China / Hong Kong Industry Focus Hong Kong Property Sector
Refer to important disclosures at the end of this report
DBS Group Research . Equity 10 Jul 2019
Seeking safe haven in uncertain times HSI: 28,543
• Steady office take-up in Island East while office demand continues to soften in Central ANALYST Jeff YAU CFA, +852 36684180 [email protected] • Challenging retail scene, resilient suburban malls Ian CHUI CFA, +852 36684174 [email protected] Jason LAM +852 36684179 [email protected] • We like office landlords more than retail counterparts and prefer Swire Properties (1972.HK). Fortune REIT (778.HK) and Sunlight REIT (435.HK) are our preferred REITs Recommendation & valuation
Company T ick er Mk t Cap Price 12-m T P Recom From Central to Island East. The Central office market is HK$bn HK$ HK$ expected to peak out soon as demand especially from China- Property Investors based corporates continues to soften. With improved Hang Lung Prop 101 HK 84 18.58 20.35 BUY transportation links following the opening of Central-Wan Chai HK Land @ HKL SP 15 6.44 7.93 BUY Bypass, Island East continues to benefit from steady leasing Hysan Dev 14 HK 42 40.35 43.80 HOLD demand led by tenant decentralisation and should outperform Swire Properties 1972 HK 185 31.55 36.90 BUY the broader market which is projected to record flat rental Wharf REIC 1997 HK 167 55.05 54.45 HOLD REITs & Business Trust growth in 2019. Property funds and private equity dominate Champion REIT 2778 HK 38 6.51 6.99 BUY the investment sales market. The upcoming tender of the Fortune REIT 778 HK 21 10.74 11.80 BUY mega-sized West Kowloon Terminus commercial site will be in Link REIT 823 HK 203 96.00 96.80 HOLD the spotlight. Prosperity REIT 808 HK 5 3.41 3.86 BUY Sunlight REIT 435 HK 10 5.99 6.56 BUY Challenging retail scene, resilient suburban malls. Inbound Source: Bloomberg Finance L.P., DBS Bank (Hong Kong) Limited (“DBS HK”) tourism growth did not translate into increased tourist consumption. Local shoppers have become cautious on @US$ denominated spending given rising global economic uncertainties. The Based on 28 Jun 2019 closing political protests, if prolonged, could weigh on consumer spending especially luxury goods and big-ticket items. While retail reversionary growth remains marginally positive, turnover rents could potentially fall, and be a drag on retail rental income. Suburban malls are faring better as their tenants largely serve the daily needs of nearby residents and therefore their businesses are more stable.
Stock recommendations. Property investors are trading at 42% discount to our current NAV estimates on a weighted average basis. Within the sector, we like office landlords more than retail counterparts. We continue to prefer Swire Properties which benefits from sustained demand from office decentralisation. Wharf REIC and Hysan Development are HOLDs given the challenging retail scene in the near term. The commercial REITs we cover are trading at prospective distribution yield of 3.6% on a weighted average basis. Benign interest rate environment should provide the runway for further unit price appreciation. We like Fortune REIT and Sunlight REIT for their steady growth with further rental upside from asset enhancement initiatives.
ed-JS/ sa-CS / AH
Industry Focus
Hong Kong Property Sector
Office In Central, demand for office space among China-based corporates has further softened from 2H18. According to Jones Fading office demand in core areas. According to Jones Lang Lang LaSalle, office vacancy in Central edged up to 2.3% in Lasalle, the overall market registered a net withdrawal of May-19 from Dec-18’s 1.8%. 217,500 square feet (sf) in 1Q19, the first since 2Q17. This was reflected as an increase in office vacancy as a result of fading Office vacancy - Central office demand in core areas. Coupled with the completion of
One Hennessy in Wan Chai and NEO in Kwun Tong, the overall vacancy rate in Hong Kong continued to rise to 4.9% in May- % 19 from Dec-18’s 4.2%, according to Jones Lang LaSalle. The 6.0 leasing market in Hong Kong East held up better within all sub- May-19: 2.3% markets, largely led by the ongoing decentralisation trend. 5.0
Office vacancy - overall 4.0 3.0
% 2.0 9.0 8.0 May-19: 4.9% 1.0 7.0 0.0
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1.0 Office decentralisation is showing no signs of abating, and this 0.0 is supporting the leasing market. Given the substantial rental
gap between CBD and decentralised areas, cost-conscious
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Jan-18 Jan-19 multinational firms continue to relocate their business operations to decentralised locations. Significant rental savings Source: Jones Lang Lasalle can be realised from office relocation.
Office vacancy – all submarkets Island East’s transport connectivity has greatly improved following the commissioning of Central-Wan Chai Bypass in
3Q18. The Bypass has shortened the travelling time between % Central and North Point to 5 minutes from 15-20 minutes. 13.0 Apr-19 May-19 12.112.2 With remarkable improvement in transportation accessibility, 12.0 11.0 Island East should become increasingly popular as an office 10.0 9.0 destination among cost conscious multinational corporates. 8.0 The Securities and Futures Commission (SFC) has confirmed to 7.0 6.0 4.8 4.9 relocate from Cheung Kong Center in Central to One Island 5.0 3.4 2.9 3.1 4.0 2.2 2.3 East in Quarry Bay where rents are c.60- 70% lower. The 3.0 1.8 1.5 1.9 2.0 regulatory authority will occupy 195,000sf of office space 1.0 0.0 vacated by JP Morgan, who is moving to the newly built The Quayside in Kwun Tong, a 60/40 joint venture between Link
Overall REIT and Nan Fung Group. Overall, the vacancy at Island East
Central HK East HK
has further improved to 1.5% in May-19 from 1.7% in Dec-18.
Tsimshatsui Bay
Kowloon East Kowloon
Wanchai/ Causeway Wanchai/ Source: Jones Lang Lasalle
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Industry Focus
Hong Kong Property Sector
Office vacancy – Island East Henderson Land (12.HK) is offering 218 Electric Road in North Point for pre-leasing. Redeveloped from Newton Hong Kong, this office tower provides GFA of 144,000sf upon scheduled completion in 3Q19. It is in close proximity to AIA Tower and % 5.0 18 King Wah Road. Based on an average monthly rent of May-19: 1.5% 4.5 HK$50psf (on lettable area basis), we estimate that this office property, if fully let, would produce rental income of 4.0 c.HK$80m p.a. 3.5
3.0 218 Electric Road 2.5 2.0 1.5 1.0 0.5
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New World Development (17.HK) is developing an office project in Quarry Bay known as K11 Atelier King’s Road. Internal fit out work is now being carried out. The company retains this property for long-term investment upon scheduled project completion in 2H19. Situated next to Quarry Bay MTR Station, this office development provides total GFA of 487,500sf. Coupled with highly improved transportation links from the Central-Wan Chai Bypass, this property should attract strong leasing demand. L’Occitane has leased 1.5 floors Source: DBS HK (25,500sf) at this office tower, relocating from Times Square in Causeway Bay. This makes this France-based personal care retail brand the first tenant at this office development. The WeWork is grabbing more office space. WeWork has further reported monthly rent is HK$50psf, c.30% lower than that for expanded its footprint in Hong Kong with a focus on areas Times Square. Overall, K11 Atelier King’s Road is c.40% pre- close to the CBD. It has leased office space of 80,000sf at committed. If fully let, this new office tower should generate Hysan Place and Lee Garden One, both held by Hysan rental income of >HK$250m p.a. Development (14.HK). It has also agreed to take up 150,000sf of office space at Gateway in Tsim Sha Tsui, which has been K11 Atelier King’s Road converted from Hampton Court. Reportedly, WeWork has inked an agreement with Swire Properties (1972.HK) to become the sole tenant of Generali Tower in Wan Chai (near Three Pacific Place) and will occupy 100,000 sf of office space at newly built H Code in Central. In Kwun Tong, WeWork committed two floors at The Quayside but scrapped the expansion plan at Two Harbour Square.
Eaton Club (owned by Great Eagle) has taken up an additional floor at Three Garden Road for in-house expansion. This co- working space operator is looking to set up new centres at Langham Place Office Tower and Great Eagle Centre.
Source: DBS HK
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Industry Focus
Hong Kong Property Sector
In response to this rapidly evolving trend, Sunlight REIT Office vacancy – Wan Chai/Causeway Bay (435.HK) is currently undertaking a major property enhancement programme at Bonham Trade Centre (which will be rebranded as Strand 50) in Sheung Wan with a capex % budget of HK$50m. Sunlight REIT plans to revitalise the low 6.0 zone of Strand 50. Homegrown theDesk will operate its fifth 5.0 co-working space centre at the low zone of Strand 50. Strand May-19: 2.9% 50 is an 8-minute walk from the heart of Central, and lies in 4.0 close proximity to Bonham Circus, where the low zone is occupied by WeWork. 3.0
Strand 50 2.0 1.0
0.0
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Source: Jones Lang Lasalle
Most co-working space operators have yet to turn profitable while initial capex requirements are relatively demanding. We do not rule out the possibility of some industry consolidation in future if funding becomes a concern.
Central market to peak out soon, Island East to outperform. Despite rising vacancy, overall office rents edged up slightly by 0.9% in 1Q19. For the rest of 2019, global market uncertainties caused by trade disputes between the US and China would continue to undermine office demand from both multinational and China-based firms. Overall leasing demand should continue to be driven by office decentralisation or consolidation among multinational corporates. These trends point to a slowdown in net space absorption. But the overall Source: DBS HK vacancy rates are still relatively low, which should offer some rental support. Overall, we forecast office rents to remain flat in 2019. The Central office market is expected to peak out Overseas newcomers venturing into Hong Kong. Founded in soon. Island East should outperform other districts as sustained 1997, CEO Suite which offers serviced offices, virtual offices office decentralisation should help narrow the rental and co-working space in Asia, made its maiden foray into differential. The office supply glut should continue to cap Hong Kong by leasing 27,000sf office space in K11 Atelier at rentals in Kowloon East. Victoria Dockside along the Tsim Sha Tsui waterfront. Monthly office rents exceed HK$100psf on lettable area basis. En bloc office market supported by local property firms and Australian flexible space provider, Victory Offices, has also property funds. With China-based firms lying low after trade established a presence in Hong Kong and has taken up tensions between the US and China intensified, the local 25,000sf of office space at The Center in Sheung Wan. investment market was supported mainly by property funds and private equity. Reportedly, Singapore-based Mapletree China-based Kr Space pulled out of leasing deal. In contrast, Investments sold Mapletree Bay Point in Kwun Tong to private China-based Kr Space has decided not to take up the seven equity firm, PAG, for HK$8.58bn or HK$13,000psf in early floors (83,000sf) committed at newly completed One Hennessy 2019. This newly built office tower has GFA of 0.66msf and is in Wan Chai before its 10-year lease commenced. Against this in close vicinity to Ngau Tau Kok MTR Station. Strata-titled backdrop, vacancy at Wan Chai/Causeway Bay rose to 2.9% in sales are not allowed, which will have negative implications on May-19 from Dec-18’s 1.7%. the transaction price.
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Industry Focus
Hong Kong Property Sector
In May-19, Swire Properties (1972.HK) agreed to sell its 50% 226-240 Electric Road stake in 625 King’s Road in North Point for HK$2.38bn or c.HK$15,777psf to Gaw Capital. Completed in 1998, this office building offers total GFA of 301,605sf. The property is equally owned by Swire Properties and China Motor Bus (26 HK) which has also agreed to sell its 50% interest to the same purchaser. We estimate the exit yield at 2.2%. The property, 625 King’s Road, is a non-core asset of Swire Properties, and is not connected with its Taikoo Place office cluster with little operational synergy. Swire Properties continues to unlock the value of its non-core assets after completing the divestments of Cityplaza Three and Four in Taikoo Shing.
625 King’s Road
Source: DBS HK
Government failed to sell any office site in Kai Tak in 1H19. After the tender withdrawal of the adjacent commercial/hotel lot in Jan-19, China-based Goldin Financial (530.HK) outbid five other developers to secure a commercial/hotel site along the Old Kai Tak Airport Runway through a government tender in May-19. The winning bid was HK$11.12bn, translating into accommodation value of HK$12,888psf. This was very similar Source: DBS HK to that for another commercial/hotel lot acquired by Nan Fung in the area in May-17 and higher than our expectations. When According to Jones Lang LaSalle, capital values fell marginally completed, this site will provide GFA of 0.86msf, of which 30- by 0.4% q-o-q in 1Q19. For the full year, we forecast office 50% is earmarked for hotel use with the balance for office prices to retreat 1-2% with slight improvement in market yield. purpose. However, Goldin Financial decided not to complete the land acquisition in Jun-19, citing ‘recent social Hang Lung Properties (101.HK) is undertaking office contradiction and economic instability’. This resulted in development projects in North Point. Hang Lung Properties forfeited deposit of HK$25m. Overall, the government failed to formed a joint venture with its parent Hang Lung Group to sell any office sites through public tender YTD. redevelop the sites in North Point into a commercial and office tower with GFA of 105,000sf. Located at 226-240 Electric In late-Jun, the government decided to re-launch this Road, this project is in close proximity to Henderson Land’s office/hotel site for tender again in 3Q19. The outcome could office project, which is a redevelopment of the former Newton serve as barometer of market outlook for office and hotel Hong Kong Hotel. Hang Lung Properties and Hang Lung Group projects along the Old Kai Tak Airport Runway. own 66.7% and 33.3% in this office redevelopment respectively. Total development cost is estimated at HK$2.56bn.
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Industry Focus
Hong Kong Property Sector
The West Kowloon Terminus commercial site tender in the limelight. The government will offer the mega-sized commercial site above the West Kowloon Terminus for tender in 3Q19. Upon completion, this project will contain three towers with estimated GFA of 3.16m sf, mainly for office use. This will make it the largest commercial project up for public tender in more than two decades. This strategically located office development should become an alternative option for office users in Central. In particular, this development should hold appeal to China-based corporates given its proximity to the West Kowloon High-Speed Rail Terminus
West Kowloon Terminus commercial site
Source: DBS HK
The required investment outlay for this sizeable project is huge. Market estimates the land value to exceed HK$50bn, which would make it the most expensive land sold by the government. Hence it makes sense for developers to bid through forming consortiums to diversify the investment risks. In our opinion, only a handful of developer consortiums will join the race. We do not rule out the possibility of a withdrawal of the tender if developers’ bids fail to meet government expectations.
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Industry Focus
Hong Kong Property Sector
Major office supply
2019 One Hennessy Wan Chai 314,000 Chinachem Hampton Court conversion Tsim Sha Tsui 300,000 Wharf REIC 38 Wai Yip Street Kowloon Bay 490,188 Billion Dev/ Sino Land/ CSI Props 8 Bay East Kwun Tong 529,000 Wharf The Quayside Kwun Tong 797,998 Link REIT/ Nan Fung
2020 218 Electric Road North Point 130,300 Henderson Land K11 Atelier King's Road Quarry Bay 487,500 New World Development STTL 617 Shatin 171,000 SHKP KCTL 522 Kwai Chung 57,000 SHKP KCTL 517 Kwai Chung 123,505 First Group (Unlisted)
2021 and beyond IL9051 Central 465,000 Henderson Land Peel Street/Graham Street redevelopemnt Site C Central 310,000 Wing Tai Props/CSI Props Hutchison House redevelopment Central 493,500 CK Asset Holdings Excelsior Hotel redevelopment Causeway Bay 683,508 Mandarin Oriental 226-240 Electric Road North Point 105,000 Hang Lung 46-56 Queen's Road East Wan Chai 218,000 Swire Props 206-222 Wanchai Road Wan Chai 65,000 Hendeerson Land 222-228 Wanchai Road Wan Chai 121,000 SHKP Two Taikoo Place Quarry Bay 1,000,000 Swire Props Redevelopment of Wa Hah Factory Building/Zung Fu Industrial Quarry Bay 779,000 Swire Props 23 Wong Chuk Hang Road Wong Chuk Hang 107,000 Rykadan Capital AIL 462 Wong Chuk Hang 284,982 Sino Land/Empire Group KCTL 495 Kwai Chung 228,033 Hon Kwok Land 98 How Ming Street Kwun Tong 1,150,004 SHKP/Transportation International Goldin Financial Global Square Redevelopment Kowloon Bay 360,000 Goldin Financial NKIL 6557 Kai Tak 439,167 Lifestyle International NKIL 6556 Kai Tak 1,690,933 Nan Fung NKIL 6505 Cheung Sha Wan 998,201 New World Development NKIL 6582 Cheung Sha Wan 538,755 New World Development NKIL 6572 Cheung Sha Wan 371,096 New World Development 18-20 Tai Chung Road Tsuen Wan 172,729 Private developer YTTL 532 Yuen Long 223,929 Sino Land Source: DBS HK, Lands Department, Local press
Page 7
Industry Focus
Hong Kong Property Sector
Retail Monthly growth of total retail sales value – luxury items* The Hong Kong retail market growth has been losing stream in 2019 amid uncertain economic prospects. Both Mainland tourists and local residents have turned cautious in spending Yoy, % May-19: -2.7% y-o-y due to global trade uncertainties. In 5M19, total retail sales 80 values in Hong Kong fell by modest 1.8% to HK$206bn, 5M19: -4.4% y-o-y dragged by weaker sales of expensive luxury items and 60 consumer durable goods. A high comparison base was also a 40 culprit. 20
Monthly growth of total retail sales value 0
(20)
Yoy, % May-19: -1.3% y-o-y (40)
40 5M19: -1.8% y-o-y
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30 May-15
Jan-Feb 08 Jan-Feb Jan-Feb 12 Jan-Feb 20 16 Jan-Feb 10 Source: Census & Statistics Department
0 *Jewellery, watches, and other valuable gifts
(10) (20) The retail sales value of jewellery, watches and clocks and other valuable gifts declined by 4.4% in 5M19. This was (30) despite stellar inbound tourism growth. In particular, the
number of Mainland Chinese tourists rose 17.5% to 23.6m
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Jan-17 Jan-18 Jan-19 partly led by the commissioning of cross border infrastructure Source: Census & Statistics Department projects including Hong Kong-Zhuhai-Macau Bridge and Express Rail Link. This reflects mainland shoppers’ changing consumption pattern. The Rmb has depreciated 3% against Yearly growth of total retail sales value HKD from the high at Feb-19, dampening tourist spending on expensive luxury items.
