20160219-美银美林-领展房产基金-00823.HK-Portfolio_remixed_with_little_accretion__Buy_on_defensive_fundamentals_12页_739kb

Link REIT Summary

Core Content

Link REIT, Hong Kong's first and largest real estate investment trust (REIT), has made strategic moves in its portfolio management by acquiring a mixed-use building in Mongkok and divesting 9 properties. The acquisition, valued at HK$5.91bn, includes a 285,000 sqf GFA and is expected to yield an NPI margin of 3.8-4%. However, the purchase price is at full value, and the renovation period (18-24 months) is expected to lead to initial dilution in distributable profit (DPU).

The divestiture of 9 properties, with a total book value of HK$2.8bn and an NPI yield of 4.6%, may yield above book value, but with lower upside compared to previous sales due to weaker market sentiment. Link has ruled out equity-funded deals and has limited room for further gearing.

Main Points

• Portfolio Strategy: Link has been actively reshuffling its portfolio to enhance growth potential, focusing on strategic acquisitions and selective divestitures.
• Mongkok Acquisition:
  • Price: HK$5.91bn (HK$6.8bn including capex and fees).
  • Projected NPI yield: 3.8-4%.
  • Renovation period: 18-24 months, with the tower portion to be completed first.
  • Gearing: Pro forma gearing will increase to 20.4%, slightly above Link's comfort level.
• Divestiture Plan:
  • 9 properties with a book value of HK$2.8bn and an NPI yield of 4.6%.
  • Expected to fetch above book value but with lower upside than previous sales.
• Valuation:
  • Current share price yields a 340bps spread over 10Y HK government bond yield, which is wider than the long-term average of 228bps.
  • Price objective is HK$50.5/share, based on a DDM model with a 6.8% cost of equity and 2% long-term growth assumption.
  • P/B ratio is 0.8x, considered attractive.
• Financial Impact:
  • DPU estimates for FY17-18 have been trimmed by 2% due to initial dilution from the acquisition.
  • Link has the option to make discretionary distributions to offset this.
  • Net cash provided by operations is expected to increase due to higher rental income and lower direct outgoings.
  • Net interest expense is projected to rise due to increased debt.

Key Financial Data

Metric	2014A	2015A	2016E	2017E	2018E
Distribution / Share (Reported)	1.66	1.83	2.01	2.09	2.19
Distribution / Share (Annualized)	1.66	1.83	2.01	2.09	2.19
Shares Outstanding	2,309	2,292	2,228	2,229	2,231
Net Profit (HK$ million)	3,860	4,086	4,310	4,334	4,522
Payout Ratio	100.0%	103.1%	101.1%	101.0%	101.0%
Net Assets (HK$ million)	96,351	118,106	121,108	127,239	133,601
Net Debt to Total Assets	16.9%	20.4%
Distribution Yield (Annualized)	3.83%	4.22%	4.65%	4.84%	5.05%
10 Year Bond Yield	2.34%	1.46%
Yield Gap	1.49%	2.77%
NAV / Share	41.69	51.53
Prem / Disc NAV	3.9%	-16.0%

Key Performance Metrics

Metric	2014A	2015A	2016E	2017E	2018E
Net Property Income (HK$ million)	5,202	5,669	6,108	6,438	6,827
EBIT (HK$ million)	4,980	5,232	5,764	6,129	6,505
Net Profit (HK$ million)	3,860	4,086	4,310	4,334	4,522
Distributable Income (HK$ million)	3,830	4,064	3,931	4,334	4,522
DPU (HKcent)	1.658	1.828	2.014	2.095	2.187
Earnings Yield	3.8%	4.1%	4.4%	4.5%	4.7%
NPI Yield	70.9%	72.7%	73.4%	73.6%	74.3%
Return on Equity (ROE)	4.3%	3.8%	3.3%	3.5%	3.5%

Investment Rationale

• Link REIT is expected to deliver above-average total returns due to:
  • Stable performance from its shopping malls.
  • Rising contributions from malls that have undergone Asset Enhancement Initiatives (AEI).
• The company maintains a conservative approach to acquisitions and has ruled out equity funding.
• The current valuation is considered attractive, especially in a low-interest-rate environment.

Risks and Upsides

Downside Risks:

• Downturn in the Hong Kong economy.
• Lower-than-forecast growth in occupancy and spot rents.
• Lower returns from future acquisitions.
• Faster-than-expected expense growth.
• Higher government bond yields.

Upside Risks:

• Compression in HK government bond yields.
• Further compression in yield spread.
• Higher-than-expected revenue and DPU growth.

Analysts

• Karl Choi, CFA: Research Analyst, Merrill Lynch (Hong Kong)
• Raymond Ngai, CFA: Research Analyst, Merrill Lynch (Hong Kong)
• Fan Tso, CFA: Research Analyst, Merrill Lynch (Hong Kong)

Disclaimer

This report is prepared by a non-US affiliate of MLPF&S and is not registered/qualified as a research analyst under FINRA rules. Investors should consider this report as only a single factor in making investment decisions. Refer to important disclosures on pages 10 to 12 for more details.