Swire Properties Company’s Evaluation Report

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Updated: Feb 26th, 2024

Introduction

Swire Properties is a leading developer, owner, and operator of mixed-used in Hong Kong and Mainland China. Its business consists of three central elements, including property investment, property trading, and hotel investment (Swire Properties 2019). The company was founded in 1972, and it is listed on The Stock Exchange of Hong Kong Limited’s main page since 2012 (Swire Properties 2019).

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Swire Properties developed industrial areas in Hong, such as Taikoo Place and Cityplaza, operates and develops hotels, shopping malls, and offices (Swire Properties 2019). Moreover, the company has an interest in the luxury apartment market in Hong Kong and the US (Swire Properties 2019). However, the primary focus of the company is business-related property in Hong Kong and Mainland China.

While robust economic growth positively influenced the real estate industry in Asia and Hong Kong, specifically, the growth of the market is slowing down for a myriad of reasons. On the one hand, the US-China trade conflict, financial sector instability, and the rising cost of borrowing create significant challenges for property companies in Asia (CBRE Research 2019). On the other hand, Hong Kong remains one of the most expensive places to do business (Knight Frank 2019).

Since the real income of Hong Kong citizens stagnates, property market demand is expected to go down in 2020, slowing down the development of companies in the industry (Delmendo 2019). The competition in the sector is dense with Agile, Wanda Group, Vanke, and Henderson Land Development being key competitors of the Swire Industry (Owler no date). In short, Swire Properties is facing considerable challenges due to the slowing down of the market and increased competition.

The present report aims at evaluating the performance of Swire Properties by comparing its financial performance to Henderson Land Development. The report includes the cash conversion cycle, liquidity analysis, debt and capital structure analysis, customer profitability analysis, and factors that should be considered by the firm on its expansion program. The paper also draws relevant conclusions, provides recommendations concerning the improvements in the financial performance of the company, and acknowledges its limitations.

Analysis

Summary of Financial Statements

Swire Properties demonstrates moderate growth in terms of financial position in 2018 in comparison with 2017. Total equity, including non-controlling interests, grew by 8%, while net debt decreased by 15% (Swire Properties 2019). Net assets are employed primarily by property investment (over 96%), with 2.5% is attributed to hotels and 1.5% to property trading (Swire Properties 2019). In terms of financial performance, revenues in 2018 have dropped by 20.6% in comparison with 2017 (Swire Properties 2019). Even though the income from property investment and hotels increased considerably, revenues from property trading decreased by almost 80% (Swire Properties 2019).

At the same time, equity attributed to the company’s shareholders increased by 8.5% in 2018 (Swire Properties 2019). Cash generated from operations decreased 15% in 2018, with a total of HK$11,619 million principally comprised of cash inflows from investment properties (Swire Properties 2019). At the same time, the purchase of property, plant, and equipment together with additions to investment properties dropped by 30%-40% (Swire Properties 2019). The figures in the financial statement can be explained by the fluctuations of the market.

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Swire Properties seems to have adequately responded to the situation in the industry. The drop in revenues is attributed to a considerable decrease in profits from property trading. The matter reflects the demand for real estate in Hong Kong is low, which was mentioned by Delmendo (2019). Therefore, the company seems to suffer from the consequences of the outside factors, while steadily improving its performance in hotels and property investments.

Moreover, the growing price of loans mentioned by CBRE Research (2019) also made the company decrease its net debt to reduce incremental costs. Furthermore, the instability of financial markets may also be the reason for the tendency to decrease the debt to improve control over risk factors. To evaluate how well Swire Properties adjusted to the changes in the industry, it is beneficial to compare the results with another leading company in the segment.

Henderson Land Development Ltd. is a leading property group with a focus on Hong Kong and mainland China (Henderson Land 2019). The company has been listed in Hong Kong since 1981, and on December 31, 2018, it had a market capitalization of HK$172 billion (Henderson Land 2019). Even though demand for real estate has decreased considerably in 2018, the company was able to increase its profits by 1% (Henderson Land 2019).

Its net asset value increased by 7%, and earnings and dividends per share also grew inconsiderable (Henderson Land 2019). However, the growth was associated with a rise in debt capital by 7%, which negatively affected working capital (Henderson Land 2019). Inventories also grew considerably, which negatively affected the cash conversion cycle index (Henderson Land 2019). In summary, instead of controlling for risk factors, Henderson Land management decided to increase debt to maintain financial performance.