Yoy, % Visitor arrival growth - China 25 20 Yoy, % 15 May-19: 23.6% y-o-y 60 5M19: 17.5% y-o-y 10 50 40 5 30 0 20 10 (5) 0 (10) (10) (20) (15) (30)
(40)
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
5M19
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Jan/18 Jan/19 Source: Census & Statistics Department Source: HK Tourism Board
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Industry Focus
Hong Kong Property Sector
Rmb vs HK$ Real GDP growth of Hong Kong
(CNYHKD) % 1.26 10 1Q19: 0.6% y-o-y 1.24 8 1.22 6 1.2 4 1.18 2 1.16 0 1.14 (2) 1.12 (4) 1.1 (6)
(8)
Jul-18
Jul-19
Jan-18
Jan-19 Jun-18
Jun-19 (10)
Feb-18
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1Q18 3Q18 Source: Bloomberg Finance L.P. 1Q19 Source: Census & Statistics Department
Monthly growth of retail sales value – consumer durables Private consumption growth
Yoy, % May-19: -9.3% y-o-y % 50 5M19: -10.7% y-o-y 14 40 12 30 10 20 8 10 6 0 4 (10) 2 (20) 0 (30) (2)
(4)
Jul-09 Jul-13
Jul-17 (6)
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Dec-10 Dec-14 Dec-18
Nov-13 Nov-17 Nov-09
Mar-09 Mar-13 Mar-17
Aug-10 Aug-14 Aug-18
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May-11 (8)
Jan-Feb 12 Jan-Feb 16 Jan-Feb
Jan-Feb 08 Jan-Feb
1Q05
3Q05
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1Q18 3Q18 Source: Census & Statistics Department 1Q19 Source: Census & Statistics Department
Retail sales value of consumer durable goods also fell 10.7% in 5M19 primarily due to weaker sales of electrical goods etc. In Jun-19, there were two major anti-extradition bill protests in Local shoppers also showed signs of turning cautious on Hong Kong on two Sundays. Inevitably, these protests would spending on big-ticket items. The ongoing trade war between affect consumer spending in Jun, and hence retail sales figure. China and the US continues to overshadow the Hong Kong economy. The 1Q19 GDP growth slowed further to 0.6% from Some shopping landmarks also exhibited similar tenants’ sales 4Q18’s 1.2% due to weakened trade performance. Private pattern to the overall market in 1Q19. Harbour City posted consumption grew by a mere 0.2%, suggesting subdued 2.9% growth in retail sales value in 1Q19, down noticeably discretionary spending among locals. from 4Q18’s 11% and 3Q18’s 16.2%, given a very high comparison base. Yet, this still compared favourably with the broad market. Langham Place Mall which targets primarily the younger shoppers, showed similar growth rate in the corresponding period. On the other hand, tenants’ sales at The Mall at Pacific Place was 2.3% lower in the same period.
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Industry Focus
Hong Kong Property Sector
Hysan Development’s retail portfolio fared better in 1Q19. Its Median household income growth in Hong Kong retail tenants’ sales grew 4% in this period. The improvement was mainly led by Hysan Place where T Galleria (an anchor tenant) posted robust sales performance. Lee Gardens hub Yoy, % (YoY,%) 1Q19 registered 3% growth in retail sales, partly due to contribution 15 4.6% from newly opened Lee Garden Three. Luxury brands delivered 10 mixed sales performance. Lee Theatre hub lagged with 1-2% decline in retail sales. 5
0 With a direct link to the West Kowloon Terminus, MTRC’s (66.HK) Elements registered significant footfall growth (5) following the opening of Express Rail Link in Sep-18. In 1Q19, Elements recorded tenants’ sales growth of 8-9% (10) outperforming MTRC’s other shopping arcades which (15) registered low single digit sales growth during the same
period.
Sep/03
Sep/04
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Mar/17 Mar/18 Mar/19 Hong Kong’s unemployment rate Source: Census & Statistics Department
% Monthly growth of retail sales value – Food & Mar-19 -May-19: 2.8% 9 Beverage* 8 Feb-19 -Apr-19: 2.8%
7 Yoy, % May-19: 3.1% y-o-y 6 25 5M19: 0.9% y-o-y 20 5 15 4 10 3 5 0 2 (5)
(10)
Jan/01
Jan/02
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Jan/17 Jan/18 (15)
Source: Census & Statistics Department
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Jan-Feb 08 Jan-Feb Jan-Feb 12 Jan-Feb While the local economic expansion lost momentum, 16 Jan-Feb unemployment rate remained low at 2.8% in May 2019. Source: Census & Statistics Department Median household income grew 4.6% (or 8.8% for those residing in public housing) in 1Q19. This provided support for *Food, alcoholic drinks, and tobacco sales of consumer staples. Retail sales of food and alcoholic drinks, and supermarket items grew 0.9% and 1.3% in 5M19 respectively. Total value of restaurant receipts rose 3.1% in 1Q19. This was mirrored by Link REIT’s steady tenants’ sales growth for its suburban or neighbourhood malls near public housing estates.
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Industry Focus
Hong Kong Property Sector
Monthly growth of retail sales value – supermarkets In terms of reversionary growth, major shopping malls should see rental reversions of 0-5%. Selected suburban malls could record favourable rental growth of >10% on lease renewal Yoy, % May-19: -0.8% y-o-y backed by resilient retail sales. 20 5M19: 1.2% y-o-y K11 Musea opening soon. In 2H19, the highlight in the retail 15 market is the opening of K11 Musea. It is the retail part of New 10 World Development’s Victoria Dockside, a mixed-use Development on the Tsim Sha Tsui waterfront. K11 Musea will 5 provide total GFA of >1.1m sf, making it the largest new mall in more than a decade. New York’s The Museum of Modern 0 Art (MOMA) will open its flagship design store (6,000sf) at K11 Musea in 3Q19, enhancing cultural experience among tourists (5) and local shoppers. This should help differentiate K11 Musea
from other shopping landmarks.
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Jan-Feb 08 Jan-Feb Jan-Feb 12 Jan-Feb Jan-Feb 16 Jan-Feb Many renowned food and lifestyle brands will also make their Hong Kong debut at K11 Musea. Fortnum & Mason is a case in Source: Census & Statistics Department point. There will also be a 12-screen UA Cinema with >1700 seats in total. Based on average base rents of HK$120psf on Quarterly growth of total restaurant receipts lettable area basis, we forecast that K11 Musea, if fully let, should produce annual income of >HK$900m.
Yoy, % K11 Musea 18 1Q19: 3.1% y-o-y 16 14 12 10 8 6 4 2 0
(2)
1Q09 1Q11 1Q13 1Q15 1Q17 1Q19 1Q10 1Q12 1Q14 1Q16 1Q18 1Q08 Source: Census & Statistics Department
The recent protests, if prolonged, could weigh on consumer Source: DBS HK spending, particularly luxury goods and big-ticket items. Even allowing for favourable base effect in the second half, we forecast that total retail sales value to fall c.3% in 2019, which Opposite to K11 Musea, there is a single-block commercial would have negative implications on turnover rent growth. tower, H Zentre, which is also near completion. Developed by Henderson Land, H Zentre is superbly located on Middle Road In 1Q19, rents for high-street shops edged up 0.1% q-o-q and is adjacent to Sheraton-Hong Kong Hotel. It has easy while that for the overall prime shopping centres went up by transportation accessibility and is served by different modes of 0.5% according to Jones Lang LaSalle. For the full year, we public transportation. H Zentre has total GFA of 0.34m sf, of forecast rents for high street shops to fall mildly in 2019. which 0.236m sf is earmarked for medical purpose and retail Shopping centres should see stable rents. Suburban or use. H Zentre has purpose-built systems and facilities for community malls are expected to fare slightly better. medical centres and clinics. With spectacular views of Victoria Harbour, the top floors will host premium F&B outlets. Ground
Page 11
Industry Focus
Hong Kong Property Sector
and low floors are occupied by retail brands. Currently, about HK$115m, with an exit yield of <2%. Additionally, the 40% of space has been pre-committed. company sold retail podium at Lake Silver in Wu Kai Sha, a joint venture with MTRC, to Wang On Property via tender for H Zentre HK$653m. Majority of retail space will be used by its affiliate companies.
The government plans to earmark HK$20bn for purchasing retail properties in three years starting from 1Q20. These retail facilities will be used to house social and welfare organisations. In our view, this move would allow owners including property developers to crystallise the value of their retail premises especially in suburban areas. These premises are usually situated beneath residential apartments.
In fact, suburban or community malls have been sought after in recent years. Compared to office properties, property companies and funds, and individual property investors are showing strong appetite for these retail assets which offer more resilient earnings.
Source: DBS HK
Citygate Outlets Extension in Tung Chung has been handed over to the tenants for renovation since Mar-19 with the opening scheduled in the summer of 2019. Pre-leasing has been progressing well with c.96% of retail space being committed. The mall is developed by a consortium equally owned by Swire Properties, SHKP, New World, Hang Lung Group and Henderson Land. Swire Properties is the project manager. The opening of this extension should enrich the retail and food offering of the entire Citygate Outlets. With GFA of 340,000sf, this outlet mall is well positioned to tap the demand from growing number of Mainland tourists brought by the commissioning of the Hong Kong-Zhuhai-Macau Bridge given its proximity to the boundary crossing facilities. We estimate that the newly built Citygate Outlet Extension would produce an annual rental income of >HK$200m.
Pre-leasing of Cheung Kong Asset Holdings’ OP Mall in Tsuen Wan is progressing well with >60% of retail space already pre- committed. Japan-based chain discount store Don Don Donki has committed to take up c.50,000sf of retail space. This will be its second store in Hong Kong. Other tenants include fitness centre and F&B outlets. Located close to Tsuen Wan West Station, OP Mall is a four-storey shopping arcade with GFA of 0.43m sf. It will have soft opening in 2H19. We estimate that OP Mall, if fully let, should generate annual rental income of c.HK$170m to Cheung Kong Asset Holdings.
Sino Land (83.HK) has been divesting its non-core retail assets since the beginning of 2019. It sold retail arcade at One New York in Cheung Sha Wan to a local property investor for
Page 12
Industry Focus
Hong Kong Property Sector
Property Investors rental reversions. With more residential projects in China available for pre-sale, the company should see stronger
contracted sales in 2H19. Its China property business should Share price performance – Property Investors add momentum to its earnings growth. But this may not
necessarily translate into higher valuation for the stock in the 1M 3M 1H19 2018 short-to-medium term. The counter is trading at 50% discount to our estimated current NAV. BUY with US$7.93 TP. Name T ick er (%) (%) (%) (%)
Hang Lung Props 101 HK 6.9 (2.9) 24.5 (21.6) Hang Lung Properties’ Plaza 66 in Shanghai continues to see HK Land @ HKL SP (3.6) (10.9) 2.2 (10.8) better retail sales, which grew >10% in 4M19 even with a Hysan Dev 14 HK (1.2) (3.7) 8.3 (10.8) higher comparison base. Renovation of Grand Gateway 66 is Swire Props 1972 HK (4.5) (5.7) 14.7 8.5 well underway with full completion in late 2019 or early 2020. Wharf REIC 1997 HK (3.0) (6.1) 17.5 (10.6) Despite short-term shortfall of tenants’ sales and rental Market cap wt. (1.9) (5.4) 16.2 (6.4) income, this renovation exercise should boost its rental value. Excluding Forum 66 and Riverside 66 that recorded flat Hang Seng Index 4.2 (0.8) 10.4 (15.3) tenants’ sales, other malls outside of Shanghai posted double Hang Seng Prop. Index 2.1 (2.7) 15.4 (9.3) digit growth in retail sales. This augurs well for their future Source: Bloomberg Finance L.P. reversionary growth. The soon-to-be-opened mall at Spring City 66 in Kunming has been substantially pre-committed. The second office tower at Wuhan Center 66 and Conrad Hotel at In 1H19, share prices of property investors have risen 2%-25% Shenyang Forum 66 are scheduled to come onstream in 2H19. or 16% on a weighted average basis, outperforming the Hang This should expand is rental income base. The stock is trading Seng Index (+10.4%). Within the sector, Hang Lung Properties at 49% discount to our appraised current NAV. BUY with was the best performing stock in 1H19 after falling 22% in HK$20.35 TP. 2018. Wharf REIC also saw its share price appreciating 18% during the same period. But the uptrend has reversed of late Hysan Development recorded 4% growth in retail tenants’ due to Rmb depreciation. sales in 1Q19, which compared favourably with the general retail market. Hysan Place led the growth thanks to stellar sales Meanwhile, property investors are trading at discounts of 34- performance at T Galleria. But, retail sales at Lee Theatre hub 50% to their current NAVs, or at an average discount of 42%. fell marginally during the same period. Overall, retail The sector valuation remains undemanding from the historical reversionary growth remains positive at low single digit. perspective. We remain positive on Swire Properties’ long-term Despite increased expiring rents, office portfolio witnessed value given ongoing office decentralisation trend. The low rental reversion of c.15%. Construction works of Tai Po valuation should lend strong support to Hongkong Land’s residential project will commence soon with pre-sale targeted share price even allowing for subdued office demand in for 2021. The stock is trading at 49% discount to our Central. We have HOLD rating on two retail landlords, Hysan appraised current NAV. HOLD with HK$43.8 TP. Development and Wharf REIC, as the retail scene remains challenging in the near term. Despite a noticeable moderation of tenants’ sales that could weigh on turnover rents, Harbour City and Times Square’s Swire Properties sees solid reversionary growth at virtually fully retail rental reversions should remain in single-digit in 2019. let Pacific Place offices. Office rental reversion at its Island East Conversion of Hampton Court at Harbour City into office portfolio is showing signs of improvement. In May-19, the usage is nearing completion. About 50% of office space company agreed to sell its 50% stake in 625 King’s Road in converted has been pre-committed by tenants such as co- North Point for HK$2.38bn. The disposal of this non-core office working space operator WeWork, which has committed asset should produce decent gains of >HK$1.7bn and also free c.150,000sf of office space. This exercise should help maximise up capital for its portfolio expansion within its key property the rental value of Harbour City. The stock is trading at 34% cluster. This augurs well for the company’s long-term growth. discount to our assessed current NAV. The recent protests have The stock is trading 39% below our appraised current NAV. affected the consumer sentiment and may cast a shadow over BUY with HK$36.9 TP. its near-term share price performance. HOLD with HK$54.45 TP. Despite subdued office demand in Central, Hongkong Land continues to record favourable rental growth on renewals and new lettings for its Central office portfolio. Its Central retail portfolio effectively remains fully occupied with mildly positive
Page 13
Industry Focus
Hong Kong Property Sector
Valuation comparison – Property investors
Disc. to Mk t Last 12-m PE PE J un-20 J un-20 Yield Yield Company Code FYE Cap Price target Recom F Y19 F Y20 NAV NAV F Y19 F Y20 HK$bn HK$ HK$ x x HK$ % % %
Hang Lung Props 101 HK Dec 84 18.58 20.35 BUY 20.2 19.4 37.0 (50) 4.0 4.1 HK Land @ HKL SP Dec 15 6.44 7.93 BUY 14.4 14.1 13.2 (51) 3.4 3.6 Hysan Dev 14 HK Dec 42 40.35 43.80 HOLD 15.9 15.5 79.7 (49) 3.8 3.8 Swire Props 1972 HK Dec 185 31.55 36.90 BUY 7.9 23.9 52.7 (40) 2.8 2.9 Wharf REIC 1997 HK Dec 167 55.05 54.45 HOLD 16.2 15.5 83.7 (34) 4.0 4.1 Source: DBS HK, Bloomberg Finance L.P.
