Fortune REIT

OCBC on 28 Jul 2015

Fortune REIT reported a good set of 2Q15 results which met our expectations. Revenue of HK$463.8m represented an increase of 13.2% YoY, while DPU jumped 11.9% to 11.75 HK cents. This was driven by robust organic growth and additional income contribution from Laguna Plaza which was acquired in Jan this year. As at 30 Jun 2015, Fortune REIT’s occupancy rate stood at a healthy 97.3%, despite frictional vacancies from its ongoing AEI. Average rental reversion of 22.1% was achieved for 1H15. Its portfolio was independently valued at HK$35.2b (as at 30 Jun 2015), a boost of 7.7% from Dec 2014’s valuation. We like Fortune REIT for its strong management team and resilient portfolio. We maintain our HOLD rating and fair value estimate of HK$8.04 on the stock as we believe valuations are fair.

2Q15 results within expectations
Fortune REIT reported a good set of 2Q15 results which met our expectations. Revenue of HK$463.8m represented an increase of 13.2% YoY, while DPU jumped 11.9% to 11.75 HK cents. This was driven by robust organic growth and additional income contribution from Laguna Plaza which was acquired in Jan this year, but partially offset by the divestment of Nob Hill Square in Apr. For 1H15, Fortune REIT’s gross revenue rose 13.4% to HK$922.6m and constituted 50.8% of our FY15 forecast. DPU of 23.38 HK cents was higher by 12.0% and formed 51.5% of our full-year projection.

Operating metrics showcase resiliency
As at 30 Jun 2015, Fortune REIT’s occupancy rate stood at a healthy 97.3%, despite frictional vacancies from its ongoing asset enhancement initiatives. Average rental reversion of 22.1% was achieved for 1H15, bringing its average portfolio passing rent up to HK$38.40 psf per month. Fortune REIT’s portfolio was independently valued at HK$35.2b (as at 30 Jun 2015), a boost of 7.7% from Dec 2014’s valuation. This was contributed by an increase in valuation for all its assets, coupled with the addition of Laguna Plaza (valued at HK$2.1b), but partially offset by the disposal of Nob Hill Square. Its portfolio weighted average retail cap rate remains unchanged at 4.7%. 

Maintain HOLD
In terms of financial position, Fortune REIT’s gearing stood at 30.6%, with no refinancing needs until 2016. We like Fortune REIT for its strong management team and resilient portfolio, as close to 60% of its gross rental income is derived from the non-discretionary retail sector. We maintain our HOLD rating and fair value estimate of HK$8.04 on the stock as we believe valuations are fair.

Fortune REIT

OCBC on 12 May 2015

Fortune REIT started FY15 on a positive note, recording a 13.6% YoY increase in revenue to HK$458.8m and a 12.0% growth in its DPU to 11.63 HK cents for its 1Q15 results. This was within our expectations. Overall portfolio occupancy stood at a healthy 98.1%, as at 31 Mar 2015; while average passing rent was HK$37 psf per month, an 8.2% YoY increase, if we exclude Laguna Plaza. While we like Fortune REIT for its strong management team, we see limited upside potential ahead. We trim our fair value estimate slightly from HK$8.05 to HK$8.04 due to a marginally higher unit base assumption, and reiterate our HOLD rating. Fortune REIT is currently trading at FY15F distribution yield of 5.7%, which is close to one standard deviation below its 5-year average blended forward yield of 6.3%.

1Q15 results within expectations
Fortune REIT started FY15 on a positive note, recording a 13.6% YoY increase in revenue to HK$458.8m and a 12.0% growth in its DPU to 11.63 HK cents for its 1Q15 results. This was within our expectations, as revenue and DPU constituted 25.3% and 25.6% of our full-year forecasts, respectively. Growth was driven by solid rental reversions of 18.4% across its portfolio, contribution from Laguna Plaza, which was acquired in Jan 2015, and the re-opening of the first renovated zone of Belvedere Square (50,000 sq ft) which had undergone AEI works. 

Operating metrics still healthy
Overall portfolio occupancy stood at a healthy 98.1%, as at 31 Mar 2015 (end FY14: 97.3%); while average passing rent was HK$37 psf per month, which represented an 8.2% YoY increase, if we exclude Laguna Plaza. In terms of financial position, Fortune REIT’s gearing was 33.2%, as at end 1Q15, and 46% of its debt has been hedged through interest rate swaps and caps. Following the opportunistic divestment of Nob Hill Square in Apr this year for HK$648m and the utilisation of the net proceeds to repay its loans, Fortune REIT’s gearing was subsequently reduced to 31.8%. Despite China’s restriction on visits of Shenzhen residents to Hong Kong to once a week, Fortune REIT does not expect to see a significant impact on the performance of Fortune Kingswood, which is located near the Shenzhen border. This is because tenant sales are still largely driven by the local catchment area.

Maintain HOLD
While we like Fortune REIT for its strong management team, as illustrated by the awards it recently won in five categories of “Asia’s Best Companies Poll 2015” conducted by FinanceAsia, we see limited upside potential ahead. We trim our fair value estimate slightly from HK$8.05 to HK$8.04 due to a marginally higher unit base assumption, and reiterate our HOLD rating. Fortune REIT is currently trading at FY15F distribution yield of 5.7%, which is close to one standard deviation below its 5-year average blended forward yield of 6.3%.

Fortune REIT

OCBC on 22 Jan 2015

Fortune REIT reported another good set of results, with 4Q14 revenue and DPU increasing by 8.4% and 8.0% YoY to HK$425.7m and 10.5 HK cents, respectively. This was within our expectations. Looking ahead, we expect contribution from its recently acquired Laguna Plaza to further boost its growth. We raise our FY15 DPU forecast by 5.4% and also roll forward our valuations. This results in our fair value estimate increasing from HK$7.29 to HK$8.05. While we like Fortune REIT for its resilient portfolio as 57% of its gross rental income is derived from the non-discretionary retail sector, we believe the stock appears fairly priced, having appreciated 7.4% YTD. Our forecasted FY15F distribution yield of 5.4% is more than one standard deviation below its 5-year average forward yield of 6.4%. Maintain HOLD.

