Strategy. September 26, REITs: Link, Hui Xian and Fortune the Better Choices, but Landlords Have More Potential From a Broader Perspective

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1 Strategy September, REITs: Link, Hui Xian and Fortune the Better Choices, but Landlords Have More Potential From a Broader Perspective Ten-year government bond yields declined after the FOMC meeting on September, which gave some breathing space to REITs. Based on the latest yield gap and DPS growth potential, Link REIT, Hui Xian REIT and Fortune REIT are the better choices, in our view. From a regional perspective, Singapore REITs are offering higher yields, but investors need to pay attention to their changing regional mix, which may result in higher currency risk. Meanwhile, Hong Kong landlords are catching up. Their latest yield gaps are still >bps above the -year average, and we believe they are likely to outperform pure Hong Kong REITs in the near term. Some breathing space after the FOMC meeting. As the US Federal Open Market Committee (FOMC) meeting decided to maintain the benchmark interest rate at the current level on September, ten-year government bond yields in the US, Japan and Germany dropped in the last two trading days (Figure ), which mitigated concerns about a further rise in government bond yields. We believe it s time to revisit the performance of REITs. China REITs do not look much more attractive than Hong Kong REITs. In the past five years, the average yield difference between Hong Kong-listed China REITs and Hong Kong REITs has been bps, mainly because of the higher rental yield in the China market (Figure ). Although the latest yield difference is bps, this does not imply China REITs have become much more attractive after taking potential RMB depreciation into account. Wong Chi Man Head of Research (8) 98- cmwong@chinastock.com.hk Tony Li Research Analyst (8) 98-9 tonyli@chinastock.com.hk Link REIT, Hui Xian REIT and Fortune REIT are better choices. Although Link REIT s (8.HK) absolute yield of.8% is the lowest among its peers, its valuation remains undemanding, as it is trading bps above its -year average yield gap versus -year US. In addition, its FY Mar/8 DPS is expected to grow.% YoY, based on consensus, which is one of the highest. Meanwhile, trading at 88bps above the -year average yield gap, we believe Hui Xian REIT offers a decent buffer for investors. Its E dividend yield of 8.% is also the highest among its peers, with a sizable market cap. DPS growth of.% in should offset most of the impact of potential RMB depreciation. But we understand its trading currency (RMB) may not be convenient for some investors, which leads to the valuation discount. Meanwhile, Fortune REIT (8.HK) is trading at par with its -year average yield gap, while its E DPS is projected to increase by a decent %, according to consensus (Figure & ). Singapore REITs are trading at higher yield, but investors need to pay attention to their regional mix. From a regional perspective, the top REITs in Singapore are trading at.% E dividend yield, higher than the.8% of pure Hong Kong REITs (with no or very little ex-hong Kong exposure) (Figure ). Because of the limited size of the Singapore property market, however, more and more Singapore REITs have acquired properties in other countries, such as Australia and China, so the potential currency risk is different from that of pure Hong Kong REITs. Landlords still looks more attractive from a broader perspective. Although there has been a catch-up rally, Hong Kong landlords are still underperforming relative to pure Hong Kong REITs on -year and -year basis (Figure and ). Given that they are still trading at >bps above the -year average yield gap (except Great Eagle (.HK), landlords still have the potential to outperform REITs, in our view.

2 // // 8// // // // // // /8/ /9/ // // // // 8// // // // // // /8/ /9/ // // // // 9// // // // // // /8/ Figure : -year treasury yields of major countries US -year treasury yield (%) Japan -year treasury yield (%) Germany -year treasury yield (%) Figure : Yield gap of pure HK REITs and HK-listed China REITs // // // // // UST Y Yield Spread between Pure HK REITs and USTY Yield Spread between HK-listed China REITs and USTY