*Closing prices as of June 28, 2019
@ USD denominated
Page 14
Industry Focus
Hong Kong Property Sector
Valuation - Property Investors
Discount to NAV – Hang Lung Properties Discount to NAV – Hongkong Land
% % 40 20 10 20 +2SD: 8% +2SD: -10% 0 0 +1SD: -13% (10) +1SD: -23% (20) (20) Average: -34% Average: -36% (40) (30) -1SD: -55% (40) (60) -2SD: -76% (50) -1SD: -49% (80) (60) -2SD: -63%
(100) (70)
Jul-07
Jul-08
Jul-09
Jul-10
Jul-11
Jul-12
Jul-13
Jul-14
Jul-15
Jul-16
Jul-17
Jul-18
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Jul-07
Jul-08
Jul-09
Jul-10
Jul-11
Jul-12
Jul-13
Jul-14
Jul-15
Jul-16
Jul-17
Jul-18
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18 Jan-19
Discount to NAV – Hysan Development Discount to NAV – Swire Properties
% % 0 (5) (10) (10) (15) (20) +2SD: -25% (20) +2SD: -24% (30) +1SD: -34% (25) +1SD: -30% (40) Average: -42% (30) Avg: -36% (50) (35) -1SD: -51% (40) (60) -1SD: -42% -2SD: -59% (45) -2SD: -48% (70) (50)
(80) (55)
Jul-07
Jul-08
Jul-09
Jul-10
Jul-11
Jul-12
Jul-13
Jul-14
Jul-15
Jul-16
Jul-17
Jul-18
Jul-12
Jul-13
Jul-14
Jul-15
Jul-16
Jul-17
Jul-18
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17 Jan-18 Jan-19
Discount to NAV – Wharf REIC Discount to NAV – Property investors
% % (12) 0 +2SD: -7% +2SD: -17% (17) (10) +1SD: -22% +1SD: -19% (22) (20) Average: -27% (27) (30) Average: -31% -1SD: -32% (32) (40) -1SD: -43% (37) (50) -2SD: -37% -2SD: -55% (42) (60) (47)
(70)
Jul-18
Jan-18 Jan-19
Sep-18
Nov-17 Nov-18
Mar-18 Mar-19
May-18 May-19
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-09 Source: Bloomberg Finance L.P., DBS HK
Page 15
Industry Focus
Hong Kong Property Sector
REITs The five commercial REITs we cover are trading at prospective distribution yield of 3.6% on a weighted average basis. YTD, Unit price performance – REITs the yield of the Hong Kong 10-year Government Bond has fallen to 1.5% along with the US treasury bond yield. This translates into current sector yield spread of 2.1%. 1M 3M 1H19 2018 Name T ick er (%) (%) (%) (%) HK 10-year Government Bond yield Champion REIT 2778 HK (2.3) (5.5) 21.5 (7.3) Fortune REIT 778 HK 2.9 3.9 19.5 (7.2) % Link REIT 823 HK (0.1) 5.2 21.1 8.3 3.5 Prosperity REIT 808 HK 1.2 (3.9) 13.7 (11.0) 3.0 Sunlight REIT 435 HK 2.2 1.5 19.3 (6.3) Jun-19: 1.51% 2.5 Market cap wt. (0.2) 2.9 20.0 0.4 2.0 Hang Seng Index 4.2 (0.8) 10.4 (15.3) Hang Seng Prop. Index 2.1 (2.7) 15.4 (9.3) 1.5 1.0 Source: Bloomberg Finance L.P. 0.5
0.0
In 1H19, the REIT sector has staged strong run since the US Fed
2011
2011
2012
2012
2013
2013
2014
2015
2015
2016
2016
2017
2018 2018 turned dovish at the beginning of the year. The 10-year US 2019 treasury bond yield retreated to 2% from 2.7% at the end of HK 10Y Gov bond yield 2018. This sparked off the rally in the REIT sector. Commercial REITs under our coverage rose 14-22% or 20% on weighted Source: Bloomberg Finance L.P. average basis. It outperformed not only the broad market but also property developers and investors. Sector yield spread US 10-year Treasury Bond yield
% % 12.0 4.0 Jun-19: 2.01% 10.0 3.5 8.0 3.0 6.0 2.5 +1sd 2.0 4.0 avg 1.5 2.0 1.0 -1sd 0.5 0.0
0.0 (2.0)
2011
2011
2012
2012
2013
2013
2014
2015
2015
2016
2016
2017
2018
2018
2019
Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 US 10Y Treasury yield Source: Bloomberg Finance L.P., DBS HK Source: Bloomberg Finance L.P.
Link REIT (823.HK) will continue to return capital generated Within the sector, Champion REIT and Link REIT were among from non-core asset disposals to unitholders with a preference the best performers with unit price appreciating 21-22%. This towards unit repurchase. It plans to buy back 60m units from was followed by Sunlight REIT and Fortune REIT. the market in FY20, which would not only neutralise the DPU dilution led by asset divestments but also lend support to unit price. Link REIT targets to grow its property portfolio value by
Page 16
Industry Focus
Hong Kong Property Sector
high single-digit CAGR through to 2025 while sustaining DPU Sunlight REIT’s (435.HK) reversionary growth remained steady growth and maintaining its current credit rating. To achieve at >10% in 3QFY19. In particular, office rental reversion these targets, we believe that the REIT will proactively explore showed signs of improving. With budget capex of HK$50m, acquisition opportunities in China and unlock the value of non- the asset enhancement works at Bonham Trade Center in core retail assets in Hong Kong. Link REIT is trading at Sheung Wan that will be rebranded as Strand 50 is currently distribution yield of 3% for FY20 and 3.2% for FY21. HOLD well underway with completion scheduled in late 2019. with HK$96.8 TP. theDesk will operate co-work space on 1/F-7/F in 4Q19 with new eateries planned on G/F. Favourable rental growth is On the back of improving occupancy at Fortune Metropolis in expected following the completion of this asset enhancement Hung Hom, Fortune REIT’s (778.HK) portfolio occupancy has initiative. Sunlight REIT offers distribution yield of 4.5-4.6% for recovered to 96-97%. Rental reversion, though moderating, FY19-20. BUY with HK$6.56 TP. remains healthy at 8-9%. Asset enhancement works at West Block of Fortune Kingswood is well underway with most of the Prosperity REIT’s (808.HK) portfolio occupancy stands firm at revamped area already committed. With total capex of 97-98%. The REIT has renewed most of the expiring leases for HK$150m, ROI is estimated at >10%. With >60% of rental 2019 or re-let the vacated space to new tenants. The overall income derived from tenants of non-discretionary trades, rental reversion remains steady at 7-8% with Prosperity Place Fortune REIT’s income stream should be resilient. Fortune REIT in Kwun Tong and Prosperity Millennia Plaza in North Point offers distribution yield of 4.8-5% for FY19-20. BUY with faring better. With comfortable gearing of 20.6%, Prosperity HK$11.8 TP. REIT is well placed to pursue acquisitions. Prosperity REIT is trading at distribution yield of 5.4% for FY19 and 5.6% for Despite slow office demand in Central, Champion REIT’s FY20. BUY with HK$3.86 TP. (2778.HK) Three Garden Road should record robust reversionary growth of >25% in FY19 given relatively low expiring rents. At Langham Place Office Tower, the space surrendered by Sears has been taken up. Tenants’ sales at Langham Place Mall grew an estimated 2-3% in 1Q19, outperforming the overall retail market. Base retail rents should see single-digit growth in FY19 but the slow retail market may drag turnover rents. The REIT has refinanced the loan of HK$3.7bn maturing in Jun-19 and made an early repayment on the loan of HK$1.3bn due 2021. Champion REIT offers distribution yield of 4.3- 4.6% for FY19-20. BUY with HK$6.99 TP.
Peer comparison - REIT
Mk t Last 12-m Yield Yield REIT Code FYE Cap Price T arget Recom F Y19 F Y20
HK$m HK$ HK$ % % Champion REIT* 2778 HK Dec 38,065 6.51 6.99 BUY 4.3 4.6 Fortune REIT* 778 HK Dec 20,706 10.74 11.80 BUY 4.8 5.0 Hui Xian REIT@^ 87001 HK Dec 19,575 3.40 n.a. NR 7.6 7.5
Jinmao Investments* 6139 HK Dec 8,700 4.35 4.96 BUY 7.9 7.9
Langham Hospitality* 1270 HK Dec 6,392 3.01 3.58 BUY 6.7 6.7 New Century REIT^ 1275 HK Dec 1,636 1.70 n.a. NR n.a. n.a. Prosperity REIT* 808 HK Dec 5,082 3.41 3.86 BUY 5.4 5.6 Regal REIT* 1881 HK Dec 7,883 2.42 2.72 BUY 6.3 6.6
Spring REIT^ 1426 HK Dec 4,275 3.36 n.a. NR 7.0 n.a. Sunlight REIT* 435 HK Jun 9,866 5.99 6.56 BUY 4.5 4.6 Link REIT* 823 HK Mar 202,600 96.00 96.80 HOLD 3.0 3.2
Yuexiu REIT*^ 405 HK Dec 16,588 5.34 6.11 BUY 6.1 6.3 Source: DBS HK*, Bloomberg Finance L.P. Closing prices as of June 28, 2019 @Rmb denominated ^ DPU based on consensus
Page 17
Industry Focus
Hong Kong Property Sector
Discount to NAV – Champion REIT Historical yield band – Champion REIT
HK$ HK$ 9 10.00 8 0.74x 9.00 7 0.63x 8.00 7.00 Ceiling: 3.88% 6 0.51x 6.00 5 0.4x 5.00 4 0.29x 4.00 3 3.00 Mid: 14.15% 2 2.00 1 1.00 Floor: 24.41%
0 -
Jul/10
Jul/15
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Nov-16
Nov-17
Nov-18
Jan/08
Jan/13
Jan/18
May-07
May-08
May-09
May-10
May-11
May-12
May-13
May-14
May-15
May-16
May-17
May-18
May-19
Sep/09
Sep/14
Nov/08
Nov/13
Nov/18
Mar/07
Mar/12
Mar/17
May/06 May/11 May/16 Discount to NAV – Fortune REIT Historical yield band – Fortune REIT
HK$ HK$ 16 14.00 0.9x 14 12.00 Ceiling: 4.3% 0.76x 12 10.00 10 0.61x 8.00 8 6.00 0.47x 6 4.00 Mid: 13.7% 4 0.33x 2.00 2 Floor: 23%
0 -
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jul-11
Jul-12
Jul-13
Jul-14
Jul-15
Jul-16
Jul-17
Jul-18
Jul-19
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Jul/06
Jul/07
Jul/08
Jul/09
Jul/10
Jul/11
Jul/12
Jul/13
Jul/14
Jul/15
Jul/16
Jul/17
Jul/18
Jul/19
Jan/06
Jan/07
Jan/08
Jan/09
Jan/10
Jan/11
Jan/12
Jan/13
Jan/14
Jan/15
Jan/16
Jan/17
Jan/18 Jan/19
Discount to NAV – Link REIT Historical yield band – Link REIT
HK$ HK$ 140 120.00 Ceiling: 2.8% 1.52x 120 100.00 1.31x
100 80.00 1.11x
80 60.00 0.91x Mid: 5% 60 0.71x 40.00
40 20.00 Floor: 7.2% 20 - 0
Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-16 Jul-17 Jul-18 Jul-19 Jul-15
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-17 Jan-18 Jan-19
Jan-16
Jul/06 Jul/07 Jul/08 Jul/09 Jul/10 Jul/11 Jul/12 Jul/13 Jul/14 Jul/15 Jul/16 Jul/17 Jul/18 Jul/19
Jan/06 Jan/07 Jan/08 Jan/09 Jan/10 Jan/11 Jan/13 Jan/15 Jan/16 Jan/17 Jan/18 Jan/19 Jan/14 Jan/12
Source: Bloomberg Finance L.P., DBS HK
Page 18
Industry Focus
Hong Kong Property Sector
Discount to NAV – Prosperity REIT Historical yield band – Prosperity REIT
HK$ HK$ 5.0 4.50 0.77x 4.5 4.00 Ceiling: 4.8% 4.0 0.68x 3.50 3.5 0.59x 3.00 3.0 0.49x 2.50 2.5 0.4x 2.00 2.0 1.50 Mid: 1.5 1.00 13.2% 1.0 0.50 Floor: 21.5% 0.5 -
0.0
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Nov-16
Nov-17
Nov-18
May-06
May-07
May-08
May-09
May-10
May-11
May-12
May-13
May-14
May-15
May-16
May-17
May-18
May-19
Nov/06
Nov/07
Nov/08
Nov/09
Nov/10
Nov/11
Nov/12
Nov/13
Nov/14
Nov/15
Nov/16
Nov/17
Nov/18
May/06
May/07
May/08
May/09
May/10
May/11
May/12
May/13
May/14
May/15
May/16
May/17 May/18 May/19
Discount to NAV – Sunlight REIT Historical yield band – Sunlight REIT
HK$ HK$ 8 7.00 7 0.78x 6.00 Ceiling: 4.45% 6 0.67x 5.00 5 0.56x 4.00 4 0.45x 3.00 3 0.34x 2.00 Mid: 15.6% 2 1.00 1 Floor: 26.7% -
0
Jul-07
Jul-08
Jul-09
Jul-10
Jul-11
Jul-12
Jul-13
Jul-14
Jul-15
Jul-16
Jul-17
Jul-18
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Jun/07
Jun/08
Jun/09
Jun/10
Jun/11
Jun/12
Jun/13
Jun/14
Jun/15
Jun/16
Jun/17
Jun/18
Jun/19
Dec/06
Dec/07
Dec/08
Dec/09
Dec/10
Dec/11
Dec/12
Dec/13
Dec/14
Dec/15
Dec/16 Dec/17 Dec/18
Source: Bloomberg Finance L.P., DBS HK
Page 19
Industry Focus
Hong Kong Property Sector
Property Investors – GAV breakdown
GAV Breakdown (%) Hang Lung Props Hongkong Land Hy san Swire Props Wharf REIC HK 51 65 94 78 98 Residential 9 0 15 4 2 Office 16 56 44 55 34 Retail 24 8 34 14 58 Hotel 0 1 0 3 3 Industrial 0 0 0 0 0 Others 2 0 1 2 0 Farmland 0 0 0 0 0 China 49 18 6 20 0 Overseas 0 17 0 2 0 Listed subsidiaries. associates & 0 0 0 0 2 investments Other assets 0 0 0 0 0 T otal 100 100 100 100 100 Source: DBS HK
Property Investors – NAV sensitivities
% increase in NAV Hang Lung Props Hongkong Hy san Swire Props Wharf REIC if the following prices Land rise by 10% Office -HK 1.9% 6.3% 4.7% 6.1% 4.0% Retail - HK 2.7% 0.9% 3.5% 1.4% 6.8% Residential - HK 1.0% 0.0% 1.7% 0.4% 0.3% Hotels - HK 0.0% 0.1% 0.0% 0.3% 0.3% Source: DBS HK
Stake increase of major shareholder - YTD
WHARF REAL ESTAT (1997 HK) Name of substantial No. of shares Average price per No. of shares % of issued Date of relevant shareholder inv olv ed Buy /Sell share (HK$) interested share capital ev ent
Wheelock and Company 166,000 B 61.13 1,912,950,608 63.00 29-Apr-19
Source: HKEX
Company share buybacks - YTD
LINK REIT (823 HK)
4-Jan-19 79,000 78.79 6,224,552 3-Jan-19 800,000 78.41 62,726,800 2-Jan-19 820,000 78.02 63,979,270
Source: HKEX
Page 20 Industry Focus Hang Lung Properties
Bloomberg: 101 HK | Reuters: 101.HK Refer to important disclosures at the end of this report
BUY New rental properties on the horizon Last Traded Price ( 28 Jun 2019): HK$18.58 (HSI : 28,543) Price Target 12-mth: HK$20.35 (9.5% upside) (Prev HK$18.22) • Retail sales growth shows no sign of moderation despite trade war Potential Catalyst: Improving retail sales Where we differ: Market has slightly higher earnings estimate for FY19-20 • Portfolio expansion to add spice to rental income growth • BUY with HK$20.35 TP Analyst Jeff YAU CFA, +852 36684180, [email protected] Retail sales growth exhibits no signs of moderation despite Ian CHUI CFA, +852 36684174, [email protected] Jason LAM +852 36684179, [email protected] trade war. In Shanghai, Plaza 66 continues to maintain >10% growth in retail sales in 4M19 despite a higher comparison base. Retail sales at Grand Gateway 66, however, is currently being Price Relative dragged by ongoing renovation. The revamped area has been largely HK$ Relative Index
216 committed at higher rents and will gradually re-open for business in 24.0 196 22.0 phases until 1Q20. With a capex budget of c.HK$800m, payback 176 20.0 156 period of this asset enhancement initiative is estimated at 4-5 years. 18.0 136 116 16.0 Excluding Riverside 66 in Tianjin and Forum 66 in Shenyang that 96 14.0 76 registered flattish retail sales, other retail malls outside Shanghai 12.0 56 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19 posted decent tenants’ sales growth of >10% in the same period. In Hang Lung Properties (LHS) Relative HSI (RHS) particular, Dalian Olympia 66 delivered better-than- average retail Forecasts and Valuation sales growth as leasing operations are ramping up. Continued retail FY Dec (HK$ m) 2017A 2018A 2019F 2020F sales improvement should support positive reversionary growth in the Turnover 11,199 9,408 10,240 10,827 years ahead. EBITDA 7,837 6,326 6,666 7,016 Pre-tax Profit 7,278 5,703 5,774 6,006 Portfolio expansion to add spice to rental income growth. Underlying Profit 5,530 4,093 4,129 4,298 EPS (HK$) 1.23 0.91 0.92 0.96 Scheduled to open for business in Sep/Oct 19, the mall at Kunming EPS Gth (%) (12.8) (26.0) 0.9 4.1 Spring City 66 is already 85% pre-committed. Pre-leasing of the PE (X) 15.3 20.7 20.5 19.7 office portion that is scheduled for launch in late 2019 has P/Cash Flow (X) 8.2 12.5 11.3 10.8 commenced. The second office tower at Wuxi Center 66 and Conrad EV/EBITDA (X) 13.5 16.7 15.9 15.1 DPS (HK$) 0.75 0.75 0.75 0.77 Hotel at Shenyang Forum 66 are slated for completion in 2H19. This Div Yield (%) 4.0 4.0 4.0 4.1 is followed by Wuhan Heartland 66 which is expected to come Net Gearing (%) 2 11 19 22 onstream in 2H20. The investment property portfolio expansion ROE (%) 4.2 3.0 3.0 3.1 Est. NAV (HK$) 36.2 37.0 should propel the company’s rental earnings growth. Disc. to NAV (%) (49) (50) BUY with HK$20.35 TP. The stock is trading at 49% discount to our Earnings Rev (%): (0) (0) appraised current NAV. Tenants’ sales at its key malls show no signs Consensus EPS (HK$): 1.06 1.11 of moderation, and should be positive for future reversionary growth. Other Broker Recs: B:11 S:2 H:2 Portfolio expansion should further enhance its recurring earnings Source of all data on this page: Company, DBS Bank (Hong Kong) Limited base, which warrants a higher stock valuation. BUY with HK$20.35 (“DBS HK”), Thomson Reuters TP, based on 45% discount to our Jun-2020 NAV estimate.
