936,000 936,000 936,000 936,000 936,000 943,000

Office 1,033,000 1,033,000 1,033,000 1,033,000 1,033,000 1,033,000 1,033,000 1,033,000 1,033,000 1,033,000 1,033,000 1,033,000 1,033,000 1,033,000 1,033,000

1,969,000 1,969,000 1,969,000 1,969,000 1,969,000 1,969,000 1,969,000 1,969,000 1,969,000 1,969,000 1,969,000 1,969,000 1,969,000 1,969,000 1,976,000

Occupancy rate % (avg)

Retail 98% 96% 99% 99% 99% 99% 99% 100% 100% 98% 98% 100% 99% 98% 96%

Office 83% 87% 94% 93% 96% 98% 95% 94% 94% 97% 95% 96% 95% 96% 95%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017


Rental income nd nd nd nd nd nd nd nd nd nd nd 1,664 1,783 1,895 nd

Management fee nd nd nd nd nd nd nd nd nd nd nd 101 105 112 nd

Other charges nd nd nd nd nd nd nd nd nd nd nd 118 129 130 nd

585 600 630 706 774 871 956 1,076 1,258 1,352 1,492 1,883 2,017 2,137 2,112

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017


Retail 585 600 630 706 774 871 956 1,076 1,258 1,352 1,492 1,883 2,017 2,137 2,112

Office 256 237 256 294 365 440 470 457 474 556 604 661 670 701 712

Revenue 841 837 886 1,000 1,139 1,311 1,426 1,533 1,732 1,908 2,096 2,544 2,687 2,838 2,824

Retail 497 508 531 598 658 739 826 948 1,121 1,198 1,301 1,701 1,775 1,917 1,894

Office 206 187 213 242 310 385 416 397 401 480 529 575 571 616 624

Operating profit 703 695 744 840 968 1,124 1,242 1,345 1,522 1,678 1,830 2,276 2,346 2,533 2,518

Retail 85.0% 84.7% 84.3% 84.7% 85.0% 84.8% 86.4% 88.1% 89.1% 88.6% 87.2% 90.3% 88.0% 89.7% 89.7%

Office 80.5% 78.9% 83.2% 82.3% 84.9% 87.5% 88.5% 86.9% 84.6% 86.3% 87.6% 87.0% 85.2% 87.9% 87.6%

Operating margin % 83.6% 83.0% 84.0% 84.0% 85.0% 85.7% 87.1% 87.7% 87.9% 87.9% 87.3% 89.5% 87.3% 89.3% 89.2%

Valuation on the book (HKDm)

Properties 12,323 14,800 17,350 19,200 21,100 22,000 24,000 29,800 37,000 43,600 46,200 52,100 54,070 54,510 56,600

Other assets nd nd nd nd nd nd 57 32 51 43 35 42 44 24 67

Total business assets nd nd nd nd nd nd 24,057 29,832 37,051 43,643 46,235 52,142 54,114 54,534 56,667

Implied cap. rate (properties - gross rental)

6.8% 5.7% 5.1% 5.2% 5.4% 6.0% 5.9% 5.1% 4.7% 4.4% 4.5% 4.9% 5.0% 5.2% 5.0%

Retail


Passing rent nd nd nd nd nd nd nd nd nd nd 228 266 285 297 299

Tenant sales 3,200 3,800 4,160 4,713 5,297 5,867 6,200 7,200 9,100 9,300 9,400 10,500 9,100 8,100 8,200

Area (sq.ft. GFA) 936,000 936,000 936,000 936,000 936,000 936,000 936,000 936,000 936,000 936,000 936,000 936,000 936,000 936,000 943,000

Gross rental (HKDm) 585 600 630 706 774 871 956 1,076 1,258 1,352 1,492 1,883 2,017 2,137 2,112

Retail 936,000 936,000 936,000 936,000 936,000 936,000 936,000 936,000 936,000 936,000 936,000 936,000 936,000 936,000 943,000

Office 1,033,000 1,033,000 1,033,000 1,033,000 1,033,000 1,033,000 1,033,000 1,033,000 1,033,000 1,033,000 1,033,000 1,033,000 1,033,000 1,033,000 1,033,000

1,969,000 1,969,000 1,969,000 1,969,000 1,969,000 1,969,000 1,969,000 1,969,000 1,969,000 1,969,000 1,969,000 1,969,000 1,969,000 1,969,000 1,976,000

Valuation on the book (HKDm)

Retail 7,524 9,283 10,910 12,157 12,689 13,411 15,022 19,549 25,179 29,751 32,070 37,127 38,731 38,655 38,651

Office 4,799 5,517 6,440 7,043 8,411 8,589 8,978 10,251 11,821 13,849 14,130 14,973 15,339 15,855 17,949

12,323 14,800 17,350 19,200 21,100 22,000 24,000 29,800 37,000 43,600 46,200 52,100 54,070 54,510 56,600

Implied cap. rate (%)

Retail 6.6% 5.5% 4.9% 4.9% 5.2% 5.5% 5.5% 4.8% 4.5% 4.0% 4.1% 4.6% 4.6% 5.0% 4.9%

Office 4.3% 3.4% 3.3% 3.4% 3.7% 4.5% 4.6% 3.9% 3.4% 3.5% 3.7% 3.8% 3.7% 3.9% 3.5%

Blended 5.7% 4.7% 4.3% 4.4% 4.6% 5.1% 5.2% 4.5% 4.1% 3.8% 4.0% 4.4% 4.3% 4.6% 4.4%

Implied per sq.ft. valuation (HKD/sq.ft.)

Retail 8,038 9,918 11,656 12,988 13,557 14,328 16,049 20,886 26,901 31,785 34,263 39,666 41,379 41,298 40,987

Office 4,646 5,341 6,234 6,818 8,142 8,315 8,691 9,924 11,443 13,407 13,679 14,495 14,849 15,348 17,376

Blended 6,259 7,517 8,812 9,751 10,716 11,173 12,189 15,135 18,791 22,143 23,464 26,460 27,461 27,684 28,644

Office

Gross rental 256 237 256 294 365 440 470 457 474 556 604 661 670 701 712

Passing rent (HKD/sq.ft.) nd nd nd nd nd nd nd nd nd nd nd 50 51 52 54


Renewal retention rate (%) 70% 73% 78% 63% 68% 84% 75% 74% 41% 67% 65% 75% 65% 86% 74%

Area 1,033,000 1,033,000 1,033,000 1,033,000 1,033,000 1,033,000 1,033,000 1,033,000 1,033,000 1,033,000 1,033,000 1,033,000 1,033,000 1,033,000 1,033,000


20.65 19.12 20.65 23.72 29.44 35.50 37.92 36.87 38.24 44.85 48.73 53.32 54.05 56.55 57.44

No. of tenants nd nd nd nd nd nd nd nd nd nd nd nd nd nd 130


101


Plaza Hollywood: breakdown of tenant sales, GFA, and gross rental by major trades

2013 2014 2015 2016 2017

Tenant sales (HKDm) 2,600 2,600 2,600 2,400 2,500


Fashion 14.6% 14.8% 14.2% 15.2% 14.3%

Leather goods - - - - -

Jewellery, beauty & accessories 19.1% 18.9% 18.4% 16.4% 17.1%

Department store, confectionary 15.4% 15.6% 15.6% 16.4% 17.6%

F&B, entertainment 20.6% 21.2% 21.2% 22.2% 23.9%

Children's wear, toys

Sportswear 3.3% 4.1% 4.3% 4.5% 3.8%

Electrical, audio-visual equipment 16.9% 15.5% 16.7% 14.5% 13.1%

Others 10.1% 9.9% 9.6% 10.8% 10.2%

100.0% 100.0% 100.0% 100.0% 100.0%


Fashion 23.5% 22.0% 21.2% 22.9% 21.9%





Children's wear, toys - - - - -

Sportswear 3.6% 4.1% 4.7% 4.8% 4.2%


Others 8.1% 9.0% 8.0% 9.4% 10.1%

100.0% 100.0% 100.0% 100.0% 100.0%


Fashion 22.9% 22.0% 20.1% 19.1% 19.2%






Sportswear 4.4% 4.9% 5.3% 5.3% 4.8%


Others 12.4% 12.1% 10.6% 11.1% 12.1%

100.0% 100.0% 100.0% 100.0% 100.0%


Fashion 380 385 369 365 358


Jewellery, beauty & accessories 497 491 478 394 428

Department store, confectionary 400 406 406 394 440

F&B, entertainment 536 551 551 533 598


Sportswear 86 107 112 108 95

Electrical, audio-visual equipment 439 403 434 348 328

Others 263 257 250 259 255

2,600 2,600 2,600 2,400 2,500


Fashion 132,070 123,640 119,144 128,698 123,078


Jewellery, beauty & accessories 68,002 66,316 70,812 67,440 61,258

Department store, confectionary 70,812 71,374 74,746 76,994 80,928

F&B, entertainment 192,204 195,014 193,890 175,344 184,336


Sportswear 20,232 23,042 26,414 26,976 23,604

Electrical, audio-visual equipment 33,158 32,034 32,034 33,720 32,034

Others 45,522 50,580 44,960 52,828 56,762

562,000 562,000 562,000 562,000 562,000


Fashion 109 113 106 104 110






Sportswear 21 25 28 29 28


Others 59 62 56 61 69

475 513 529 546 574


102


Plaza Hollywood: breakdown of tenant sales, GFA, and gross rental by major trades (cont’d)

