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Yuexiu REIT (405 HK) Summary

Core Content

Yuexiu REIT is a Hong Kong-listed real estate investment trust (REIT) that exclusively invests in commercial properties in Guangzhou, China. The REIT is noted for its high-quality assets and active asset-enhancement initiatives (AEIs), which are expected to drive steady growth in distributable income per unit (DPU) over the next 10 years. The company is currently trading at a discount to its net asset value (NAV), with a unit price that has fallen by 25% since mid-2013, presenting a potential value opportunity.

Main Points

• Strong Execution: The REIT has demonstrated strong execution capabilities with a significant increase in the occupancy rate at Guangzhou IFC and the successful renovation of Victory Plaza.
• DPU Growth: We project a steady DPU growth rate of 7% for 2013-2015, driven by higher occupancy rates at Guangzhou IFC and improved rental income from other properties.
• Asset Acquisitions: Asset acquisitions from its parent company, Yuexiu Property, are expected to further boost DPU over the long term. Notably, Fortune World Plaza and Fortune Centre are expected to be acquired in 2015-2016.
• Valuation: The unit price is currently at a 34% discount to NAV, and the dividend yield for 2014E is 8.0%. The REIT is expected to offer a 7.1% dividend yield for 2014-2015E based on a DDM-derived target price of HKD4.40.
• Dividend Yield and Spread: The REIT's dividend yield is expected to increase, with a yield spread to the US 10-year bond that is anticipated to widen, making it more attractive to investors.
• Gearing: The gearing (debt to total assets) has increased slightly due to the acquisition of Guangzhou IFC, but is expected to remain stable and manageable over the next few years.

Key Information

Investment Case

• High-Quality Assets: Yuexiu REIT holds six properties in Guangzhou's central business district (CBD), including Guangzhou IFC and White Horse Building.
• Occupancy Trends: The occupancy rate at Guangzhou IFC's offices is expected to rise from 80-85% at the end of 2013 to 95% by the end of 2014.
• Rental Growth: The introduction of Uniqlo at Victory Plaza and other AEIs are expected to drive rental income growth for the plaza over the next 2-3 years.
• Catalysts: The REIT is supported by better-than-expected 2013 results, improved occupancy rates, the introduction of well-known brands, and strong sales turnover for the Uniqlo store.

Financial Highlights

• Revenue and Net Property Income: Expected to grow from CNY1,318m in 2013E to CNY1,689m in 2015E.
• DPU Growth: Projected to increase from CNY0.216 in 2013E to CNY0.245 in 2015E.
• Dividend Yield: Expected to rise from 7.4% in 2013E to 8.4% in 2015E.
• Valuation Metrics: The P/BV (price-to-book value) is expected to increase from 0.6x in 2013E to 0.7x in 2015E.

Risks

• Rental Decline: A potential decline in commercial property rents, especially for grade-A offices, due to new supply entering the market at competitive prices.
• Low-Yield Acquisitions: The risk of acquiring assets with lower yields than the REIT's current trading yield.

Valuation Comparison with Major H-REITs

Investment Thesis

• Yuexiu REIT is expected to benefit from the rising occupancy rate at Guangzhou IFC and AEIs for other properties.
• The REIT's DPU is forecast to grow steadily over the next three years, supported by the introduction of new tenants and the potential for asset acquisitions.
• The REIT is currently trading at a discount to NAV, which is seen as a positive for long-term value accretion.
• Despite a higher gearing compared to peers, the REIT's financial position is considered reasonable and sustainable.

Conclusion

Yuexiu REIT is initiated with a Buy rating due to its attractive yield, steady DPU growth, and the potential for value appreciation. The REIT's unit price has declined significantly, and its current yield is higher than that of many other H-REITs. The REIT's strong execution capabilities and strategic asset acquisitions make it a compelling investment opportunity in the current market environment.