At A Glance Issued Capital (m shrs) 4,498 Mkt Cap (HK$m/US$m) 84,737 / 10,865 Major Shareholders (%) Hang Lung Group Ltd 57.6 First Eagle Investment Management, L.L.C. 5.8 Free Float (%) 42.4 3m Avg. Daily Val. (US$m) 11.78 ICB Industry: Financials / Real Estate Investment & Services Bloomberg ESG Disclosure Score (2017)^ 50 - Environmental / Social / Governance 48 / 44 / 63
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ed-JS/ - CS /RM Industry Focus
HK Property Sector
Income Statement (HK$ m) Balance Sheet (HK$ m) FY Dec 2017A 2018A 2019F 2020F FY Dec 2017A 2018A 2019F 2020F Turnover 11,199 9,408 10,240 10,827 Fixed Assets 156,256 168,078 180,706 188,195 EBITDA 7,837 6,326 6,666 7,016 Other LT Assets 1,362 1,423 1,438 1,453 Depr / Amort (43) (45) (45) (45) Cash & ST Invts 22,106 12,363 6,575 4,006 EBIT 7,794 6,281 6,621 6,971 Other Current Assets 3,862 4,589 4,144 3,748 Associates Inc 53 49 54 55 Total Assets 183,586 186,453 192,862 197,402 Interest (Exp)/Inc (569) (627) (900) (1,020) ST Debt 2,112 2,414 2,000 1,000 Exceptionals 0 0 0 0 Creditors 6,673 5,974 5,867 5,760 Pre-tax Profit 7,278 5,703 5,774 6,006 Other Current Liab 504 558 658 758 Tax (1,353) (1,203) (1,213) (1,261) LT Debt 22,708 24,839 30,253 34,253 Minority Interest (395) (407) (433) (446) Other LT Liabilities 9,344 9,074 9,074 9,074 Underlying Profit 5,530 4,093 4,129 4,298 Minority Interests 6,087 6,033 6,302 6,570 Shareholder’s Equity 136,158 137,561 138,708 139,987 Total Cap. & Liab. 183,586 186,453 192,862 197,402 Sales Gth (%) (14) (16) 9 6 Share Capital (m) 4,498 4,498 4,498 4,498 Net Profit Gth (%) (13) (26) 1 4 Net Cash/(Debt) (2,714) (14,890) (25,678) (31,247) EBITDA Margins (%) 70 67 65 65 Working Capital 16,679 8,006 2,193 236 EBIT Margin (%) 70 67 65 64 Net Gearing (%) 2 11 19 22 Tax Rate (%) 19 21 21 21
Cash Flow Statement (HK$ m) Segmental Breakdown (HK$ m) / Key Assumptions FY Dec 2017A 2018A 2019F 2020F FY Dec 2017A 2018A 2019F 2020F EBIT 7,794 6,281 6,621 6,971 Revenues (HK$ m) Tax Paid (1,776) (1,063) (1,213) (1,261) Property sales 3,420 1,227 1,685 1,685 Depr/Amort 43 45 45 45 Property leasing 7,779 8,181 8,523 9,052 Chg in Wkg.Cap 2,792 501 845 845 Hotel 0 0 32 89 Other Non-Cash (296) (26) 0 0 Total 11,199 9,408 10,240 10,827 Operating CF 8,557 5,738 6,298 6,600 Net Capex (4,216) (13,661) (12,012) (6,867) Assoc, MI, Invsmt (10,107) 8,402 289 320 Investing CF (14,323) (5,259) (11,723) (6,547) Net Chg in Debt (3,245) 3,053 5,000 3,000 Key Assumptions (%) 2019F 2020F New Capital 0 0 0 0 Residential price - HK 10 5 Dividend (3,685) (3,718) (3,806) (3,865) Office rental - HK 0 2 Other Financing CF (1,157) (1,261) (1,557) (1,757) Retail rental (High street shops) - HK 0 1 Financing CF (8,087) (1,926) (363) (2,622) Chg in Cash (13,853) (1,447) (5,788) (2,569)
Source: Company, DBS HK
Page 22 Industry Focus Hongkong Land
Bloomberg: HKL SP | Reuters: HKLD.SI Refer to important disclosures at the end of this report
BUY Strong asset backing Last Traded Price ( 28 Jun 2019): US$6.44 (STI : 3,322) • Positive office rental reversion despite subdued office Price Target 12-mth: US$7.93 (23.1% upside) (Prev US$8.02) demand in Hong Kong • More new projects in China lining up for sale Potential Catalyst: Attractive valuation Where we differ: Market has slightly higher earnings estimate for FY19- • BUY with US$7.93 TP 20. Positive office rental reversion despite subdued demand in Hong Analyst Jeff YAU CFA, +852 36684180, [email protected] Kong. Leasing enquires for Central office portfolio has slowed down Ian CHUI CFA, +852 36684174, [email protected] noticeably due to subdued demand from Chinese enterprises. As a Jason LAM +852 36684179, [email protected] result, Central office portfolio’s vacancy inched up 2.1% in Mar-19 from Dec-18’s 1.4%. Despite higher vacancy and waning demand, office Price Relative reversionary growth remains positive. The Central retail portfolio US$ Relative Index effectively remained fully occupied with mildly positive base rental 9.1 210 8.6 reversions. In Singapore, the office portfolio vacancy stood at 2.8% in 190 8.1 170 Mar-19 and favourable reversionary growth should continue. In Beijing, 7.6 150 7.1 WF Central is currently 88% leased with occupancy expected to exceed 6.6 130 6.1 110 90% by end-19. Construction works at the Chaoyang commercial site 5.6 90 5.1 70 are expected to commence in 2020 with project completion targeted for Jul-15 Jul-16 Jul-17 Jul-18 Jul-19 4Q23. Its project partner, CICC, will be the anchor tenant taking up Hongkong Land (LHS) Relative STI (RHS) c.20% of office space. Forecasts and Valuation More projects in China lining up for pre-sale. Due to fewer project FY Dec (US$ m) 2017A 2018A 2019F 2020F Turnover 1,616 2,665 2,275 1,840 launches, contracted sales revenue tumbled 36% to US$193m in 1Q19. EBITDA 879 1,094 1,042 1,089 With growing number of new projects expected to be offered for pre- Pre-tax Profit 1,100 1,240 1,252 1,279 sale in 2H19, the company is set to see stronger contracted sales. In Underlying Profit 947 1,036 1,055 1,073 EPS (US$) 0.41 0.44 0.45 0.46 3Q19, the company is expected to pre-sell Yue City & River and City in EPS Gth (%) 12.6 9.1 1.4 1.7 Nanjing. In 4Q19, River One, Harbour Tale, Hillview and Yuelai project in PE (X) 15.9 14.6 14.4 14.1 Chongqing, Caohejing project in Shanghai and Yixinhu project in P/Cash Flow (X) 16.0 19.4 11.9 20.4 Chengdu are expected to be released into the market. Hongkong Land EV/EBITDA (X) 21.3 17.1 18.0 17.2 DPS (US$) 0.20 0.22 0.22 0.23 is scheduled to complete development properties of 0.66m sm, 0.67m Div Yield (%) 3.1 3.4 3.4 3.6 sm and 0.8m sm respectively in FY19, FY20, and FY21, up from FY18’s Net Gearing (%) 7 9 11 12 0.49m sm. While the bulk of projects scheduled for completion are from ROE (%) 2.8 2.8 2.7 2.7 Est. NAV (HK$) 12.8 13.2 Chongqing, projects in new markets including Wuhan, Nanjing and Disc. to NAV (%) (50) (51) Hangzhou should come onstream from FY20 onwards. Its China property business should add momentum to its earnings growth. But Earnings Rev (%): (0) 2 this may not necessarily translate into higher valuation for the stock in Consensus EPS (US$): 0.46 0.48 Other Broker Recs: B:9 S:4 H:1 the short-to-medium term. BUY with US$7.93 TP. The stock, trading at 50% discount to our Source of all data on this page: Company, DBS Bank (Hong Kong) Limited (“DBS HK”), Thomson Reuters assessed current NAV, is undervalued from a historical perspective. The low valuation has priced in the peaking Central office sector. BUY with US$7.93 TP, based on 40% discount to our Jun-2020 NAV estimate. At A Glance Issued Capital (m shrs) 2,334 Mkt Cap (US$m) 15,567 Major Shareholders (%) Jardine Strategic Holdings Ltd 50.4 APG Asset Management N.V. 5.8 Free Float (%) 49.6 3m Avg. Daily Val. (US$m) 1.38 ICB Industry: Financials / Real Estate Investment & Services Bloomberg ESG Disclosure Score (2016)^ 14 - Environmental / Social / Governance 11 / 9 / 29
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HK Property Sector
Income Statement (US$ m) Balance Sheet (US$ m) FY Dec 2017A 2018A 2019F 2020F FY Dec 2017A 2018A 2019F 2020F Turnover 1,616 2,665 2,275 1,840 Fixed Assets 32,588 33,846 34,209 34,916 EBITDA 879 1,094 1,042 1,089 Other LT Assets 5,698 6,855 7,203 7,548 Depr / Amort (3) (4) (4) (4) Cash & ST Invts 1,622 1,375 1,202 966 EBIT 876 1,089 1,038 1,085 Other Current Assets 3,044 2,887 3,746 4,444 Associates Inc 302 265 359 359 Total Assets 42,952 44,963 46,359 47,874 Interest (Exp)/Inc (78) (114) (145) (165) ST Debt 191 794 300 300 Exceptionals 0 0 0 0 Creditors 1,695 1,337 1,362 1,366 Pre-tax Profit 1,100 1,240 1,252 1,279 Other Current Liab 114 119 119 119 Tax (151) (206) (196) (202) LT Debt 3,980 4,145 5,139 5,439 Minority Interest (1) 2 0 (3) Other LT Liabilities 164 198 198 198 Underlying Profit 947 1,036 1,055 1,073 Minority Interests 35 28 22 20 Shareholder’s Equity 36,774 38,342 39,218 40,431 Total Cap. & Liab. 42,952 44,963 46,359 47,874 Sales Gth (%) (19) 65 (15) (19) Share Capital (m) 2,353 2,334 2,334 2,334 Net Profit Gth (%) 12 9 2 2 Net Cash/(Debt) (2,549) (3,564) (4,237) (4,773) EBITDA Margins (%) 54 41 46 59 Working Capital 2,667 2,011 3,166 3,624 EBIT Margin (%) 54 41 46 59 Net Gearing (%) 7 9 11 12 Tax Rate (%) 14 17 16 16
Cash Flow Statement (US$ m) Segmental Breakdown (US$ m) / Key Assumptions FY Dec 2017A 2018A 2019F 2020F FY Dec 2017A 2018A 2019F 2020F EBIT 876 1,089 1,038 1,085 Revenues (US$ m) Tax Paid (137) (172) (196) (202) Rental income 912 983 1,018 1,046 Depr/Amort 3 4 4 4 Service and mgmt charges 140 150 156 162 Chg in Wkg.Cap 40 (329) 386 (159) Sale of trading properties 564 1,533 1,101 632 Other Non-Cash 18 12 (153) (187) Total 1,616 2,665 2,275 1,840 Operating CF 800 604 1,079 541 Net Capex (108) (93) (30) (30) Assoc, MI, Invsmt (839) (963) (1,200) (500) Investing CF (947) (1,056) (1,230) (530) Net Chg in Debt 239 838 500 300 Key Assumptions (%) 2019F 2020F New Capital 0 (132) 0 0 Dividend (447) (469) (522) (547) Office rental - HK 0 2 Other Financing CF 15 0 0 0 Financing CF (193) 237 (22) (247) Retail rental (Shopping centre) - HK 0 1 Chg in Cash (340) (215) (173) (236)
Source: Company, DBS HK
Page 24 Industry Focus Hysan Development
Bloomberg: 14 HK | Reuters: 0014.HK Refer to important disclosures at the end of this report
HOLD Sustainable office reversionary growth Last Traded Price (28 Jun 2019): HK$40.35 (HSI :28,543) • Hysan Place seeing healthy retail sales improvement Price Target 12-mth: HK$43.80 (8.6% upside) (Prev HK$42.95) • Solid office reversionary growth to sustain Potential Catalyst: Positive rental reversion • HOLD with HK$43.80 TP Where we differ: Market has slightly higher earnings estimate for FY19-20. Hysan Place seeing healthy retail sales improvement. Hysan Analyst Jeff YAU CFA, +852 36684180, [email protected] Development’s retail tenants’ sales grew 4% in 1Q19, and Ian CHUI CFA,+852 36684174, [email protected] outperformed the general retail market (-1.2%) in the same period. Jason LAM +852 36684179, [email protected] The growth was led by Hysan Place where tenants’ sales improved 10% thanks to stellar performance of T Galleria. Lee Gardens hub also Price Relative recorded tenants’ sales growth of 3% with luxury retail brands HK$ Relative Index
209 delivering mixed sales performance. On the other hand, tenants’ sales 46.1 189 of Lee Theatre hub softened by 1-2%. About 32% of retail leases are 41.1 169 up for renewal or rent review in 2019. YTD, retail reversionary growth 149 36.1 129 has been positive at the low single-digit. Overall, occupancy cost ratio 31.1 109 remained healthy at 17% in 1Q19. 26.1 89 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19 Solid office reversionary growth to sustain. Office portfolio Hysan Development (LHS) Relative HSI (RHS) occupancy was firm at c.97% with vacancy concentrated in Grade B Forecasts and Valuation office Property such as Leighton Centre. About 30% of floor area is FY Dec (HK$ m) 2017A 2018A 2019F 2020F Turnover 3,548 3,890 4,070 4,167 scheduled for roll over in 2019. Hysan Development has renewed the EBITDA 3,135 3,157 3,312 3,394 majority of expiring leases or re-let the vacated space. Rental reversion Pre-tax Profit 3,205 3,159 3,309 3,389 has averaged c.15% upon renewals, new lettings or rent reviews. The Underlying Profit 2,491 2,536 2,657 2,721 EPS (HK$) 2.38 2.42 2.54 2.60 company is gradually renovating the leased units at Bamboo Grove EPS Gth (%) 5.3 1.7 4.7 2.4 with healthy reversionary growth. Hysan Development plans to PE (X) 16.9 16.6 15.9 15.5 renovate the lift lobby and common areas of Lee Garden Two, which P/Cash Flow (X) 14.5 13.1 12.8 12.4 should help to maintain its competitiveness. With comfortable gearing EV/EBITDA (X) 15.6 15.5 14.8 14.4 DPS (HK$) 1.37 1.44 1.52 1.55 of 5-6%, the company is well placed to pursue acquisitions. Hysan Div Yield (%) 3.4 3.6 3.8 3.8 Development is eyeing the EMSD site as it should produce significant Net Gearing (%) 5 5 4 4 synergies with its core portfolio in Causeway Bay. However, it is not ROE (%) 3.6 3.5 3.5 3.6 Est. NAV (HK$) 79.6 79.7 known when the site will be available for sale. The company has also Disc. to NAV (%) (49) (49) been exploring acquisition opportunities in Shanghai and Greater Bay Area. In the next couple of years, the company has no immediate plans Earnings Rev (%): (2) (2) for redeveloping Leighton Centre. But this ageing property should be a Consensus EPS (HK$): 2.58 2.70 Other Broker Recs: B:5 S:1 H:7 candidate for redevelopment in the longer term. Source of all data on this page: Company, DBS Bank (Hong Kong) Limited HOLD with HK$43.8 TP. The stock is trading 49% below our assessed (“DBS HK”), Thomson Reuters current NAV. Retail market uncertainty remains a key share overhang. Thus we reiterate HOLD with HK$43.8 TP. This is based on 45% discount to our Jun-2020 NAV estimate. At A Glance Issued Capital (m shrs) 1,047 Mkt Cap (HK$m/US$m) 42,856 / 5,495 Major Shareholders (%) Lee Hysan Company Ltd 41.4 Silchester International Investors, L.L.P. 7.0 First Eagle Investment Management, L.L.C. 5.0 BlackRock Institutional Trust Company, N.A. 5.8 Free Float (%) 46.6 3m Avg. Daily Val. (US$m) 5.95 ICB Industry: Financials / Real Estate Investment & Services Bloomberg ESG Disclosure Score (2017)^ 34 - Environmental / Social / Governance 22 / 39 / 57
