Equity Research Property Yuexiu REIT (405 HK) Buy (initiation) Target price: HK$5.90 Premium investment property portfolio, attractive dividend yield; initiate at Buy First HK-listed China property REIT, seven premium properties in Guangzhou and Shanghai The company was the first Hong Kong-listed real estate investment trust (REIT) investing solely in property in mainland China. It owns and manages seven premium investment properties in Guangzhou and Shanghai, all located in the CBD. Its properties include White Horse Building, Fortune Plaza, City Development Plaza, Victory Plaza, Yuexiu Neo Metropolis, and Guangzhou International Finance Center (Guangzhou IFC) in Guangzhou, and Hongjia Tower in Shanghai, with a total rentable area of 487,324 sqm. Dennis Yao SFC CE No. ALK994 dennisyao@gfgroup.com.hk +852 3719 1065 GF Securities (Hong Kong) Brokerage Limited 29-30/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong Guangzhou IFC is the main revenue and earnings driver The 440m tower is a landmark project in Guangzhou that includes a high-end office, luxury retail mall, serviced apartments, and a Four Seasons hotel. It was completed in 2010 and has a total rentable area of 230,267 sqm. In 2015, the tower had an occupancy rate of 95%, with a monthly average rental rate of Rmb211 per sqm. Booked revenue from the project totaled Rmb1.0bn in 2015, accounting for 58% of the company s total revenue. Strong parent Yuexiu REIT is 37%-owned by Yuexiu Property (123 HK, NR), a major state-owned (Guangzhou government) residential developer. According to our discussion with Yuexiu Property s new management, Yuexiu REIT will continue to acquire projects in order to accelerate its earnings growth. Hongjia Tower in Shanghai a new growth driver This project, acquired in 2015, is located in the Pudong district of Shanghai, has a rental area of 46,026 sqm and a monthly average rental rate of Rmb243 per sqm (2015). We expect this project s occupancy rate to remain stable at 99% this year, and contribute revenue of Rmb130m. Stock performance 28,000 HK$ 27,000 26,000 25,000 24,000 23,000 22,000 21,000 20,000 19,000 18,000 17,000 16,000 15,000 Jun-14 Oct-14 Feb-15 Jun-15 Oct-15 Feb-16 HSI Yuexiu REIT Source: Bloomberg 7.00 6.00 5.00 4.00 3.00 2.00 1.00 Dividend payout over 90%; attractive dividend yield of over 7% The company has distributed over 90% of its earnings as annual dividends to shareholders since its listing in 2005. Given the earnings contribution from Hongjia Tower, we expect DPS to grow by 5% in 2016-18, with a dividend yield of over 7%. Undervalued asset play; initiate at Buy Given the limited supply of Grade-A office and high-end commercial properties in Guangzhou and Shanghai, we see solid appreciation potential for the company s premium investment properties going forward. In our view, the company s rational valuation should be equal to its book value, given its recurring rental revenue. The stock is trading at a 30% discount to 2016E NBV (based on our estimate), clearly undervalued, in our view. We initiate coverage with a Buy rating and a target price of HK$5.90, equal to 1.0x 2016E NBV. Key data May 24 close (HK$) 4.24 Shares in issue (m) 2845 Major shareholder Yuexiu Property (37%) Market cap (HK$ bn) 12.1 3M avg.vol. (m) 4.5 52w high/low (US$) 4.52/3.82 Source: Bloomberg Stock valuation Turnover (Rmb m) Net Profit (Rmb m), GF Securities (HK) DPS (Rmb) DPS YoY (% chg) Yield (x) ROE (%) BPS (Rmb) 2014 1,571 928 0.237 10 6.9 7.1 4.7 0.7 2015 1,710 741 0.239 1 7.0 5.5 4.7 0.7 2016E 1,812 762 0.251 5 7.4 5.4 4.7 0.7 2017E 1,993 843 0.264 5 7.7 6.0 4.7 0.7 2018E 2,193 927 0.277 5 8.1 6.5 4.8 0.7 P/B (x)
