HK/China Equity Long-Short

Osbert Tang, CFA

Equity Capital Markets

In this Insight, we take a look on <a href="https://www.smartkarma.com/entities/sf-real-estate-investment-trust" target="_blank" data-smartkarma-citation="entities:31496:1" rel="noopener">SF Real Estate Investment Trust (SF HK)</a> (SF REIT), which is a proposed REIT listing in Hong Kong with <a href="https://www.smartkarma.com/entities/maanshan-dingtai-rare-a" target="_blank" data-smartkarma-citation="entities:4128:1" rel="noopener">S.F. Holding (002352 CH)</a> (SFH) as its sponsor. The REIT will initially have three logistics properties in its portfolio, one in Hong Kong and two in China (Foshan and Wuhu). Having a gross lettable area of 307,990.8 sq.m., the appraised value of these properties amounted to HK$6.1bn.On balance and based on the information in the application proof prospectus, we view the REIT positively. Key positives are: 1.) quality assets; 2.) stable profit and cash flow; and 3.) potential injection. On the other hand, the key negatives are: 1.) focus on HK; 2.) reliance on SFH; and 3.) small size.

In this Insight, we take a look on SF Real Estate Investment Trust (SF HK) (SF REIT), which is a proposed REIT listing in Hong Kong with S.F. Holding (002352 CH) (SFH) as its sponsor. The REIT will initially have three logistics properties in its portfolio, one in Hong Kong and two in China (Foshan and Wuhu). Having a gross lettable area of 307,990.8 sq.m., the appraised value of these properties amounted to HK$6.1bn.On balance and based on the information in the application proof prospectus, we view the REIT positively. Key positives are: 1.) quality assets; 2.) stable profit and cash flow; and 3.) potential injection. On the other hand, the key negatives are: 1.) focus on HK; 2.) reliance on SFH; and 3.) small size.

SF REIT Pre-IPO: Initial Thoughts on S.F. Holding's (002352 CH) Logistics REIT In HK

Silver Point

Thomas J. Monaco

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

Equity Bottom-Up

*Profit Warning: MTR Corp (66.HK) [MTR] warned that it has faced significant operational and valuation challenges, which have led to its first loss since listing two decades ago. Losses of negative HKD 4.8 bn are likely from COVID-19 and a troubled mega project; and*2021 To Remain Very Challenging: The decision by the Hong Kong government to close all but three border checkpoints since the beginning of 2020 is likely to remain in place through much of 2021 as business conditions continue to worsen with the SAR now battling its now fourth wave of COVID-19. At it stands, ridership is down 31.5% YOY in 2020.

*Profit Warning: MTR Corp (66.HK) [MTR] warned that it has faced significant operational and valuation challenges, which have led to its first loss since listing two decades ago. Losses of negative HKD 4.8 bn are likely from COVID-19 and a troubled mega project; and*2021 To Remain Very Challenging: The decision by the Hong Kong government to close all but three border checkpoints since the beginning of 2020 is likely to remain in place through much of 2021 as business conditions continue to worsen with the SAR now battling its now fourth wave of COVID-19. At it stands, ridership is down 31.5% YOY in 2020.

*Weak Conference Highlighted By What Wasn’t Discussed: Link REIT (823.HK) [Link] discussed its continued operational and strategic challenges through the COVID-19 pandemic. Hong Kong shopping mall occupancy remains between 95%-96%, with rental reversion rates still tracking at negative 2.6%. Additional deals from mainland China expected to be yield accretive; and*New Acquisition Strategy: While it sounds ridiculous, Link has apparently had an epiphany with respect to evaluating portfolio acquisitions based on growth and risk/reward. If this is now the case, what was management actually thinking with The Cabot in London on July 26, 2020.

*Weak Conference Highlighted By What Wasn’t Discussed: Link REIT (823.HK) [Link] discussed its continued operational and strategic challenges through the COVID-19 pandemic. Hong Kong shopping mall occupancy remains between 95%-96%, with rental reversion rates still tracking at negative 2.6%. Additional deals from mainland China expected to be yield accretive; and*New Acquisition Strategy: While it sounds ridiculous, Link has apparently had an epiphany with respect to evaluating portfolio acquisitions based on growth and risk/reward. If this is now the case, what was management actually thinking with The Cabot in London on July 26, 2020.   