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HK Property Sector
Income Statement (HK$ m) Balance Sheet (HK$ m) FY Dec 2017A 2018A 2019F 2020F FY Dec 2017A 2018A 2019F 2020F Turnover 3,548 3,890 4,070 4,167 Fixed Assets 73,221 78,189 78,372 79,331 EBITDA 3,135 3,157 3,312 3,394 Other LT Assets 5,501 5,608 6,398 7,196 Depr / Amort (22) (17) (17) (17) Cash & ST Invts 2,662 2,817 2,951 3,061 EBIT 3,113 3,140 3,295 3,377 Other Current Assets 738 430 415 400 Associates Inc 209 192 200 207 Total Assets 82,122 87,044 88,136 89,988 Interest (Exp)/Inc (117) (173) (185) (195) ST Debt 150 300 300 300 Exceptionals 0 0 0 0 Creditors 736 873 858 843 Pre-tax Profit 3,205 3,159 3,309 3,389 Other Current Liab 875 662 662 662 Tax (484) (481) (504) (516) LT Debt 6,035 6,022 5,922 5,822 Minority Interest (230) (142) (149) (151) Other LT Liabilities 1,323 1,549 1,549 1,549 Underlying Profit 2,491 2,536 2,657 2,721 Minority Interests 3,048 3,206 3,274 3,383 Shareholder’s Equity 69,955 74,432 75,572 77,429 Total Cap. & Liab. 82,122 87,044 88,136 89,988 Sales Gth (%) 0 10 5 2 Share Capital (m) 1,047 1,047 1,047 1,047 Net Profit Gth (%) 5 2 5 2 Net Cash/(Debt) (3,523) (3,505) (3,271) (3,061) EBITDA Margins (%) 88 81 81 81 Working Capital 1,639 1,412 1,546 1,655 EBIT Margin (%) 88 81 81 81 Net Gearing (%) 5 5 4 4 Tax Rate (%) 15 15 15 15
Cash Flow Statement (HK$ m) Segmental Breakdown (HK$ m) / Key Assumptions FY Dec 2017A 2018A 2019F 2020F FY Dec 2017A 2018A 2019F 2020F EBIT 3,113 3,140 3,295 3,377 Revenues (HK$ m) Tax Paid (410) (473) (504) (516) Property rental income 3,548 3,890 4,070 4,167 Depr/Amort 22 17 17 17 Total 3,548 3,890 4,070 4,167 Chg in Wkg.Cap 15 63 0 0 Other Non-Cash (250) 4 0 0 Operating CF 2,490 2,751 2,808 2,878 Net Capex (2,140) (1,265) (200) (200) Assoc, MI, Invsmt 2,186 275 (536) (536) Investing CF 46 (990) (736) (736) Net Chg in Debt (130) 150 (100) (100) Key Assumptions (%) 2019F 2020F New Capital 0 0 0 0 Dividend (1,539) (1,572) (1,598) (1,682) Office rental - HK 0 2 Other Financing CF (200) (304) (240) (250) Financing CF (1,869) (1,726) (1,938) (2,032) Retail rental (Shopping centre) - HK 0 1 Chg in Cash 667 35 134 110
Source: Company, DBS HK
Page 26 Industry Focus Swire Properties
Bloomberg: 1972 HK | Reuters: 1972.HK Refer to important disclosures at the end of this report
BUY Going from strength to strength Last Traded Price (28 Jun 2019): HK$31.55 (HSI : 28,543) • Continued office reversionary growth to improve Price Target 12-mth: HK$36.90 (17.0% upside) (Prev HK$35.35) rental income
Potential Catalyst: Steady reversionary growth • Asset divestment to unlock the value Where we differ: Market has slightly higher earnings estimate for FY20. • BUY with HK$36.9 TP Analyst Continued office reversionary growth to improve rental Jeff YAU CFA, +852 36684180, [email protected] income. In Mar-19, spot rents at One and Two Pacific Place stood Ian CHUI CFA, +852 36684174, [email protected] firm at HK$130-165 psf while those at Three Pacific held steady at Jason LAM +852 36684179, [email protected] HK$115-125 psf. In 1Q19, rental reversion for the Pacific Place office Price Relative portfolio was strong at 20%. In Island East, spot rents at Taikoo Place HK$ Relative Index were firm in the high-HK$40s to mid-HK$50s psf while rental 37.1 216
196 reversions accelerated to 13% from 2018’s 6%. Spot rents at One 32.1 176 Island East/One Taikoo Place were higher in the mid-HK$50s to low- 156 27.1 136 HK$70s psf. The rental reversion at One Island East improved to 9% 116 22.1 (2018: 7%). Overall, continued reversionary growth, coupled with 96
17.1 76 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19 new contributions from One Taikoo Place, should help support office
Swire Properties (LHS) Relative HSI (RHS) income growth. Forecasts and Valuation Asset divestment to unlock the value. In May-19, Swire Properties FY Dec (HK$ m) 2017A 2018A 2019F 2020F agreed to dispose its entire 50% stake in 625 King’s Road, an office Turnover 18,558 14,719 14,681 14,958 tower in North Point, for HK$2.38bn or c.HK$15,777psf to Gaw EBITDA 9,913 10,326 11,051 9,451 Pre-tax Profit 9,253 11,304 24,707 9,235 Capital. The sale is expected to bring in an attributable disposal gain Underlying Profit 7,834 10,148 23,225 7,736 of HK$1.76bn upon completion. With GFA of 0.3m sf, 625 King’s EPS (HK$) 1.34 1.73 3.97 1.32 Road is equally owned by Swire and China Motor Bus which has also EPS Gth (%) 10.1 29.5 128.9 (66.7) agreed to sell its stake to the same purchaser. We estimate the exit PE (X) 23.6 18.2 7.9 23.9 P/Cash Flow (X) 13.5 15.9 17.7 19.6 yield at c.2.2%. This office property is a non-core asset, and is not EV/EBITDA (X) 21.8 21.0 19.6 22.9 connected with Taikoo Place office cluster with little operational DPS (HK$) 0.77 0.84 0.89 0.92 synergy. We expect the proceeds generated to be recycled into Swire Div Yield (%) 2.4 2.7 2.8 2.9 Net Gearing (%) 14 11 6 7 Properties’ new investments within the Pacific Place and Taikoo Place ROE (%) 3.2 3.8 8.2 2.6 clusters. Swire Properties may also be keen to acquire the Queensway Est. NAV (HK$) 51.9 52.7 Plaza site if it is offered for sale as it would generate strong synergies Disc. to NAV (%) (39) (40) with its neighbouring Pacific Place development. Earnings Rev (%): 8 3 BUY with HK$36.9 TP. The stock is trading at 39% discount to our Consensus EPS (HK$): 1.44 1.48 appraised current NAV. The company has been optimising its property Other Broker Recs: B:8 S:2 H:4 portfolio through divesting non-core assets and expanding its Source of all data on this page: Company, DBS Bank (Hong Kong) Limited property footprint in key clusters at Pacific Place and Taikoo Place. (“DBS HK”), Thomson Reuters This should brighten its long-term earnings prospects without stretching its balance sheet. BUY with HK$36.9 TP based on 30% discount to our Jun-2020 NAV estimate.
At A Glance Issued Capital (m shrs) 5,850 Mkt Cap (HK$m/US$m) 181,058 / 23,215 Major Shareholders (%) Swire Pacific Ltd 82.0 Schroder Investment Management (Hong Kong) Ltd. 5.8 Free Float (%) 18.0 3m Avg. Daily Val. (US$m) 8.58 ICB Industry: Financials / Real Estate Investment & Services Bloomberg ESG Disclosure Score (2017)^ 51 - Environmental / Social / Governance 48 / 46 / 63
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HK Property Sector
Income Statement (HK$ m) Balance Sheet (HK$ m) FY Dec 2017A 2018A 2019F 2020F FY Dec 2017A 2018A 2019F 2020F Turnover 18,558 14,719 14,681 14,958 Fixed Assets 275,902 281,063 276,975 285,610 EBITDA 9,913 10,326 11,051 9,451 Other LT Assets 25,056 31,000 31,966 33,397 Depr / Amort (426) (394) (414) (434) Cash & ST Invts 1,708 2,094 10,509 9,919 EBIT 9,487 9,932 10,637 9,016 Other Current Assets 11,643 19,490 19,191 19,211 Associates Inc 591 915 953 1,038 Total Assets 314,309 333,647 338,641 348,138 Interest (Exp)/Inc (875) (894) (910) (820) ST Debt 8,337 1,230 7,690 7,690 Exceptionals 50 1,351 14,027 0 Creditors 7,820 10,368 9,168 8,818 Pre-tax Profit 9,253 11,304 24,707 9,235 Other Current Liab 638 392 392 392 Tax (1,415) (1,086) (1,355) (1,393) LT Debt 28,718 30,769 21,309 23,309 Minority Interest (4) (70) (127) (105) Other LT Liabilities 9,418 9,597 9,597 9,597 Underlying Profit 7,834 10,148 23,225 7,736 Minority Interests 1,997 2,016 2,043 2,048 Shareholder’s Equity 257,381 279,275 288,442 296,284 Total Cap. & Liab. 314,309 333,647 338,641 348,138 Sales Gth (%) 11 (21) 0 2 Share Capital (m) 5,850 5,850 5,850 5,850 Net Profit Gth (%) 10 30 129 (67) Net Cash/(Debt) (35,347) (29,905) (18,490) (21,080) EBITDA Margins (%) 53 70 75 63 Working Capital (3,444) 9,594 12,450 12,230 EBIT Margin (%) 51 67 72 60 Net Gearing (%) 14 11 6 7 Tax Rate (%) 15 10 5 15
Cash Flow Statement (HK$ m) Segmental Breakdown (HK$ m) / Key Assumptions FY Dec 2017A 2018A 2019F 2020F FY Dec 2017A 2018A 2019F 2020F EBIT 9,487 9,932 10,637 9,016 Revenues (HK$ m) Tax Paid (1,044) (1,443) (1,355) (1,393) Property Investment 11,380 12,254 13,060 13,416 Depr/Amort 426 394 414 434 Property trading 5,833 1,061 150 0 Chg in Wkg.Cap 3,787 2,311 (601) (50) Hotels 1,345 1,404 1,471 1,542 Other Non-Cash (900) (1,803) (905) (834) Total 18,558 14,719 14,681 14,958 Operating CF 11,756 9,391 8,190 7,173 Net Capex (5,977) 3,717 9,290 (3,699) Assoc, MI, Invsmt (910) (2,964) (934) (699) Investing CF (6,887) 753 8,356 (4,398) Net Chg in Debt 1,889 111 (3,000) 2,000 Key Assumptions (%) 2019F 2020F New Capital 0 0 0 0 Dividend (4,464) (4,646) (5,131) (5,365) Office rental - HK 0 2 Other Financing CF (2,329) (5,177) 0 0 Financing CF (4,904) (9,712) (8,131) (3,365) Retail rental (Shopping centre) - HK 0 1 Chg in Cash (35) 432 8,415 (590)
Source: Company, DBS HK
Page 28 Industry Focus Wharf REIC
Bloomberg: 1997 HK | Reuters: 1997.HK Refer to important disclosures at the end of this report
HOLD Retail challenges ahead Last Traded Price (28 Jun 2019): HK$55.05 (HSI : 28,543) • Retail tenants sales growth moderated noticeably Price Target 12-mth: HK$54.45 (1.1% downside) (Prev HK$58.20) • New office space converted from Hampton Court is Potential Catalyst: improving outlook of US-China trade negotiation pre-leasing smoothly Where we differ: Market has slightly higher earnings estimate for FY19- 20. • HOLD with HK$54.45 TP
Analyst Retail tenants’ sales growth moderated noticeably. Retail Jeff YAU CFA, +852 36684180, [email protected] tenants’ sales growth at Harbour City moderated noticeably to 2.9% Ian CHUI CFA, +852 36684174, [email protected] in 1Q19 from 4Q18’s 11% and 3Q18’s 16.2%, due to the ultra-high Jason LAM +852 36684179, [email protected] comparison base. In 1Q18, retail sales at Harbour City jumped by Price Relative 37.7%. The slower sales of expensive luxury items and electronic HK$ Relative Index goods were a drag on tenants’ sales, while fashion and leather
66.2 205 goods retailers, department stores and supermarket items delivered
185 61.2 solid sales growth. Times Square posted a mild drop of 1.3% in 165 56.2 145 tenants’ sales in the same period, in line with the overall market, 51.2 125 with beauty retailers faring better. While slower retail sales may be a 46.2 105
41.2 85 drag on turnover rents in FY19, retail rental reversion at Harbour City Nov-17 Apr-18 Sep-18 Feb-19 and Times Square should remain in the single digit in FY19. Wharf REIC (LHS) Relative HSI (RHS) Forecasts and Valuation New office space converted from Hampton Court is pre- FY Dec (HK$ m) 2017A 2018A 2019F 2020F leasing smoothly. Conversion of Hampton Court (serviced Turnover 20,904 16,481 17,005 17,603 apartments) at Harbour City into 15 office floors is scheduled for EBITDA 15,495 13,037 13,551 14,038 completion in Jul-19. Pre-leasing of office space is proceeding Pre-tax Profit 14,433 12,187 12,471 12,966 Underlying Profit 9,500 10,052 10,349 10,753 smoothly with about 50% of office area pre-committed. WeWork EPS (HK$) 3.13 3.31 3.41 3.54 has committed to c.150,000sf of office space at a monthly rent of EPS Gth (%) 11.4 5.8 2.9 3.9 HK$55-60psf. Given higher rental yields for office premises, this PE (X) 17.6 16.6 16.2 15.5 P/Cash Flow (X) (56.4) 18.0 20.6 15.9 usage conversion should help to exploit the earnings potential of EV/EBITDA (X) 13.9 16.3 15.5 14.7 Harbour City. With comfortable gearing of 18% as of Dec-18, DPS (HK$) 0.95 2.10 2.20 2.28 Wharf REIC is well placed to explore prime commercial investment Div Yield (%) 1.7 3.8 4.0 4.1 opportunities in Hong Kong. Net Gearing (%) 20 18 17 15 ROE (%) 4.7 4.7 4.7 4.7 HOLD with HK$54.45 TP. The stock is trading 34% below our Est. NAV (HK$) 83.6 83.7 Disc. to NAV (%) (34) (34) appraised current NAV. The recent protests have affected the consumer sentiment and may cast a shadow over its near-term share Earnings Rev (%): 0 1 price performance. HOLD with HK$54.45 TP, based on 35% Consensus EPS (HK$): 3.46 3.64 discount to our Jun-2020 NAV estimate. That said, longer term, Other Broker Recs: B:10 S:0 H:6 Wharf REIC should be able to tap on increased shopper traffic in Source of all data on this page: Company, DBS Bank (Hong Kong) Limited Tsim Sha Tsui when the benefits from Express Rail Link fully filter (“DBS HK”), Thomson Reuters through. At A Glance Issued Capital (m shrs) 3,036 Mkt Cap (HK$m/US$m) 162,438 / 20,828 Major Shareholders (%) Wheelock and Co Ltd 62.3 APG Asset Management N.V. 5.8 Free Float (%) 37.7 3m Avg. Daily Val. (US$m) 20.92 ICB Industry: Financials / Real Estate Investment & Services Bloomberg ESG Disclosure Score (2017)^ 44 - Environmental / Social / Governance 40 / 37 / 63