4Q14 results met our expectations
Fortune REIT reported another good set of results, with 4Q14 revenue and DPU increasing by 8.4% and 8.0% YoY to HK$425.7m and 10.5 HK cents, respectively. For FY14, revenue jumped 25.7% to HK$1,655.8m, due to robust rental reversion of 23.8% and a full year of contribution from Fortune Kingswood (rental reversion in excess of 30%). Its portfolio passing rent increased by 8.7% to HK$36.4 psf pm. FY14 DPU of 41.68 HK cents translated into a growth of 15.8%, and formed 99.8% of our full year forecast. Results were within our expectations. All of Fortune REIT’s assets recorded an increase in their valuations ranging from 2.7% (Rhine Avenue) to 13.9% (Fortune City One).

Contribution from Laguna Plaza to further boost growth
Fortune REIT recently completed the acquisition of Laguna Plaza on 9 Jan 2015 for HK$1,918.5m (4.7% passing initial yield). This was fully funded by debt and the asset is expected to form synergies with Fortune REIT’s Centre de Laguna which is located at close proximity. We expect Fortune REIT’s gearing ratio to reach 33% at end FY15, versus 29.4% as at 31 Dec 2014. This is still a healthy level, in our view. Following this acquisition, Fortune REIT’s total debt hedged will ease from 55% to 46%.

Maintain HOLD
We raise our FY15 DPU forecast by 5.4% to take into account the acquisition of Laguna Plaza and also introduce our FY16 projections. Rolling forward our valuations, we bump up our fair value estimate from HK$7.29 to HK$8.05. While we like Fortune REIT for its resilient portfolio as 57% of its gross rental income is derived from the non-discretionary retail sector, we believe the stock appears fairly priced, having appreciated 7.4% YTD. Our forecasted FY15F distribution yield of 5.4% is more than one standard deviation below its 5-year average forward yield of 6.4%. Maintain HOLD.

Fortune REIT

OCBC on 12 Nov 2014

Fortune REIT reported a stellar set of 3Q14 results which met ours and Bloomberg consensus’ expectations. DPU rose 24.4% YoY to 10.3 HK cents on the back of a 32.0% surge in revenue to HK$416.6m. Management updated us that it has not seen any impact on its malls from the “Occupy Central” movement in Hong Kong. Its tenants’ sales still registered a single-digit growth for 9M14 despite the sluggish retail scene there. Positive rental reversions of 24.6% were achieved for 9M14, while the decline in occupancy was attributed to the commencement of AEI works at Belvedere Square. We lift our FY14 and FY15 DPU forecasts slightly by 1.3% and 1.8%, respectively. Our fair value estimate is bumped up from HK$6.68 to HK$7.29 as we also lower our discount rate assumption from 8.3% to 8.0% given Fortune REIT’s strong defensive attributes amid the current macroeconomic uncertainties. However, we are downgrading the stock to HOLD on valuation grounds.

3Q14 results within expectations
Fortune REIT reported a stellar set of 3Q14 results which met ours and Bloomberg consensus’ expectations. Total revenue surged 32.0% YoY to HK$416.6m as a result of strong rental reversions across its portfolio, better returns after the completion of its AEIs, and contribution from Fortune Kingswood which was acquired in Oct 2013. Income available for distribution and DPU rose 25.9% and 24.4% YoY to HK$193.1m and 10.3 HK cents, respectively. For 9M14, total revenue was up 33.0% to HK$1,230.1m and constituted 75.5% of our FY14 forecast. DPU of 31.18 HK cents represented a growth of 18.6% and formed 75.6% of our full-year estimates. 

Operating metrics still healthy
Despite concerns over the “Occupy Central” movement in Hong Kong, management updated that it has not seen any impact on its malls as they are not located in the affected districts. Its tenants’ sales still registered a single-digit growth for 9M14 despite the sluggish 1.0% dip in total value of retail sales in Hong Kong for 8M14. This is because Fortune REIT focuses largely on the non-discretionary retail sector. Positive rental reversions of 24.6% were achieved for 9M14, while portfolio passing rent of HK$35.7 psf (as at 30 Sep 2014) compared favourably to the HK$34.2 psf recorded as at 30 Jun 2014. Although portfolio occupancy fell from 99.1% (30 Jun 2014) to 97.1%, this was attributed to the commencement of AEI works at Belvedere Square. Fortune REIT expects occupancy at this mall to recover towards the 90% (from 76.6%) mark by the end of the year upon the completion of phase one. Phase two will start after Lunar New Year next year.

Downgrade to HOLD on valuation grounds
We lift our FY14 and FY15 DPU forecasts slightly by 1.3% and 1.8%, respectively. Our fair value estimate is bumped up from HK$6.68 to HK$7.29 as we also lower our discount rate assumption from 8.3% to 8.0% given Fortune REIT’s strong defensive attributes amid the current macroeconomic uncertainties. However, we are downgrading the stock to HOLD on valuation grounds, as Fortune REIT’s share price has already performed well, appreciating 16.2% YTD. We see limited upside at its current price level.

Fortune REIT

OCBC on 9 May 2014

Fortune REIT’s 1Q14 DPU of 10.38 HK cents (+15.3% YoY) was above our expectations. We note that portfolio occupancy has improved 0.6ppt QoQ to reach 99.3%, while positive rental reversion of 26.5% was achieved. Going forward, management expects Fortune Kingswood and the completed AEIs at Ma On Shan Plaza and Fortune City One Market to contribute to further growth. We understand the HK$80m AEI at Belvedere Square Phase 3 will commence as planned in 2H14, and that ROI of 15% is targeted. For the rest of the year, we also believe there may be opportunities for repositioning and rental growth at Fortune Metropolis and Provident Square, as a sizeable portion of their total GRA will be expiring. After incorporating the better results, our fair value is now raised to HK$6.68 from HK$6.28. Maintain BUY on Fortune REIT.

1Q14 results beat expectations
Fortune REIT reported a better-than-expected set of 1Q14 results, with NPI up 32.7% YoY to HK$289.2m, and distributable income up 26.5% to HK$193.9m. The remarkable performance was mainly due to contribution from newly-acquired Fortune Kingswood, higher secured rents across the portfolio and superior returns from its asset enhancement initiatives (AEIs). DPU registered 10.38 HK cents, up 15.3% YoY. This formed 26.7%/26.1% of ours/consensus full-year DPU projections, which we deem to be above expectations.

