Acquiring Remaining 50% Stake In Qibao Vanke Plaza At Bargain Price
LINK REIT announced the acquisition of a 50% stake in Qibao Plaza from Vanke on 9 Feb 24. The agreed property value is 24% lower than the latest market valuation and implies an NPI yield of over 6.5%. We estimate an 0.74% accretion to FY25 DPU. Higher gearing and allocation to mainland China are justified by good valuation. Maintain BUY. Target price: HK$50.70.
WHAT’S NEW
• LINK REIT announced the acquisition of the remaining 50% stake in Qibao Vanke Plaza on 9 Feb 24. Management hosted a conference call regarding the acquisition.
ESSENTIALS
• A bargain deal funded mainly with offshore HK$. Link REIT announced the acquisition of the remaining 50% stake in Shanghai Qibao Vanke Plaza. The agreed property value at acquisition is Rmb5.2b, which: a) is 24% lower than the latest market valuation; and b) implies an NPI yield of over 6.5%. As a comparison, when LINK REIT acquired the first 50% stake of Qibao Vanke Plaza in Feb 21, the NPI yield was around 4.5%. Considering that: a) the property’s operation has improved during 2021-23; and b) China’s interest rate is declining, we think the latest acquisition is a bargain deal. However, it is noteworthy that the acquisition will mainly be funded with offshore HK$.
• Qibao Vanke Plaza is a high-quality asset in mainland China with: a) occupancy rate at 94.5% as of Jan 24; b) rental reversion at 11.2% in 2023, c) occupancy cost below 20% and improving; d) revenue and net profit of the property increasing by 16.9%/54.3% respectively during 2021-23; e) no need for major asset enhancement initiative; and f) LINK REIT’s management expecting high single digit rental reversion in the future, which will drive 2-3% NPI growth.
STOCK IMPACT
• Impact on LINK REIT. Considering the NPI yield at acquisition (>6.5%) is higher than onshore funding cost of 4%, we expect the deal will increase FY25 DPU by 0.74%. The deal also leads to higher pro-forma net gearing of 20.4% (vs 18.0% before) and higher allocation to mainland China of 14.4% (vs 13.3% before). Management guided to cap allocation to mainland China at +/-15%. Lastly, a sell-down adjustment was applied, that If LINK REIT sells all or part of the interests in Qibao Vanke Plaza within 12 months post the completion date of the deal, Vanke will share part of the profit above Rmb5.2b.