2013 2014 2015 2016 2017


Fashion 69 76 74 68 75






Sportswear 86 91 88 89 97


Others 108 102 104 96 102

70 76 78 81 85


Fashion 2,874 3,112 3,099 2,835 2,905


Jewellery, beauty & accessories 7,303 7,410 6,756 5,836 6,979

Department store, confectionary 5,654 5,683 5,426 5,112 5,437

F&B, entertainment 2,787 2,826 2,843 3,039 3,241


Sportswear 4,241 4,626 4,233 4,004 4,025

Electrical, audio-visual equipment 13,252 12,580 13,554 10,320 10,224

Others 5,769 5,089 5,552 4,906 4,492

4,626 4,626 4,626 4,270 4,448


We have an end-2019E NAV of HKD97.70 for Wharf REIC. Of its HKD111/share in gross

NAV, some HKD77.9/share is derived from Harbour City, which we value based on a 4%

cap rate, which we consider to be conservative. Shifting to a 3.5% cap rate, which arguably

would better reflect the transacted cap rate in the physical market, would add HKD11/share

to its NAV.

Meanwhile, Times Square accounts for HKD22.50/share (20%) of its gross NAV of

HKD111/share, based on a cap rate of 4% for both offices and retail. If we were to change

the cap rate to 3.5%, our NAV calculation would rise by HKD3.15/share.

Wharf REIC: hotel assets

Property Wharf REIC’s stake GFA (sq ft) No. of rooms

Marco Polo Gateway Hotel 100% 289,000 400

Marco Polo Prince Hotel 100% 279,000 394

Marco Polo Hongkong Hotel 72% 547,000 665

The Murray 72% 336,000 336

1,451,000 1,795

Source: Company

Our target price of

HKD68.40 is based on a

30% discount to end-

2019E NAV

103


Wharf REIC: 2019E NAV breakdown

Valuation

GFA Spot rent* Cap rate Per sq ft Total Per share

(sq ft) (HKD) (%) (HKD) (HKDm) (HKD)

Harbour City - Retail 2,068,000 240 4.0% 72,000 148,896 49.04

- Gateway 2,107,000 60 4.0% 18,000 37,926 12.49 - Harbour City 2,698,000 45 4.0% 13,500 36,423 12.00 - Serviced apartments 296,000 50 4.0% 15,000 4,440 1.46 - Hotels (794 rooms, or 0.57m sq ft, directly owned, at HKD5m/room) 1,115,000 6,989 3,970 1.31 - Pacific Club 138,000 5,000 690 0.23 - Ocean Terminal Extension 145,000 12,000 1,740 0.57 8,567,000 234,085 77.10 Times Square - Retail 943,000 160 4.0% 48,000 45,264 14.91 - Office 1,033,000 65 4.0% 19,500 20,144 6.63 1,976,000 65,408 21.54 Plaza Hollywood 562,000 70 4.5% 18,667 10,491 3.46 Crawford House - Retail 85,000 180 4.0% 54,000 4,590 1.51 - Office 211,000 80 4.0% 24,000 5,064 1.67 296,000 9,654 3.18 Wheelock House - Retail 4,000 400 4.0% 120,000 480 0.16 - Office 104,000 100 4.0% 30,000 3,120 1.03 108,000 3,600 1.19 71.6% stake in Harbour Centre 7,696 2.53 100% stake in The Star Ferry 120 0.04 Gross asset value 331,053 109.04 Net debt (34,409) (11.33) NAV 296,644 97.70

Source: Daiwa forecasts Note:*based on GFA

Among global property stocks, it is not without precedent to see shares trading at NAV or

even at a premium to NAV. As such, we believe there is significant upside to the fair value

of Hong Kong property stocks if they were to become accepted as an important component

of the universe of global property stocks and be priced in the same way as others. For

example, Link REIT has traded at an average 13% premium to NAV since its IPO

(November 2005) and is currently trading at a 6% discount. Against this backdrop, for

Hong Kong property stocks that are in a position to enter the league of premier global

property stocks, NAVs discounts of 10-20%, or even lower, are not inconceivable, in our

view.

That said, our base case does not assume a rerating initially. As such, the NAV discount

we use to value Wharf REIC is based on the NAV discounts of the existing premier Hong

Kong property stocks. Among the premier names in Hong Kong property, we think the

relevance of CK Asset and Swire Properties as benchmarks is hindered by the fact that

neither has a long history of trading. Hence, Hongkong Land (HKL SP, USD6.95, Buy [1])

and SHK Properties (16 HK, HKD123.5, Buy [1]) are arguably the most relevant

benchmarks.

Since 1990, Hongkong Land has traded at an average discount to NAV of 33%, while SHK

Properties has traded at an average discount to NAV of 31%. We believe that Hongkong

Land is a more relevant benchmark, as the bulk of its earnings come from income-

producing property assets, which is also the case for Wharf REIC. By way of contrast, SHK

Properties derives a larger proportion of earnings (over 50%) from residential property

sales, which tends to be more volatile. In addition, we believe SHK Properties’ valuation

has been affected by the court case related to the Kwok brothers in recent years.

As such, we apply a 30% discount to Wharf REIC’s end-2019E NAV to arrive at a target

price of HKD68.40, which is in line with the 30% discount we use to value the premier

Hong Kong property companies such as Swire Properties, Hongkong Land and Cheung

Kong Asset, which have excelled in terms of capital allocation, in our view.

We use a 30% discount

to NAV to value Wharf

REIC, the benchmark we

use for first-tier Hong


104


SHKP: price/NAV trend Hongkong Land: price/NAV trend

Source: Datastream, Daiwa estimates Source: Datastream, Daiwa estimates

Avg since 1990: -30.9%(80%)

(60%)

(40%)

(20%)

0%

20%

40%

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

SHKP (disc)/prem to NAV(Disc)/prem (%)

Current: -43.9%

+2SD

+1SD

-1SD

-2SD

-35.3%

-16.3%

-54.2%

(90%)

(70%)

(50%)

(30%)

(10%)

10%

30%

50%

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Hongkong Land (disc)/prem to NAV(Disc)/prem(Disc)/prem

Current NAV disc: -46.5%

+1SD:

-1SD: Average since 1991:

105


Risks to our view

Tenant sales in Harbour City might have peaked

Given that tenant sales in Harbour City are already the highest in the world, the property is

vulnerable to weakness in the retail market and competition from other cities or other

properties in the Tsim Sha Tsui area.

New acquisitions may worsen financial profile

We note that there will be several prime commercial property sites up for tender in Hong

Kong in the coming years. Among them, sites in West Kowloon and Central will likely

attract the most attention. If Wharf REIC were to acquire a major site at record prices, then

this could worsen its financial profile.

Wharf REIC is still not a REIT

The Hong Kong family property companies do not readily fit into core property sector

stocks for global investors, and the appetite among global investors for Hong Kong

property stocks could continue to be affected by weak sentiment related to macroeconomic

risks and geopolitical factors. While Wharf REIC has declared a 65% payout ratio since its

formation, it is not officially a REIT and may not be readily admitted into REIT portfolios.