The fact that the two companies chose different strategies for addressing the common threats makes the comparison complicated. Considering the absolute values, Swire Properties’ current assets are HK$21,584 million, while Henderson Land’s current assets are HK$134,179 million, which means that Henderson Land can tolerate higher risks. Therefore, the strategies utilized by the companies’ administrations are appropriate. However, Henderson Land’s current assets are mostly in inventory, which may be considered a liability. Further analysis is required to acquire a deeper understanding of Swire Properties’ current performance.

Liquidity Analysis and Cash Conversion Cycle

Liquidity analysis is critical for acknowledging if a company can meet its short-term obligations. There are two standard ratios used for identifying liquidity of assets, including quick ratio and current ratio. The present report will use only the current ratio to avoid confusion. In terms of these metrics, Swire Properties has improved its position considerably in comparison with the three previous years. Table 1 demonstrates the current liquidity ratio for Swire Properties in 2015-2018. According to the analysis, Swire Properties decreased its current liabilities by 30% and increased its current assets by 61.6% during the last year.

During three years before 2018, liquidity of the company’s assets was below 1, which means that the liquidity of assets was questionable. The drastic changes in liquidity of assets may mean that the company acknowledges the increased threats identified by CBRE Research (2019). However, it must be stated that current assets in 2018 include HK$15,526 million as assets classified as held for sale (Swire Properties 2019). Without the sale of non-current assets, liquidity in 2018 would drop to 0.515.

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Table 1. Swire Properties Current Liquidity Ratio (Swire Properties 2019; 2017; 2015).

2018201720162015
Current Assets (mln HK$)$21,584$13,351$10,319$14,941
Current Liabilities (mln HK$)$11,763$16,795$15,623$16,744
Current ratio (mln HK$)1.8349060610.794938970.6605005440.892319637

Henderson Land’s performance in terms of liquidity is stable without considerable changes throughout the past four years. The liquidity analysis of the company is to demonstrate that the liquidity of assets remains high. According to Myers and Rajan (1998), however, high liquidity may reduce management’s ability to commit credibly to an investment strategy that protects investors. Therefore, it is recommended that current liquidity revolves around 1 to improve management’s flexibility and ensure the ability to raise cash on short notice (Myers and Rajan 1998). In comparison with Henderson Land, Swire Properties’ performance is significantly lower.

Table 2. Henderson Land Current Liquidity Ratio (Henderson Land 2019; 2018; 2016).

2018201720162015
Current Assets (mln HK$)134,179120,326120,532109,259
Current Liabilities (mln HK$)62,31450,06246,03732,304
Current ratio (mln HK$)2.1532721382.4035396112.6181549623.382212729

The cash conversion cycle (CCC) is also a vital metric that helps to identify how many days it takes for a company to convert its investments into cash flows from sales. A decreasing trend of CCC analysis for Swire Properties demonstrated in Table 3 suggests that the company’s performance is improving. In comparison with Henderson Land, whose performance is unstable and unpredictable, Swire Properties outperforms its competitor.

CCC analysis for Henderson Land is represented in Table 4. While the results of the analysis seem univocal, there is one consideration that should be made. The companies under analysis are real-estate companies, and CCC metrics may be inapplicable to the industry due to their specific characteristics. For instance, Swire Industries shifted its priorities towards investments, which means that its inventory will remain small in comparison with Henderson Land (Swire Properties 2019). Therefore, the metrics should be used with caution due to the limits of their use.

Table 3. Swire Properties CCC (Swire Properties 2019; 2017; 2015).

20182017201620152014
Inventory (mln HK$)1,4692,3005,6697,6157,979
Cost of Sales (mln HK$)4,4937,5696,4865,781
DSI153.09192.14373.78492.29
ACCOUNTS RECEIVABLES (MLN HK$)2,4012,9962,8812,8482,821
Revenue (mln HK$)14,71918,55816,79216,447
Revenue Per Day (mln HK$)40.3350.8446.0145.06
DSO66.9257.7962.2662.90
Accounts Payable (mln HK$)10,1547,8207,8458,9437,674
DPO730.08377.71472.37524.58
CCC-510.07-127.77-36.3330.61

Table 4. Henderson Land CCC (Henderson Land 2019; 2018; 2016).

