Hong Kong Retail Landlords:Expect positive rental reversions in upcoming interim results
Although Hong Kong retail sales value growth has been slowing, we believeretail landlords can still achieve positive rental reversion in the upcominginterim results. Among the retail landlords and REITs under our coverage, weexpect Fortune REIT to report a better set of results, given the solid rentalreversion coming from Kingswood Mall acquired in 2013.·。
Retail sales trend not favourable to retail landlords: YTD HK retail salesvalue (up to May 2014) was marginally down 0.2% Y/Y, mainly due to aslowdown in sales of jewellery, watches and valuable gifts. Excluding theeffect of the “gold rush” last year, which set a high base for comparison, weestimate that YTD retail sales value went up 4% Y/Y. Historically, retailsales and retail rent track each other closely (Figure 2). Hence, we expect aslowdown in retail sales value would gradually affect the rate of retail rentalreversion of retail landlords.
FY14 interim preview: We expect Fortune REIT to report better resultsthan other retail landlords. In view of the solid rental reversion (30% in1Q14) of Fortune Kingswood acquired in October 2013, we estimate 1H14DPU to increase 14% Y/Y to HK$0.204. For Wharf, we expect underlyingearnings to go up 3% Y/Y to HK$5,872 mn driven by rental reversion andcontribution from China properties. Hysan's results are expected to beweaker than others, with underlying earnings estimated to drop 1% Y/Y dueto the loss in income from Sunning Plaza and Sunning Court due toredevelopment. Overall, we expect there to be more pressure on potentialrental drops on street shops than shopping malls, and expect retail landlordsto continue to achieve positive reversion in this round of results.
What to look for: While the usual parameters such as trend of tenants’retail sales and retail rental reversions will be things to look for, we believethat the operating profit margin and potential provisions for Wharf’s Chinaresidential sales would also be a focus. For full-year 2014, we expect theoperating profit margin for their China residential development sales to dropbelow 20% from 22% last year due to price cuts and different product mixes.The recent strong performance of the stock is, we believe, more driven bythe China property sector rebound than Hong Kong retail sales.
Revising PT: We roll over our PT timeframe from Dec-14 to Jun-15 andadjust up our price targets for Fortune REIT, Hysan and Wharf to HK$8.4,HK$38.5 and HK$59, respectively. Within the retail landlord space, FortuneREIT and Link REIT are our preferred picks