Link REIT 领展房地产基金 (823 HK)

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1 Link REIT 领展房地产基金 (823 HK) Riding the momentum of retail recovery Link REIT announced its FY18 annual result yesterday. It is in line with our estimates. Total distributable income in FY18 grew 7% YoY to HKD5,431 mn, in line with our estimate of HKD5,412 mm. FY18 total DPU is HKD cents, implying a 9.4% YoY growth. The growth was mainly driven by 8.3% YoY increase in revenue. And the cancellation of units through units buyback in order to neutralise the DPU loss from the asset disposals also helps, and they plan to have around 80 million more units buyback in the coming months. As we stated in our initiation, Link REIT sold the underperformed properties, helping the net property income margin of the remaining properties increase to 77.0% compared to 75.3% last year. Target price is revised from HKD75.00 to HKD79.00 based on DDM model, due to rolling over to FY19, implying a 9.1% upside. Proven excellent operation track record with upgraded retail portfolio. The revenue of Hong Kong retail properties like-for-like growth reached 9.5% in FY18 at HKD6,133mn and the average unit rent reached HKD62.4/sqft, representing a 12.8% YoY increase. We believe Link REIT is a beneficiary of the retail recovery in Hong Kong and the consumption upgrade in PRC. Car park rental growth remains strong in the near term. Like-for-like YoY growth of car park revenue in Hong Kong is 10.9%. And the car park income per space per month is HKD2,492, up 11.3% YoY. They believe the short-term growth is still visible due to the shortage of supply. As stated in our initiation, Link REIT s car parks are deeply undervalued in terms of valuation. The average valuation per space reaches HKD567K this year with a 27.1% YoY. Proactive forward-looking strategy in PRC team and infrastructure ready to seek for good opportunities in tier one cities. With the income from the newly acquired Metropolitan Plaza in Guangzhou, the FY18 total revenue and net property income from Mainland China malls stands at HKD884mn and HKD684mn, representing a 54% and 49% growth respectively. They are actively looking for new opportunities in the 4 first-tier cities (Beijing, Shanghai, Guangzhou and Shenzhen) as well as in Hong Kong. Plan for units buyback to reduce the influence of asset disposal. The upcoming 80 mn units buyback implies 3.7% of total current outstanding units. Assume the repurchase is at current price HKD72.40, total spending is going to be HKD5.8bn. If other factors remain constant, this would bring 3.9% increase in the DPU. Risk factors: longer-than-expected time to re-use the capital gain from disposal, lower-than-expected quality of the asset acquisition, interest rate hikes, Hong Kong and PRC economy slow down. Investment Summary FY-end Mar FY16 FY17 FY18 FY19E FY20E Revenue (HK$mn) 8,740 9,255 10,023 10,603 11,694 Chg (%) Distributable net profit (HK$mn) 4,567 4,992 5,281 5,701 6,260 Chg (%) Core EPU (HK$) Chg (%) Core P/E (x) P/B (x) EV/EBITDA (x) DPU (HK$) Yield (%) Source: Bloomberg, Company data, Orient Securities (Hong Kong) Share Price HK$72.40 ACCUMULATE Hong Kong / Real Estate / REIT 7 June 2018 Rachel Chui (SFC CE: BIH311) (852) Rachel.chui@dfzq.com.hk Latest Key Data Target Price HK$79.00 Total shares outstanding (mn) 2,150 Market capitalisation (HK$mn) 155,700 Enterprise value (HK$mn) 178,795 12M daily turnover (HK$mn) M volatility (%) 16.8 PEG avg FY18-20E (x) 26.2 ROE avg FY18-20E (%) 3.4 2P/B FY19E (x) 0.9 Net debt/equity FY19E (%) 25 Performance (%) 1M YTD 12M Absolute Relative to HSI 4 (4) (3) Major Shareholders (%) Blackrock 8.2 Capital Group Companies Inc 6.1 Auditor PricewaterhouseCoopers Price Chart Turnover (HK$mn) Source: Bloomberg, Orient Securities (Hong Kong) Price (HK$) Orient Securities (Hong Kong) Limited Please read the analyst certification, company disclosure and disclaimer in the last page 1