The base for Harbour

City is already high in

terms of tenant sales

and rental

106


Appendix 1: the 11 cities in the Greater Bay Area

1. Guangzhou in the GBA


2. Foshan in the GBA


3. Zhaoqing in the GBA


4. Shenzhen in the GBA


5. Dongguan in the GBA


107


6. Huizhou in the GBA


7. Macau in the GBA


8. Zhuhai in the GBA


9. Zhongshan in the GBA


10. Jiangmen in the GBA


11. Hong Kong in the GBA


108


Appendix 2: tenant breakdown – Harbour City, Times Square and Plaza Hollywood

Harbour City - retail tenants profile

Fashion / Leather Goods / Shoes & Bags

1 22 Octobre 61 COS 121 Kate Spade New York 181 Rebecca Minkoff

2 3.1 Phillip Lim 62 DAKS 122 Kent & Curwen 182 REDValentino

3 45R 63 Degaia 123 KENZO 183 REDYAZEL

4 6IXTY 8IGHT 64 Delvaux 124 Koyo Jeans 184 REISS

5 7 For All Mankind 65 Diane von Furstenberg 125 KURA CHIKA by PORTER 185 RENE CAOVILLA

6 a.testoni 66 DIESEL 126 La Perla 186 Repetto

7 Abercrombie & Fitch 67 Dior Homme 127 Laurel 187 Rigby & Peller

8 ADORE 68 Dolce&Gabbana 128 LEE 188 Roberto Cavalli

9 Alexander McQueen 69 Dr. Martens 129 LeSportsac 189 Roger Vivier

10 Alexander Wang 70 DSQUARED2 130 Levi's 190 Ruco Line

11 Alexandre Zouari Paris 71 dunhill 131 LOEWE 191 SAINT LAURENT

12 alice + olivia by Stacey Bendet 72 D'urban 132 Loro Piana 192 Salvatore Ferragamo

13 American Eagle Outfitters 73 EASTPAK 133 Louis Vuitton 193 Samantha Thavasa

14 amika 74 ecco 134 Maison Margiela 194 Samantha Vega

15 anagram 75 Ed hardy 135 MAJE 195 Samsonite Black Label

16 Ank Rouge 76 Elisabetta Franchi 136 Marc Jacobs 196 Sandro

17 Anteprima 77 Emilio Pucci 137 Marcelo Burlon County of Milan 197 Scotch & Soda

18 Anteprima WireBag 78 Emporio Armani 138 MARELLA 198 Secret Honey

19 Anya Hindmarch 79 EMU Australia 139 Marimekko 199 Sergio Rossi

20 Aquascutum 80 ERES 140 Marina Rinaldi 200 SHIBUYA109

21 Artisan & Artist 81 Ermanno Scervino 141 Mark Nason 201 Snidel

22 ASH 82 ESPERANZA 142 Market liberty 202 Sportmax

23 Atsuro Tayama 83 Etro 143 Marni 203 St. John

24 Avenue1218 84 Evisu 144 MASSIMO DUTTI 204 Staccato

25 ba&sh 85 Evisukuro 145 Maud Frizon Paris 205 STANCE

26 BALENCIAGA 86 Fabiana Filippi 146 Max Mara 206 Stella McCartney

27 Bally 87 FENDI 147 MAX&Co. 207 Stuart Wetizman

28 Balmain Paris 88 Flower Mountain 148 Mccaylaa 208 SUGARMAN

29 Bao Bao Issey Miyake 89 FRED PERRY 149 MCM 209 Superdry

30 Berluti 90 FURLA 150 McQ 210 Tara Jarmon

31 Billionaire 91 G2000 151 Melissa 211 The Herschel Supply Co. Brand

32 Birkenstock 92 GAP 152 MISS SIXTY 212 The Kooples

33 BLUMARINE 93 Gieves & Hawkes 153 Miu Miu 213 Theory

34 Boggi Milano 94 Giorgio Armani 154 MLB 214 Timberland

35 BORA AKSU 95 Giuseppe Zanotti 155 MM6 215 TOD'S

36 BOTTEGA VENETA 96 GIVENCHY 156 Moiselle 216 Tommy Hilfiger

37 Boy London 97 GUCCI 157 Moncler 217 Tommy Hilfiger Denim

38 Brooks Brothers 98 Harrison Wong 158 MOSCHINO 218 TORY BURCH

39 Burberry 99 Her Own Words 159 Moynat 219 Trash Candy

40 CALVIN KLEIN JEANS 100 Hermes 160 Mr&Mrs ITALY 220 TRUSSARDI

41 CALVIN KLEIN PERFORMANCE 101 High Street 161 Mulberry 221 une nana cool

42 CALVIN KLEIN UNDERWEAR 102 HOGAN 162 New Era 222 UNIQLO

43 CALZEDONIA 103 HOM 163 No Brand No Name 223 Valentino

44 Calzedonia 104 HUGO BOSS 164 Onitsuka Tiger 224 Valextra

45 Canali 105 I.T 165 pacsafe 225 Venilla suite

46 CARVEN 106 i29 - a.testoni 166 Patrizia Pepe 226 Versace

47 CELINE 107 iBLUES 167 Paul & Shark 227 Versace Jeans

48 CERRUTI 1881 108 initial 168 Paul Smith 228 Versus Versace

49 CHANEL 109 Intimissimi 169 Pedder Red 229 Vilebrequin

50 cherite by PRIMEPATTERN 110 IRO 170 PENNYBLACK 230 Vivienne Westwood

51 Chevignon 111 Isabel Marant 171 Phase Eight 231 Weekend Max Mara

52 Chloe 112 izzue 172 Philipp Plein 232 WEGO TOKYO

53 Christian Louboutin (Men's) 113 J.Crew 173 PINKO 233 WHISTLES

54 Church's 114 J.LINDEBERG 174 Pleats Please Issey Miyake 234 Wolford

55 CHUU 115 JACK WILLS 175 PLEIN SPORT 235 Y-3

56 CK Calvin Klein 116 Jessica (Episode) 176 Polo Ralph Lauren 236 Yves Salomon

57 Claudie Pierlot 117 Jimmy Choo 177 Porsche Design 237 ZADIG & VOLTAIRE

58 Club Monaco 118 Joy & Peace 178 Prada Canton Road 238 Zara

59 COACH 119 Joyce 179 Ralph Lauren 239 Zero Halliburton

60 COLE HAAN 120 Juicy Couture 180 Randa

Department Store

240 eslite spectrum Tsim Sha Tsui Store 241 Lane Crawford 242 LCX

Source: Company, Daiwa

109


Harbour City - retail tenants profile (cont’d)