Solid operational performance
Portfolio occupancy for the quarter saw a sequential uptick of 0.6ppt to reach 99.3% – the highest level in over three years. In addition, rental reversion was strong at 26.5%, led by rental growth at Fortune Kingswood. As a result, average portfolio passing rent improved from HK$33.5 psf in 4Q13 to HK$33.9 psf. Excluding Fortune Kingswood, the growth in passing rent for the original portfolio, we note, was also healthy at 7.0%. Going forward, management expects Fortune Kingswood and the completed AEIs at Ma On Shan Plaza and Fortune City One Market to contribute to further growth. We also understand the HK$80m AEI at Belvedere Square Phase 3 will commence as planned in 2H14, and that ROI of 15% is targeted. For the rest of the year, we believe there may be opportunities for repositioning and rental growth at Fortune Metropolis and Provident Square, as a sizeable 66.1% and 66.1% of total GRA at the respective malls will be expiring. This may possibly provide another boost to Fortune REIT’s rental income, in our view.

Maintain BUY
As at 31 Mar, Fortune REIT’s gearing ratio remained sturdy at 32.9%. However, interest cost improved from 2.59% in prior quarter to 2.22%. In Apr, we note that Fortune REIT has refinanced its existing HK$1.4b loan facilities, ahead of its maturity in Feb 2015. This not only lowers its interest margin to 1.4% (from 2.0% under existing facilities), but also fully eliminates its refinancing needs for 2014-15. After incorporating the better results, our fair value is now raised to HK$6.68 from HK$6.28. Maintain BUY.

Fortune REIT

OCBC on 27 Jan 2014

FRT reported 4Q13 results that were in line with ours and the street's expectations. Revenue rose 34.6% YoY to HK$392.6m chiefly due to contribution from Fortune Kingswood from Oct 2013, as well as higher occupancy rates and strong rental growth across the portfolio. Net property income was up 33.0% at HK$275.2m. Income available for distribution climbed 27.8% YoY to HK$182.1m. DPU increased by 16.1% to 9.72 HK cents because of the placement units (representing an increase of 8.4% over the number of prior units) issued on 6 Aug 2013. Raising the cost of equity to 8.5% from 7.9%, we lower our FV on FRT to HK$6.28 from HK$7.01. We maintain our BUY rating on FRT.

Kingswood tenant repositioning
FRT reported 4Q13 results that were in line with ours and the street's expectations. Revenue rose 34.6% YoY to HK$392.6m chiefly due to contribution from Fortune Kingswood from Oct 2013, as well as higher occupancy rates and strong rental growth across the portfolio. Net property income was up 33.0% at HK$275.2m. Income available for distribution climbed 27.8% YoY to HK$182.1m. DPU increased by 16.1% to 9.72 HK cents because of the placement units (representing an increase of 8.4% over the number of prior units) issued on 6 Aug 2013. Occupancy for the Kingswood has increased to 99.0% from 95.5% at acquisition. The Jockey Club, which previously occupied 12,350 sqft on the ground floor, has been relocated to the first floor, and the original prime space is being subdivided and 100% pre-committed by new retail F&B tenants. Kingswood is positioned for rental growth with 46.5% of leases expiring in 2014 (low base). FRT's portfolio saw its valuation increase by 45.2% to HK$29.3b, including HK$6.0b from Kingswood. The original portfolio's valuation increased by 15.3% YoY. Cap rates were mostly unchanged; portfolio weighted average retail cap rate was at 4.7%. 

Opportunities in 2014
Portfolio occupancy was strong at 98.7% as at end Dec. Average rental reversion was 20.4% for FY13 and average passing rent for the original portfolio was higher by 9.0% to HK$33.5 psf. The HK$15m AEI at Ma On Shan Plaza, with works to downsize and subdivide the supermarket for more retail and F&B outlets, was completed in Dec 2013 and achieved ROI of 60%. In 2014, Fortune Metropolis has 69% of total GRA expiring and Provident Square has anchor tenant space expiring, providing repositioning opportunities. This year will also see the beginning of a HK$80m capex AEI on Belvedere Square with target completion by end 2015. Target ROI is 15%.

Maintain BUY
Raising the cost of equity to 8.5% from 7.9%, we lower our FV on FRT to HK$6.28 from HK$7.01. We maintain our BUY rating on FRT.

Fortune REIT

OCBC on 12 Nov 2013

FRT reported 3Q13 results that were generally in line with ours and the street's expectations. Revenue rose 10.7% YoY to HK$315.7m. Income available for distribution climbed 10.6% YoY to HK$153.3m, however, DPU increased by only 1.5% to 8.28 HK cents because of the placement units (representing an increase of 8.4% over the number of prior units) issued on 6 Aug. Income from Fortune Kingswood started contribution from 9 Oct. FRT's unit price has fallen 11% since 29 Jul (closing price of HK$7.14), the day before it announced the MOU for Kingswood. We believe the counter has been oversold. We tweak our FV slightly to HK$7.01 from HK$6.95. On valuation grounds, we upgrade FRT to a BUY from Hold. We believe that the reflection of the maiden contribution by Fortune Kingswood in the 4Q13 results will be a significant positive catalyst; we forecast 4Q13 DPU of 10.0 HK cents.

Kingswood contribution only from 4Q
FRT reported 3Q13 results that were generally in line with ours and the street's expectations. Revenue rose 10.7% YoY to HK$315.7m, thus pulling net property income up 8.2% to HK$215.6m. Income available for distribution climbed 10.6% YoY to HK$153.3m, however, DPU increased by only 1.5% to 8.28 HK cents because of the placement units (representing an increase of 8.4% over the number of prior units) issued on 6 Aug. Income from Fortune Kingswood started contribution from 9 Oct.

Good operational performance
Portfolio occupancy stood at 98.3% as at end Sep, due to strong recovery after the completion of AEIs. The average rental reversion for 9M13 was solid, clocking in at 20.0%. Average passing rent was higher by 8.2% to HK$34.2 psf for 9M13. The HK$20m AEI at the wet market of Fortune City One was completed with ROI surpassing 25%. There are now more trades and the layout has been improved. Occupancy of the FCO market increased to above 90% from 75% previously. The HK$15m AEI at Ma On Shan Plaza, with works to downsize and subdivide the current supermarket for more retail and F&B outlets, is due to be completed by year-end. All newly-subdivided shops have attracted commitments and the ROI is estimated to be approximately 60%.