2 Operations figures remain strong Despite the one month rental loss of the 17 properties disposed, Link REIT still recorded a decent growth especially on retail part, due to the newly added Guangzhou Metropolitan Plaza as well as the entire retail industry recovery. The reversion rate keeps climbing to shops 31.2% and overall 29.1%. FY17 FY18 YoY Revenue breakdown Retail and commercial properties 6,914 7,554 9% Car parks 1,940 2,046 5% Air conditioning service fees % Other property related revuenue % Total 9,255 10,023 8% Property operating expenses breakdown Property managers' fees, security and cleaning % Staff costs % Government rent and rates % Repair and maintenance % Utilities % Promotion and marketing expenses % Outstanding Estate common area reversion costs rate in Hong Kong 106retail business 100-6% Business and real estate taxes in PRC % Other property operating expenses % Total 2,261 2,160-4% Hong Kong Portfolio 1HFY16 FY16 1HFY17 FY17 1HFY18 FY18 Reversion rate *Shops *Overall Occupancy rate at period end Still hidden value in car park properties Current average valuation per space reaches HKD567K this year with a 27.1% YoY. We still see a considerable potential for it to unlock the value if they are able to sell it at at closer to market price. Currently a normal car park price usually is between HKD1mn-2.5mn, and the new record in Hong Kong is HKD6mn/car park space. If these car parks were sold at a decent yield and they are able to repurchase some of other good quality recurring properties, it would bring the upside to DPU. Yield spread Link REIT is currently trading at 50bps spread over US 10 year Treasury bond yield. The rise of interest rates would still be a major risk of Link REIT. See last page for disclaimer. 2

3 Figure 1: Peer valuation table 21 April 2018 Mkt Cap PE(x) PB(x) EV/EBITDA(x) Dividend Yield(%) Ticker Company Currency Share px (HKD bn) 2017A 2018E 2019E 2017A 2018E 2019E 2017A 2018E 2019E 2017A 2018E 2017A REIT hk equity HUI XIAN REIT CNY hk equity CHAMPION REIT HKD hk equity FORTUNE REIT HKD hk equity LINK REIT HKD hk equity YUEXIU REIT HKD hk equity SUNLIGHT REIT HKD Average Stapled Securities 6823 Hk equity HKT-SS HKD hk equity HK ELECTRIC INVE HKD hk equity JINMAO HOTEL AND HKD hk equity LANGHAM -SS HKD Average Hong Kong Property 16 HK Equity SHK PPT HKD HK Equity NEW WORLD DEV HKD HK Equity HENDERSON LAND D HKD HK Equity HANG LUNG PPT HKD HK Equity HYSAN DEV HKD HK Equity CK ASSET HOLDING HKD HK Equity SWIREPROPERTIES HKD HK Equity SINO LAND HKD HK Equity WHEELOCK & CO HKD HK Equity K WAH INTL HLDGS HKD HK Equity FE CONSORT INTL HKD Average Source: Bloomberg, Orient Securities (Hong Kong) A Figure 2:DDM valuation Terminal growth rate % 3.0% 3.5% 4.0% 4.5% 6.4% % Discount rate 7.4% % % Figure 3: P/B Band Figure 4: Historical P/B HK$ x (x) 1.6 HK$ x 1.5 HK$80.0 HK$60.0 HK$ x 1.00x 0.75x 0.50x Mean +1 Std HK$ Std 0.7 HK$ See last page for disclaimer. 3

4 Financial statements & forecast Income Statement (consolidated) Balance Sheet (consolidated) FY-end Mar (HK$mn) FY16 FY17 FY18 FY19E FY20E FY-end Mar (HK$mn) FY16 FY17 FY18 FY19E FY20E Revenue 8,740 9,255 10,023 10,603 11,694 Current Assets 4,024 1,265 12,502 1,318 1,484 Property operating expenses (2,227) (2,261) (2,360) (2,263) (2,464) Cash and cash equivalents , Net property income 6,513 6,994 7,663 8,340 9,230 Other current assets 3, , ,045 SG&A (368) (342) (417) (424) (468) Non-current Assets 159, , , , ,008 Finance cost, net (508) (567) (665) (777) (923) Investment properties 157, , , , ,193 Interest income Other