20182017201620152014
Inventory (mln HK$)97,17774,21978,47681,55680,101
Cost of Sales (mln HK$)7,65310,61812,49910,384
DSI4087.262624.492336.652841.14
Accounts Receivable (mln HK$)15,23917,4359,9738,3718,520
Revenue (mln HK$)21,98227,96025,56823,641
Revenue Per Day (mln HK$)60.2276.6070.0564.77
DSO271.27178.90130.94130.39
Accounts Payable (mln HK$)27,11323,52524,99619,09817,304
DPO1207.56833.97643.82639.77
CCC3150.971969.421823.772331.76

Debt and Capital Structure Analysis

It is vital to assess debt and capital structure to appreciate the possible risks associated with investments in Swire Properties. Two metrics are available for evaluating how liabilities are used to develop a company, including debt to equity ratio and debt to total assets ratio. Table 5 demonstrates how the rate changed during the past four years. The analysis shows a steady downward trend in the use of debt for development purposes.

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On the one hand, minimized use of debt may be associated with decreased risks of investment. On the other hand, the chosen strategy in terms of the capital structure may mean that the firm’s management may fail to utilize the benefits of debt for increasing profits. However, before concluding, it is beneficial to demonstrate how debt is used by one of Swire Properties’ competitors.

Table 5. Swire Properties Debt Analysis (Swire Properties 2019; 2017; 2015).
2018201720162015
Total Assets (mln HK$)333,647314,309281,708272,724
Total Liabilities (mln HK$)52,35654,93154,48354,775
Total Equity (mln HK$)281,291259,378227,225217,949
Debt to Total Assets0.160.170.190.20
Debt to Equity0.190.210.240.25

As it was mentioned in Section 2.1, Henderson Land utilizes a different approach to the capital structure gradually increasing the role of debt to maintain the growth of profits. Table 6 demonstrates how the discussed ratios were changing during the past four years for the company. The analysis shows that currently, 28% of the company’s assets are paid for with borrowed money. Moreover, the upward trend in the use of borrowed money suggests that the number may continue growing in the future. While the strategy has positively affected the profits (Henderson Land 2019), it may pose considerable threats to the future of the company.

As mentioned in Section 1, the Asian market faces the problem of the rapidly increasing cost of debt (Knight Frank 2019). Therefore, Henderson may need to consider controlling for possible risks by gradually decreasing its liabilities and paying off its debts. At the same time, the role of debt is still low and it can afford to continue increasing debt to sustain the growth of profits.

Table 6. Henderson Land Debt Analysis (Henderson Land 2019; 2018; 2016).

2018201720162015
Total Assets (mln HK$)441,106410,998358,061336,269
Total Liabilities (mln HK$)123,114113,05589,77380,000
Total Equity (mln HK$)317,992297,943268,288256,269
Debt to Total Assets0.280.280.250.24
Debt to Equity0.390.380.330.31

Swire Properties and Henderson Land’s capital structure demonstrates two different ways a company can address outside threats. On the one hand, Henderson Land’s use of debt has positively affected the company’s financial performance and secured its steady development even during the period of decreased demand. On the other hand, Swire Properties’ strategy shows an adequate reaction to outside threats, which ensures future stable performance. Comparing the two approaches, Swire Properties seems to be in a more favorable position. The company does not need to act aggressively; instead, it can be more flexible in the choice of development strategy. However, Swire Properties may consider increasing its liabilities to regain its position in property trade, which has decreased considerably.

However, considering the changes in Swire Property’s capital structure, it may be stated that the company wants to turn to investments in real estate. Property sale does not seem to be a field of interest, which means that the company will continue to decrease its debt. Instead of suffering from the increased cost of debt, the company decided to use it and lend money to property developers.

In summary, Swire Properties is steadily decreasing the role of debt in its capital structure and the trend is expected to proliferate in the nearest future. In comparison with its competitors, the company seems to be in a more favorable position considering the outside threats mentioned in Section 1 of the present report. The analysis of Swire Properties’ capital structure shows that the company’s management has chosen an adequate strategy for development; however, the company may benefit from increased liabilities if it wants to re-enter the property trade market or expand to other markets.

Customer Profitability Analysis

Swire Industries does not disclose information about its customers; therefore, customer profitability analysis for major customers is impossible. However, the company provides information concerning its revenues in different sectors of customers, which may be beneficial for evaluating the decisions made by the corporate governance. Table 7 provides information about revenues, costs of sale, and profits by segment for the period 2015-2018.

The analysis demonstrates that the property investment sector is the most profitable and brings 99% of profits. The hotel sector is associated with losses for the past four years, which may mean that the company would want to consider selling its hotel property to improve its financial performance. However, the analysis demonstrates that the company management decided to decrease its presence in the property trading segment instead. The historical analysis can provide some insights on the matter.

Table 7. Swire Properties Customer Profitability Analysis (Swire Properties 2019; 2017; 2015).

