Fortune Real Estate Investment Trust

OCBC on 31 Aug 2012

In Jul, HK retail sales climbed 3.8% YoY by value, significantly lower than the median 9.0% forecast of economists surveyed by Dow Jones Newswires and the YoY increases from Jan-Jun, which varied between 8.7% and 17.1%. A government spokesman attributed Jul's slow growth to the external economic environment and more cautious local consumer sentiment. Retail sales growth could be more moderate in 2H12 than 1H12 and this will reduce the extent of possible rental increases. A new visa policy to be implemented starting 1 Sep will help more mainlanders travel to HK. However, we estimate that mainland arrivals account for only ~19% of HK retail sales, so any increase in retail sales due to the visa policy will likely be moderate. For suburban mall operators like FRT, local consumer sentiment will still be a more important driver for positive rental reversions. We maintain our fair value of HK$5.33 and HOLD rating.

HK Jul retail sales below expectations
In Jul, HK retail sales climbed 3.8% YoY by value, significantly lower than the median 9.0% forecast of five economists surveyed by Dow Jones Newswires and the YoY increases from Jan-Jun, which varied between 8.7% and 17.1%. Jun retail sales had grown 11.0% YoY. A government spokesman attributed Jul's slow growth to the external economic environment and more cautious local consumer sentiment. Retail sales growth could be more moderate in 2H12 than 1H12 and this will reduce the extent of possible rental increases.

New visa policy could increase PRC visitor numbers...
The Chinese government has announced a change in the Individual Visit Scheme, whereby non-residents living in Beijing, Shanghai, Guangzhou, Shenzhen, Tianjin and Chongqing are able to apply for passports and visas to HK, Macau and Taiwan starting from 1 Sep 2012. Currently, people need to return to the area that issued their residency permit (hukou) to apply. The six cities have substantial non-resident populations. Shenzhen reportedly has a non-resident population of 4.1m, of which many are thought to be migrant workers with mass-market consumption patterns - which suits FRT’s positioning.

...but PRC arrivals account for only 19% of retail sales
For the first seven months of the year, overall visitor arrivals to HK climbed 15.2% YoY to 26.7m. In particular, arrivals by visitors residing in the mainland increased 22.6% YoY to 18.8m. Residents of mainland China spent HK$78,792m on shopping in 2011. Based on this, we estimate that mainlanders accounted for only 19.4% of the HK’s total retail sales in 2011, so additional arrivals due to the visa policy will not necessarily be a panacea. For suburban mall operators like FRT, local consumer sentiment will still be a more important driver for positive rental reversions. We calculate that visitor arrivals as a whole accounted for 24.4% of 2011 retail sales.

Maintain HOLD
We maintain our fair value of HK$5.33 and HOLD rating.