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HK Property Sector
Income Statement (HK$ m) Balance Sheet (HK$ m) FY Dec 2017A 2018A 2019F 2020F FY Dec 2017A 2018A 2019F 2020F Turnover 20,904 16,481 17,005 17,603 Fixed Assets 262,376 267,261 269,752 271,245 EBITDA 15,495 13,037 13,551 14,038 Other LT Assets 6,408 5,738 5,888 6,038 Depr / Amort (144) (292) (304) (316) Cash & ST Invts 3,076 2,675 3,159 5,746 EBIT 15,351 12,745 13,247 13,722 Other Current Assets 815 4,682 5,462 5,512 Associates Inc 67 233 150 150 Total Assets 272,675 280,356 284,261 288,541 Interest (Exp)/Inc (985) (791) (926) (906) ST Debt 20,800 3,070 4,900 4,901 Exceptionals 0 0 0 0 Creditors 8,805 8,351 8,151 8,171 Pre-tax Profit 14,433 12,187 12,471 12,966 Other Current Liab 2,829 2,926 2,926 2,926 Tax (4,267) (1,994) (2,033) (2,115) LT Debt 24,752 39,027 36,197 35,196 Minority Interest (666) (141) (89) (99) Other LT Liabilities 2,521 2,650 2,650 2,650 Underlying Profit 9,500 10,052 10,349 10,753 Minority Interests 5,650 5,535 5,524 5,524 Shareholder’s Equity 207,318 218,797 223,913 229,173 Total Cap. & Liab. 272,675 280,356 284,261 288,541 Sales Gth (%) 24 (21) 3 4 Share Capital (m) 3,036 3,036 3,036 3,036 Net Profit Gth (%) 12 6 3 4 Net Cash/(Debt) (42,476) (39,422) (37,938) (34,351) EBITDA Margins (%) 74 79 80 80 Working Capital (28,543) (6,990) (7,356) (4,740) EBIT Margin (%) 73 77 78 78 Net Gearing (%) 20 18 17 15 Tax Rate (%) 30 16 16 16
Cash Flow Statement (HK$ m) Segmental Breakdown (HK$ m) / Key Assumptions FY Dec 2017A 2018A 2019F 2020F FY Dec 2017A 2018A 2019F 2020F EBIT 15,351 12,745 13,247 13,722 Revenues (HK$ m) Tax Paid (1,745) (2,519) (2,033) (2,115) Investment Property 13,334 14,304 14,750 15,267 Depr/Amort 144 292 304 316 Development Property 5,907 89 0 0 Chg in Wkg.Cap (3,282) (240) (980) (30) Hotels 1,403 1,821 1,982 2,058 Other Non-Cash (820) (780) (926) (906) Others 260 267 273 278 Operating CF 9,648 9,498 9,612 10,987 Total 20,904 16,481 17,005 17,603 Net Capex (2,507) (588) (1,500) (500) Assoc, MI, Invsmt (10,106) 375 0 0 Investing CF (12,613) (213) (1,500) (500) Net Chg in Debt 41,170 (3,369) (1,000) (1,000) Key Assumptions (%) 2019F 2020F New Capital 1,000 0 0 0 Dividend (10,374) (6,199) (6,628) (6,900) Office rental - HK 0 2 Other Financing CF (31,319) 0 0 0 Financing CF 477 (9,568) (7,628) (7,900) Retail rental (Shopping centre) - HK 0 1 Chg in Cash (2,488) (283) 484 2,587
Source: Company, DBS HK
Page 30 Industry Focus Champion REIT
Bloomberg: 2778 HK | Reuters: 2778.HK Refer to important disclosures at the end of this report
BUY On growth trajectory Last Traded Price (28 Jun 2019): HK$6.51 (HSI : 28,543) • Strong reversionary growth at Three Garden Road Price Target 12-mth: HK$6.99 (7.3% upside) (Prev HK$6.68) despite lower occupancy
Potential Catalyst: Interest rate cut • Debt refinancing completed Where we differ: Market has similar DPU estimate for FY19-20 • BUY with HK$6.99 TP Analyst Jeff YAU CFA, +852 36684180, [email protected] Strong reversionary growth at Three Garden Road despite Ian CHUI CFA, +852 36684174, [email protected] lower occupancy. Despite slow leasing enquires, spot rents at Three Jason LAM +852 36684179, [email protected] Garden Road remained firm at HK$130psf generally, and exceeded HK$140psf for small office units. With expiring rents of HK$94psf in Price Relative 2019, rental reversion should stay strong at >25%, and underpin the property’s rental income growth. Occupancy, however, retreated to c.95% from Dec-18’s 99.1%. Selected financial-related tenants are taking up more space while Citibank has reduced its space requirements. Langham Place Office Tower is virtually fully let. The space surrendered by Sears has been re-let to new tenants including Eaton House (co-working space operator). Tenants’ sales at Langham Place Mall grew 2-3% in 1Q19 which compared favourably with the Forecasts and Valuation overall retail market (-1.2%). Cosmetic tenants continue to FY Dec (HK$ m) 2017A 2018A 2019F 2020F outperform. The overall average retail base rent should rise by a Gross Revenue 2,700 2,965 3,207 3,400 Net Property Inc 2,166 2,405 2,604 2,783 single-digit in FY19. With increased base rents, turnover rent growth Net Profit 11,140 7,812 1,561 1,681 is likely to be diluted. Distribution Inc 1,413 1,530 1,631 1,756 DPU (HK$) 0.24 0.26 0.28 0.30 Debt refinancing completed. In Apr-19, Champion REIT secured 5- DPU Gth (%) 6 8 6 7 year unsecured loan facilities of HK$5.3bn which carries an interest Div Yield (%) 3.7 4.0 4.3 4.6 margin of 95bps above HIBOR. The facilities comprise of a HK$5bn Gross Gearing (%) 19 18 17 17 Book Value (HK$) 10.36 11.42 11.53 11.64 term loan and c.HK$300m revolving credit facilities. The term loan P/Book Value (x) 0.6 0.6 0.6 0.6 was used to repay a HK$3.7bn secured loan due Jun-19 and to early refinance a HK$1.3bn secured loan due in 2021. This debt refinancing Earnings Rev (%): 0 (2) not only lengthens the debt maturity profile but also significantly Consensus DPU (HK$): 0.28 0.30 Other Broker Recs: B: 8 S: 2 H: 5 lowers the secured debt loan portion from 63% to 30%. This should give Champion REIT more flexibility in pursuing debt-funded Source of all data on this page: Company, DBS Bank (Hong Kong) Limited (“DBS HK”), Thomson Reuters acquisitions in future. BUY with HK$6.99 TP. Champion REIT offers distribution yield of 4.3-4.6% for FY19-20. Despite subdued office demand in Central, income from Three Garden Road should remain on an upward trajectory in FY19-20. Revenue from Langham Place should also grow steadily. BUY with DDM-based TP of HK$6.99. At A Glance Issued Capital (m shrs) 5,859 Mkt Cap (HK$m/US$m) 38,666 / 4,958 Major Shareholders (%) Great Eagle Holdings Ltd 58.9 Eagle Asset Management (CP) Ltd. 7.2 DJE Kapital AG 5.8 Free Float (%) 33.9 3m Avg. Daily Val. (US$m) 2.92 ICB Industry: Financials / Real Estate Investment Trusts Bloomberg ESG Disclosure Score (2018)^ 26 - Environmental / Social / Governance 19 / 19 / 52
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HK Property Sector
Income Statement (HK$ m) Balance Sheet (HK$ m) FY Dec 2017A 2018A 2019F 2020F FY Dec 2017A 2018A 2019F 2020F Gross revenue 2,700 2,965 3,207 3,400 Fixed Assets 76,704 83,135 84,004 84,881 Property expenses (534) (560) (603) (618) Other LT Assets 257 258 258 258 Net Property Income 2,166 2,405 2,604 2,783 Cash & ST Invts 1,190 1,400 1,472 1,590 Other expenses (281) (316) (341) (364) Other Current Assets 301 498 498 498 Interest (Exp)/Inc (331) (400) (427) (429) Total Assets 78,453 85,291 86,232 87,228 Exceptionals 9,850 6,412 0 0 ST Debt 0 3,697 200 4,500 Pre-Tax Profit 11,405 8,101 1,836 1,990 Creditors 1,338 1,337 1,337 1,337 Tax (265) (289) (275) (308) Other Current Liab 1,423 1,591 1,615 1,678 Non-Controlling Interests 0 0 0 0 LT Debt 14,785 11,307 14,804 10,504 Net Profit 11,140 7,812 1,561 1,681 Other LT Liabilities 556 598 598 598 Distribution income 1,413 1,530 1,631 1,756 Non-Controlling Interests 0 0 0 0 Unitholders’ funds 60,351 66,761 67,678 68,611 Revenue Gth (%) 6 10 8 6 Total Capital 78,453 85,291 86,232 87,228 NPI Gth (%) 7 11 8 7 Share Capital (m) 5,823 5,847 5,870 5,895 Dist. Inc Growth (%) 6 8 7 8 Gross Debt (14,841) (15,004) (15,004) (15,004) DPU Growth (%) 6 8 6 7 Working Capital (1,269) (4,727) (1,182) (5,427) Book NAV (HK$) 10.36 11.42 11.53 11.64 Gross Gearing (%) 19 18 17 17
Cash Flow Statement (HK$ m) Segmental Breakdown (HK$ m) / Key Assumptions FY Dec 2017A 2018A 2019F 2020F FY Dec 2017A 2018A 2019F 2020F Pre-Tax Income 11,405 8,101 1,836 1,990 Revenues (HK$ m) Tax Paid (237) (289) (275) (308) Rental income 2,351 2,594 2,812 2,986 Depr/Amort 0 0 0 0 Carpark income 45 48 51 54 Chg in Wkg.Cap. 142 0 0 0 Building management fee 269 288 308 321 Other Non-Cash (9,703) (6,130) 128 139 income Rental related income 35 36 38 39 Operational CF 1,607 1,682 1,689 1,820 Net Capex (12) (39) (38) (37) Total 2,700 2,965 3,207 3,400 Assoc, MI, Invsmt 20 28 28 28 Investment CF 8 (11) (10) (9) Net Chg in Debt 0 0 0 0 Key Assumptions (%) 2019F 2020F New issues/Unit Buyback 0 0 0 0 Distribution Paid (1,378) (1,462) (1,606) (1,693) Office rental - HK 0 2 Other Financing CF (4) 0 0 0 Financing CF (1,382) (1,462) (1,606) (1,693) Retail rental (Shopping centre) - HK 0 1 Chg in Cash 233 209 73 118
Source: Company, DBS HK
Page 32 Industry Focus Fortune REIT
Bloomberg: 778 HK | Reuters: 0778.HK Refer to important disclosures at the end of this report
BUY Fortune malls bring fortune Last Traded Price (28 Jun 2019): HK$10.74 (HSI : 28,543) Price Target 12-mth: HK$11.80 (9.8% upside) • Recovering portfolio occupancy, healthy reversionary growth Potential Catalyst: Steady rental reversion Where we differ: Market has slightly higher DPU estimate for FY19-20. • Enhancement works to unlock value of Fortune Kingswood Analyst Jeff YAU CFA, +852 36684180, [email protected] • BUY with HK$11.80 TP Ian CHUI CFA, +852 36684174, [email protected] Jason LAM +852 36684179, [email protected] Recovering portfolio occupancy, healthy reversionary growth. Portfolio occupancy has recovered to 96-97% Price Relative currently from Dec-18’s 93.1% led by reduced vacancy at HK$ Relative Index Fortune Metropolis. After the REIT secured two new tenants to 11.5 207 fill the vacant space on 9/F, committed occupancy at Fortune 10.5 187
167 Metropolis improved to c.80% from Dec-18’s 73.1%. 9.5 147 8.5 Occupancy at Fortune Kingswood inched up to c.90% as the 127 7.5 107 renovated space gradually re-opened for business. The trade
6.5 87 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19 mix at Ma On Shan Plaza has been refined with the addition of
Fortune REIT (LHS) Relative HSI (RHS) a variety of eateries. Retail tenants’ sales growth stays positive with F&B trades faring better. Rental reversion should moderate Forecasts and Valuation FY Dec (HK$ m) 2017A 2018A 2019F 2020F slightly to 8-9% in FY19 from FY18’s 12.7%. Gross Revenue 2,030 1,940 1,980 2,068 Net Property Inc 1,457 1,472 1,494 1,561 Enhancement works to unlock value of Fortune Net Profit 3,201 5,991 849 891 Distribution Inc 971 986 1,000 1,047 Kingswood. The asset enhancement works at West Block of DPU (HK$) 0.51 0.51 0.52 0.54 Fortune Kingswood is well underway. Ph 1 has been completed DPU Gth (%) 3 1 1 4 with the majority of enhanced area let to tenants selling Div Yield (%) 4.7 4.8 4.8 5.0 Gross Gearing (%) 27 21 20 20 household products, electrical appliances, and Chinese Book Value (HK$) 14.05 16.61 17.28 17.97 medicine. Ph 2 is almost completed with the creation of an P/Book Value (x) 0.8 0.6 0.6 0.6 education zone. Ph 3 has commenced with new F&B outlets to be introduced to G/F. With total capex of HK$150m, the ROI is Earnings Rev (%): 0 0 Consensus DPU (HK$): 0.53 0.55 estimated at >10%. Fortune REIT is finalizing the asset Other Broker Recs: B:8 S:1 H:3 enhancement plan for East Block of Fortune Kingswood. Source of all data on this page: Company, DBS Bank (Hong Kong) Limited (“DBS HK”), Thomson Reuters BUY with HK$11.80 TP. Fortune REIT offers distribution yield of 4.8-5% for FY19-20. A higher valuation can be justified given healthy reversionary growth and rental uplift following the asset enhancement at Fortune Kingswood. With > 60% of rental income derived from tenants selling consumer staples, Fortune REIT’s income should be resilient across economic cycles. BUY with DDM-based TP of HK$11.80.