2018201720162015
Revenues
Property Investment (mln HK$)12,25411,38010,90210,857
Property Trading (mln HK$)1,0615,8334,7604,463
Hotels (mln HK$)1,4041,3451,1301,127
Profits
Property Investment (mln HK$)8,7326,6715,9386,231
Property Trading (mln HK$)991,1111,1991,089
Hotels(mln HK$)-41-43-117-303
Costs
Property Investment (mln HK$)3,5224,7094,9644,626
Property Trading (mln HK$)9624,7223,5613,374
Hotels (mln HK$)1,4451,3881,2471,430

In the years 2015-2017, Swire Properties had a large presence in the property trading market, and in 2018, the company decreased its presence by more than 80%. The matter may be because the cost of sales was growing more rapidly than revenues, which led to stagnation of profits from this customer segment. At the same time, Swire Properties managed to decrease its losses in hotels, which may mean that in the nearest future, the segment will become profitable. The company’s administration seems to have based their decisions on trends rather than on raw numbers, which demonstrates the high qualifications of the executive personnel.

To evaluate how the company is performing, it is beneficial to compare its customer profitability with the results of its competitor. Table 8 shows the changes in Henderson Land’s profits, revenues, and costs during the past four years. The analysis revealed that the company’s profitability dropped significantly in property development, which is a reaction to a decreased demand. The results also demonstrate that the increase in profits was due to sales of non-current assets.

Even though Henderson Land also operates in the hotel business, it does not report its revenues for the segment and it is included in “other.” The comparison of performance in terms of customer profitability demonstrates that Swire Properties is in a more secure position due to effective administrative decisions. Henderson Land lost 21% of profits on average across the segments, while Swire Properties underperforms only in the property sale sector.

Table 8.Henderson Land Customer Profitability Analysis (Henderson Land 2019; 2018; 2016).

2018201720162015
Revenues
Property Development (mln HK$)13,33520,02917,67915,690
Property Leasing (mln HK$)6,0205,6785,5595,589
Department store operation (mln HK$)1,496834871879
Other (mln HK$)1,1311,4191,4591,483
Profits
Property Development (mln HK$)5,2735,4593,8374,092
Property Services (mln HK$)4,5204,2874,2334,129
Department store operation (mln HK$)296265298301
Other(mln HK$)7051,0046961,014
Costs
Property Development (mln HK$)8,06214,57013,84211,598
Property Services (mln HK$)1,5001,3911,3261,460
Department store operation (mln HK$)1,200569573578
Other (mln HK$)426415763469

In summary, Swire Properties’ overall performance in terms of customer profitability is satisfactory, considering the historical analysis. Swire Properties’ outperforms Henderson Land in terms of customer profitability since the company utilizes minimum debt for investing in development and its losses in profits decreased only in one segment. Moreover, Swire Properties seem to have made an evidence-based decision to decrease its presence in the property trade sector due to low customer profitability in the segment. At the same time, the company’s administration decided to retain control of hotels due to decreased losses in the last three years. While the decisions seem adequate, the outcomes are unclear, and more data is needed to perform reliable analysis.

Working Capital and Long Term Sources of Finance

Swire Properties’ performance in terms of working capital has improved considerably in comparison with previous years. Table 9 demonstrates that the company has experienced a significant cash shortage during the previous years. However, since the company sold some of its non-current assets, it was able to address the problem. Without the sale mentioned in Section 2.2, the company would have suffered from the inability to cover its liabilities even though the profitability of the company is high. Historical analysis of working capital demonstrates that decreasing its presence on the property sale market was a forced decision since the company needed cash to cover its liabilities.

Table 9. Swire Properties Working Capital (Swire Properties 2019; 2017; 2015).

2018201720162015
Current Assets (mln HK$)21,58413,35110,31914,941
Current Liabilities (mln HK$)11,76316,79515,62316,744
Working Capital (mln HK$)9,821-3,444-5,304-1,803

In comparison with Henderson Land, however, Swire Properties is underperforming in terms of working capital. Table 10 provides historical data about Henderson Land’s working capital during the past four years. The analysis shows that Henderson Land has managed to improve its performance over the analyzed period steadily. Even though percentage-wise working capital’s growth of Swire Properties is considerably faster, Henderson Land’s performance is more stable, and its nominal working capital is significantly higher. While the recent changes in the ratio a positive, the company’s administration needs to make sure that they can sustain the performance during the following years. While the company may increase its current liabilities to boost its current assets, it is vital not to run out of cash.

