20131024-美银美林-Growth_to_stand_out_among_HK_prop_peers_15页_784kb

Summary of Growth to Stand Out Among HK Prop Peers

Core Content

This report provides an analysis of Link REIT, a leading real estate investment trust (REIT) in Hong Kong, focusing on its growth prospects, valuation, and performance relative to its peers. The report highlights the REIT's ability to outperform in a low-growth environment, driven by several key factors.

Main Views and Key Information

Investment Rating and Valuation

• Rating: Neutral
• Price Objective (PO): HK$39, derived from the Dividend Discount Model (DDM)
• Cost of Equity: 7.3%, based on a risk-free rate of 4.0% and a beta of 0.55
• Long-term Growth Rate: 1.75%
• Current Dividend Yield Spread: 254bps over 10-year HK Exchange Fund Notes (HKEFN), slightly wider than the historical average of 220bps
• Book NAV (as of Mar 2013): HK$35.68
• Price to Book Value: 1.0x

Projected Growth

• 1H FY14 DPU Growth: Expected to be 10% (HK$0.78), driven by:
  • Rental Reversion: Low-to-mid 20%
  • Carpark Revenues: 9% increase
• NPI Margin: Expected to increase by 130bps to 71.9% in 1H FY14, due to strong revenue growth and lower staff cost growth (1% YoY)
• DPU Growth Projections (FY14–FY16): 10.2%, 9.1%, and 7.3% respectively
• Total Return Expectations: Above-average returns due to strong operating performance and AEI benefits

Key Growth Drivers

• Asset Enhancement Initiatives (AEI): Link has 150 malls, with only 30 having undergone AEI. Remaining malls may benefit from second rental cycles, which can lead to higher rents.
• Retail Tenant Sales Data: Enables Link to identify under-priced leases and align rental income growth with tenant sales growth.
• Carpark Utilization and Fees: Utilization has increased, and Link raised monthly fees by 6–7% in May 2013. Expected to maintain solid growth in FY14 and FY15.
• Public Housing Residents: They are the frequent shoppers at Link’s malls and have seen faster income growth than private housing residents, contributing to higher rental demand.

Valuation Analysis

• DDM Fair Value Sensitivity:
  • A 50bps increase in cap rates could be offset by a 9% increase in NPI to maintain book NAV.
• Implied Dividend Yield:
  • Ranges from 3.39% to 5.72% based on varying discount rates and long-term growth assumptions.
• Implied Cap Rates:
  • Link's cap rate is 5.3%, more attractive than Champion (4.5%) and Fortune (5.0%).

What to Watch

• Rental Reversions: A key driver of DPU growth
• NPI Margins: Expected to improve due to revenue growth and cost control
• AEI Progress and ROI: Ongoing initiatives and their impact on performance
• Book NAV: A key valuation metric
• Expansion into China: Potential opportunities, though not expected to significantly impact asset allocation in the short term
• Dividend Payout Ratio: Maintained at 100% over the forecast period

Financial Highlights

• Revenue Growth: Expected to increase by 7.3% in 1H FY14, driven by retail and carpark revenue
• Net Profit: Projected to grow by 10.8% YoY
• DPS Yield: Expected to increase from 3.4% to 4.9% by FY16
• Gearing (Debt to Gross Assets): Remains low at 0.1x
• Interest Cover: Expected to rise from 9.1x to 14.5x over the forecast period

Risk Considerations

• Dividend Yield Expansion Risk: Contained near term, with current spread over HKEFN at 254bps
• Market Volatility: Low
• 52-Week Range: HK$33.30–HK$46.40
• Analyst Notes:
  • Management may consider expansion into China and selected divestitures
  • Link’s growth is expected to stand out in the next few years due to strong fundamentals and AEI benefits

Key Performance Metrics

• EBIT Yield: Expected to rise from 4.4% to 6.3% by FY14
• ROE (2014E): 4.5%
• Net Interest Expenses: Expected to decrease by 5.6% in FY14

Conclusion

Link REIT is viewed as a solid investment with sustainable growth, though its valuation is considered fair. The REIT is expected to outperform peers due to its asset enhancement initiatives, strong carpark revenue growth, and the income growth of its frequent shoppers. While expansion into China is being studied, it is unlikely to have a significant impact in the short term. Investors should focus on rental reversion, NPI margins, and AEI progress.