At A Glance Issued Capital (m shrs) 1,934 Mkt Cap (HK$m/US$m) 21,390 / 2,743 Major Shareholders (%) Focus Eagle Investments Ltd. 21.4 Ballston Profits Ltd. 5.8 Schroder Investment Management Ltd. (SIM) 5.8 Free Float (%) 72.8 3m Avg. Daily Val. (US$m) 3.52 ICB Industry: Financials / Real Estate Investment Trusts
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HK Property Sector
Income Statement (HK$ m) Balance Sheet (HK$ m) FY Dec 2017A 2018A 2019F 2020F FY Dec 2017A 2018A 2019F 2020F Gross revenue 2,030 1,940 1,980 2,068 Fixed Assets 37,751 42,000 43,570 45,078 Property expenses (573) (468) (486) (507) Other LT Assets 20 25 25 25 Net Property Income 1,457 1,472 1,494 1,561 Cash & ST Invts 516 543 486 541 Other expenses (129) (139) (151) (156) Other Current Assets 1,335 64 65 66 Interest (Exp)/Inc (267) (260) (267) (276) Total Assets 39,622 42,632 44,147 45,710 Exceptionals 2,360 5,140 0 0 ST Debt 1,497 400 3,505 3,800 Pre-Tax Profit 3,420 6,212 1,075 1,129 Creditors 1,490 1,271 1,283 1,292 Tax (219) (221) (227) (238) Other Current Liab 11 17 17 17 Non-Controlling Interests 0 0 0 0 LT Debt 9,286 8,459 5,354 5,159 Net Profit 3,201 5,991 849 891 Other LT Liabilities 450 471 471 471 Distribution income 971 986 1,000 1,047 Non-Controlling Interests 0 0 0 0 Unitholders’ funds 26,888 32,013 33,516 34,971 Revenue Gth (%) 3 (4) 2 4 Total Capital 39,622 42,632 44,147 45,710 NPI Gth (%) 3 1 2 4 Share Capital (m) 1,914 1,927 1,940 1,947 Dist. Inc Growth (%) 4 2 1 5 Gross Debt (10,783) (8,859) (8,859) (8,959) DPU Growth (%) 3 1 1 4 Working Capital (1,147) (1,081) (4,254) (4,501) Book NAV (HK$) 14.05 16.61 17.28 17.97 Gross Gearing (%) 27 21 20 20
Cash Flow Statement (HK$ m) Segmental Breakdown (HK$ m) / Key Assumptions FY Dec 2017A 2018A 2019F 2020F FY Dec 2017A 2018A 2019F 2020F Pre-Tax Income 3,420 6,212 1,075 1,129 Revenues (HK$ m) Tax Paid (193) (188) (227) (238) Base rent & other income 1,681 1,696 1,723 1,800 Depr/Amort 0 0 0 0 Charge-out collections 349 244 257 268 Chg in Wkg.Cap. 35 11 5 5 Total 2,030 1,940 1,980 2,068 Other Non-Cash (1,980) (4,758) 400 413 Operational CF 1,282 1,277 1,253 1,309 Net Capex (52) (61) (50) (50) Assoc, MI, Invsmt 1 1,991 0 0 Investment CF (52) 1,930 (50) (50) Net Chg in Debt (108) (1,950) 0 100 Key Assumptions (%) 2019F 2020F New issues/Unit Buyback 0 0 0 0 Distribution Paid (953) (988) (993) (1,028) Other Financing CF (236) (244) (267) (276) Financing CF (1,297) (3,182) (1,261) (1,204) Retail Rental (Shopping Center) - HK 0 1 Chg in Cash (67) 25 (57) 55
Source: Company, DBS HK
Page 34 Industry Focus Link REIT
Bloomberg: 823 HK | Reuters: 823.HK Refer to important disclosures at the end of this report HOLD Visionary growth Last Traded Price (28 Jun 2019): HK$96.00 (HSI : 28,543) • Solid leasing operations Price Target 12-mth: HK$96.80 (0.8% upside) • Seeking portfolio expansion without compromising credit rating and DPU growth Potential Catalyst: Unit buybacks, interest rate cut Where we differ: Market has slightly higher DPU estimate for FY20. • HOLD with HK$96.8 TP
Analyst Solid leasing operations. The average monthly growth in retail gross Jeff YAU CFA, +852 36684180, [email protected] sales of Link REIT’s tenants in Hong Kong on a psf basis moderated to Ian CHUI CFA,+852 36684174, [email protected] 5.4% in FY19 from FY18’s 8%. Rent-to-sales ratio, however, inched to Jason LAM +852 36684179, [email protected] 13.5% in FY19 from FY18’s 12.9%. This reflected the REIT’s strong Price Relative bargaining power during rental negotiations with its tenants resulting in HK$ Relative Index solid rental reversion of 22.5% in FY19. The ratio remains healthy and 106.6 210 96.6 should continue to support retail reversionary growth in the year ahead. 190 86.6 In FY19, its China retail portfolio posted robust rental reversion of 30.2% 170 76.6
66.6 150 with newly acquired Jingtong Roosevelt Plaza and Central Walk faring 56.6 130 better. Link Square 1 and 2 in Shanghai recorded favourable rental 46.6 110 36.6 90 growth of >20% upon the renewal of its lease with anchor tenant PwC. Jul-15 Jul-16 Jul-17 Jul-18 Jul-19
Link REIT (LHS) Relative HSI (RHS) Seeking portfolio expansion without compromising credit rating and DPU growth. Link REIT targets to grow its property portfolio value Forecasts and Valuation FY Mar (HK$ m) 2018A 2019A 2020F 2021F by high single-digit CAGR through to 2025 while maintaining sustainable Gross Revenue 10,023 10,037 10,984 11,737 DPU growth and its current strong credit rating. In addition to organic Net Property Inc 7,663 7,689 8,541 9,210 growth, acquisitions would play a crucial role in achieving this target. Net Profit 47,761 20,329 6,232 6,600 Distribution Inc 5,431 5,723 6,145 6,513 Following the acquisitions of Jingtong Roosevelt Plaza and Central Walk, DPU (HK$) 2.50 2.71 2.91 3.09 China portfolio accounted for 13.2% of total portfolio value, below DPU Gth (%) 9 9 7 6 management’s guidance of 20%. Hence we believe the REIT will Div Yield (%) 2.6 2.8 3.0 3.2 Gross Gearing (%) 12 11 11 11 continue to explore acquisition opportunities in China. To fund the Book Value (HK$) 83.06 89.48 93.54 97.79 portfolio expansion without compromising on its current credit rating, we P/Book Value (x) 1.2 1.1 1.0 1.0 believe that Link REIT would continue to divest its non-core assets in Hong Kong with part of proceeds used for unit buybacks to maintain Earnings Rev (%): 0 0 Consensus DPU (HK$): 2.95 3.22 DPU growth. Other Broker Recs: B:4 S:2 H:13 HOLD with HK$96.80 TP. Link REIT offers distribution yield of 3-3.2% Source of all data on this page: Company, DBS Bank (Hong Kong) for FY20-21. This translates into yield spread of 1.5-1.7%. With DDM- Limited (“DBS HK”), Thomson Reuters based TP of HK$96.80, we keep our HOLD rating at this stage. Link REIT continues to return capital generated from asset divestments to unitholders with a preference towards unit buybacks. It plans to repurchase 60m units from the market in FY20 subject to market conditions and regulation. This should cushion downside risk on unit price. Its Vision 2025, if it materialises, could translate into a higher unit price over the long term. At A Glance Issued Capital (m shrs) 2,110 Mkt Cap (HK$m/US$m) 207,077 / 26,551 Major Shareholders (%) Capital Research Global Investors 6.2 State Street Global Advisors Asia Ltd. 6.0 APG Asset Management N.V. 5.4 BlackRock Institutional Trust Company, N.A. 5.1 The Vanguard Group, Inc. 5.8 Free Float (%) 77.3 3m Avg. Daily Val. (US$m) 54.89 ICB Industry: Financials / Real Estate Investment Trusts Bloomberg ESG Disclosure Score (2018)^ 44 - Environmental / Social / Governance 27 / 60 / 68
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HK Property Sector
Income Statement (HK$ m) Balance Sheet (HK$ m) FY Mar 2018A 2019A 2020F 2021F FY Mar 2018A 2019A 2020F 2021F Gross revenue 10,023 10,037 10,984 11,737 Fixed Assets 203,206 218,634 228,200 237,479 Property expenses (2,360) (2,348) (2,443) (2,526) Other LT Assets 696 469 469 469 Net Property Income 7,663 7,689 8,541 9,210 Cash & ST Invts 11,689 6,789 7,807 8,487 Other expenses (417) (405) (417) (438) Other Current Assets 813 1,045 1,055 1,065 Interest (Exp)/Inc (646) (513) (551) (752) Total Assets 216,404 226,937 237,531 247,501 Exceptionals 42,799 15,030 0 0 ST Debt 2,589 3,367 2,967 2,567 Pre-Tax Profit 49,399 21,801 7,573 8,021 Creditors 2,462 2,585 2,575 2,565 Tax (1,420) (1,359) (1,342) (1,421) Other Current Liab 2,174 2,174 2,204 2,234 Non-Controlling Interests (218) (113) 0 0 LT Debt 23,196 20,850 23,250 24,650 Net Profit 47,761 20,329 6,232 6,600 Other LT Liabilities 6,915 8,635 8,635 8,635 Distribution income 5,431 5,723 6,145 6,513 Non-Controlling Interests 474 587 587 587 Unitholders’ funds 178,594 188,739 197,313 206,262 Revenue Gth (%) 8 0 9 7 Total Capital 216,404 226,937 237,531 247,500 NPI Gth (%) 10 0 11 8 Share Capital (m) 2,155 2,109 2,109 2,109 Dist. Inc Growth (%) 7 5 7 6 Gross Debt (25,785) (24,217) (26,217) (27,217) DPU Growth (%) 9 9 7 6 Working Capital 5,277 (292) 1,116 2,186 Book NAV (HK$) 82.89 89.48 93.54 97.79 Gross Gearing (%) 12 11 11 11
Cash Flow Statement (HK$ m) Segmental Breakdown (HK$ m) / Key Assumptions FY Mar 2018A 2019A 2020F 2021F FY Mar 2018A 2019A 2020F 2021F Pre-Tax Income 49,399 21,801 7,573 8,021 Revenues (HK$ m) Tax Paid (904) (1,359) (1,342) (1,421) Retail and commercial 7,554 7,648 8,586 9,195 Depr/Amort 20 20 20 20 properties Car parks 2,046 1,979 1,976 2,093 Chg in Wkg.Cap. (50) (4) 10 10 Other revenues 423 410 423 449 Other Non-Cash (41,980) (14,517) 386 752 Total 10,023 10,037 10,984 11,737 Operational CF 6,485 5,941 6,647 7,381 Net Capex 20,951 9,338 (625) (625) Assoc, MI, Invsmt (12,864) (2,563) (407) 65 Investment CF 8,087 6,775 (1,032) (560) Net Chg in Debt (1,760) (4,320) 2,000 1,000 Key Assumptions (%) 2020F 2021F New issues/Unit Buyback (4,349) (3,216) 0 0 Distribution Paid (5,254) (5,517) (5,975) (6,325) Other Financing CF (599) (89) (621) (817) Financing CF (11,962) (13,142) (4,597) (6,141) Retail rental (Shopping centre) -HK 0 1 Chg in Cash 2,610 (426) 1,018 680
Source: Company, DBS HK
Page 36 Industry Focus Prosperity REIT
Bloomberg: 808 HK | Reuters: 0808.HK Refer to important disclosures at the end of this report
BUY Steady climb Last Traded Price (28 Jun 2019): HK$3.41 (HSI : 28,543) Price Target 12-mth: HK$3.86 (13.2% upside) (Prev HK$3.77) • Firm occupancy with steady reversionary growth
Potential Catalyst: Steady rental income growth • Solid balance sheet for pursuing acquisitions Where we differ: Market has similar DPU estimates for FY20 • BUY with HK$3.86 TP Analyst Jeff YAU CFA, +852 36684180, [email protected] Firm occupancy with steady reversionary growth. Portfolio Ian CHUI CFA, +852 36684174, [email protected] occupancy remains firm at 97-98% (Dec-18: 97.6%). About Jason LAM +852 36684179, [email protected] 36.5% of floor area is scheduled for roll over in 2019. Prosperity REIT has renewed most of the expiring leases or re- Price Relative let the space to new tenants e.g. the Hong Kong government is HK$ Relative Index
3.9 now a tenant at Trendy Centre. The overall rental reversion 205 3.7 3.5 185 shows no sign of moderating and remains steady at 7-8%. 3.3 165 3.1 Prosperity Place in Kwun Tong and Prosperity Millennia Plaza in 145 2.9 125 North Point recorded stronger-than-average reversionary 2.7 2.5 105 growth. The REIT has been gradually recruiting more high- 2.3 85 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19 paying commercial tenants to Prosperity Place which should Prosperity REIT (LHS) Relative HSI (RHS) spice up rental income growth. Forecasts and Valuation FY Dec (HK$ m) 2017A 2018A 2019F 2020F Solid balance sheet for pursuing acquisitions. In 2019, Gross Revenue 446 447 471 491 Net Property Inc 354 351 371 386 Prosperity REIT will renovate the ground floor lobby of Net Profit 748 688 211 222 Prosperity Millennia Plaza and change the air-conditioning Distribution Inc 262 269 277 289 system in the common areas of 9 Chong Yip Street. Prosperity DPU (HK$) 0.18 0.18 0.18 0.19 DPU Gth (%) 0 2 2 3 REIT’s gearing is currently low at 20.6%. Interest costs for Div Yield (%) 5.2 5.3 5.4 5.6 c.50% of its debts has been hedged with the aid of interest Gross Gearing (%) 21 21 20 20 rate swaps. This helps mitigate interest rate risk. A higher Book Value (HK$) 5.48 5.74 5.80 5.87 gearing of 35% translates to a debt headroom of HK$2.5bn for P/Book Value (x) 0.6 0.6 0.6 0.6 yield-accretive acquisitions. Prosperity REIT is exploring Earnings Rev (%): 0 0 acquisition opportunities in office and industrial sectors. Consensus DPU (HK$): 0.19 0.19 Other Broker Recs: B: 2 S: 0 H: 0 BUY with HK$3.86 TP. Prosperity REIT offers distribution yields Source of all data on this page: Company, DBS Bank (Hong Kong) of 5.4-5.6% for FY19-20. The US Fed has turned dovish with Limited (“DBS HK”), Thomson Reuters potential rate cut which should boost sentiment towards the REIT sector. Coupled with steady reversionary growth, there should be room for unit price appreciation. Maintain BUY with DDM-based TP of HK$3.86.