Table 10. Henderson Land Working Capital (Henderson Land 2019; 2018; 2016).

2018201720162015
Current Assets (mln HK$)134,179120,326120,532109,259
Current Liabilities (mln HK$)62,31450,06246,03732,304
Working Capital (mln HK$)71,86570,26474,49576,955

Swire Properties may also consider setting up expansion programs, which can improve the company’s stability in terms of financial performance. Even though the firm has assets in the United States, they are inconsiderable, and their impact on the company’s performance is limited. Therefore, the company can benefit from expanding its influence outside Asia to control the risks associated with the region. However, long-term sources of finance are needed to ensure that the company has enough funds to cover expansion costs. The most efficient way of addressing the problem is usually by plowing back on profits.

However, the company is already using retained profits for development. In 2018, the company retained HK$23,752 million, while paying only HK$4,914 million in dividends (Swire Properties 2019). Therefore, the method is inapplicable for financing expansion programs. At the same time, Swire Properties could raise money by issuing equity shares or preference shares. However, the method is costly because tax reduction is not applied in this case.

The most appropriate method for addressing the problem with funding expansion is through loans from financial organizations. The company has a low debt to equity ratio, which means that it can afford to take more loans to boost its performance. Moreover, tax deductions may be applied to the interest on loans, which makes it a cheaper way of getting enough funds. Therefore, Swire Properties should consider loans from financial organizations as a primary way of raising funds for expansion programs. However, before starting such a program, Swire Properties should consider external risk factors, such as increased tension in China-USA relationships, which may limit the efficiency of such endeavors.

Conclusion and Recommendations

Summary of Findings

Swire Properties has experienced considerable changes in its financial performance and position in 2018. External and internal factors made the company decrease its presence in the property sale segment and sell some of its long-term assets. Among external factors, increased cost of debt, international conflicts, and financial sector instability made the company limit the use of debt to control for the risk factors. The internal factors include unstable performance in terms of liquidity, and working capital made the company’s administration take measures to make sure that the company has enough funds to cover its current liabilities.

Customer profitability analysis demonstrates that increased cost of sales in the property sale segment has pushed the company to focus on investments, which had considerable implications on short-term assets and profits. The comparative analysis demonstrates that Swire industries underperform in all spheres except for the debt to equity ratio. However, recent changes should be evaluated to provide a complete picture of the company’s performance.

Even though the company’s management faces multiple challenges, it has made a decisive move, which may positively affect the company in the nearest future. The positive influence of these decisions may be seen in Swire Properties’ financial statement for the 2018 fiscal year. For the first time in four years, the company’s working capital is a positive number, and the liquidity ratio is above 1. However, it is unclear if the company will be able to maintain its current performance. In short, the results of the evaluation are indecisive, and further assessment is needed to make any relevant predictions.

Recommendations

The analysis revealed several weak points of the company’s performance, which need to be addressed to maintain its stable performance. First, the company Swire Properties should continue to pay close attention to its working capital and asset liquidity using all the available tools. Second, the firm may consider revising its capital structure to use more debt to increase profit. The borrowed money may be used for expansion programs outside Asia to control for risk factors associated with the region. However, any borrowings should be considered with caution due to the instability of world politics. Third, the company may need to sell its hotels since the segment has been lossmaking for the past four years. These recommendations may help to improve Swire Properties’ performance in the long run.

As for recommendations for the investors, the analysis demonstrates that investments in the company’s shares are associated with medium risk. On the one hand, asset liquidity and working capital ratios are low, which implies that the company is unstable. On the other hand, the capital structure suggests that the risks associated with investing in the company are limited. However, it is recommended that all the investments are made after the annual report for 2019 is published to make sure that the company can sustain the positive changes that occurred in 2018.

Reference List

CBRE Research (2019) Real estate market outlook 2019. Web.

Delmendo, L. (2019) ‘’, Global Property Guide. Web.

Knight Frank (2019). . Web.

Henderson Land Development Ltd. (2019). Annual report 2018. Web.

Henderson Land Development Ltd. (2018). Annual report 2017. Web.

Henderson Land Development Ltd. (2018). Annual report 2015. Web.

Myers, S. C. and Rajan, R. G. (1998) ‘The paradox of liquidity’, The Quarterly Journal of Economics, 113(3), pp. 733–771. Web.

Owler (no date) Swire Properties’s competitors, revenue, number of employees, funding and acquisitions. Web.

Swire Properties (2019) . Web.

Swire Properties (2017) . Web.

Swire Properties (2015 ) . Web.

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