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Protests to weigh on Hong Kong SAR's dividend outlook

13 November 2019

Earnings estimates for companies in travel & leisure, retail and real estate sectors were directly impacted by the protests and have been sharply revised downwards over the past three months. Notably, street analysts continue to cut earnings estimates for over 70% of the constituents in these three sectors. For travel & leisure, recent data show that 60% of the constituents saw a 5% or greater cut in consensus earnings compared to the projections three months ago. Similarly, 30% of the companies in retail and property sectors have their earnings estimates cut by at least 5% over the same period. However, we are still expecting dividends to grow by 6% and 8% respectively in 2019 and 2020, mostly attributed to the banking sector and real estate sector. The projected increase in dividends over these two years is modest compared to the growth rates registered in 2017 and 2018, during which dividends grew by double digits.

Travel & Leisure Industry
Aggregate dividends from this industry are expected to grow at a slower pace in 2020, with a 0.6% increase, compared to the 15.8% growth rate estimated for 2019. Top dividend contributors in this industry are expected to increase dividends slightly or maintain stable dividend payouts.

We expect that Cathay Pacific Airways will suspend its upcoming dividend. According to recent releases from Cathay Pacific, the flag carrier of Hong Kong experienced a decrease in both the number of passengers and the amount of cargo and mail carried in August and September compared to same period last year. The most significant drop comes from mainland China. In its passenger business, revenue passenger kilometers dropped by 28.1% and 23.2% yoy in mainland China in August and September respectively, the largest drop among all regions. Cathay Pacific's cargo and mail revenue tonne also showed a 14.0% and 4.4% yoy drop in August and September respectively. The proportion of revenue from the mainland has increased in recent years, with almost 50% of its revenue generated from mainland China in FY18. The large variance across Cathay Pacific's projected earnings for FY19 suggests a significant amount of uncertainty in its outlook, underpinning our low confidence flag for the upcoming 2nd interim dividend estimate. We expect that Cathay Pacific will suspend its dividend as latest earnings projections suggest that they could generate a loss in the second half of FY19. Our expectation is consistent with the poor performance reported in their latest filing. Earnings prospects remain bleak in the short term, with management expecting the upcoming months to be challenging due to the weak demand for travel following the protests. We note that when Cathay Pacific underperformed in the second half of FY16, it suspended its final dividend.

Retail Industry
The aggregate dividends from the retail industry are expected to grow 6.4% to HKD 11.7 billion in 2020, supported by stable dividends from well-known retail enterprises, as well as the fast growth in dividends from a few education companies. In 2016, total dividends from education related companies accounted for approximately 2% of the aggregate dividends in the retail sector, and we expect their contribution to jump to 20% in 2020. The expected slowdown in growth from other retail companies, which are negatively affected by the macro economic uncertainties and the social unrests in Hong Kong, are likely to keep a lid on the growth of payouts from this sector. Notably, we are expecting Chow Tai Fook Jewellery and Luk Fook Holdings to decrease their upcoming payouts by 6.7% and 18.2% on a year-on-year basis. Real Estate Industry
Dividend growth from the real estate sector is expected to moderate in 2020. The deceleration in growth of payouts from companies in mainland China can be attributable to the tightening property measures implemented in recent years. The limited upside potential in dividends from Hong Kong property firms can be attributed to the weak macro environment and the prolonged political unrest.

Companies with large retail and hotel portfolios, such as Sun Hung Kai Properties, Swire Properties and Wharf REIC are expected to suffer the most from the protests. The undercut in tourist spending will affect the ability of retail tenants to afford rent and will lead to lower hotel occupancy. For example, in their latest annual report, the management of Sun Hung Kai expressed their concern that weakening consumer sentiment and declining tourist spending have posed challenges in the retail market for recent months. Property rental and hotel operations contributed to 30% of Sun Hung Kai Properties' total revenue in FY2019, and some of its major shopping malls such as IFC Mall and The Sun Arcade are at the storm eye of the ongoing protest.

To access the report, please contact

Maojun Ye, CFA, Principal Research Analyst at IHS Markit
Qianwen Ruan, FRM, Senior Research Analyst II at IHS Markit
Yang Yang, CFA, Senior Research Analyst I at IHS Markit

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