*Another Weak Set Of Metrics: Link REIT (823.HK) [Link REIT] reported negative FY 1H21 bottom-line results of HKD 4.1 bn. While still a loss, this figure represents about 17.2% of losses (HKD 23.9 bn) posted in FY 2H20. Losses in both periods were attributed to negative fair value marks of HKD 7.3 bn and HKD 27.6 bn, respectively. While results on an operating basis were positive, the trend unfortunately remains negative for Link REIT – declining HKD 564 mn (15.1%). The poor operating results were driven by weaker Hong Kong rental income which declined HKD 186 mn (5.4%) HOH; and a HKD 55 mn (9.8%) decline in mainland Chinese property-related revenues;*Worries Abound: Weaker than expected Hong Kong retail operations leading to lower level of rental reversions; and continued negative revaluation of property due to lower rents and/or higher cap rates remain long-term risks; and*Poor Capital Management: On July 26, 2020, Link announced its proposed acquisition of a Grade A office building, The Cabot at 25 Cabot Square at Canary Wharf in London. This transaction makes little sense for Link REIT on a number of levels. Management also reiterated its 2025 target, suggesting that intends to add to the existing "core" portfolio while adding "core-plus" and "value-add" assets, which would include mainland Chinese Tier-1 cities, the United Kingdom, Australia, Singapore and Japan. Link REIT has also completed the 60 mn share buyback. Instead of weighing a buybacks return versus new investment ROI, management views share buybacks as a mechanism to defend its shares against short-selling.

*Another Weak Set Of Metrics: Link REIT (823.HK) [Link REIT] reported negative FY 1H21 bottom-line results of HKD 4.1 bn. While still a loss, this figure represents about 17.2% of losses (HKD 23.9 bn) posted in FY 2H20. Losses in both periods were attributed to negative fair value marks of HKD 7.3 bn and HKD 27.6 bn, respectively. While results on an operating basis were positive, the trend unfortunately remains negative for Link REIT – declining HKD 564 mn (15.1%). The poor operating results were driven by weaker Hong Kong rental income which declined HKD 186 mn (5.4%) HOH; and a HKD 55 mn (9.8%) decline in mainland Chinese property-related revenues;*Worries Abound: Weaker than expected Hong Kong retail operations leading to lower level of rental reversions; and continued negative revaluation of property due to lower rents and/or higher cap rates remain long-term risks; and*Poor Capital Management: On July 26, 2020, Link announced its proposed acquisition of a Grade A office building, The Cabot at 25 Cabot Square at Canary Wharf in London. This transaction makes little sense for Link REIT on a number of levels. Management also reiterated its 2025 target, suggesting that intends to add to the existing "core" portfolio while adding "core-plus" and "value-add" assets, which would include mainland Chinese Tier-1 cities, the United Kingdom, Australia, Singapore and Japan. Link REIT has also completed the 60 mn share buyback. Instead of weighing a buybacks return versus new investment ROI, management views share buybacks as a mechanism to defend its shares against short-selling.

*Weak Numbers Expected: Link REIT (823.HK) [Link] hosted a pre-blackout investor presentation on Oct 8, 2020.The outcome was generally a negative earnings pre-announcement whereby DPU is set to decline 7.6% - the first dividend decline since Link was listed in 2005. The culprit for the poor pre-announcement was a negative rental reversion rate and increased rental concessions (which we believe are not one off) in Hong Kong, factors which are anticipated to continue to place intense pressure on results for the foreseeable future; and  *Hong Kong Pressures Are Very Apparent: This recent London transaction is so far away from Link REIT’s core competencies speaks volumes as to where it believes its core Hong Kong retail business is heading. This doesn’t seem like smart diversification and smells more of panic leverage when one considers the price and location of this deal. We are hopeful that management doesn’t let the large cash position burn another hole its pocket.

*Weak Numbers Expected: Link REIT (823.HK) [Link] hosted a pre-blackout investor presentation on Oct 8, 2020.The outcome was generally a negative earnings pre-announcement whereby DPU is set to decline 7.6% - the first dividend decline since Link was listed in 2005. The culprit for the poor pre-announcement was a negative rental reversion rate and increased rental concessions (which we believe are not one off) in Hong Kong, factors which are anticipated to continue to place intense pressure on results for the foreseeable future; and  *Hong Kong Pressures Are Very Apparent: This recent London transaction is so far away from Link REIT’s core competencies speaks volumes as to where it believes its core Hong Kong retail business is heading. This doesn’t seem like smart diversification and smells more of panic leverage when one considers the price and location of this deal. We are hopeful that management doesn’t let the large cash position burn another hole its pocket.   

Hong Kong

Link REIT is Asia's largest real estate investment trust, managing a diversified portfolio of retail facilities, car parks, offices, and logistics assets across Hong Kong, Chinese Mainland, Australia, Singapore, and the UK. The company was founded in 2004 and is headquartered in Hong Kong.

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Link REIT (823 HK)

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