Oversold
FRT's unit price has fallen 11% since 29 Jul (closing price of HK$7.14), the day before it announced the MOU for Kingswood. We believe the counter has been oversold. We maintain an expected market return of 13.5% and a risk-free rate of 2.3% in our DDM model; these assumptions are conservative since current expected market return is 13.3% and spot HK 10-year bond yield is 1.9%). We tweak our FV to HK$7.01 from HK$6.95. On valuation grounds, we upgrade FRT to a BUY from Hold. We believe that the reflection of the maiden contribution by Fortune Kingswood in the 4Q13 results will be a significant positive catalyst; we forecast 4Q13 DPU of 10.0 HK cents.

Fortune REIT

OCBC on 1 Aug 2013

FRT has entered into a non-binding MOU in connection with the acquisition of 100% of the issued share capital of a target company by FRT and assignment of the shareholder loans to FRT. The target company owns Kingswood Ginza Property, which comprises the entire Kingswood Ginza Mall as well as other retail, kindergarten, parking lots and ancillary spaces. The indicative purchase consideration is HK$5,849m. 142,962,000 new units, representing an increase of 8.4% of the total number of units currently in issue (excluding the new units), have been placed out at HK$6.82 each. The net proceeds of ~HK$947m will be used to partially fund the proposed acquisition. The remainder will be funded through new facilities. In our model, we assume that the acquisition will be completed by mid-September. While the acquisition is likely to be accretive, we note the continued increase in bond rates since late June, and hence lift our risk-free rate to 2.3% from 2.0%. Incorporating a higher expected market return of 13.5% as well (13.0% previously), we lower our FV to HK$6.95 from HK$7.51. On valuation grounds, we downgrade FRT to a HOLD.

Kingswood Ginza in close proximity to mainland
FRT has entered into a non-binding MOU regarding the acquisition of the entire issued share capital of the target company by FRT and the assignment of the shareholder loans to FRT. The target company owns Kingswood Ginza Property, which comprises the entire Kingswood Ginza Mall as well as other retail, kindergarten, parking lots and ancillary spaces. Kingswood Ginza Mall is the largest shopping center in HK’s Yuen Long district and is in close proximity to the mainland. The indicative purchase consideration is HK$5,849m. With 1H13 net property income at HK$110.4m, implied annualized NPI yield is 3.78%. NPI yield of the existing portfolio is ~3.94% (based on annualized 1H13 NPI). If the occupancy of Kingswood Ginza Property can be raised from the current 95.5%, we believe its NPI yield could be brought closer to 4%.

Increase portfolio valuation by 26%
The acquisition could increase FRT’s portfolio valuation by ~26%. 142,962,000 new units, representing an increase of 8.4% over the number of prior units, have each been placed out at HK$6.82, which is at a discount of 4.4% to the volume weighted average price for trades done on the SGX-ST and the SEHK for 29 July. The net proceeds of ~HK$947m is intended to partially fund the acquisition. The remainder funding will come from new facilities which will bear a blended interest margin of 1.48% per annum over HIBOR. The borrowings will become payable in 3.5 to 5 years. 

Downgrade to HOLD
In our model, we assume that the acquisition will be completed by mid-September. While the acquisition is likely to be accretive in the longer term, we note the continued increase in bond rates since late June, and hence lift our risk-free rate to 2.3% from 2.0%. Incorporating a higher expected market return of 13.5% as well (13.0% previously), we lower our FV to HK$6.95 from HK$7.51. On valuation grounds, we downgrade FRT to a HOLD.

Fortune REIT

OCBC on 16 Jul 2013

FRT reported income available for distribution of HK$153.7m (+12.5% YoY), driven by a 10.7% YoY increase in revenue to HK$307.9m and a 11.6% YoY rise in net property income to HK$219.6m. DPU was the same as 1Q13 at 9.00 HK cents (+11.9% YoY). The results were in line with ours and the street's expectations. The portfolio valuation as of 30 June stood at HK$22.2B, up 9.8% from Dec 2012. The increase was mainly driven by improved asset performance, with cap rates of 4.3%-5.1%. The increase in asset valuation pushed the gearing ratio down to 20.9%. FRT is trading at a P/B of 0.71x (NAV of HK$10.01). We maintain our FV of HK$7.51 and BUY rating on FRT.

2Q13 NPI up 11.6% YoY 
FRT reported income available for distribution of HK$153.7m (+12.5% YoY), driven by a 10.7% YoY increase in revenue to HK$307.9m and a 11.6% YoY rise in net property income to HK$219.6m. DPU was the same as 1Q13 at 9.00 HK cents (+11.9% YoY). The results were generally in line with ours and the street's expectations. Interest cost was 2.81% as at 30 June (versus 2.76% as at 31 March). We raise our FY13F interest cost assumption from 2.75% to 2.80%. 76% of FRT's interest cost is hedged at fixed rates.

Portfolio valuation at HK$22.2B
The portfolio valuation as of 30 June 2013 stood at HK$22.2B, up 9.8% from Dec 2012. The increase was mainly driven by improved asset performance, with cap rates of 4.3%-5.1%. The only asset which saw a cap rate change was Jubilee Square, which had a slight cap rate compression. Coupled with its monthly rental increasing by 34% following AEI, the valuation for the asset rose 37% from December to HK$756m at June. The increase in portfolio valuation pushed FRT's gearing ratio down to 20.9%. FRT is trading at a P/B of 0.71x (NAV of HK$10.01). 

Strong operational performance
Good rental reversion of 18.2% was registered for 1H13 renewals. Average passing rent was HK$33.1 psf, up 7.0% YoY. Portfolio occupancy remained healthy at 97.8%, weighed down partially by AEIs in Fortune City One's wet market (HK$18m; 2Q13 start) and at Smartland. The AEI at the wet market and another small AEI at Ma On Shan Plaza (HK$17m; 3Q13 start, probably in August) should be completed by end 2013. The next large scale project is Phase 3 AEI for Belvedere Square (HK$80m; 4Q13-end 2014). 

Maintain FV of S$7.51 
We maintain our FV of HK$7.51 and BUY rating on FRT.