First HK-listed China property REIT, seven premium properties in Guangzhou and Shanghai The company was the first Hong Kong-listed real estate investment trust (REIT) investing solely in property in mainland China. It owns and manages seven premium investment properties in Guangzhou and Shanghai, all located in the CBD. Its properties include White Horse Building, Fortune Plaza, City Development Plaza, Victory Plaza, Yuexiu Neo Metropolis, and Guangzhou International Finance Center (Guangzhou IFC) in Guangzhou, and Hongjia Tower in Shanghai, with a total rentable area of 487,324 sqm. Figure 1: Portfolio of seven premium investment properties Property Type Location Area of Year of ownership completion (sqm) Total rentable Occupancy area (sqm) rate Monthly rental rate (Rmb/sqm) White Horse Building Wholesale shopping center Yuexiu district 1990 50,199 50,129 100.0% 636.7 Fortune Plaza Grade-A office Tianhe district 2003 41,355 41,355 99.6% 149.1 City Development Plaza Grade-A office Tianhe district 1997 42,397 42,397 97.7% 127.1 Victory Plaza Retail shopping center Tianhe district 2003 27,698 27,262 100.0% 242.8 Neo Metropolis Commercial complex Yuexiu district 2007 61,964 49,887 99.7% (2) 108.1 The Guangzhou International Finance Center (GZIFC) Commercial complex Tianhe district 2010 457,357 230,267 95.2% 211.3 Including: Grade A Office 267,804 183,540 97.3% 235.3 Retail shopping mall 46,989 46,727 86.8% 105.4 Hotel 91,461 N/A N/A N/A Serviced apartments 51,102 N/A N/A N/A Hongjia Tower Commercial complex Pudong, Shanghai 2010 62,139 46,026 98.9% 242.8 Sum 743,106 487,324 97.3% 237.5 Office 475,656 363,206 98.1% 196.0 Retail 74,687 73,990 91.7% 160.6 Whosale 50,199 50,129 100% 636.7 2015 results review 2015 revenue rose 9% YoY to Rmb1.7bn, with an overall occupancy rate of 97% and an average monthly rental rate of Rmb237.5 per sqm. Total distribution to shareholders rose 6% YoY to Rmb704m. DPS was HK$0.306. Guangzhou IFC is the main revenue and earnings driver The 440m tower is a landmark project in Guangzhou that includes a high-end office, luxury retail mall, serviced apartments, and a Four Seasons hotel. It was completed in 2010 and has a total rentable area of 230,267 sqm. In 2015, the tower had an occupancy rate of 95%, with a monthly average rental rate of Rmb211 per sqm. Booked revenue from the project totaled Rmb1.0bn in 2015, accounting for 58% of the company s total revenue. White Horse building also driving revenue and earnings The building is a major wholesale market for more than 1,100 fashion manufacturers, and has a 100% occupancy rate. In 2015, its revenue rose 11% YoY to Rmb407m, accounting for 24% of the company s total revenue. Figure 2: Guangzhou IFC Figure 3: White Horse Building Sources: yuexiureit.com 2
Figure 4: Top 10 tenants in Guangzhou IFC office area Hongjia Tower in Shanghai a new growth driver This project, acquired in 2015, is located in the Pudong district of Shanghai, has a rental area of 46,026 sqm and a monthly average rental rate of Rmb243 per sqm (2015). We expect this project s occupancy rate to remain stable at 99% this year, and contribute revenue of Rmb130m. Figure 5: Hongjia Tower in Shanghai Strong parent Yuexiu REIT is 37%-owned by Yuexiu Property (123 HK, NR), a major stateowned (Guangzhou government) residential developer. According to our discussion with Yuexiu Property s new management, Yuexiu