Beauty / Personal Care

243 111 SKIN 295 Dior Beauty 347 KOSE 399 Premier by Dead Sea

244 3 LAB 296 Dior Maison de Beaute 348 La Mer 400 PRISMOLOGIE

245 A Beauty Bar 297 diptyque 349 La Prairie 401 RAHUA

246 ACCA KAPPA 298 DR HARRIS 350 LA ROCHE-POSAY 402 ReFa

247 Aesop 299 Dr.Ci:Labo 351 LAB SERIES 403 REVIVE

248 Aesop Harbour City Facial Room 300 Dyson supersonic 352 LANEIGE 404 RMK

249 ALAIA 301 EDITIONS DE PARFUMS FREDERIC MALLE 353 LANOLIPS 405 RODIAL

250 ALLIES OF SKIN 302 ELCHIM 354 Laura Mercier 406 Roger & Gallet

251 amika 303 ELEVATIONE Time Stops 355 LE BON 407 RUBIS

252 ANNA SUI 304 ERNO LASZLO 356 LEGOLOGY 408 SABON

253 ANNICK GOUTAL 305 Estee Lauder 357 Leonor Greyl 409 Serge Lutens

254 APIVITA 306 Etude House 358 Les Merveilleuses LADUR??E 410 SHISEIDO

255 AQUIS 307 EVE LOM 359 LightMAC Medical Skincare Centre 411 SHOW BEAUTY

256 Aromatherapy Associates 308 Eyeko 360 Lipstick Queen 412 shu uemura

257 Artisenses 309 Face College Medical Laser Center 361 L'occitane 413 Sisley

258 Atelier Cologne 310 Facesss 362 L'Oreal Paris 414 SK-II

259 Aveda 311 FANCL 363 LUSH 415 SkinCeuticals Flagship Store

260 Aveda Experience Center 312 FOREO 364 Lyanature co. 416 SLIP SILK

261 Aveda Lifestyle Salon & Spa 313 Fresh 365 M.A.C 417 SOFINA

262 bareMinerals 314 ghd 366 MAGIC HAUS 418 Spa L'OCCITANE

263 Beauty by no! no! 315 Giorgio Armani Beauty 367 MAISON CAULIERES 419 SUBTLE ENERGIES

264 BEAUTYBLENDER 316 GIVENCHY 368 Maison Christian Dior 420 Sulwhasoo

265 BELLE FLEUR 317 GLAMGLOW 369 MAISON FRANCIS KURKDJIAN 421 Sulwhasoo SPA & Beauty Lounge

266 Benefit Cosmetics 318 GOTI 370 MAKE UP FOR EVER 422 SWISS SMILE

267 BEYORG Beyond Organic 319 Gratiae 371 MARIELLA MARTINATO 423 TATCHA

268 Biologique Recherche 320 Greenland 372 MD HAIR RESTORATION 424 THANN Sanctuary

269 BIOTHERM 321 Gucci Fragrance 373 Melvita 425 The Beauty Chef

270 BIOXIDEA 322 Guerlain 374 MEN'S SOCIETY 426 The Body Shop

271 Bobbi Brown 323 Guerlain Parfumeur 375 MERBLISS 427 The history of Whoo

272 BOLIN WEBB 324 Hair Spa by Leonor Greyl 376 MIOGGI 428 This Works

273 BONPOINT 325 HELENA RUBINSTEIN 377 MOSCHINO Fragrance 429 Tiffany & Co. Fragrance

274 Burberry Fragrance 326 Hermes Fragrance 378 MTM Skincare & TIME by MTM 430 TIME by MTM

275 BVLGARI Parfums 327 HH Hair.Nail 379 Mulan Spa 431 TOM FORD BEAUTY

276 BY TERRY 328 Hourglass 380 MURDOCK 432 TONIC

277 Caudalie 329 IKOO 381 narciso rodriguez 433 Urban Decay

278 CHA LING l'Esprit du The 330 IL COLPO HAIR.NAILS 382 NARS 434 Valentino

279 CHANEL BEAUTE 331 IL COLPO PLATINUM 383 NATURA BISSE 435 VALMONT

280 CHANTECAILLE 332 ILUMINAGE BEAUTY 384 NOESA 436 Vanessa Megan

281 Charlotte Tilbury 333 INGRID MILLET 385 NUFACE 437 VERSACE

282 Chloe Fragrance 334 innsifree 386 NYX Professional Makeup 438 VICHY

283 Christian Louboutin Beaute 335 IPSA 387 OMOROVICZA 439 View Medical Group

284 CIRE TRUDON 336 Issey Miyake Fragrance 388 Origins 440 VitaJuwel

285 Cle de Peau Beaute 337 Jo Malone London 389 PANKHURST LONDON 441 WEI BEAUTY

286 CLARINS 338 JOYCE BEAUTY 390 PATRICKS 442 Welleco

287 Clinique 339 Jurlique 391 PAUL & JOE 443 WINDLE & MOODIE

288 COLLAGEN+ 340 KERASTASE 392 Penhaligon's 444 YM Yoki Magokoro

289 Cosmax 341 KARUNA 393 PERRICONE MD 445 YUNI

290 Cosme Go 342 KATE SOMERVILLE 394 PHILIP B 446 Yves Saint Laurent Beaute

291 Creed 343 KEVYN AUCOIN 395 PHILIPS 447 ZENOLOGY

292 DEBORAH LIPPMANN 344 Kiehl's Place 396 PHYTO

293 Derma Centre 345 Kiehl's Since 1851 397 Plurecil

294 Dior Backstage Studio 346 KIKO MILANO 398 Pony Effect

Watches, Jewellery & Accessories

448 Alluressories 467 DIDIER DUBOT 486 Jaeger- LeCoultre 505 RedLine

449 APM Monaco 468 Elegant Watch & Jewellery 487 John Hardy 506 ROLEX

450 Audemars Piguet 469 Emperor Jewellery 488 Just Gold 507 RUIFIER

451 Auto Shop 470 Emphasis Jewellery 489 LAOPU GOLD 508 S.T.Dupont

452 Black Clover 471 Emporio Armani Watches and Jewelry 490 Links of London 509 Swarovski

453 Boucheron 472 Florence T 491 LONGINES 510 Swatch

454 Buccellati 473 Folli Follie 492 M.A.D.Gallery 511 TAG Heuer Boutique

455 BVLGARI 474 Fossil 493 MIKIMOTO 512 The Unit Store

456 Cartier 475 FRANCK MULLER BOUTIQUE HONG KONG 494 Monica Vinader 513 Thomas Sabo

457 CHANEL Watches and Fine Jewellery 476 FRED 495 Montblanc 514 Tic Tac Time

458 Chaumet 477 FREYWILLE 496 Museum Context x Harry Potter 515 Tiffany & Co.

459 CHOPARD 478 Georg Jensen 497 Nomos Glash??tte 516 Time + Style

460 Chow Tai Fook Jewellery Co., Ltd. 479 Glashutte Original 498 Olivia Burton 517 TISSOT

461 City Chain Glam Time Pieces 480 Global Timepieces 499 PANDORA 518 TOUS

462 City Chain Primo 481 G-shock Casio 500 Paprika 519 TUDOR

463 CLUSE 482 HACHill 501 Piaget 520 Van Cleef & Arpels

464 Crisella 483 Hublot 502 Poppis 521 ZOOBEETLE Paris

465 Daniel Wellington 484 iroiro 503 Prince Jewellery & Watch

466 De Beers Jewellers 485 IWC Schaffhausen 504 RADO

Optical

522 Glasstique 525 Linda Farrow 528 Ocular Plus 531 REFLECTIONS

523 Grand Optical 526 MUJOSH 529 O-O Shop 532 Sunglass Hut

524 LENSCRAFTERS 527 OCEAN OPTICAL 530 Puyi Optical 533 Visual Culture


110


Harbour City - retail tenants profile (cont’d)

Sports

534 adidas 542 Dance With Dragon 550 LeSportsac 558 Plein Sport

535 adidas FTWR SUPPLY 543 FILA 551 Mammut 559 PUMA

536 adidas Originals 544 Fila Fusion 552 Munsingwear 560 Reebok

537 AIGLE 545 GigaSports 553 NAUTICA 561 SKECHERS

538 ASHWORTH 546 Haglofs 554 New Balance 562 Sportmax

539 Callaway Apparel 547 Her Own Words 555 Nike 563 The North Face

540 CHAMPION 548 Jack Bunny !! by PEARLY GATES 556 Nike Kicks Lounge 564 VANS

541 CW-X by Wacoal 549 JACK WILLS 557 Pearly Gates 565 VICTORINOX

Kids & Family

567 0/3 Baby Collection 578 Chicco 590 Kingkow 602 Petit Bateau

568 Abebi 579 Chickeeduck 591 Little MO&Co. 603 Philipp Plein Junior

568 Armani Junior 580 Dolce & Gabbana Children 592 LITTLE SUGARMAN 604 Ralph Lauren Childrenswear

569 Atelier De Courcelles 581 Dr. Kong Footcare 593 Miki House 605 Seed Heritage

570 Baby Dior 582 Fendi Kids 594 mini melissa 606 Shoe Box

571 BabyNes Nutrition System Boutique 583 GUCCI KIDS 595 Molo 607 Smiggle

572 BAPE KIDS 584 Gusella 596 MONNALISA 608 Stella McCartney Kids

573 Barocco 585 Hallmark Babies 597 Mothercare 609 Stride Rite

574 Baumhaus 586 I Pinco Pallino 598 MUSEE TULLE 610 the bonniemob

575 Bonpoint 587 Jumpin Gym USA 599 Museum Context x Harry Potter 611 Tommy Hilfiger Kids

576 Book Castle 588 Kenzo Kids 600 Nicholas & Bears 612 ToysRUs

577 Burberry Children 589 Kids 21 601 Our Generation 613 Watson's Baby

Banking / Medical Services

614 Citibank 615 HSBC 616 HSBC (Premier Centre) 617 Medical Floor

Electronics

618 1010/csl 621 Chung Yuen Electrical 624 Fortress 627 Sony Style

619 Bose 622 Delon Photo & Hi-Fi Centre 625 LEICA STORE 628 Standard Audio & Photo Supplies

620 BROADWAY 623 DEVIALET 626 Samsung

Home & Lifestyle

629 7 Eleven 642 Fotomax 655 Nam Pei Hong 668 The Top Leather Restoration Centre

630 9 SPA 643 Grand Ocean 656 OSIM 669 TUMI

631 A hidden Lab. 644 Hong Kong Records 657 Pak Shing Tong 670 UNIQLO

632 Acanta 645 Hot Toys Rebel Base 658 PYLONES 671 Venture Photography

633 Baumhaus 646 kikki.K 659 Repetto 672 VIC Lounge

634 Bee Bee Kids Playground 647 LAMY 660 Roseonly 673 Watsons Health

635 Caskells 648 LIQUID GOLD 661 SA L2-3 674 Watson's Wine Cellar

636 city'super 649 Lladro 662 SABON 675 XPLUS

637 diptyque 650 LOG-ON 663 Shichida Educational Institute 676 Zara

638 Donguri Republic 651 Mannings 664 SmarTone 677 ZARA HOME

639 Exclusivites 652 Marcelo Burlon County of Milan 665 THANN Sanctuary

640 Fitness First Platinum 653 Marimekko 666 The Groom Shoes Repair and Polish

641 Fook Ming Tong Tea Shop 654 MUJI 667 THE LITTLE GYM

Restaurants / Deli & Confectionery

Western Delicacies 705 Three on Canton 731 Crystal Jade La Mian Xiao Long Bao 758 IRVINS Salted Egg

