Fortune Real Estate Investment Trust

OCBC on 4 June 2012

HK retail sales grew at 11.4% YoY for April to reach HK$35.7b. While this is slower than the 17.1% YoY increase for March (revised figure), the moderated pace could be partially attributed to the inaugural nationwide Consumption Promotion Month on the Mainland for most of April, which could have reduced average spending by Mainlander tourists in HK. Private retail rents and prices set new highs in March. New Territories, where the majority of Fortune’s suburban malls are located, outperformed both HK Island and Kowloon with rents climbing 31% MoM and 24% YoY. We maintain our BUY rating and fair value of HK$5.22.

Rents in New Territories grow the fastest
The HK private retail rent and price indexes set new records in Mar, after the previous highs in Feb. The rent index was 0.9% higher than in Feb, while the price index showed a 2.4% MoM improvement. Perhaps more instructive is the rental rates for the different regions. New Territories, where the majority of Fortune’s malls are located, saw average private retail rents climb 31% MoM and 24% YoY, outperforming both HK Island (3% MoM, 0% YoY) and Kowloon (20% MoM, 22% YoY). The continued strength in the New Territories rental market bodes well for positive rental reversions at Fortune’s suburban malls.

Retail sales climb slower
For April, retail sales in HK climbed 11.4% YoY to HK$35.7b. While this is slower than the 17.1% YoY increase for March (revised figure of HK$36.6b), we note that the Chinese government had its first ever nationwide Consumption Promotion Month on the Mainland, which may have temporarily reduced average spending by Mainland tourists in HK. A HK government official expressed cautious optimism, with the still buoyant labour market and inbound tourism continuing to lend support.

Importance of the Chinese tourist
Visitor arrivals to HK continued to be strong in April, with the total number of arrivals growing 14.4% YoY to 3.8m. Arrivals from Mainland China climbed 23.9% to 2.6m. In 2011, the latest period for which data is available, the average overnight tourist spent HK$4,430 per trip on shopping (an overnight tourist is one who stays for at least one night in HK). Overnight Mainlander tourists spent an even greater amount, HK$5,795, on shopping every trip.

Maintain BUY
Fortune is trading at a P/B of 0.6x (NAV per unit of HK$7.81) and an estimated FY12 dividend yield of 7.2%. We maintain our BUY rating and our fair value of HK$5.22.