Fortune REIT

OCBC on 3 Jul 2013

The prospect of an early tapering of US Federal Reserve’s quantitative easing program has driven up bond yields and, as a result, high-yield counters such as Fortune REIT (FRT) have seen a correction in their prices. FRT’s unit price has fallen 15.1% since the peak of HK$8.43 on 15th May this year (but still up 12.4% YTD). We note that rising risk-free rates will not have much impact on cost of debt for FRT given that interest cost for ~76% of FRT's debt exposure has been hedged to fixed rates with effective interest cost at 2.76%. FRT has no refinancing needs till 2015 and has a weighted term to maturity of 2.7 years. FRT's gearing continues to remain low at 23%. Accounting for the higher HK 10-year government risk-free rate (which climbed from 0.8% at the beginning of May to 2.0% currently), we raise our cost of equity assumption to 7.5% from 6.6%. We also raise our LT nominal growth rate for dividends from 1.75% to 2.0%. Our FV falls to HK$7.51 from HK$8.64. We maintain a BUY rating on FRT.

Affected by rising risk-free rates 
The prospect of an early tapering of US Federal Reserve’s quantitative easing program has driven up bond yields and, as a result, high-yield counters such as Fortune REIT (FRT) have seen a correction in their prices. FRT’s unit price has fallen 15.1% since the peak of HK$8.43 on 15th May this year (but still up 12.4% YTD). We note that rising risk-free rates will not have much impact on cost of debt for FRT given that interest cost for ~76% of FRT's debt exposure has been hedged to fixed rates with effective interest cost at 2.76%. FRT has no refinancing needs till 2015 and has a weighted term to maturity of 2.7 years. FRT's gearing continues to remain low at 23%.

Strong operational performance
To recap, Fortune REIT reported excellent results for 1Q13. Revenue and net property income climbed 16.3% YoY and 17.6% YoY to HK$301.4m and HK$217.9m respectively. Occupancy rose to 98.6%, the highest level in over two years, with good portfolio-wide operational statistics and a fast recovery after AEI. Average passing rents grew by 10.0% YoY to a new high of HK$32.9 sq ft. Due to a strong leasing market, rental reversions were at 19.5%, higher than the mid-teen percentages that management had guided.

Continued growth through AEIs 
The HK$100m AEI for Fortune City One, completed in 4Q12, has repositioned the mall as a one-stop shopping, dining and leisure centre. The HK$15m AEI at Jubilee Square is expected to be completed in 2Q13 with an ROI of over 25%. Two smaller AEIs at FCO's wet market (HK$18m; 2Q13 start) and Ma On Shan Plaza (HK$17m; 3Q13 start) should be completed by end 2013. The next large scale project is Phase 3 AEI for Belvedere Square (HK$80m; 4Q13-end 2014). 

Decrease FV to HK$7.51
Accounting for the higher HK 10-year government risk-free rate (which climbed from 0.8% at the beginning of May to 2.0% currently), we raise our cost of equity assumption to 7.5% from 6.6%. We also raise our LT nominal growth rate for dividends from 1.75% to 2.0%. Our FV falls to HK$7.51 from HK$8.64. We maintain a BUY rating on FRT.

Singapore Reits

OCBC on 4 Jun 2013

We see two key factors driving the S-REITs price correction over the last two weeks. First, increased expectations that the Federal Reserve could taper its bond purchases as early as 2H13; and secondly, opportunistic profit-taking on the back of a strong performance over 2012-13. At this juncture, however, we see the selling to be overdone. In our view, the odds of the Fed tapering bond purchases in 2H13 are roughly 50-50 and we see fundamental valuations for the S-REITs sector (370bp against the 10Y government bonds) to be undemanding currently. In addition, S-REITs sector would likely continue to deliver, in 2013, firm earnings from asset enhancement initiatives/development projects, yield-accretive acquisitions and active leasing efforts. Maintain our OVERWEIGHT rating on the S-REITs sector. Starhill Global REIT [BUY, S$1.05 FV] is our top pick in the sector due to its growth potential, strong fundamentals and compelling valuations. We also like CapitaCommercial Trust [BUY, S$1.80 FV] and Fortune REIT [BUY, HK$8.64 FV] for the quality of their portfolio assets, positive rental reversion profiles and low gearing.

Interest rate fears hitting S-REITs sector
We see two key factors driving the dramatic correction in the S-REITs sector over the last two weeks. First, increased expectations that the Federal Reserve could taper its bond purchases as early as 2H13; and secondly, the market going into opportunistic profit-taking on the back of a strong performance over 2012-13. At this juncture, however, we see the selling to be overdone. The S-REITs sector has nearly relinquished all of its YTD gains; the FSTREI was up 13.5% YTD on 15 May 2013 is now up only 1.6% YTD as at 3 Jun 2013. We would now selectively bargain hunt for REITs with firm fundamentals and good potential for DPU growth.

S-REITs’ valuations undemanding
In our view, the odds of the Fed tapering bond purchases in 2H13 are roughly 50-50 and we see fundamental valuations for the S-REITs sector to be undemanding currently. The S-REITs sector is trading at a market-cap weighted spread of 370bp against the 10Y government bonds, which is still attractive versus the 4-year average of 430bp and also versus other major REIT markets, such as Hong Kong (280bp), Japan (310bp) and Australia (200bp).

S-REITs benefiting from strong fundamentals
We see S-REITs delivering firm financial performances in 2013 from asset enhancement initiatives/development projects, yield-accretive acquisitions and active leasing efforts. For our coverage, we expect the S-REITs to post 6.6% growth in aggregate DPU for the current fiscal year, before experiencing another 8.6% growth in the next year.

Selectively bargain hunt
Given current valuations, we maintain our OVERWEIGHT rating on the S-REITs sector and advocate for bargain hunting for S-REITs with good growth potential, strong financial position and compelling valuations (relatively lower P/B and decent DPU yields). Starhill Global REIT [BUY, S$1.05 FV] is our top pick in the sector due to its growth potential, strong fundamentals and compelling valuations. We also like CapitaCommercial Trust [BUY, S$1.80 FV] and Fortune REIT [BUY, HK$8.64 FV] for the quality of their portfolio assets, positive rental reversion profiles and low gearing.