678 A Nu Retrouvez-vous Asian Delights 732 Dim Sum Bar 759 Jamie's Deli

679 add @ Prince 706 ANA Ten 733 Du Hsiao Yueh 760 KFC

680 Al Molo Ristorante Italiano 707 Cafe&Meal MUJI 734 Duck Victoria 761 Kisses Cupcakes

681 Alma Portuguese Grill 708 Ebisoba Ichigen 735 FU RONG 762 La Famille

682 Artisan De La Truffe 709 Greyhound Cafe 736 HEXA 763 Lady M New York

683 Be on Canton 710 Gyu-Kaku 737 HOT No.1 764 Leonidas Praline

684 BLT Burger 711 Hainan Shaoye 738 House of Jasmine 765 Little Mermaid @ city'super

685 BLT Steak 712 HAKU Curated By Hideaki Matsuo 739 Mak's Noodles 766 Luna Cake Premium

686 Cafe EPURE 713 Hattendo Cafe 740 Xihe Ya Yuan Beijing Duck 767 Mellow Brown Coffee by UCC

687 Cafe Marco 714 Japanese Restaurant Ginza 741 ye shanghai 768 PAUL LAFAYET @ city'super

688 COVA Pasticceria & Confetteria 715 Kaya Deli & Confectionery 769 Ralph's Coffee

689 COVA Ristorante & Caffe 716 Menya Itto 742 18 Grams @ city'super 770 Royce @ city'super

690 Cucina 717 Nha Trang Vietnamese Cuisine 743 Angelina Paris @city'super 771 Sensory ZERO

691 DALLOYAU 718 Nishimura 744 baekmidang 772 Sift

692 Dan Ryan's Chicago Grill 719 On-Yasai 745 Bears & Friends 773 Starbucks Coffee

693 EPURE 720 Quan Alley 746 Bonjour @ Eslite 774 Stickhouse @ city'super

694 Jamie's Deli 721 sen-ryo 747 Cafe de Coral 775 Sugarfina

695 Jamie's Italian 722 Sushi Tokami 748 Coffee DX by Colour Brown 776 Super Sweets Gallery @ city'super

696 La Locanda by Giancarlo Perbellini 723 Sweet Basil Thai Cuisine 749 Coffee Store by colour brown @ Eslite 777 sweets house Cha Cha @ city'super

697 Le Cafe de Joel Robuchon 724 Tai Hing 750 cooked Deli by city'super 778 Tea WG Boutique

698 Lobby Lounge 725 Thai Brasserie by Blue Elephant 751 Danish Bar @ city'super 779 Ten One Tea

699 maze Grill 726 The Joomak 752 Fusion Deli @ city'super 780 Ten Ren's Tea @ Eslite

700 Noritake -Gifts, Niji Bistro 727 TSUKADA NOJO 753 GODIVA 781 The Coffee Academ?cs

701 Paper Moon 728 Tsuta Japanese Soba Noodles 754 Green Common 782 Tokyo Milk Cheese Factory

702 Pizza Express 729 Umai SushiKan 755 Haagen Dazs 783 Uji-en

703 Reserva Iberica Chinese Cuisines 756 Hanlin Tea Room 784 Venchi

704 The Cheesecake Factory 730 China Tang 757 i CREMERiA 785 yu teahouse @ Eslite


111


Times Square - retail tenants profile


1 5cm 23 DELSEY 45 KENT & CURWEN 67 RABEANCO

2 Aape BY A BATHING APE 24 DIESEL 46 KENZO 68 repetto

3 agnes b. 25 Dior 47 Levi's 69 Rimowa

4 AMERICAN EAGLE OUTFITTERS 26 Dior Homme 48 Lipault 70 ROCKPORT

5 Ariane Prette Monaco 27 D'URBAN 49 LOEWE 71 SAINT LAURENT

6 AT TWENTY 28 ecco 50 LONGCHAMP 72 Salad

7 ATSURO TAYAMA 29 EVISU 51 LOUIS VUITTON 73 Salvatore Ferragamo

8 ba&sh 30 FENDI 52 M dreams by Melissa 74 SAMSONITE

9 BALENCIAGA 31 FRED PERRY 53 maje 75 sandro

10 BIRKENSTOCK 32 Furla 54 MARYLING 76 STACCATO

11 Bottega Veneta 33 GEOX 55 MAX & Co. 77 STUART WEITZMAN

12 Brooks Brothers 34 GIVENCHY 56 MaxMara 78 SUGARMAN

13 Calvin Klein Jeans & Calvin Klein Underwear 35 G-Star Raw 57 MCM 79 The Kooples PARIS

14 Calzedonia Italian Legwear 36 GUCCI 58 MICHAEL KORS 80 TOMMY HILFIGER

15 CAMPER 37 Harmont & Blaine 59 Motherhouse 81 TORY BURCH

16 CELINE 38 HEAVEN PLEASE+ 60 Nike 82 TRUSSARDI JEANS

17 CHANEL 39 izzue 61 Nike Kicks Lounge 83 VICTORINOX

18 CHEVIGNON 40 J.CREW 62 OYSHO 84 Vivienne Westwood

19 Claudie Pierlot 41 Jack & Jones 63 Phase Eight 85 WEEKEND MaxMara

20 CLUB MONACO 42 Jimmy Choo 64 Piquadro 86 Whistles London

21 COACH 43 Joy & Peace 65 PORTER INTERNATIONAL 87 Y-3

22 COLE HAAN 44 Juicy Couture 66 PROTECA & ACE 88 ZARA

Beauty / Personal Care

89 3CE 99 Dior Beauty 109 M.A.C 119 SEKKISEI

90 amika: 100 ELEVATIONE Time Stops 110 MAKE UP FOR EVER 120 shu uemura

91 AMOREPACIFIC 101 Eu Yan Sang 111 MLB 121 sisley PARIS

92 APIVITA 102 Facesss 112 OGAWA 122 Sulwhasoo

93 Benefit 103 FANCL 113 ORIGINS 123 The Body Shop

94 CATALO 104 john master organics 114 OROGOLD COSMETICS 124 TRESOR RARE

95 CAUDALIE 105 Jurlique 115 OSIM 125 via il Colpo

96 CHANEL BEAUTE 106 KIKO MILANO 116 OTO 126 Watsons

97 CLINIQUE 107 LANEIGE 117 POLA

98 CRABTREE & EVELYN 108 L'Occitane 118 Sabon

Entertainment / Music

127 PARSONS MUSIC 128 Cine Times

Gift / Book / Stationery

129 HAPPIPLAYGROUND 131 BOOKAZINE, Partytime, Sweet World 133 campo marzio 135 LOG-ON

130 Donguri Republic 132 Sanrio GIFT GATE 134 smiggle

Department Store / Supermarket

136 Lane Crawford 137 Marks & Spencer 138 city'super 139 Liquid Gold

Watches / Jewellery / Optical

140 AGATHA 148 Chow Tai Fook 156 MaBelle 164 Ray-Ban

141 apm MONACO 149 City Chain millisecond 157 Madia 165 TIC TAC TIME

142 ARTE 150 DE BEERS Jewellers 158 MIKIMOTO 166 TIFFANNY & CO.

143 Bvlgari watch 151 Elegant Watch & Jewellery 159 MONTBLANC 167 TROLLBEADS

144 CALVIN KLEIN watches + jewelry 152 G-Shock Casio 160 NIESSING 168 TSL

145 Cartier 153 LensCrafters 161 OMEGA

146 CHAUMET 154 Les Nereides PARIS 162 PANDORA

147 Chow Sang Sang 155 Longines 163 Panerai shop

Sports / Action Wear / Equipment

169 adidas 174 Columbia Sportswear 179 Marathon Sports 184 Timberland

170 adidas ORIGINALS 175 FILA 180 Merrell 185 VANS

171 AIGLE 176 GO WILD 181 My Catalog

172 ASHWORTH 177 J.LINDEBURG 182 Reebok

173 CALVIN KLEIN PERFORMANCE 178 Lacoste 183 SKECHERS

Children’s Wear & Toys

186 LEGO Certified Store 187 Kingkow 188 Partytime 189 Baby Milo Store

Audio-Visual / Electronics / Home Appliance

190 BOSE 192 Chun Yuen 194 FORTRESS 196 Wonder Photo Shop Fujifilm Fotomax

191 BROADWAY 193 DG Lifestyle Store 195 Suning

Banks / Services

197 HSBC ATM Service

Restaurants / Food & Beverage

198 Budaoweng Hotpot Cuisine 206 Forbidden Duck 214 Make it 222 Sen-ryo

199 Cafe Terceira 207 GREENHOUSE 215 Modern China Restaurant 223 SHANGHAI MIN 1987

200 Chung's Kitchen 208 Haagen-Dazs 216 Nha Trang Vietnamese Cuisine 224 Starbucks Coffee

201 Club Albergue 1601 209 Hey Tea Go 217 Pak Loh Chiu Chow Restaurant 225 TOM N TOMS COFFEE

202 cooked Deli by city'super 210 La Creation & Chateraise 218 Petit Pret 226 Uji-En

