Swire Group

Swire chief eyes property, aviation shifts

Slosar says earnings from housing sales have reached cyclical peak while airline business faces global challenge as cargo sector struggles

PUBLISHED : Monday, 28 July, 2014, 4:26am
UPDATED : Monday, 28 July, 2014, 6:36am

Swire Pacific's core property and aviation businesses face major structural shifts, chairman John Slosar said.

Speaking in broad terms before Swire enters a so-called "quiet period" before half-year earnings due on August 14, Slosar told the South China Morning Post profits from the group's residential property trading operations were at their cyclical peak.

And he indicated the performance at Cathay Pacific Airways would be in line with an industry worldwide that had underperformed investor expectations.

"We are now in a cycle - I suppose over the last two years and probably for the next three - where we have had quite high residential property sales in Hong Kong," Slosar said. "They tend to give you a bit of a profit peak.

"Post about 2017, we're pretty seriously out of land bank in terms of residential trading."

We are now in a cycle ... where we have had quite high residential property sales
John Slosar, chairman, Swire Pacific

Moving on to Cathay, Slosar - who ran the airline as chief executive for three years before taking up his new appointment in March - said smart investors would use performances elsewhere in the world as a gauge.

"Investors will always pay attention to where aviation is going," he said. "If you look at results elsewhere, they have generally been towards the soft to disappointing end."

Property and aviation had been key to volatility in Swire's earnings for many years, Slosar said, adding that the management was taking action to offset downside risks.

Property generated close to 77 per cent of group attributable profit last year. Aviation was the next biggest contributor, at just over 12 per cent.

Returns on equity in both divisions were significantly below the group's marine services and beverages businesses.

Nevertheless, analysts expect Swire to report adjusted earnings per share growth this year ahead of competitors at 17.9 per cent, according to a Bloomberg consensus estimate.

Group stock is up 7 per cent year to date, against 3.9 per cent for the Hang Seng Index.

Slosar said replenishing the near-empty residential land bank in Hong Kong was a key challenge.

"We need to pick and choose carefully," he said. "We won't do so at any price. We'll do so when we see good pieces [of land] at reasonable prices where we think we can do something that will sell to consumers.

"Are there immediate prospects for that? It looks kind of difficult at this moment, but markets have a way of adjusting."

Slosar said earnings would be reinforced by new revenue from retail developments on the mainland - Taikoo Hui in Guangzhou and Taikoo Li Sanlitun in Beijing that are operational, together with a Chengdu project due to come on stream towards the end of the year, and a substantial Shanghai project in about 18 months.

"All of those projects have been cash out for a number of years and now they are finally starting to turn that corner where we start to operate them," he said. "That will be a positive development for us, with investment property being such a big part of our balance sheet and our [profit and loss account].

"In Guangzhou, we are growing retail sales faster than the market.

"Similarly, in Beijing, in Sanlitun, we are growing retail faster than city retail, which means we are attracting consumers disproportionately to our sites. We think we can do that in other cities as well."

Slosar was similarly confident that restructuring in the group's airfreight business had addressed cyclical shifts in the aviation industry, although he conceded that any swings would affect group profits.

"Cathay is still a very volatile business, and it is very hard to predict with great confidence what is going to be going on in aviation in three, four, five years. That will have a material impact on our earnings," he said. "If aviation has a great year, that is likely to do great things for us, and if it has a difficult year, we have to do other things to overcome it."

Consensus earnings forecasts for Cathay - named this month, for the fourth time, the world's best airline by global consultancy Skytrax - have been cut since the management briefed analysts in May on performance to that point.

Calculations by Goldman Sachs showed six banks had cut their full-year Cathay earnings forecast by an average of 24 per cent. Goldman recommends investors sell the stock.

But Slosar is adamant that restructuring over the past 18 months had left the airline - the world's biggest air cargo operator - in a strong position.

"Three years back, by 2017-18, Cathay was potentially going to have 38 dedicated freighters, most of which were old," he said. "We've taken out almost half of what would have been the committed freighter fleet. And of those 20 or 21, 14 are almost brand new 747-8 freighters by Boeing.

"They are the most efficient and can deal with the high-cost environment.

"We've restructured our entire supply side by taking advantage of opportunities elsewhere without having to do some horrible thing like write it all off and start again.

"I think we've done a good job of that. We're smaller and a lot more efficient."