REIT will continue to acquire projects in order to accelerate its earnings growth. Dividend payout over 90%; attractive dividend yield of over 7% The company has distributed over 90% of its earnings as annual dividends to shareholders since its listing in 2005. Given the earnings contribution from Hongjia Tower, we expect DPS to grow by 5% in 2016-18, with a dividend yield of over 7%. Undervalued asset play; initiate at Buy Given the limited supply of Grade-A office and high-end commercial properties in Guangzhou and Shanghai, we see solid appreciation potential for the company s premium investment properties going forward. In our view, the company s rational valuation should be equal to its book value, given its recurring rental revenue. The stock is trading at a 30% discount to 2016E NBV (based on our estimate), clearly undervalued, in our view. We initiate coverage with a Buy rating and a target price of HK$5.90, equal to 1.0x 2016E NBV. 3
Figure 6: Financial statements Income Statement Balance Sheet Year-end Dec (Rmb m) 2014 2015 2016E 2017E 2018E Year-end Dec (Rmb m) 2014 2015 2016E 2017E 2018E Revenue 1,571 1,710 1,812 1,993 2,193 Cash and Cash Equivalents 986 683 602 560 863 Operating expenses (922) (1,066) (1,105) (1,216) (1,338) Due from Related Companies 532 292 292 292 292 Gross profit 649 644 707 777 855 Other current assets 144 182 124 134 146 Fair value gains 672 1,075 1,000 1,000 1,000 Total Current Assets 1,663 1,157 1,018 986 1,301 Financial expenses (381) (763) (725) (689) (654) Income taxes (177) (260) (267) (296) (326) Property, Plant and Equipment 2,369 2,412 2,557 2,813 3,094 Net profit 928 741 762 843 927 Investment Properties 19,299 23,194 24,194 25,194 26,194 Dividend distribution paid 644 680 714 750 788 Goodwill 160 824 824 824 824 DPS (Rmb) 0.237 0.239 0.251 0.264 0.277 Land Use Rights 1,577 1,528 1,528 1,528 1,528 Deferred Assets 176 187 187 187 187 Cash Flow Statement Top up Payment Asset 118 32 32 32 32 Year-end Dec (Rmb m) 2014 2015 2016E 2017E 2018E Total Non Current Assets 23,700 28,178 29,323 30,579 31,860 Cash Flow from Operating Activities 727 630 60 941 782 Trade Payables 15 13 14 15 17 Cash Flow from Investing Activities 24 (2,425) (50) (900) (900) Accruals and Other Payables 1,003 769 1,119 1,535 1,689 Cash Flow from Financing Activities (405) 1,491 (90) (83) 421 Tax Payables 0 3 3 3 3 CF at beginning 640 986 682 906 529 Amounts Due to Related parties 69 75 75 75 75 Net change 347 (304) (80) (41) 303 Rental Deposits 131 127 127 127 127 CF at end 987 682 602 560 863 Borrowings 300 2,842 2,700 2,565 2,436 Receipt in Advance 60 77 0 0 0 Total Current Liabilities 1,578 3,906 4,037 4,320 4,347 Financial Ratios Year-end Dec 2014 2015 2016E 2017E 2018E Borrowings 7,809 8,136 8,950 9,845 11,322 Deferred Tax Liabilities 2,608 3,611 3,611 3,611 3,611 Revenue growth rate (YoY) 15% 9% 6% 10% 10% Minority Interest 87 93 93 93 93 Gross margin 41% 38% 39% 39% 39% Receipt in Advance 26 13 13 13 13 Net profit margin (incl fair value gains) 59% 43% 42% 42% 42% Rental Deposits 113 176 176 176 176 Net gearing 54% 77% 76% 84% 91% Total Non Current Liabilities 10,643 12,029 12,842 13,737 15,214 ROE 7% 6% 6% 6% 7% Total Shareholders Equity 13,142 13,400 13,461 13,508 13,600, GF Securities (HK) 4
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GF Securities (Hong Kong) Brokerage Limited. All rights reserved. 29-30/F, Li Po Chun Chambers, 189 Des Voeux Road Central, Hong Kong Tel: +852 3719 1111 Fax: +852 2907 6176 Website: http://www.gfgroup.com.hk 5