non-current assets 1, Fair value gain (loss) 11,263 11,494 35,493 10,133 14,488 Total Assets 163, , , , ,492 Disposal value gain (loss) 396 1,387 7, Current Liabilities 4,387 4,046 7,225 9,099 9,422 Pre-tax profit 17,302 18,970 49,399 17,315 22,331 Bank and other loans ,589 4,589 4,589 Taxes expenses (953) (1,057) (1,420) (1,113) (1,216) Receipts in advance 1,643 1,870 2,462 2,336 2,659 Reported net profit 16,349 17,913 47,979 16,202 21,115 Other currents liabilities 1,785 1,876 2,174 2,174 2,174 Adj: MI (54) (202) (218) (218) (218) Long-term Liabilities 31,624 33,397 30,111 40,111 40,211 Adj: Fair value gain/loss (11,209) (11,290) (35,270) (10,133) (14,488) Long-term loans 25,965 27,197 23,196 33,196 33,296 Adj: Others (144) (117) 96 (150) (150) Other non-currents liabilities 5,659 6,200 6,915 6,915 6,915 Adj: Gains on disposals of IP (375) (1,312) (7,306) - - Total Liabilities 36,011 37,443 37,336 49,210 49,633 Distributable income 4,567 4,992 5,281 5,701 6,260 Minority interests Discretionary distribution Net assets attr to unitholders 127, , , , ,949 Total Distributable Amount 4,634 5,075 5,431 5,701 6,260 Total net assets 127, , , , ,859 EBIT, ex fair value gain (loss) 6,145 6,652 7,246 7,916 8,762 Net cash (debt) (26,588) (26,962) (22,621) (37,229) (37,445) Core EPU (HK$) Net gearing (%) DPU (HK$) NAVPU (HK$) Cash Flow (consolidated) Key Ratios FY-end Mar (HK$mn) FY16 FY17 FY18E FY19E FY20E FY-end Mar FY16 FY17 FY18 FY19E FY20E Profit before tax 17,302 18,970 49,399 17,315 22,331 Growth (%) Change of working capital Revenue Fair value gain/loss (11,263) (11,494) (35,493) (10,133) (14,488) EBIT, ex fair value gain (loss) Financial cost, net DPU Income tax paid (726) (788) (1,420) (1,113) (1,216) Margin (%) Other operating cash flow (222) (1,191) (7,046) (12) 29 NPI Operating Cash Flow 5,682 6,077 6,485 6,859 7,619 EBIT, ex fair value gain (loss) Interest received Others (%) Net investment (10,673) ,455 (23,607) (942) Effective tax rate Other investing cash flow 1,097 (32) (8,375) (0) 0 Average RoE Investment Cash Flow (9,562) 422 8,087 (23,564) (938) Average RoA Dividend paid (4,368) (4,898) (5,254) (5,552) (5,975) Net debt financing 9, (1,760) 12, Interest paid (573) (739) (810) (777) (923) Semi-Annual Breakdown Net proceeds from equity finan (2,197) (1,697) (4,349) - - FY-end Mar (HK$mn) 2HFY16 1HFY17 2HFY17 1HFY18 2HFY18 Other financing cash flow (0) Revenue 4,555 4,608 4,647 4,949 5,074 Financing Cash Flow 1,987 (6,291) (11,962) 5,672 (6,798) Net property income 3,417 3,440 3,554 3,767 3,896 Net cash change (1,893) 208 2,610 (11,033) (117) EBIT, ex fair value gain (loss) 3,212 3,283 3,369 3,582 3,664 Cash b/n at year-end , Pre-tax profit 8,796 6,574 12,396 12,728 36,671 Tax (487) (517) (540) (589) (831) Net profit 2,412 2,389 2,441 2,700 2,262 Key Assumptions NPI margin (%) FY-end Mar (% or HK$mn) FY16 FY17 FY18 FY19E FY20E Operating margin (%) Regular revenue YoY 13% 6% 6% 7% 13% Effective tax rate (%) Regular expenses YoY 8% 2% 6% 5% 6% Net margin (%) Revenue from Metropolitan Pla Core EPU (HK$) Revenue from 700 Nathan Road DPU (HK$) Source: Company data, Orient Securities (Hong Kong) See last page for disclaimer. 4

5 Company in-depth Analyst Certification I, Rachel Chui (Lik Ching), being the person primarily responsible for the content of this research report, in whole or in part, hereby certify that: (1) all of the views expressed in this report accurately reflect my personal view about the subject company(ies) and its (or their) securities; (2) no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report, or our Investment Banking Department; (3) I am not, directly or indirectly, supervised by or reporting to our Investment Banking Department; (4) the subject company(ies) do(es) not