Fortune REIT

OCBC on 10 May 2013

Fortune REIT reported excellent results for 1Q13. Revenue and net property income climbed 16.3% YoY and 17.6% YoY to HK$301.4m and HK$217.9m respectively. Occupancy rose to 98.6%, the highest level in over two years, with good portfolio-wide operational statistics and a fast recovery after AEI. Average passing rents grew by 10.0% YoY to a new high of HK$32.9 sq ft. Due to a strong leasing market, rental reversions were at 19.5%, higher than the mid-teen percentages that management had guided. While 2Q/3Q may see anchor tenants renewing leases with lower percentages, we think that revenue and net property income are likely to grow on a QoQ basis. DPU of 9.0 HK cents formed 27% of our initial FY13 estimate and 26% of the street’s FY13 consensus estimate. Raising revenue assumptions and lowering interest cost assumptions, we lift our fair value to HK$8.64 from HK$7.28 and we maintain a BUY rating on FRT. It is trading at a still-attractive P/B of 0.9x.

Better-than-expected 1Q13
Fortune REIT (FRT) reported excellent results for 1Q13. Revenue and net property income climbed 16.3% YoY and 17.6% YoY to HK$301.4m and HK$217.9m respectively. Occupancy rose to 98.6%, the highest level in over two years, with good portfolio-wide operational statistics and a fast recovery after AEI. Average passing rents grew by 10.0% YoY to a new high of HK$32.9 sq ft. Due to a strong leasing market, rental reversions were at 19.5%, higher than the mid-teen percentages that management had guided. While 2Q/3Q may see anchor tenants renewing leases with lower percentages, we think that revenue and net property income are likely to grow on a QoQ basis. There was also a full quarter's contribution from Belvedere Square and Provident Square, which were acquired on 17 Feb 2012. DPU of 9.0 HK cents formed 27% of our initial FY13 estimate and 26% of the street’s FY13 consensus estimate.

Continuous program of successful AEIs 
The HK$100m AEI for Fortune City One (FCO), completed in 4Q12, has repositioned the mall as a one-stop shopping, dining and leisure centre. The HK$15m AEI at Jubilee Square is expected to be completed in 2Q13 with an ROI of over 25%. Two smaller AEIs at FCO's wet market (HK$18m; starts in 2Q13) and Ma On Shan Plaza (HK$17m; starts in 3Q13) should be completed by end 2013. The next large scale project is Phase 3 AEI for Belvedere Square (HK$80m; 4Q13-end 2014). 

Low gearing
At 23%, FRT's gearing continues to remain low. Interest cost for ~76% of FRT's debt exposure has been hedged to fixed rates with effective interest cost at 2.76%. FRT has no refinancing needs till 2015 and has a weighted term to maturity of 2.7 years. Management continues to evaluate potential acquisitions. 

Raising FV to HK$8.64
Raising revenue assumptions and lowering interest cost assumptions, we lift our fair value to HK$8.64 from HK$7.28 and we maintain a BUY rating on FRT. It is trading at a still-attractive P/B of 0.9x.

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.

Fortune REIT

OCBC on 25 Jan 2013

FRT's had a solid FY12, with revenue climbing 22.5% YoY to HK$1.11b and NPI rising 22.8% YoY to HK$788.3m. The two properties acquired on 17 Feb 2012 accounted for 12.4% of NPI growth. The remaining 10.4% of NPI growth from the original portfolio of 14 properties was from strong reversion and AEI results. Overall rental reversion was high at 19.8%, partially because of the low base in 2009 when the leases due to be renewed were signed. We understand from management that, since 2010 provides a higher base, 2013's rental reversions are likely to be in the mid-teen percentages. FY12 DPU of 23.35 HK cents was up 23.0% YoY, representing the highest growth trend in the REIT's 9-years history. The results were in line with ours and consensus expectations. We are maintaining our fair value of HK$7.28 and a BUY rating on FRT.

Rental reversions likely to be in mid-teens
FRT's had a solid FY12, with revenue climbing 22.5% YoY to HK$1.11b and NPI rising 22.8% YoY to HK$788.3m. The two properties acquired on 17 Feb 2012 accounted for 12.4% of NPI growth. The remaining 10.4% of NPI growth from the original portfolio of 14 properties was from strong reversion and AEI results. Passing rent for the original portfolio was up 8.3%. Overall rental reversion was high at 19.8%, partially because of the low base in 2009. Management indicates that 2013's rental reversions are likely to be in the mid-teen percentages. FY12 DPU of 23.35 HK cents was up 23.0% YoY, representing the highest growth trend in the REIT's 9-years history. The results were in line with ours and consensus expectations.

More AEI opportunities
Portfolio occupancy climbed from 96.1% as of 30 Sep 2012 to 97.7% as of 31 Dec 2012, reflecting good recovery upon AEI completion. 2013 sees significant portions of occupied GRA for FRT's three largest assets by valuation, i.e., Fortune City One (FCO), Ma On Shan Plaza (MOSP) and Metro Town, up for expiry (43.1%, 41.4% and 69.9% respectively). For FCO, 2013 will see the first reversion of leases from the AEIs that were completed in 2010. Following the completion of HK$100m AEI in 4Q12 (ROI of over 20%), management is considering a HK$10-20m AEI at FCO to improve the wet market and increase occupancy. At MOSP, FRT will explore getting back some space from the supermarket to bring in some higher yielding trades (e.g. another AEI at HK$10-20m). At Metro Town, there is mark-to-market upside because of improvement in foot traffic. One of the Feb acquisitions, Belvedere, may see a ~HK$80m AEI starting end 2013. 

Solid balance sheet 
The portfolio valuation increased by 4.9% to HK$20.2b between Jun to Dec 2012; capitalisation rates stayed the same. The valuation of the original portfolio climbed 5.0% to HK18.0b. 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 a BUY rating on FRT. FRT is one of our top REIT picks and has an attractive P/B of 0.75x.

Fortune REIT

OCBC on 18 Jan 2013

HK retail sales by volume grew by 8.1% YoY in Nov 2012, representing a rebound from the 3.6% YoY growth in Oct 2012. For 11M12, retail sales by volume grew by a solid 7.1% YoY. Tourist arrivals were a contributing factor, growing by 18.7% YoY in Nov (vs. +15.8% YoY for 10M12). As we have previously calculated, tourists account for one quarter of overall HK retail sales (in terms of value), with mainland Chinese tourists accounting for one fifth of overall retail sales. The long term growth of the Chinese economy bodes well for HK retail properties. We have a fair value of HK$7.28 on FRT and maintain our BUY rating. FRT is our top pick among overseas retail S-REITs. We believe that the recent price consolidation provides an attractive entry point for investors.

