太古地产(01972) 　　With overall HK retail sales stabilizing in 3Q, Swire Properties’ (“Swire”) HK malls also started to show moderation in retail sales decline. On the other hand, its HK office portfolio has shown similar trends as in 2Q16. In October, Swire announced the disposal of its office project in Kowloon Bay which is a one-off positive for the stock. We believe key drivers for the stock would have to come from a sustained improvement in the retail sales of PP Mall and a stronger demand outlook for offices. Contributions from Swire’s new malls in Miami and Shanghai are expected to kick-in in F17 and leasing updates of such would be one of the foci to look for. Maintain Neutral. 　　Retail sales showed signs of stabilization in 3Q. Swire released its quarterly operating statement for 3Q16. Along with the sequential improvement in HK’s overall retail sales from an 8.2% Y/Y decline in 2Q16 to a 7.5% Y/Y decline in 3Q16, both PP Mall and Citygate Outlets have reported narrower retail sales decline. PP Mall has recorded a decent reclamation from -17% Y/Y as of Jun-end to -15.3% Y/Y as of Sep-end. We believe Swire’s effort to reshuffle the tenant mix at PP Mall, better domestic consumption sentiment due to recovering home prices and stabilizing tourist arrivals in recent months have helped with the malls’ performances. That said, we think it will take time for PP Mall’s retail sales growth to revert to positive territory. On the other hand, Cityplaza Mall’s decline has been similar to that as of Jun-end. While September retail sales were mainly aided by new smartphone sales, the better-than-expected tourist arrivals during Golden Week should also point towards a good set of numbers in October. We believe the more significant base effect, stabilizing tourism trend and domestic consumption will continue to help retail sales decline narrow and other major retail landlords such as Wharf could benefit from retail sales improvement as well. 　　Investment Thesis 　　Swire Properties is well-positioned to capture the future growth in office demand with the Island East office development and the new office development in Kowloon East. The steady performance of its growing China portfolio is also recognized by the market. That said, we believe Swire Properties is likely to be lack of drivers in the near term as: 1) office demand is decelerating, and 2) HK retail malls including Pacific Place Mall are not doing well. 　　Valuation 　　Our Dec-16 PT of HK$23.8 is based on a 33% discount to Dec-16 NAV, which is the long-term average discount