Champion REIT HOLD, TP HK$3.70, HK$3.09 close
Champion REIT’s Langham Place Mall is one of the favourite destinations in HK among inbound tourists and contributed 27% of its revenue in FY21. It trades at a 50% discount to NAV and a 6.9% FY22F DPU yield.
Hysan Development ADD, TP HK$26.60, HK$20.55 close
Hysan should benefit from retail sales recovery at its mall portfolio, including Lee Gardens and Hysan Place, that accounted for 45% of its FY21 revenue. It trades at a 65% discount to NAV and a 6.8% FY22F dividend yield.
Wharf REIC HOLD, TP HK$37.50, HK$37.65 close
Wharf REIC is a key beneficiary of the gradual reopening of HK’s borders, with its retail malls (e.g. Harbour City) accounting for 44% of its FY21 revenue. It trades at a 35% discount to NAV and a 3.3% FY22F dividend yield.
Loosening of quarantine measures to benefit retail landlords
- The HK government has announced the loosening of quarantine measures for inbound travellers to HK, with fewer Covid-19-related tests required.
- We expect to see a gradual increase in overseas visitors to HK with the new measures that will be in effect from 26 Sep 22.
- We also expect to see more Chinese travellers to HK, even though they may still be subject to tight quarantine measures when they return home.
- Among the stocks we cover, Wharf REIC, Hysan and CREIT have the highest exposures to non-mass-market retail in HK by revenue.
Quarantine measures for inbound travellers to be further loosened
? The HK government is putting an end to mandatory hotel quarantines for inbound travel starting from 26 Sep 22 with the following arrangements:
? Under a “test-and-go” practice, travellers will be required to go through just three days of medical surveillance either at home or in self-arranged accommodation and are still subject to “Amber Code” restrictions under the Vaccine Pass, meaning that they are unable to enter restaurants or bars for dining.
? Inbound travellers will be required to take a rapid antigen test (RAT) within 24 hours of departure rather than a nucleic acid test (PCR) within 48 hours of departure currently. They are still required to take PCR tests at the airport and on days 2, 4 and 6 upon arrival, but they can head home or to an hotel via the means of transport they prefer without having to wait for PCR test results at the airport.
? Quotas for the Return2HK and Come2HK schemes will also be scrapped.
To see more international business travellers
? We think the new arrangements would attract international business travellers whose trips are relatively long and who are not so impacted by entry restrictions from the Vaccine Pass or by post-arrival PCR tests.
May also see more Chinese visitors to HK but ….
? With the lifting of quotas for Return2HK and Come2HK, we expect to see more inbound tourists from China, especially from the Greater Bay Area (GBA).
? Given the relatively strict anti-pandemic policies in China, in which Chinese travellers are subject to quarantine measures (e.g. 7 days of hotel quarantine plus 3 days of medical surveillance at home for returning to Guangdong Province), the initial figures for inbound travellers from China may not increase substantially. Nevertheless, we think the HKSAR Government would be actively engaged in dialogue with the Chinese Government to facilitate more frequent travel between HK and China.
Wharf REIC, Hysan and CREIT would benefit the most
? We think the easing of quarantine restrictions for inbound travel allows for a gradual recovery of HK’s business activities with China and overseas and expect retail landlords to be direct beneficiaries on the back of an increase in high-end retail sales from travellers.
? Among the HK property stocks that we cover, Wharf REIC, Hysan and Champion REIT (CREIT) have the highest exposures to non-mass-market retail, with 27-45% of revenue from HK retail in FY21.
? While we retain Neutral sector rating for HK property, we think share prices for nonmass-market- focused retail landlords will react positively to the new quarantine arrangements.
? Key downside risks to retail landlords include: a new round of Covid-19 outbreak which could lead to tightening of quarantine measures, a stronger HK$ vs. Asian currencies, and faster-than-expected interest rate hikes in US or HK. An upside risk is an earlier-than-expected reopening of HK’s borders.