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Result Analysis: 1HFY22 results beat expectations, acquisitions to drive inorganic growth

Including discretionary distribution of HK$146m (1HFY21: HK$144m), Link REIT’s 1HFY22 distribution income rose 14.2% to HK$3.34bn, 8% above our forecast partly led by lower-than-expected cash finance costs and tax charges. Due to increased number of outstanding units from the distribution reinvestment scheme, interim DPU grew by a smaller 12.7% to HK$1.5959 (1HFY21: HK$1.4165).

Total revenue rose 10.4% to HK$5.78bn (1HFY21: HK$5.23bn). Revenue from Hong Kong retail portfolio improved by 6.2% to HK$3.6bn mainly due to the waiver of property management fees and air-conditioning service fees granted in 1HFY21. Excluding property management fees and air-conditioning service fees, Hong Kong retail rental income would have risen by 1.8%, thanks to positive reversionary growth and increased receipts from mall merchandizing. Hong Kong retail portfolio’s rental reversion turned positive at 3.4% in 1HFY22 (FY21: -1.8%). Markets/cooked food stalls outperformed by staging encouraging reversionary growth of 14.2%. Meanwhile, shops and education tenants recorded rental reversions of 2.3% and 4.3% respectively. Average monthly unit rent was stable at HK$62.4psf. As of Sep-21, overall retail occupancy climbed to a record high of 97.5% from Mar-21’s 96.8%. Overall carpark income rose 12.2% to HK$1bn, driven by higher hourly car park income which went up by 39.1% and has recovered to pre-COVID level. 

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Boosted by the distribution of electronic consumption vouchers, tenant sales at Link REIT’s Hong Kong retail portfolio reached pre-COVID level with growth further accelerating to 8.9% in 1HFY22 from 1QFY22’s 4.8%. F&B sector was a bright spot with sales rebounding by 25.7% in 1HFY22. General retail tenants also recorded solid tenant sales growth of 13.4%. On the other hand, tenant sales at supermarket and foodstuff trades dropped by 8.6% in the period due to the high base in 1HFY21. As such, rent-to-sales ratio normalized to 13%. This should underpin the slightly positive reversionary growth in 2HFY22. 

With new tenants including Bupa, committed occupancy at The Quayside in Kwun Tong climbed to 93.8% as of Oct-21 from Mar-21’s 82.9%. Currently, blue-chip finance and insurance companies account for c.60% of the property’s lettable area.

Income from its China portfolio delivered 15.6% growth, driven by new contribution from Happy Valley Shopping Mall in Guangzhou and positive reversionary growth. The five wholly owned shopping malls in China continued to register solid reversionary growth of 12.1% in 1HFY22 (FY21: 11.1%). Furthermore, the newly acquired minority-owned property, Qibao Vanke Plaza, also achieved a remarkable rental reversion of 31.3%. Tenant sales at Link Plaza in Beijing and Guangzhou have recovered to c.90% of the 2019 level along with economic recovery. Retail occupancy in China averaged 91.5%, or 96.2% excluding newly acquired Happy Valley Shopping Mall where occupancy was 74.1% in Sep-21. 

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Due to the competition from new supply in Shanghai, rental decline accelerated to 12.1% in 1HFY22 from FY21’s 8% upon the rollover of 8.3% of floor area. The property was 96.7% let as of Sep-21 (Mar-21: 95.8%).

As the overall rental margin had edged down to 76% in 1HFY22 from 1HFY21’s 77%, NPI income rose by a smaller 8.8% to HK$4.39bn (1HFY21: HK$4.04bn). 

Link REIT has completed two asset enhancement projects at Hing Wah Plaza and Tai Wo Plaza with respective ROIs of 13.2% and 3.6% in 1HFY22. With estimated capex of HK$346m, enhancement works at CentralWalk in Shenzhen are currently underway with project completion targeted for late 2021. Two small asset enhancement projects at Tai Yuen Market and Lok Fu Market are scheduled for completion in mid-2022. Moreover, twenty asset enhancement projects in Hong Kong are in the planning stage with aggregate capex of >$1bn. Link REIT has plans to upgrade the Happy Valley Shopping Mall in Guangzhou which should commence later next year.

In late Oct, Link REIT made its foray into the rapidly growing logistics segment in China by acquiring 75% stakes in two newly built modern warehouses in Dongguan and Foshan for a total consideration of Rmb754m. The two properties will be co-managed and co-owned by Link REIT and the seller, First Priority Group, which has the largest market share in Dongguan and second largest logistics warehouse stock in the Greater Bay Area. As of Sep-21, both properties were fully let with WALE of 3.5 and 4.4 years for the Dongguan and Foshan asset respectively. With estimated initial gross yields of 6.8-7%, the acquisition should be immediately yield accretive. Despite the initial small investment, this allows the REIT to tap into the growing logistic demand boosted by the development of e-commerce. We do not rule out the possibility of the REIT deepening its logistics presence in the future with a greater collaboration with First Priority Group. 

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In Nov-21, Link REIT reached an agreement to acquire a godown in Chai Wan and a mixed-use car parking building in Hung Hom via a private tender for HK$2.7bn and HK$3.12bn respectively. These have been repurposed to a 4S full-service building hosting automotive showrooms, car servicing and repair workshops, godown and ancillary offices. Both properties will be leased back to Zung Fu Holdings for an initial fixed term of five years with three optional three-year terms. Zung Fu, wholly owned by Jardine Matheson, has been the exclusive car dealer of Mercedes-Benz for >60 years. The transaction is expected to be completed at end-Dec 2021. Initial yield is estimated at 3-3.3%. With built-in annual rental increment of 4%, these two properties provide steadily growing rental income to Link REIT.  Overall, we estimate that these two acquisitions would add c.1% to FY23 DPU.

Following the recent string of acquisitions, the Hong Kong and China assets now account for 78.2% and 16.8% of Link REIT’s total property valuation with the balance from overseas.  In Sep-21, the management has revised up the guidance for China and overseas assets to 20-25% and 10-15% of total assets respectively, from <20% and <10% previously. Hence, we expect more acquisitions in China and overseas in the years ahead, to align with its Vision 2025 strategy.

Total debt increased to 42.5bn in Sep-21 from Mar-21’s HK$38.6bn due to the acquisitions in China. This translated into gearing of 19.5%. Following the acquisitions of two logistics assets in Guangdong, three retail properties in Sydney and two carpark/car service buildings in Hong Kong, Link REIT’s gearing is estimated to increase to c.23.6% which remains comfortable. 

We have raised our FY22 and FY23 DPU forecast by 5.3% and 3.8% respectively to factor in the impact from acquisitions and stronger-than-expected interim results.

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In 1HFY22, Link REIT has bought back 1.3m units at an aggregated cost of HK$82.6m or HK$65.2/unit, 16.4% below its book value of HK$77.99 as of Sep-21. 

Link REIT is trading at 4.6-4.7% distribution yield for FY22-23, translating into yield spread of 3.2%. This compares favourably to its 10-year average of 2.5%. The stock is attractively valued on a historical viewpoint. Link REIT is on the path towards post COVID earnings recovery in Hong Kong and China with favourable reversionary growth. The recent acquisitions in Hong Kong, China, and Australia should not only bring in immediate yield accretion but also diversify its asset/earnings base. Link REIT will continue to pursue yield-accretive acquisitions to achieve high single digit CAGR in AUM, which should in turn underpin its long-term DPU growth. Hence, we reiterate BUY with a higher DDM-based TP of HK$82.80.