Strong tourist arrivals boost retail
HK retail sales by volume grew by 8.1% YoY in Nov 2012, representing a rebound from the 3.6% YoY growth in Oct 2012. For 11M12, retail sales by volume grew by a solid 7.1% YoY. Tourist arrivals were a contributing factor, growing by 18.7% YoY in Nov (vs. +15.8% YoY for 10M12). 11M12 tourist arrivals totaled a whopping 44m. As we have previously calculated, tourists account for one quarter of overall HK retail sales (in terms of value), with mainland Chinese tourists accounting for one fifth of overall retail sales. The long term growth of the Chinese economy bodes well for HK retail properties.

Healthy rental growth to continue
Portfolio passing rent for FRT’s original portfolio (excluding the two properties purchased in Feb 2012) was up by 8.4% YoY for 9M12. We believe that for 2013, the increase in the passing rent will also be in the healthy high single digit percentages, particularly because of the recent completion of the HK$100m AEI at Fortune City One, its largest asset, with target ROI of 15%. A change in tenant mix will help improve the positioning of the mall and we believe rental reversions for this mall will be around the high-teens. We like management’s proactive approach. Belvedere Square, which was one of the properties acquired in Feb 2012, has had 35% of its leases already re-negotiated in 9M12 and management has indicated that an AEI is possible for 2013/2014. 

A top REIT pick
FRT’s unit price climbed by 69% in 2012, however, we still continue to find this REIT attractive on valuation grounds. We think the recent price consolidation provides a good entry point for investors. We have a fair value of HK$7.28 and a BUY rating on FRT. FRT is our top pick among overseas retail S-REITs.

 

Fortune REIT

OCBC on 30 Nov 2012

We believe that FY13F DPU yield for Fortune REIT (FRT) is attractive at 5.0%, especially compared to that of its closest HK peer, The LINK REIT, which has a consensus FY13F DPU yield of 3.7% (Bloomberg). It should be noted that HK’s 10-year government bond yield is 0.56%, versus 1.33% for Singapore. This means that the average FY13F DPU yield for 5.5% for local retail REITs implies a spread of 4.2%, tighter than the 4.4% spread for FRT. At an NAV per unit of HK$8.32, FRT is trading at a P/B of 0.80x, at a good discount to the overall local retail S-REITs' P/B of 1.15x and The LINK’s P/B of 1.52x. Adjusting our DDM model assumptions, which were previously conservative, we raise our fair value from HK$6.63 to HK$7.28 and maintain our BUY call on FRT. FRT is one of our top two picks among the retail S-REITs.

Impressive 9M12
To recap, 9M12 DPU grew 23.1% YoY, the highest rate of growth in the REIT’s nine-year history. The performance was due to a three-pronged growth strategy: active lease management, yield-accretive acquisitions (e.g. FRT acquired Provident Square and Belvedere Square in mid-Feb) and asset enhancement initiatives with ROIs of at least 15%. Given stable retail space supply in the vicinity of its malls, we believe FRT has a positive operational outlook.

Yield compression versus physical property
As first analysed in our report dated 8 Oct 2012, FRT can see further dividend yield compression from unit price increases. On average, for the period 2003-2011 (excluding 2008), FRT's DPU yield has been at 1.4x relative to the yield for HK physical retail property. Based on 1.4x, and given that the 2012 average annualized yield for physical retail property in HK is 2.7% (based on 9M12), this implies a possible yield of ~3.8% for FRT's FY12F. At FRT's current unit price, FY12F DPU yield is 4.9%. As such, there is potential upside for FRT’s unit price.

Yield compression versus peers 
We believe that FRT's FY13F DPU yield is attractive at 5.0%, especially compared to that of its closest HK peer, The LINK REIT, which has a consensus FY13F DPU yield of 3.7% (Bloomberg). It should be noted that HK’s 10-year government bond yield is 0.56%, versus 1.33% for Singapore. This means that the average FY13F DPU yield of 5.5% for local retail REITs implies a spread of 4.2%, tighter than the 4.4% spread for FRT. At an NAV per unit of HK$8.32, FRT is trading at a P/B of 0.80x, at a good discount to the overall local retail S-REITs' P/B of 1.15x and The LINK’s P/B of 1.52x. Gearing is low at 24.6%. 

Raise FV to HK$7.28
Adjusting our DDM model assumptions, which were previously conservative, we raise our fair value from HK$6.63 to HK$7.28 and maintain our BUY call on FRT. FRT is one of our top two picks among the retail S-REITs.

Fortune Reit

OCBC on 31 Oct 2012

9M12 DPU grew 23.1% YoY, representing the highest rate of growth in the REIT’s nine-year history. The results are in line with our expectations, with 9M12 DPU of 23.98 HK cents forming 74% of our prior FY12 DPU estimate. 9M12 revenue increased by 21.1% to HK$822.1m. The 20.7% increase in 9M12 NPI to HK$581.4m can be broken down into an 11.6% increase from the two new properties acquired in mid-Feb and a 9.1% increase from the original portfolio due to strong reversion and AEI. The average rental reversion clocked was impressive at 20.1%, among the highest level in years. At an NAV per unit of HK$8.32, FRT is trading at 0.7x NAV, significantly below the retail S-REITs average of ~1.1x. Gearing remains fairly low at 24.6%. Rolling forward our DDM model to FY13, we raise our fair value from HK$6.49 to HK$6.63 and maintain our BUY rating on FRT. We believe that the FY13F DPU yield is attractive at 5.6%.

Good growth in 3Q12
9M12 DPU grew 23.1% YoY, representing the highest rate of growth in the REIT’s nine-year history. The results are in line with our expectations, with 9M12 DPU of 23.98 HK cents forming 74% of FY12 DPU estimate. 3Q12 revenue climbed by 22.6% YoY to HK$284.7m and NPI rose 22.9% YoY to HK$199.3m. 9M12 revenue increased by 21.1% to HK$822.1m. The 20.7% increase in 9M12 NPI to HK$581.4m can be broken down into an 11.6% increase from the two new properties acquired in mid-Feb and a 9.1% increase from the original portfolio due to strong reversion and AEI.

