2007/2008 Guide to Asia's Blue Chip Companies

Conglomerate

A peak in performance

The strengthening of economies in the region has driven growth across sectors, proving favourable to Asian conglomerates. For example, a quick snapshot of conglomerates in the region shows businesses such as Singapore’s Keppel Corporation booked a 33% net profit growth in 2006, with its operating profit climbing 35% in the first nine months of 2007. In tandem with the Philippines’ strong economic growth at 11% in 2006, Ayala Corporation’s top line surged 49% in 2006, while its earnings continued to grow at 41% in the first three quarters of 2007. And the net profit of Hong Kong’s Hutchison Whampoa soared 40% in 2006 and another 53% year-on-year in the first half of 2007.
Our index includes Swire and Wharf (both listed and based in Hong Kong) as conglomerates that we follow. As one of the oldest firms in the index, Swire is heavily skewed toward property and rental businesses, with 63% of its gross asset value in property. The company also encompasses airlines, shipping, beverages, offshore oil-drilling services, manufacturing and retail businesses.

In 2006, Swire’s solid performance was largely attributed to its property arm, with property investments and rental income derived from retail and office space. Through 2007, Swire posted strong earnings growth with a net profit surging 57.8% year-on year in the first half, to reach HK$12.49 billion ($1.6 billion). It should be noted, however, that a large portion of Swire’s income was a result of a property revaluation gain as well as the disposal of the company’s interest in Shekou Container Terminals in February 2007.

Wharf, on the other hand, had a less providential year. Despite the fact that it had 76% of its gross asset value in an investment property portfolio, 2006 showed only an average performance for Wharf. Its bottom line dipped 22.5%, as a result of a lower unrealised surplus from the revaluation of investment properties, rising borrowing costs and a deferred tax item recorded by the group’s subsidiary i-Cable Communications. The income from its communications, media and entertainment businesses dropped 44% and its logistics division decreased 2% year-on-year.

Wharf’s property division, however, did well in 2006. Rising property rentals supported the valuation of the group’s investment property portfolio, which climbed 11% yearly. The operating profit of Harbour City and Times Square, representing close to 60% of the group’s total assets, also increased by 14% in 2006.

Moving ahead, JP Morgan’s analysts are positive about the retail rental revisions for Wharf’s Harbour City and Times Square, as increasing domestic consumption and a strong up-tick in tourist arrivals boosts the Hong Kong retail sector. Analysts are also optimistic on Wharf’s property development in China, which currently accounts for 16% of its gross asset value.

This good news notwithstanding, analysts are cautious about Wharf’s office property segment. Due to the increasing office-space supply in East and West Kowloon, there should be a limited upside in the group’s office rents. During the first half of 2007, retention rates of the Harbour City office division was low at 63%, with office spot-rent down by 7% to 9% during the second half of 2006. Analysts are also concerned about the fierce competition i-Cable is facing, especially in its cable TV segment.

Overall, JP Morgan’s analysts prefer Swire to Wharf, given the formers’ better prospects. Swire is the largest landlord in the Hong Kong Island East district and offers relatively new and high-quality buildings. Strong demand for office space still favours the company’s rental business. Swire’s Pacific Place office building is expected to enjoy additional rent increases, given that rents in the nearby central business district are much higher.

Apart from the income stream from its office property portfolio in Hong Kong, its investments in China – especially in property – could be a key vehicle in 2008. Analysts expect that Swire will benefit from the region’s strong aviation sector through Cathay Pacific, and from increasing consumer spending through its Coca-Cola bottling business and retail sportswear business.

Ranking by revenue
Country	Company	($ million)
HK	Swire Pacific	$2,464.65
HK	Wharf Holdings	$1,723.49

Ranking by revenue growth
Country	Company
HK	Wharf Holdings	6.50%
HK	Swire Pacific	0.90%

Ranking by net profit
Country	Company	($ million)
HK	Swire Pacific	$2,910.22
HK	Wharf Holdings	$1,387.28

Ranking by ROE
Country	Company
HK	Swire Pacific	21.56%
HK	Wharf Holdings	15.32%

Ranking by total points
Country	Company
HK	Swire Pacific	39
HK	Wharf Holdings	37