3 Figure : Peer valuation Company name Last price (HK$) Market cap (HK$m) dividend yield (%) E dividend yield (%) -year average (%) Difference between E dividend yield and -year average (ppt) Difference Current yield gap versus - -year average year US yield gap (%) (%) between curent yield gap and the -year average (ppt) PER (x) E PER (x) E PER (x) PBR (x) Pure Hong Kong REITs 8 HK Equity Link REIT.8,..8.9 (.9) HK Equity Champion REIT.8,.8.. (.98).9.9 (.) HK Equity Fortune Real Estate Investment Trust 9. 8,8.8.. (.)..8 (.) HK Equity Sunlight Real Estate Investment Trust.98 8, (.8).. (.) HK Equity Prosperity REIT.,... (.8)..9 (.) China REITs HK Equity Yuexiu Real Estate Investment Trust.,...88 (.) HK Equity Hui Xian Real Estate Investment Trust., Landlords HK Equity Wharf Holdings Ltd/The 8., HK Equity Hysan Development Co Ltd. 9, HK Equity Great Eagle Holdings Ltd.,.8.. (.) HK Equity Hang Lung Properties Ltd.9 8, Figure : DPS growth of REITs Company name DPS H DPS H DPS Change YoY E DPS E DPS Change YoY Pure Hong Kong REITs 8 HK Equity Link REIT. n.a. n.a. n.a.8..% 8 HK Equity Champion REIT %...% 8 HK Equity Fortune Real Estate Investment Trust %...% HK Equity Sunlight Real Estate Investment Trust. n.a. n.a. n.a...8.8% 88 HK Equity Prosperity REIT % China REITs HK Equity Yuexiu Real Estate Investment Trust (RMB).8.8..%.. -.% 8 HK Equity Hui Xian Real Estate Investment Trust (RMB)...9.%.9..% Note: Link REIT is for the financial years ended March,, and 8. Sunlight REIT is for the financial years ended June,, and 8.

4 Figure : Peer valuation of Singapore REITs Company Ticker Price Mkt Cap LCY US$m Current E E Current E E Current E E Capitaland Mall Trust CT SP Equity., Ascendas Real Estate Inv Trt AREIT SP Equity., Capitaland Commercial Trust CCT SP Equity., Mapletree Commercial Trust MCT SP Equity.8, Suntec Reit SUN SP Equity., Keppel Reit KREIT SP Equity., Mapletree Industrial Trust MINT SP Equity., Mapletree Greater China Comm MAGIC SP Equity.9, Mapletree Logistics Trust MLT SP Equity.8, Sph Reit SPHREIT SP Equity.99, Frasers Centrepoint Trust FCT SP Equity., Ascott Residence Trust ART SP Equity., Starhill Global Reit SGREIT SP Equity.8, Parkw aylife Real Estate PREIT SP Equity., Cdl Hospitality Trusts CDREIT SP Equity.9, Capitaland Retail China Trus CRCT SP Equity Oue Hospitality Trust OUEHT SP Equity Frasers Commercial Trust FCOT SP Equity Far East Hospitality Trust FEHT SP Equity Keppel Dc Reit KDCREIT SP Equity First Real Estate Invt Trust FIRT SP Equity Lippo Malls Indonesia Retail LMRT SP Equity Frasers Hospitality Trust FHT SP Equity Oue Commercial Real Estate I OUECT SP Equity Aims Amp Capital Industrial AAREIT SP Equity Ascendas Hospitality Trust ASCHT SP Equity Cache Logistics Trust CACHE SP Equity Cambridge Industrial Trust CREIT SP Equity Viva Industrial Trust VIT SP Equity Soilbuild Business Space Rei SBREIT SP Equity Ireit Global IREIT SP Equity Sabana Shariah Comp Ind Reit SSREIT SP Equity Bhg Retail Reit BHGREIT SP Equity Saizen Reit SZREIT SP Equity Simple Average, Median Figure : -year relative performance between pure HK REITs and HK landlords.%.%.% 9.%.%.%.%.% -.% -.% -.% PER(x) PBR(x) Div YIeld(%) Sources: Capital IQ, CGIS Research Relative performance of pure HK REITs Relative performance of HK landlords

5 Figure : -year relative performance between pure HK REITs and HK landlords.%.%.%.%.% -.% -.% -.% Relative performance of pure HK REITs Relative performance of HK landlords Sources: Capital IQ, CGIS Research Figure 8: Link REIT yield gap Figure 9: Champion REIT yield gap.... Yield gap between Link REIT and US -year Yield gap between Champion REIT and US -year

6 Figure : Fortune REIT yield gap Figure : Sunlight REIT yield gap Yield gap between Fortune REIT and US -year 8 Yield gap between Sunlight REIT and US -year Figure : Prosperity REIT yield gap 8 Yield gap between Persperity REIT and US -year Figure : Yuexiu REIT yield gap Yield gap between Yuexiu REIT and US -year Figure : Hui Xian REIT yield gap Figure : Wharf yield gap 8 Yield gap between Hui Xian REIT and US -year // // // // // Yield gap between Wharf and US -year

7 Figure : Hysan yield gap Figure : Great Eagle yield gap Yield gap between Hysan and US -year Yield gap between Great Eagle and US -year Figure 8: Hang Lung Properties yield gap - - Yield gap between HLP and US -year

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