fall into the restriction of the quiet period as defined in paragraph 16.5(g) of SFC Code of Conduct; (5) I and my associates do not deal in or trade in the stock(s) covered in this report within 30 calendar days prior to the date of issue of the report; (6) I and my associates do not serve as an officer(s) of the listed company(ies) covered in this report; and (7) I and my associates have no financial interests in relation to the listed company (ies) covered in this report. Meanings of Orient Securities Ratings Buy Describes stocks that we expect to provide a total return of >10% within a 12-month period. Accumulate Describes stocks that we expect to provide a total return of >0% within a 12-month period. Hold Describes stocks that we expect to provide a total return of between -20% and +20% within a 12-month period. Sell Describes stocks that we expect to provide a total return of <0% within a 12-month period. Disclosure & Disclaimer Orient Securities (Hong Kong) Limited does and seeks to do business with the company or companies covered in this report. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Orient Securities (Hong Kong) Limited and its affiliates, officers, directors, and employees may from time to time have long or short positions in securities, warrants, futures, options, derivatives or other financial instruments referred to in this report. In no event will Orient Securities (Hong Kong) Limited or any other member of Orient Securities (Hong Kong) Limited be liable or responsible for loss of any kind, whether direct, indirect, consequential or incidental, resulting from the act or omission of any third party occurring in reliance upon the contents of this report. Any information provided in this research report is for information purpose only and have no regards to the investment objectives, financial situation or risk tolerance level of any specific recipient and does not constitute any solicitation or any offer to buy or sell any securities or any other financial instruments. Before entering into any investment contract, individual should exercise judgment or seek for professional advice when necessary. Orient Securities (Hong Kong) Limited may not execute transactions for individual(s) in the securities/instruments mentioned. Although the information in this report is obtained or complied from sources that Orient Securities (Hong Kong) Limited believes to be reliable, no representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of the materials contained in this report. All price-related information is indicative only, and value of the investment(s) referred to in this report and the income from them may fluctuate because of changes in foreign exchange rates, market indexes, relevant operational / financial conditions of the company and other factors. Information contained in this report may change at any time and Orient Securities (Hong Kong) Limited gives no undertaking to provide notice of any such change. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. 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 any law, regulation, rule or other registration or licensing requirement. Investment(s) in securities / financial instructions put through/execute outside Hong Kong are subject to the applicable laws and regulations of the relevant overseas jurisdiction, the entity issuing this research report and the analyst(s) authoring this research report are not subject to all the disclosures and other regulatory requirements in other countries. This report may not be copied, reproduced, distributed, redistribute or published by any person for any purpose without the prior written consent of Orient Securities (Hong Kong) Limited. All rights are reserved. 5