At A Glance Issued Capital (m shrs) 1,494 Mkt Cap (HK$m/US$m) 5,319 / 682 Major Shareholders (%) CK Asset Holdings Limited 18.4 The Vanguard Group, Inc. 5.8 Free Float (%) 81.6 3m Avg. Daily Val. (US$m) 0.70 ICB Industry: Financials / Real Estate Investment Trusts Bloomberg ESG Disclosure Score (2016)^ 11 - Environmental / Social / Governance n.a. / n.a. / 48
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Income Statement (HK$ m) Balance Sheet (HK$ m) FY Dec 2017A 2018A 2019F 2020F FY Dec 2017A 2018A 2019F 2020F Gross revenue 446 447 471 491 Fixed Assets 10,490 10,990 11,210 11,434 Property expenses (93) (96) (100) (104) Other LT Assets 20 21 21 21 Net Property Income 354 351 371 386 Cash & ST Invts 363 359 353 349 Other expenses (61) (62) (66) (68) Other Current Assets 10 16 16 16 Interest (Exp)/Inc (82) (53) (55) (56) Total Assets 10,884 11,386 11,600 11,820 Exceptionals 577 490 0 0 ST Debt 0 0 0 800 Pre-Tax Profit 788 726 250 262 Creditors 186 193 196 199 Tax (40) (38) (39) (40) Other Current Liab 152 159 163 170 Non-Controlling Interests 0 0 0 0 LT Debt 2,304 2,312 2,312 1,512 Net Profit 748 688 211 222 Other LT Liabilities 188 197 208 218 Distribution income 262 269 277 289 Non-Controlling Interests 0 0 0 0 Unitholders’ funds 8,054 8,524 8,721 8,922 Revenue Gth (%) (1) 0 5 4 Total Capital 10,884 11,386 11,600 11,820 NPI Gth (%) (1) (1) 6 4 Share Capital (m) 1,469 1,486 1,502 1,519 Dist. Inc Growth (%) 1 3 3 5 Gross Debt (2,340) (2,340) (2,340) (2,340) DPU Growth (%) 0 2 2 3 Working Capital 36 23 9 (804) Book NAV (HK$) 5.48 5.74 5.80 5.87 Gross Gearing (%) 21 21 20 20
Cash Flow Statement (HK$ m) Segmental Breakdown (HK$ m) / Key Assumptions FY Dec 2017A 2018A 2019F 2020F FY Dec 2017A 2018A 2019F 2020F Pre-Tax Income 788 726 250 262 Revenues (HK$ m) Tax Paid (26) (28) (29) (29) Rental income 366 365 384 399 Depr/Amort 0 0 0 0 Carpark income 28 30 31 32 Chg in Wkg.Cap. 4 4 2 2 Rental-related income 52 51 56 59 Other Non-Cash (445) (385) 111 113 Operational CF 322 317 334 348 Net Capex 860 (12) (12) (12) Total 446 447 471 491 Assoc, MI, Invsmt 5 4 3 3 Investment CF 865 (8) (9) (9) Net Chg in Debt (550) 0 0 0 Key Assumptions (%) 2019F 2020F New issues/Unit Buyback 0 0 0 0 Distribution Paid (261) (264) (273) (283) Office rental - HK 0 2 Other Financing CF (86) (50) (58) (59) Financing CF (897) (313) (331) (343) Chg in Cash 290 (5) (6) (4)
Source: Company, DBS HK
Page 38 Industry Focus Sunlight REIT
Bloomberg: 435 HK | Reuters: 0435.HK Refer to important disclosures at the end of this report
BUY theDesk joining Strand 50 Last Traded Price (28 Jun 2019): HK$5.99 (HSI : 28,543) Price Target 12-mth: HK$6.56 (9.5% upside) (Prev HK$6.27) • Steady reversionary growth for office and retail portfolios Potential Catalyst: Solid rental reversion • New co-working space at refurbished Strand 50 Where we differ: Market has similar DPU estimate for FY19. • BUY with HK$6.56 TP Analyst Jeff YAU CFA, +852 36684180, [email protected] Steady reversionary growth for office and retail portfolios. Ian CHUI CFA, +852 36684174, [email protected] Office portfolio occupancy improved slightly to 96.8% in Mar-19 Jason LAM +852 36684179, [email protected] from Dec-18’s 95.7%, mainly led by increased occupancy at The Price Relative Harvest in Mongkok. Anglo Eastern Ship Management, the largest HK$ Relative Index tenant at Sunlight Tower and occupying >80,000sf, has decided to
6.7 210 move out upon lease expiry in 2H20. As there is sufficient time, we 6.2 190 5.7 170 believe Sunlight REIT should be able to find replacement tenants. 5.2 150 4.7 Office reversionary growth accelerated slightly to 12.4% in 3QFY19 130 4.2 from 1HFY19’s 10.1% with Sunlight Tower recording better rental 3.7 110 3.2 90 reversion of 12.9%. Retail occupancy softened to 97.2% in Mar-19 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19 from Dec-18's 98.9%. This was mainly led by increased vacancy at Sunlight REIT (LHS) Relative HSI (RHS) Metro City Ph1 property (MCP1) as a result of clustering of a handful Forecasts and Valuation of non-renewal cases. Overall, retail properties recorded steady rental FY Jun (HK$ m) 2017A 2018A 2019F 2020F Gross Revenue 788 817 846 885 growth upon renewals at 10.8% in 3QFY19. Rental reversions at Net Property Inc 623 646 674 708 MCPI was healthy at 7% in the period. Sheung Shui Centre Net Profit 744 1,442 414 432 Shopping Arcade fared better with rental reversion of 11.5% Distribution Inc 540 436 444 462 DPU (HK$) 0.33 0.26 0.27 0.28 DPU Gth (%) 36 (20) 1 3 New co-working space at renovated Strand 50. Sunlight REIT is Div Yield (%) 5.5 4.4 4.5 4.6 currently carrying out asset enhancement works at the low zone of Gross Gearing (%) 21 22 21 20 Book Value (HK$) 8.49 9.02 9.30 9.59 Bonham Trade Center which will be rebranded as Strand 50. P/Book Value (x) 0.7 0.6 0.6 0.6 theDesk, a co-working space operator, will join Strand 50, with operations commencing in 4Q19. It will occupy the refurbished Earnings Rev (%): (0) (0) 29,000sf space on 1/F-7/F. A staircase will be introduced to connect Consensus DPU (HK$): 0.28 0.29 Other Broker Recs: B:2 S: 0 H: 0 the lobby and second floor to improve foot traffic circulation. Sunlight REIT also plans to introduce new eateries on the ground Source of all data on this page: Company, DBS Bank (Hong Kong) Limited (“DBS HK”), Thomson Reuters floor. The renovation works are scheduled to be completed in late 2019. With planned capex of HK$50m, ROI is estimated at 13-15%.
BUY with HK$6.56 TP. Sunlight REIT offers distribution yield of 4.5- 4.6% for FY19-20. Given its steady reversionary growth and rental uplift following the renovation of Strand 50, we see room for further unit price appreciation. BUY with DDM-based TP of HK$6.56.
At A Glance Issued Capital (m shrs) 1,652 Mkt Cap (HK$m/US$m) 10,241 / 1,313 Major Shareholders (%) Shau Kee Financial Enterprise Ltd. 22.6 Silchester International Investors, L.L.P. 15.0 Henderson Land Development Co Ltd 8.7 Henderson Sunlight Asset Management Limited 8.3 The Vanguard Group, Inc. 5.8 Free Float (%) 45.4
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Income Statement (HK$ m) Balance Sheet (HK$ m) FY Jun 2017A 2018A 2019F 2020F FY Jun 2017A 2018A 2019F 2020F Gross revenue 788 817 846 885 Fixed Assets 17,062 18,755 19,306 19,873 Property expenses (165) (171) (172) (177) Other LT Assets 108 168 168 168 Net Property Income 623 646 674 708 Cash & ST Invts 1,086 642 634 633 Other expenses (100) (113) (113) (116) Other Current Assets 41 66 66 66 Interest (Exp)/Inc (96) (64) (75) (84) Total Assets 18,298 19,631 20,174 20,740 Exceptionals 384 1,052 0 0 ST Debt 0 20 600 0 Pre-Tax Profit 812 1,522 486 508 Creditors 63 64 64 64 Tax (68) (80) (71) (76) Other Current Liab 279 286 286 286 Non-Controlling Interests 0 0 0 0 LT Debt 3,902 4,231 3,651 4,251 Net Profit 744 1,442 414 432 Other LT Liabilities 154 174 174 174 Distribution income 540 436 444 462 Non-Controlling Interests 0 0 0 0 Unitholders’ funds 13,899 14,857 15,400 15,966 Revenue Gth (%) 2 4 3 5 Total Capital 18,298 19,631 20,174 20,740 NPI Gth (%) 2 4 4 5 Share Capital (m) 1,638 1,646 1,655 1,664 Dist. Inc Growth (%) 36 (19) 2 4 Gross Debt (3,902) (4,251) (4,251) (4,251) DPU Growth (%) 36 (20) 1 3 Working Capital 784 339 (249) 350 Book NAV (HK$) 8.49 9.02 9.30 9.59 Gross Gearing (%) 21 22 21 20
Cash Flow Statement (HK$ m) Segmental Breakdown (HK$ m) / Key Assumptions FY Jun 2017A 2018A 2019F 2020F FY Jun 2017A 2018A 2019F 2020F Pre-Tax Income 812 1,522 486 508 Revenues (HK$ m) Tax Paid (64) (80) (71) (76) Rental income 634 655 681 712 Depr/Amort 0 0 0 0 Carpark income 31 33 36 38 Chg in Wkg.Cap. 13 7 0 0 Rental-related income 123 129 129 135 Other Non-Cash (244) (942) 123 134 Total 788 817 846 885 Operational CF 517 507 538 565 Net Capex (34) (665) (30) (30) Assoc, MI, Invsmt 147 11 17 17 Investment CF 114 (654) (13) (13) Net Chg in Debt 0 325 0 0 Key Assumptions (%) 2019F 2020F New issues/Unit Buyback (36) 0 0 0 Distribution Paid (401) (547) (440) (453) Office rental - HK 0 2 Other Financing CF (106) (75) (92) (101) Financing CF (543) (297) (533) (554) Retail rental (Shopping centre) - HK 0 1 Chg in Cash 87 (444) (8) (1)
Source: Company, DBS HK
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Hong Kong Property Sector
^ Bloomberg ESG Disclosure Scores rate companies annually based on their disclosure of quantitative and policy-related ESG data. It is based on a scoring scale of 0-100, and calculated using a subset of more than 100 raw data points it collects on ESG. It is designed to measure the robustness of companies' disclosure of ESG information in their reporting/the public domain. Based on Bloomberg disclosures, as of 25 Jan 2019, the global ESG disclosure average score is 24.92 and 22.14, 28.26, 49.97 for Environmental, Social and Governance, respectively. DBS HK recommendations are based on an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return, i.e., > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable share price catalysts within this time frame) *Share price appreciation + dividends Completed Date: 10 Jul 2019 08:46:05 (HKT) Dissemination Date: 10 Jul 2019 09:27:27 (HKT) Sources for all charts and tables are DBS HK unless otherwise specified. GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank (Hong Kong) Limited (“DBS HK”). This report is solely intended for the clients of DBS Bank Ltd., DBS HK, DBS Vickers (Hong Kong) Limited (“DBSV HK”), and DBS Vickers Securities (Singapore) Pte Ltd. (“DBSVS”), its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS HK. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd., DBS HK, DBSV HK, DBSVS, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report. This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein. Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBS Vickers Securities (USA) Inc (“DBSVUSA”), a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making.
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ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate1 does not serve as an officer of the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or his associate does not have financial interests2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the DBS Group.
COMPANY-SPECIFIC / REGULATORY DISCLOSURES
1. DBS Bank Ltd, DBS HK, DBSVS or their subsidiaries and/or other affiliates have proprietary positions in Hang Lung Properties Ltd (101 HK), , Hysan Development Co Ltd (14 HK), Champion REIT (2778 HK), Fortune Real Estate Investment Trust (778 HK), Langham Hospitality Investments and Langham Hospitality Investments Ltd (1270 HK), Prosperity REIT (808 HK), Link REIT (823 HK) and Yuexiu Real Estate Investment Trust (405 HK) recommended in this report as of 05 Jul 2019.
DBS Bank Ltd, DBS HK, DBSVS or their subsidiaries and/or other affiliates have a proprietary position in Hongkong Land Holdings Limited (HKL SP) recommended in this report as of 28 Jun 2019.
2. Neither DBS Bank Ltd nor DBS HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.
3. DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates have a net long position exceeding 0.5% of the total issued share capital in Langham Hospitality Investments and Langham Hospitality Investments Ltd (1270 HK), Prosperity REIT (808 HK) and Yuexiu Real Estate Investment Trust (405 HK) recommended in this report as of 05 Jul 2019.
4. DBS Bank Ltd, DBS HK, DBSVS, DBS Vickers Securities (USA) Inc (“DBSVUSA”), or their subsidiaries and/or other affiliates beneficially own a total of 1% of the issuer's market capitalization of Langham Hospitality Investments and Langham Hospitality Investments Ltd (1270 HK), Prosperity REIT (808 HK) and Yuexiu Real Estate Investment Trust (405 HK) as of 05 Jul 2019.
5. Compensation for investment banking services: DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past 12 months for investment banking services from Prosperity REIT (808 HK) and Yuexiu Real Estate Investment Trust (405 HK) as of 31 May 2019.
DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA, within the next 3 months, will receive or intend to seek compensation for investment banking services from Yuexiu Real Estate Investment Trust (405 HK) and Citigroup Incorporated (C US) as of 31 May 2019.
1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst. 2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.
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6. DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have managed or co-managed a public offering of securities for Yuexiu Real Estate Investment Trust (405 HK) in the past 12 months, as of 31 May 2019.
DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.
7. Disclosure of previous investment recommendation produced: DBS Bank Ltd, DBSVS, DBS HK, their subsidiaries and/or other affiliates of DBSVUSA may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA in the preceding 12 months.
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RESTRICTIONS ON DISTRIBUTION General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. Australia This report is being distributed in Australia by DBS Bank Ltd, DBSVS or DBSV HK. DBS Bank Ltd holds Australian Financial Services Licence no. 475946. DBSVS and DBSV HK are exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. Both DBS Bank Ltd and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, and DBSV HK is regulated by the Hong Kong Securities and Futures Commission under the laws of Hong Kong, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.
Hong Kong This report is being distributed in Hong Kong by DBS Bank Ltd, DBS Bank (Hong Kong) Limited and DBS Vickers (Hong Kong) Limited, all of which are registered with or licensed by the Hong Kong Securities and Futures Commission to carry out the regulated activity of advising on securities.
Indonesia This report is being distributed in Indonesia by PT DBS Vickers Sekuritas Indonesia. Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.
Wong Ming Tek, Executive Director, ADBSR Singapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report. Thailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. United This report is produced by DBS HK which is regulated by the Hong Kong Monetary Authority Kingdom This report is disseminated in the United Kingdom by DBS Vickers Securities (UK) Ltd (“DBSVUK”). DBSVUK is authorised and regulated by the Financial Conduct Authority in the United Kingdom. In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVUK. This communication is directed at persons having professional experience in matters relating to investments. Any investment activity following from this communication will only be engaged in with such persons. Persons who do not have professional experience in matters relating to investments should not rely on this communication. Dubai This research report is being distributed by DBS Bank Ltd., (DIFC Branch) having its office at units 608-610, 6th Floor, Gate International Precinct Building 5, PO Box 506538, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Financial Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for Centre professional clients (as defined in the DFSA rulebook) and no other person may act upon it.
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Hong Kong Property Sector
United Arab This report is provided by DBS Bank Ltd (Company Regn. No. 196800306E) which is an Exempt Financial Adviser as defined Emirates in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. This report is for information purposes only and should not be relied upon or acted on by the recipient or considered as a solicitation or inducement to buy or sell any financial product. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situation, or needs of individual clients. You should contact your relationship manager or investment adviser if you need advice on the merits of buying, selling or holding a particular investment. You should note that the information in this report may be out of date and it is not represented or warranted to be accurate, timely or complete. This report or any portion thereof may not be reprinted, sold or redistributed without our written consent. United States This report was prepared by DBS HK. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate. Other In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, jurisdictions professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions. DBS Bank (Hong Kong) Limited 13 th Floor One Island East, 18 Westlands Road, Quarry Bay, Hong Kong Tel: (852) 3668-4181, Fax: (852) 2521-1812
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Hong Kong Property Sector
DBS Regional Research Offices
HONG KONG MALAYSIA SINGAPORE DBS Bank (Hong Kong) Ltd AllianceDBS Research Sdn Bhd DBS Bank Ltd Contact: Carol Wu Contact: Wong Ming Tek (128540 U) Contact: Janice Chua 13th Floor One Island East, 19th Floor, Menara Multi-Purpose, 12 Marina Boulevard, 18 Westlands Road, Capital Square, Marina Bay Financial Centre Tower 3 Quarry Bay, Hong Kong 8 Jalan Munshi Abdullah 50100 Singapore 018982 Tel: 852 3668 4181 Kuala Lumpur, Malaysia. Tel: 65 6878 8888 Fax: 852 2521 1812 Tel.: 603 2604 3333 Fax: 65 65353 418 e-mail: [email protected] Fax: 603 2604 3921 e-mail: [email protected] e-mail: [email protected] Company Regn. No. 196800306E
INDONESIA THAILAND PT DBS Vickers Sekuritas (Indonesia) DBS Vickers Securities (Thailand) Co Ltd Contact: Maynard Priajaya Arif Contact: Chanpen Sirithanarattanakul DBS Bank Tower 989 Siam Piwat Tower Building, Ciputra World 1, 32/F 9th, 14th-15th Floor Jl. Prof. Dr. Satrio Kav. 3-5 Rama 1 Road, Pathumwan, Jakarta 12940, Indonesia Bangkok Thailand 10330 Tel: 62 21 3003 4900 Tel. 66 2 857 7831 Fax: 6221 3003 4943 Fax: 66 2 658 1269 e-mail: [email protected] e-mail: [email protected] Company Regn. No 0105539127012 Securities and Exchange Commission, Thailand
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