203 Crostini 211 Lei Bistro 219 PETITE HOUSE 227 zChocolat

204 Crystal Jade La Mian Xiao Long Bao 212 Lei Garden 220 PizzaExpress 228 Zushi ANA

205 Du Hsiao Yueh 213 Mad for Garlic 221 SAN XI LOU


112


Plaza Hollywood - retail tenants profile


1 10 minutes to 10 17 Chicks 33 H&M 49 PULL & BEAR

2 2 plus 18 Coucou 34 Her Own Words 50 SATAMI

3 6IXTY 8IGHT 19 de emm.. 35 In613 51 Soap Berry

4 AL ALBA 20 Decision 36 JAM 52 SPORT B.

5 Baleno 21 DELICRON 37 Joy & Peace 53 STACCATO

6 Banker 22 DELSEY 38 Kate 54 The World Signs

7 Bauhaus 23 double-park 39 Kipling 55 Triumph

8 BIEM 24 Dr. Kong 40 Leona 56 UNIQLO

9 BodiBra 25 eashion 41 LEVI'S 57 VANS

10 Bossini 26 ecco 42 MARQUE 58 Veeko

11 BSX 27 Enough Day 43 Mirabell 59 Via Milano

12 Calvin Klein Underwear 28 FOOTSPOT. 44 momo 60 VICTORINOX

13 CAMELA 29 G & An'ge 45 pe:tite 61 Wacoal

14 Carryson 30 GIORDANO 46 Pi Square

15 CASS 31 GU 47 PLEN+Y

16 Chevignon 32 GUEI LUTUCCHI 48 PORTER INTERNATIONAL

Entertainment / Hobby

62 broadway cine delices 64 Hollywood Game Zone 66 Joint Publishing

63 CD Warehouse 65 iWorld 67 JUMPIN GYM USA

Jewellery / Watches / Accessories

68 2 PLUS 73 Image Optical 78 Optical 88 Family Eyecare 83 Swatch

69 Chow Sang Sang Jewellery 74 JOLI 79 PANDORA 84 The One

70 CHOW TAI FOOK 75 LENSCRAFTERS 80 RayBan 85 Tic Tac Time

71 City Chain 76 MaBelle 81 SILVER SHOP 86 TRIWA

72 ck Calvin Klein watches + jewelry 77 nu eye concept 82 SILVER'N GRACE 87 TSL

Sportswear / Equipment

88 adidas 92 KAMACHI 96 Nike 100 SKECHERS

89 Columbia 93 le coq sportif 97 NIKKO 101 Sportshouse

90 Gourami 94 Marathon Sports 98 PUMA 102 Timberland

91 K-Swiss 95 New Balance 99 Reebok

Health / Beauty / Pharmacy

103 ABOUTHAI 117 FANCL 131 Nail Palace 145 Salon One - IL COLPO GROUP

104 AUSupreme 118 Health Plus 132 Napura & Beverly Hills 146 SOAPMUM

105 Beijing Tong Ren Tang 119 Ingrid Millet Paris 133 nature bud 147 SUNING

106 Benefit Cosmetics 120 Jurlique 134 Oceanika 148 The Body Shop

107 Bioscreen PARIS 121 Kai Tai Chinese Medicine Holdings 135 O'Farm 149 TONY MOLY

108 Catalo 122 Kettler 136 Ogawa 150 Vita Green

109 Clinique 123 KOSE 137 ORIGINS 151 Wai Yuen Tong

110 COMVITA 124 LANEIGE 138 OSIM 152 Watson's

111 COSWAY 125 LO HONG KA 139 OTO 153 Wellsoon

112 Crabtree & Evelyn 126 MAKE UP FOR EVER 140 Pak Shing Tong 154 Yves Rocher, France

113 CRCare 127 Mannings 141 Pretty House Beauty Centre 155 Korean Ginseng Hanyinhong

114 Etude House 128 Max Choice 142 Pro-Dental Clinic 156 尚品

115 Eu Yan Sang 129 maxcare 143 Sa Sa Boutique 157 正官庄

116 FAMILY INADA 130 Meka 144 SABON

Audio-Visual / Electrical Appliances

158 BROADWAY 159 FORTRESS 160 Suning

Children’s Wear / Equipment

161 Balabala 163 Kingkow 165 mides

162 CHICKEEDUCK 164 La Compagnie Des Petits

Gift / Stationery

166 123 By ELLA 168 PLAY WOW 170 School Driver 172 Teens Channel

167 Hallmark 169 Sanrio Gift Gate 171 Smiggle 173 TOMICA

Art / Home / Furnishings

174 A-Fontane 179 JADE @ HOME 184 Suzuran Bed 189 Verdee Bamboo Living

175 AIRLAND MATTRESS 180 kai shop Housewares and Beauty Care 185 TAKAD FURNITURE 190 Zakkaya

176 CASABLANCA HOME 181 KING KOIL 186 Tefal

177 ecHOME 182 Life Kan 187 THERMOS

178 ecLiving 183 Natural Home 188 UJI LIVING

Banks / Other Services / Travel Agency

191 Bank of China (Hong Kong) 195 Hong Kong Property 199 Parsons Music 203 The Bank of East Asia

192 Centaline Property 196 JohnWing . Art & Eng 200 Pet Line

193 FOTOMAX 197 Midland Realty 201 Q-pets

194 Hang Seng Bank - ATM 198 Monkey Tree English Learning Center 202 Ricacorp Properties

Telecommunications

204 3 Shop 206 China Travel Services 208 csl.as simple as one2free 210 SmarTone

205 China Mobile 207 China Unicom 209 Eternal East Tours 211 Telecom Digital / SUN Mobile

Department Store / Supermarket

212 7-Eleven 213 Marks & Spencer 214 TASTE

Restaurants / Food & Beverage

215 A Nice Gift 220 Cheers 225 Hui Lau Shan 230 MINI MELTS

216 A-1 Bakery 221 GODIVA Belgium 1926 226 Kee Wah Bakery 231 Okashi Land

217 Aji Ichiban 222 Haagen-Dazs 227 Kingsley Desserts & Gourmandises 232 Planet Popcorn

218 Arome Bakery 223 hana-musbi 228 Maxim's Cakes 233 Ten Ren's Tea

219 BEST MART 360 224 Hanjuku Kobo 229 Mei Lok Store 234 Tong Kee Bao Dim


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Appendix 3: retail sales in China and its major cities

China retail sales by cities

City Province 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

(CNYbn) (CNYbn) (CNYbn) (CNYbn) (CNYbn) (CNYbn) (CNYbn) (CNYbn) (CNYbn) (CNYbn) (CNYbn) (CNYbn) (CNYbn) (CNYbn) (CNYbn) (CNYbn) (CNYbn) (CNYbn)

Beijing NA 166 183 201 230 263 291 330 384 465 539 634 722 812 887 964 1,034 1,101 1,158

Shanghai NA 187 202 220 240 266 298 338 387 458 521 619 719 784 856 930 1,013 1,095 1,183

Guangzhou Guangdong 112 125 137 149 168 191 220 262 319 362 448 524 598 688 714 799 871 940

Shenzhen Guangdong 74 83 94 110 125 144 168 193 228 257 300 352 401 450 492 502 551 602

Changchun Jilin 31 36 40 48 54 60 67 78 95 109 129 152 174 197 222 241 265 292

Changsha Hunan 31 34 40 45 53 74 87 104 127 152 186 220 252 286 316 369 412 455

Chengdu Sichuan 55 63 71 78 88 101 116 136 162 209 249 302 351 399 453 503 574 640

Chongqing NA 72 78 85 93 107 123 143 171 215 252 305 378 440 506 571 642 727 807

Fuzhou Fujian 35 39 43 49 58 66 78 94 113 134 162 195 232 261 306 349 376 419

Guiyang Guizhou 11 12 14 15 18 20 23 28 34 41 48 58 68 79 89 106 120 134

Haikou Hainan

Hangzhou Zhejiang 40 46 52 59 70 98 111 130 156 180 215 255 294 353 420 470 518 572

Harbin Heilongjiang 45 50 56 62 71 79 89 104 126 151 177 207 239 273 307 339 374 404

Heifei Anhui 15 16 18 21 24 32 38 47 59 70 84 111 129 148 167 218 245 273

Hohhot Inner Mongolia 7 8 9 12 16 30 36 43 53 64 76 89 102 114 126 135 148 157

Jinan Shandong 35 40 45 53 69 81 94 110 136 160 180 211 242 274 309 341 376 415

Kunming Yunnan 24 27 29 33 37 42 48 57 57 86 106 127 149 170 191 194 231 259

Lanzhou Gansu 16 17 19 21 23 26 29 34 40 47 55 65 75 85 94 115 126 136

Lhasa Tibet 6 6 8 9 11 12 14 18 21 23

Nanchang Jiangxi 14 16 18 20 23 31 36 43 53 63 76 94 112 128 130 166 187 210

Nanjing Jiangsu 42 47 53 60 71 100 117 138 165 194 229 270 310 353 417 459 509 560