Strong rental reversion
Despite AEI at Fortune City One and Jubilee Square, portfolio occupancy only declined slightly from 96.5% as of 30 Jun to 96.1% as of 30 Sep. The average rental reversion clocked was impressive at 20.1%, among the highest level in years. The fraction of tenant’s trade mix attributable to non-discretionary retail sector remains constant at about 60%, giving the portfolio resiliency. Management indicates that even tenants who are in discretionary consumption may also renew leases at substantially higher rents, e.g. real estate companies are willing to accept paying double the rents they signed on for in 2010.

Price can appreciate further
We believe that there is room for further appreciation of FRT’s unit price. As we have written about in our report dated 8 Oct 2012, FRT can see further dividend yield compression (from unit price increases). Relative to the average yield for HK physical retail property (currently around 2.7%), FRT’s FY12F yield of 5.4% is above the historical average. At an NAV per unit of HK$8.32, FRT is trading at 0.7x NAV, significantly under the retail S-REITs average of ~1.1x. Gearing remains low at 24.6%. 

Raise FV to HK$6.63
Rolling forward our DDM model to FY13, we raise our fair value from HK$6.49 to HK$6.63 and maintain our BUY rating on FRT. We believe that the FY13F DPU yield is attractive at 5.6%.

Fortune REIT

OCBC on 8 Oct 2012

In Aug, the value of HK retail sales climbed 4.5% YoY, a slightly improvement over Jul, which saw sales rise 3.9% YoY (revised figure). While these increases are substantially lower than the YoY increases earlier in the year, which ranged between 8.7% and 17.1% for Jan-Jun, rental rates and prices of retail spaces are still continuing a good upward march. Based on information from the Hong Kong Retail Management Association, we think that rental rates may have relatively more room to climb vis-à-vis the cost of other production factors, specifically wages and inventory costs. We lower our discount rate to reflect the prevailing interest rates, which are likely to stay low till at least mid-2015 given QE3. We raise our fair value from HK$5.33 to HK$6.49 and upgrade FRT from Hold to BUY.

Aug sales show slight improvement over Jul
In Aug, the value of HK retail sales climbed 4.5% YoY, a slightly improvement over Jul, which saw sales rise 3.9% YoY (revised figure). We note that these increases are substantially lower than the YoY increases earlier in the year, which ranged between 8.7% and 17.1% for Jan-Jun. However, despite the recent lackluster growth, we believe that landlords have reasonably good bargaining power.

What retailers are thinking…
According to a recent press release by the Hong Kong Retail Management Association, for full year 2012, most sub-sectors sectors expect single-digit to double-digit growth. Given the uncertain economy and high rental and labor costs, the majority of subsectors will consider more automated store operations to reduce manpower costs. Apart from closely monitoring stock control, should inflation continue, they may increase prices. They may also reduce the rate of store expansion and close shops if rental costs are too high. We interpret that rental rates may have more room to climb vis-à-vis the cost of other production factors, specifically wages and inventory costs.

Rental rates keep climbing
In Jul, the HK retail rental index climbed by 2.3% MoM and 14.3% YoY. The HK retail price index climbed by 2.7% MoM and 29.2% YoY. In comparison, for Jun 2012, the nominal wage index for those in the import/export, wholesale and retail trades increased by only 4.3% YoY. Given that FRT’s malls are geared more towards non-discretionary spending, they should have a stronger footing versus high-end malls.

Upgrade to BUY
We lower our discount rate on the premise that interest rates will stay low till at least mid-2015 given QE3. We raise our fair value from HK$5.33 to HK$6.49 and upgrade FRT from Hold to BUY. On a historical basis, the FY12F dividend yield of 5.4% is not low relative to the HK retail market yield of ~2.7% (YTD, based on government’s provisional figures). This suggests further yield compression could take place.

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.

Fortune Real Estate Investment Trust

OCBC on 8 Aug 2012

We last wrote about FRT on 23 Jul following its excellent 2Q12 results. The share price has since jumped 10.2% to HK$5.49. In Jun, the value of HK retail sales climbed 11.0% YoY, greater than the comparatively low 8.7% YoY increase seen in May. We are mildly optimistic that there could be further increases in the private retail rent and price indexes in the months ahead. We have just visited four of Fortune’s malls: Fortune City One, Ma On Shan Plaza, Fortune Metropolis and Provident Square, which was recently acquired in Feb 2012, and noted the substantial non-discretionary exposure of FRT’s portfolio. FRT’s estimated FY12 yield is reasonably attractive at 5.9%. We maintain our fair value of HK$5.33 and downgrade FRT to a HOLD on valuation grounds.

HK Jun retail sales beat expectations
In Jun, the value of HK retail sales climbed 11.0% YoY due to resilient local demand and an increase in the number of tourists. The rise was greater than the comparatively low 8.7% YoY increase seen in May, and was above the 8.2% median forecast from a Dow Jones Newswires poll. Given that the indexes for private retail rents and prices for May were up 2.4% and 3.8% MoM, we are mildly optimistic that there could be further increases in the months ahead.

Non-discretionary purchases
FRT is arguably exposed to one of the more resilient sectors in the HK real estate market – suburban retail. We note that 57.5% of the gross rental income is in the non-discretionary categories (Services & Education, F&B, Supermarkets, Homewares, Wet Markets and Community Services). We have just visited Fortune City One, Ma On Shan Plaza, Fortune Metropolis and Provident Square, which was recently acquired in Feb 2012, and observed that a substantial component of FRT’s tenant sales were resilient in nature, e.g. F&B outlets were quite full during weekday lunch and dinner periods.

Attractive yield compared to The Link
FRT’s closest peer is The Link REIT. FRT is the purer HK retail play since The Link has about a fifth of its revenue from carparks. The Link is offering a consensus FY13 (end Mar 2013) DPU yield of 4.2%. In comparison, FRT’s estimated FY12 yield is reasonably attractive at 5.9%.

Downgrade to HOLD
Fortune is trading at a P/B of 0.66x (NAV per unit of HK$8.34) and an estimated FY12 dividend yield of 5.9%. We last wrote about FRT on 23 Jul following its excellent 2Q12 results. The share price has since jumped 10.2% to HK$5.49. We maintain our fair value of HK$5.33 but downgrade FRT to HOLD on valuation grounds.