Wednesday 10 April 2013

Fortune Reit

OCBC on 9 Apr 2013

The growth in HK’s retail sales has picked up significantly since 4Q12. Combining the first two months of 2013 to eliminate distortions from the timing of Chinese New Year, retail sales climbed up 15.8% in value. Robust retail sales will continue to underpin the growth in retail rents throughout HK. The media has reported that a group has called for the boycott of Park’N Shop supermarket chain, which is part of Li Ka-shing’s Hutchison Whampoa Ltd, in support of dock workers who are striking for better work conditions. Park’N Shop is FRT’s top tenant, accounting for 8.0% of the REIT’s total gross rental income in Dec 2012. According to FRT management, businesses are running as usual and impact to the Park’n Shop outlets in FRT’s malls has not been seen. Management has indicated that 2013's rental reversions are likely to be in the mid-teen percentages. FRT has a low gearing of 23.4% and no refinancing needs till 2015. We are maintaining our fair value of HK$7.28 and BUY rating on FRT.

Good HK retail sales
The growth in HK’s retail sales has picked up significantly since 4Q12. Combining the first two months of 2013 to eliminate distortions from the timing of Chinese New Year, retail sales climbed up 15.8% in value and 15.5% in volume. According to a government official, the generally stable labour market conditions and vibrant tourism should continue to lend support to retail business in the near term, although there are still notable headwinds on the external front. Provisional statistics from the HK Tourism Board indicate that the tourism expenditure associated with inbound tourism grew 16.5% YoY in 2012 to HK$306.5b. In contrast, Singapore’ retail sales fell 2.0% YoY in Jan 2013, and tourism receipts grew by only 3% YoY to S$23b in 2012. Robust retail sales will continue to underpin the growth in retail rents throughout HK.

No worries over call for Park’N Shop boycott
The media has reported that a group has called for the boycott of Park’N Shop supermarket chain, which is part of Li Ka-shing’s Hutchison Whampoa Ltd, in support of dock workers who are striking for better work conditions. The workers are employed by Hongkong International Terminals (HIT) either directly or through contractors. HIT is a subsidiary of Hutchison Port Holdings Trust, which is owned by Hutchison Whampoa Ltd. Park’N Shop is FRT’s top tenant, accounting for 8.0% of the REIT’s total gross rental income in Dec 2012. According to FRT management, the incident is not affecting FRT malls. Businesses are running as usual and impact to the sales of the Park’n Shop outlets in FRT’s malls has not been seen.

Another solid year ahead
Overall rental reversion in 2012 was high at 19.8%, partially because of the low base in 2009. Management has indicated that 2013's rental reversions are likely to be in the mid-teen percentages.
It is worthwhile emphasising that FRT has a low gearing of 23.4% and no refinancing needs till 2015.

Maintain FV
We are maintaining our fair value of HK$7.28 and BUY rating on FRT. FRT is trading at a low P/B of 0.78x.

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