Nanning Guangxi 21 23 26 29 33 38 44 52 65 76 91 107 126 145 162 179 198 220

Shenyang Liaoning 57 62 70 72 81 92 105 123 151 178 207 243 280 319 357 388 399 399

Shijiazhuang Hebei 33 37 41 46 53 61 70 82 101 119 141 166 192 239 242 269 298 330

Taiyuan Shanxi 15 16 18 19 23 38 44 52 62 72 83 99 114 129 145 154 167 177

Tianjin NA 74 83 83 92 104 119 138 165 208 243 286 340 392 447 474 526 564 573

Urumqi Xinjiang 12 13 15 17 20 23 27 33 42 47 56 65 74 81 107 115 124 132

Wuhan Hubei 61 69 77 85 96 113 129 152 190 216 257 303 347 392 437 510 561 620

Xian Shaanxi 36 41 46 50 58 67 78 94 118 140 168 204 240 274 309 341 392 425

Xining Qinghai 5 6 6 6 7 8 12 14 17 20 23 27 32 37 41 46 51 56

Yinchuan Ningxia 5 5 5 6 7 9 11 13 16 19 22 27 32 35 38 48 51 56

Zhengzhou Henan 35 39 43 48 56 71 82 98 121 143 168 199 232 262 291 329 367 406

Others 2,545 2,791 3,138 3,382 3,809 4,309 5,007 5,933 7,329 8,432 10,012 11,879 13,604 15,403 17,349 19,172 21,233 23,618

China total (CNYbn) 3,911 4,306 4,814 5,252 5,950 6,835 7,915 9,357 11,483 13,305 15,801 18,721 21,443 24,284 27,190 30,093 33,232 36,626

China total (USDbn) 472 520 581 634 719 834 993 1,230 1,652 1,948 2,334 2,897 3,399 3,950 4,413 4,788 5,001 5,419

HK retail sales (HKDbn) 187 184 177 173 192 204 219 247 273 275 325 406 445 494 493 475 437 446

HK retail sales (USDbn) 24 24 23 22 25 26 28 32 35 35 42 52 57 63 63 61 56 57

HK retail sales as % of China retail sales

5.1% 4.5% 3.9% 3.5% 3.4% 3.1% 2.8% 2.6% 2.1% 1.8% 1.8% 1.8% 1.7% 1.6% 1.4% 1.3% 1.1% 1.1%

Source: CEIC, Daiwa

114


Appendix 4: scenes from Times Square

Russell Street in Causeway Bay Times Square: the vertical mall


Times Square: new tenants Times Square: beauty and upper-floor tenants


Times Square: luxury shops connection to office towers Times Square: restaurants on the higher floors


Times Squre: beauty and accessories shops


115


Daiwa’s Asia Pacific Research Directory

HONG KONG

Takashi FUJIKURA (852) 2848 4051 [email protected]

Regional Research Head

Jiro IOKIBE (852) 2773 8702 [email protected]

Co-head of Asia Pacific Research

John HETHERINGTON (852) 2773 8787 [email protected]

Co-head of Asia Pacific Research

Craig CORK (852) 2848 4463 [email protected]

Regional Head of Asia Pacific Product Management

Paul M. KITNEY (852) 2848 4947 [email protected]

Chief Strategist for Asia Pacific; Strategy (Regional)

Kevin LAI (852) 2848 4926 [email protected]

Chief Economist for Asia ex-Japan; Macro Economics (Regional)

Kelvin LAU (852) 2848 4467 [email protected]

Head of Automobiles; Transportation and Industrial (Hong Kong/China)

Fiona LIANG (852) 2532 4341 [email protected]

Industrials (Hong Kong/China)

Jay LU (852) 2848 4970 [email protected]

Automobiles and Components (Hong Kong/China)

Janice ZHANG (852) 2773 8842 [email protected]

Transportation (Hong Kong/China)

Leon QI (852) 2532 4381 [email protected]

Regional Head of Financials; Banking; Diversified financials; Insurance (Hong Kong/China)

Kevin JIANG (852) 2532 4383 [email protected]

Banking (China)

Anson CHAN (852) 2532 4350 [email protected]

Consumer (Hong Kong/China)

Adrian CHAN (852) 2848 4427 [email protected]

Consumer (Hong Kong/China)

Andrew CHUNG (852) 2773 8529 [email protected]

Head of Gaming (Hong Kong/China)

John CHOI (852) 2773 8730 [email protected]

Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap

Carlton LAI (852) 2532 4349 [email protected]

Small/Mid Cap (Hong Kong/China)

Dennis IP (852) 2848 4068 [email protected]

Regional Head of Power, Utilities, Renewable and Environment (PURE); PURE (Hong Kong/China)

Don LAU (852) 2848 4469 [email protected]

Power, Utilities, Renewable and Environment (PURE) – Utilities (Hong Kong); Gas (China)

Anna LU (852) 2848 4465 [email protected]

Power, Utilities, Renewable and Environment (PURE) – IPP, Wind & Nuclear (China)

Jonas KAN (852) 2848 4439 [email protected]

Head of Hong Kong and China Property

Cynthia CHAN (852) 2773 8243 [email protected]

Property (China)

Bryan CHIK (852) 2773 8741 [email protected]

Custom Products Group

Selwyn CHENG (852) 2773 8716 [email protected]


Jack CHAN (852) 2773 8731 [email protected]


PHILIPPINES

Renzo CANDANO (63) 2 737 3022 [email protected]

Consumer

Micaela ABAQUITA (63) 2 737 3021 [email protected]

Property

Gregg ILAG (63) 2 737 3023 [email protected]

Utilities; Energy

SOUTH KOREA

Sung Yop CHUNG (82) 2 787 9157 [email protected]

Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Shipbuilding; Machinery

Mike OH (82) 2 787 9179 [email protected]

Banking; Capital Goods (Construction and Defence); Utilities; Steel

Josh RHEE (82) 2 787 9124 [email protected]

Chemicals

Iris PARK (82) 2 787 9165 [email protected]

Consumer/Retail

SK KIM (82) 2 787 9173 [email protected]

IT/Electronics – Semiconductor/Display and Tech Hardware

Henny JUNG (82) 2 787 9182 [email protected]

IT/Electronics – Semiconductor/Display and Tech Hardware (Small/Mid Cap)

Thomas Y KWON (82) 2 787 9181 [email protected]

Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Games

TAIWAN

Rick HSU (886) 2 8758 6261 [email protected]

Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design (Regional)

Nora HOU (886) 2 8758 6249 [email protected]

Banking; Diversified financials; Insurance; Strategy

Steven TSENG (886) 2 8758 6252 [email protected]

IT/Technology Hardware (Automation & PC Hardware)

Kylie HUANG (886) 2 8758 6248 [email protected]

IT/Technology Hardware (Handsets and Components)

Helen CHIEN (886) 2 8758 6254 [email protected]

Small/Mid Cap

INDIA

Punit SRIVASTAVA (91) 22 6622 1013 [email protected]

Head of India Research; Strategy; Banking/Finance

Saurabh MEHTA (91) 22 6622 1009 [email protected]

Capital Goods; Utilities

SINGAPORE

Ramakrishna MARUVADA (65) 6228 6742 [email protected]

Head of Singapore Research; Telecommunications (China/ASEAN/India)

David LUM (65) 6228 6740 [email protected]

Banking; Property and REITs

Royston TAN (65) 6228 6745 [email protected]

Oil and Gas; Capital Goods

Jame OSMAN (65) 6228 6744 [email protected]

Transportation – Road and Rail; Pharmaceuticals and Healthcare; Consumer

JAPAN

Yukino YAMADA (81) 3 5555 7295 [email protected]

Strategy (Regional)

116


Daiwa’s Offices

Office / Branch / Affiliate Address Tel Fax

DAIWA SECURITIES GROUP INC

HEAD OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6753 (81) 3 5555 3111 (81) 3 5555 0661

Daiwa Securities Trust Company One Evertrust Plaza, Jersey City, NJ 07302, U.S.A. (1) 201 333 7300 (1) 201 333 7726

Daiwa Securities Trust and Banking (Europe) PLC (Head Office) 5 King William Street, London EC4N 7JB, United Kingdom (44) 207 320 8000 (44) 207 410 0129

Daiwa Europe Trustees (Ireland) Ltd Level 3, Block 5, Harcourt Centre, Harcourt Road, Dublin 2, Ireland (353) 1 603 9900 (353) 1 478 3469

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Daiwa Capital Markets Europe Limited, London Head Office 5 King William Street, London EC4N 7AX, United Kingdom (44) 20 7597 8000 (44) 20 7597 8600

Daiwa Capital Markets Europe Limited, Frankfurt Branch Neue Mainzer Str. 1, 60311 Frankfurt/Main, Germany (49) 69 717 080 (49) 69 723 340

