Highlights

• 1H26 underlying net profit rose 6.2% yoy to HK$3,311m, ahead of our forecast, as borrowing costs fell 26% yoy on a 3.5% effective rate.
   
• The board lifted the payout ratio from 65% to 90%, taking interim DPS up 42.4% to HK$0.94 — a step-change that signals management’s confidence.
   
• We raise our DDM-derived target price by 25% to HK$36.00; maintain BUY.
  
   

Analysis

• Results beat our expectations. Wharf Real Estate Investment Co's (Wharf REIC) 1H26 underlying net profit reached HK$3,311m, up 6.2% yoy and ahead of our 0.7% yoy 2026 growth forecast. Although revenue fell 1.0% yoy to HK$6,340m, mainly due to a 12% yoy decline at Times Square; and operating margin contracted 0.5ppt yoy, the underlying net profit (UNP) still grew, supported by a 26% yoy reduction in finance costs driven by a lower effective borrowing rate of 3.5% (vs 4.4% in 1H25). Despite a 1.7% hoh decrease in IP valuation, net gearing dropped a further 1.3ppt hoh to 15.9%, thanks to an 8.7% reduction in net debt. The net gearing ratio is expected to reach around 11% following the completion of the Wheelock Place sale.
   

• Resilient Hong Kong IP portfolio poised for recovery. Harbour City and Times Square delivered a mixed but resilient performance from their investment properties. Harbour City’s revenue, including hotels, rose 1% yoy with operating profit broadly stable, supported by mid-teens tenant sales growth - well ahead of the 9.6% increase in Hong Kong retail sales - and a 3ppt yoy improvement in office occupancy, even as rental reversion remained negative. While Times Square’s revenue declined 12% yoy, the mall still achieved single-digit positive tenant sales growth. Looking ahead, management is optimistic on Hong Kong’s retail market in 2H26, and we expect Harbour City’s retail rental reversion to turn positive in 2027. 

• Revision to dividend policy ‒ higher payout signals confidence. The board has raised the distribution ratio from 65% to 90% of recurrent core underlying net profit from Hong Kong investment properties and hotels starting from 2026. Management said that this higher payout neither alters its deleveraging strategy, which is expected to be further supported by the completion of Wheelock Plaza sale and potential disposal of Scott Square, nor constrains its capacity to pursue redevelopment opportunities, eg potential Marco Polo AEI. In our view, the move is underpinned by the historical low net gearing ratio, the stabilisation of the Hong Kong IP portfolio and the successful disposal of Wheelock Place. Most importantly, we believe the decision to increase the payout ratio reflects management’s confidence in both the industry outlook and the company’s own development trajectory.