Author

研究部 (Research Team)
輝立証券

Phone:	(852)22776555	Email:	research@phillip.com.hk
For Research Report and Business enquiry

Fortune REIT <778.HK> — Provision of steady return

Friday, August 5, 2011

14274

Fortune REIT(778)

Recommendation on 5 August 2011
Recommendation	HOLD
Price on Recommendation Date	$3.930
Target Price	$4.380

Weekly Special - 3306 JNBY Design Limited

Summary

Fortune REIT has been listed on the SGX-ST since 12 August 2003 and in HKEX since 20 April 2010. The principal investment strategy of Fortune REIT is to invest primarily in retail malls and parking facilities located in Hong Kong through the ownership of property companies. Fortune REIT may also acquire new properties from time to time.

Fortune REIT currently maintains a portfolio of 14 retail malls and parking facilities in Hong Kong. Tenants of Fortune REIT includes supermarkets, food and beverage outlets, banks, real estate agencies, and education providers. As of 30 June 2011, the portfolio of Fortune REIT reached a valuation of HK$15,688 million, an increase of 18.0% from the valuation of HK$13,300 million as of 31 December 2010.

With the proven growth record and strong fundamental such as low gearing and interest payment, we expected stock price of Fortune REIT would surge until the dividend yield reached the industrial average. We estimated the 12 month target price of Fortune REIT to be HK$4.38 with a “HOLD” rating, which implied an 11.38% upside potential. Besides, our TP shows a 9% deviation from our DDM model. We believe it is within an acceptable range.

Portfolio overview

Fortune REIT currently maintains a portfolio of 14 retail malls and parking facilities in Hong Kong with a total of 2 million square feet of retail space and 1,660 car park lots. Fortune REIT started with 5 properties in 2003 IPO. Fortune REIT further acquired 6 properties in 2005 and 3 properties in 2009. As of 30 June 2011, the portfolio of Fortune REIT reached a valuation of HK$15,688 million, an increase of 18.0% from the valuation of HK$13,300 million as of 31 December 2010.

Investment Thesis

Solid growth, rental reversion and AEIs

Currently there are 8 REITs listed on the Hong Kong Stock Exchange, 3 of which holds China assets, while another five hold Hong Kong assets. The only Hong Kong-listed REIT that has pure retail/carpark exposure is Link REIT, which has 180 properties under management, and has a market cap of HK$67,318 million. The Hong Kong REIT sector is trading at an average yield of 5.8% in FY10.

Fortune REIT provides better dividend yield and records lower gearing among its Hong Kong listed peers. Fortune REIT recorded a prolonged steady growth in revenue and valuation since it's listing in 2003. Retail rents have proved to be less volatile and have held up well in the economic turmoil in 08/09. The portfolio occupancy recorded a healthy upside trend and reached the record high of 97.55% in 2010. We expected the portfolio occupancy would oscillate around 95% in future. For the six months ended 30 June 2011, Fortune REIT's revenue and net property income grew by 8.0% and 5.7% YoY to HK$446.8 million and HK$319.5 million respectively. The interim income available for distribution and dividend per unit soared by 5.0% and 4.3% YoY to HK$214 million and 12.8 HK cents. The annual dividend per unit in 2009 and 2010 were 24.35 HK cents and 30.20 HK cents respectively.

In 2H2011, there will be 22.1% rental reversion by gross rental income. We expected the rental reversion would maintain the momentum of 1H2011 with a 13.8% hike. Furthermore, Fortune REIT currently undergoes 2 AEIs project, the City one Shatin Property and Ma On Shan Plaza. These 2 AEIs project will further fuel the revenue growth of Fortune REIT.

Low gearing, reducing interest expenses and M&A capabilities

Fortune REIT maintains a lower gearing among its Hong Kong listed peers. In 1H2011, it recorded a gearing ratio of 18.1%, which is far below of the 27.1% peer's average and the 45% REIT limit in Hong Kong. Besides, Fortune REIT successfully refinanced the loan facilities of HK$3,100 million under more favorable terms on 15 April 2011. The new facilities with an aggregate principal amount of HK$3,800 million, comprising a HK$2,830 million term loan facility and a HK$970 million revolving credit facility, bear an interest margin of 0.91% per annum over the Hong Kong Interbank Offer Rate (HIBOR). This would effectively reduce the interest rate by 1.09% comparing to the previous loan facility. The new loan facility would also provide Fortune REIT with a competitive edge in the current cycle of interest hike.

The low gearing and reducing interest expenses provide Fortune REIT with strong M&A capabilities. The differences between the current gearing ratio of 18.1% and the REIT limit of 45% means Fortune REIT could raise as much as HK$4,300 million by debt and without the issuance of new units.

We expected the steady revenue growth together with the low gearing and reducing interest expenses would provide a healthy growth in DPU in future.

Valuation

Fortune REIT is currently trading at a P/B ratio of 0.52X, which is about 1 standard deviation below the historical P/B mean. The major reason for the drop in P/B ratio is the increase in properties valuation. We believe that the current price of Fortune REIT is attractive and with medium to long-term investment value.

Unlike the result from the P/B band, the dividend yield band gives us another story. Fortune REIT is currently trading below its average historical dividend yield, which implies the stock is currently trading in premium. There are 3 reasons for the premium. First, the hike in dividend yield during the 08/09 economic turmoil distorted the band. If we take away the 08/09 data, the historical average would drop to 7.14%. Secondly, the raise of rental income cannot match the soaring properties price. Thirdly, REIT sector becomes one of the “Hottest” sectors during the current inflation cycle. Demands for REITs edge their prices and hence reducing the dividend yield.

Financial Data

Click Here for PDF format...

This report is produced and is being distributed in Hong Kong by Phillip Securities Group with the Securities and Futures Commission (“SFC”) licence under Phillip Securities (HK) LTD and/ or Phillip Commodities (HK) LTD (“Phillip”). Information contained herein is based on sources that Phillip believed to be accurate. Phillip does not bear responsibility for any loss occasioned by reliance placed upon the contents hereof. The information is for informative purposes only and is not intended to or create/induce the creation of any binding legal relations. The information provided do not constitute investment advice, solicitation, purchase or sell any investment product(s). Investments are subject to investment risks including possible loss of the principal amount invested. You should refer to your Financial Advisor for investment advice based on your investment experience, financial situation, any of your particular needs and risk preference. For details of different product's risks, please visit the Risk Disclosures Statement on http://www.phillip.com.hk. Phillip (or employees) may have positions/ interests in relevant investment products. Phillip (or one of its affiliates) may from time to time provide services for, or solicit services or other business from, any company mentioned in this report. The above information is owned by Phillip and protected by copyright and intellectual property Laws. It may not be reproduced, distributed or published for any purpose without prior written consent from Phillip.

Author