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Daiwa Capital Markets Europe Limited, Moscow Representative Office

Midland Plaza 7th Floor, 10 Arbat Street, Moscow 119002, Russian Federation

(7) 495 641 3416 (7) 495 775 6238

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(973) 17 534 452 (973) 17 535 113

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(65) 6387 8888 (65) 6282 8030

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(61) 3 9916 1300 (61) 3 9916 1330

DBP-Daiwa Capital Markets Philippines, Inc 18th Floor, Citibank Tower, 8741 Paseo de Roxas, Salcedo Village, Makati City, Republic of the Philippines

(632) 813 7344 (632) 848 0105

Daiwa-Cathay Capital Markets Co Ltd 14/F, 200, Keelung Road, Sec 1, Taipei, Taiwan, R.O.C. (886) 2 2723 9698 (886) 2 2345 3638

Daiwa Securities Capital Markets Korea Co., Ltd. 20 Fl.& 21Fl. One IFC, 10 Gukjegeumyung-Ro, Yeongdeungpo-gu, Seoul, Korea

(82) 2 787 9100 (82) 2 787 9191

Daiwa Securities Co. Ltd., Beijing Representative Office Room 301/302，Kerry Center，1 Guanghua Road，Chaoyang District，

Beijing 100020, People’s Republic of China

(86) 10 6500 6688 (86) 10 6500 3594

Daiwa (Shanghai) Corporate Strategic Advisory Co. Ltd. 44/F, Hang Seng Bank Tower, 1000 Lujiazui Ring Road, Pudong, Shanghai China 200120 , People’s Republic of China

(86) 21 3858 2000 (86) 21 3858 2111

Daiwa Securities Co. Ltd., Bangkok Representative Office 18th Floor, M Thai Tower, All Seasons Place, 87 Wireless Road,

Lumpini, Pathumwan, Bangkok 10330, Thailand (66) 2 252 5650 (66) 2 252 5665

Daiwa Capital Markets India Private Ltd 10th Floor, 3 North Avenue, Maker Maxity, Bandra Kurla Complex, Bandra East, Mumbai – 400051, India

(91) 22 6622 1000 (91) 22 6622 1019

Daiwa Securities Co. Ltd., Hanoi Representative Office Suite 405, Pacific Palace Building, 83B, Ly Thuong Kiet Street, Hoan Kiem Dist. Hanoi, Vietnam

(84) 4 3946 0460 (84) 4 3946 0461

DAIWA INSTITUTE OF RESEARCH LTD

HEAD OFFICE 15-6, Fuyuki, Koto-ku, Tokyo, 135-8460, Japan (81) 3 5620 5100 (81) 3 5620 5603

MARUNOUCHI OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6756 (81) 3 5555 7011 (81) 3 5202 2021

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London Research Centre 3/F, 5 King William Street, London, EC4N 7AX, United Kingdom (44) 207 597 8000 (44) 207 597 8550

117


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For “Ownership of Securities” information, please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationship

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Within the preceding 12 months, the subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: Cromwell European REIT (CERT_SP), Beijing Enterprises Water Group Ltd (371 HK), Mirae Asset Daewoo Co Ltd (006800 KS).

*Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司), Daiwa

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This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司) (“DHK”) which is regulated by the Hong Kong Securities and Futures

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This research is distributed in Singapore by Daiwa Capital Markets Singapore Limited and it may only be distributed in Singapore to accredited investors, expert investors and institutional investors as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. By virtue of distribution to these category of investors, Daiwa Capital Markets Singapore Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to disclosure of Daiwa Capital Markets Singapore Limited’s interest and/or its representative’s interest in securities). Recipients of this research in Singapore may contact Daiwa Capital Markets Singapore Limited in respect of any matter arising from or in connection with the research. Australia This research is distributed in Australia by Daiwa Capital Markets Australia Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act. Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research. India This research is distributed in India to Institutional Clients only by Daiwa Capital Markets India Private Limited (Daiwa India) which is an intermediary registered with Securities & Exchange Board of India as a Stock Broker, Merchant Bank and Research Analyst. Daiwa India, its Research Analyst and their family members and its associates do not have any financial interest save as disclosed or other undisclosed material conflict of interest in the securities or derivatives of any companies under coverage. Daiwa India and its associates, may have received compensation for any products other than Investment Banking (as disclosed)or brokerage services from the subject company in this report or from any third party during the past 12 months. Daiwa India and its associates may have debt holdings in the subject company. For information on ownership of equity, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

There is no material disciplinary action against Daiwa India by any regulatory authority impacting equity research analysis activities as of the date of this report.

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This research is solely for reference and not intended to provide tailored investment recommendations. This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd. and it may only be distributed in Taiwan to specific customers who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd. and non-customers including (i) professional institutional investors, (ii) TWSE or TPEx listed companies, upstream and downstream vendors, and specialists that offer or seek advice, and (iii) potential customers with an actual need for business development in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Recipients of this research including non-customer recipients of this research shall not provide it to others or engage in any activities in connection with this research which may involve conflicts of interests. Neither Daiwa-Cathay Capital Markets Co., Ltd. nor its personnel who writes or reviews the research report has any conflict of interest in this research. Since Daiwa-Cathay Capital Markets Co., Ltd. does not operate brokerage trading business in foreign markets, this research is prepared on a “without recommendation” to any foreign securities basis and Daiwa-Cathay Capital Markets Co., Ltd. does not accept orders from customers to trade in such foreign securities. Recipients of this research shall carefully judge their own investment risk and take full responsibility for the results of any resulting investments in the companies and/or sectors featured in this research. Without the prior written permission of Daiwa-Cathay Capital Markets Co., Ltd., recipients of this research are prohibited from disclosing the research to the media, reprinting the research, or quoting from the research to other parties. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd. in respect of any matter arising from or in connection with the research.

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This research is distributed to only institutional investors in Thailand primarily by Thanachart Securities Public Company Limited (“TNS”).

This report is prepared by analysts who are employed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates. This report is provided to you for informational purposes only and it is not, and is not to be construed as, an offer or an invitation to make an offer to sell or buy any securities. Neither TNS, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees accept any liability whatsoever for any direct or consequential loss arising from any use of this research or its contents.

The information and opinions contained herein have been compiled or arrived at from sources believed to be reliable. However, TNS, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees make no representation or warranty, express or implied, as to their accuracy or completeness. Expressions of opinion herein are subject to change without notice. The use of any information, forecasts and opinions contained in this report shall be at the sole discretion and risk of the user.

TNS, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates, their respective directors, officers, servants and employees may have positions and financial interest in securities mentioned in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this research. Therefore, investors should be aware of conflict of interest that may affect the objectivity of this research.

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118


United Kingdom This research report is produced by Daiwa Securities Co. Ltd. and/or its affiliates and is distributed in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (“FCA”) and is a member of the London Stock Exchange and Eurex. This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available. Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory. Germany This document is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany. Bahrain This research material is distributed in Bahrain by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm – Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113 United States

This research is distributed into the United States directly by Daiwa Capital Markets Hong Kong Limited and indirectly by Daiwa Capital Markets America Inc. (DCMA), a U.S. Securities and Exchange Commission registered broker-dealer and FINRA member firm, exclusively to “major U.S. institutional investors”, as defined under Rule 15a-6 promulgated under the U.S. Securities Exchange Act of 1934, as amended, and as interpreted by the staff of the U.S. Securities and Exchange Commission (SEC). This report is not an offer to sell or the solici tation of any offer to buy securities. U.S. customers wishing to effect transactions in any designated investment discussed in this report should do so through a qualified salesperson of DCMA. Non-U.S. customers wishing to effect transactions in any designated investment discussed in this report should contact a Daiwa entity in their local jurisdiction. The securities or other investment products discussed in this report may not be eligible for sale in some jurisdictions.

Analysts employed outside the U.S., as specifically indicated elsewhere in this report, are not registered as research analysts with FINRA. These analysts may not be associated persons of DCMA, and therefore may not be subject to FINRA Rule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

ADDITIONAL IMPORTANT DISCLOSURES CAN BE FOUND AT:


Ownership of Securities For “Ownership of Securities” information please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Investment Banking Relationships For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

DCMA Market Making For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions. Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analyst is named on the report); and no part of the compensation of such analyst (or no part of the compensation of the firm if no individual analyst is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report. The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months.

Disclosure of investment ratings

Rating Percentage of total

Buy* 70.8%

Hold** 19.8%

Sell*** 9.4%

Source: Daiwa

Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 31 December 2018. * comprised of Daiwa’s Buy and Outperform ratings. ** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings. Additional information may be available upon request. Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law

(This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.) If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items.

In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction.

In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.

For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements.

There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.

There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us.

Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us. Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association

http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory







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