Navigating the headwinds
- Recovery in hospitality and wholesale segments largely on track with our forecasts from our recent site visit Ability to manage its cost of debt is a key factor to watch
- Cutting FY23/24F DPU by 8-17% to reflect higher funding cost assumptions
- Maintain BUY with HK$2.02/sh TP; potential acceleration of REIT Connect would be a catalyst
Investment Thesis
The largest offshore listed China REIT in HK/SG with a solid acquisition pipeline from parent. Yuexiu REIT has the largest PRC portfolio among the listed REITs in Hong Kong and Singapore and is well-diversified across office (68%), retail (10%), wholesale (11%) and hotel (11%) assets. Serving as the offshore REIT platform of Yuexiu Group, Yuexiu REIT is poised to benefit from the robust development pipeline both from Yuexiu Property (123 HK) and the Group.
Hospitality and office recovery could be offset by higher financing costs. We have cut our FY23/24 DPU by 8/17% as we revised up our average funding cost assumptions. While recovery in the hospitality and office sectors are on track, any increase in DPU from this front will likely be offset by an increase in average funding cost amid a slew of US interest rate hikes (62% of Yuexiu REIT’s offshore debt is on floating-rate basis as at Dec-22). Operating performance of White Horse Building (c.5% of FY22 revenue or c.16% historically) – a key drag on its financial performance in the past – has been improving as per our recent site visit but it will likely take time for rental income to see a meaningful pickup.
Eye on debt management capability. Our analysis shows that a 100-bp rise in 1M Hong Kong Interbank Offered Rate (HIBOR) on top of our assumed average HIBOR rate (4.5% and 5.5% for FY23F and FY24F, vs
YTD avg of 3.6%) would impact our estimated FY23/24F DPU by c.10-11%. Yuexiu REIT’s ability to replace offshore debts with onshore financing in the current interest rate environment would therefore be a key factor to watch. Further asset depreciation risk should be manageable given the continually favourable onshore liquidity profile, potential liquidity and value enhancement from Private Equity Real Estate (PERE) and further relaxation over C-REIT asset classes.
BUY with TP of HK$2.02/sh. We derive our 12-mth DCF-based target price of HK$2.02 based on an unchanged discount rate of 7% and terminal growth of 3%. The stock is now trading at an 7.5% FY23F yield, slightly above the historical mean of 7.1%. The potential acceleration of REIT Connect development (see link for details) could be a unit price catalyst.
Key Risks to Our View:
Faster-than-expected US rate hikes; weaker-than-expected economic recovery in China; stronger than expected RMB depreciation