Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Index Rebalance

The Hang Seng Indexes Company Limited (HSIL) announced the results of its review of the Hang Seng Family of Indexes post market close on 26 February. The constituent changes will be effective after the close of trading on 12 March.For the <a href="https://www.smartkarma.com/entities/hong-kong-hang-seng-index" target="_blank" data-smartkarma-citation="entities:22899:1" rel="noopener">Hong Kong Hang Seng Index (HSI INDEX)</a>, there are 3 inclusions - <a href="https://www.smartkarma.com/entities/alibaba-health-information-technology-ltd" target="_blank" data-smartkarma-citation="entities:453:1" rel="noopener">Alibaba Health Information Technology (241 HK)</a>, <a href="https://www.smartkarma.com/entities/longfor-properties" target="_blank" data-smartkarma-citation="entities:8149:1" rel="noopener">Longfor Properties (960 HK)</a> and <a href="https://www.smartkarma.com/entities/haidilao-international-holding-ltd" target="_blank" data-smartkarma-citation="entities:27044:1" rel="noopener">Haidilao (6862 HK)</a>. This takes the number of index constituents to 55 and sets the stage for a further increase in the number of stocks as a part of the market consultation, the conclusions of which are to be announced on 1 March.One-way turnover is estimated at 2.65% and will result in a one-way trade of HK$6.08bn. The highest impact is on <a href="https://www.smartkarma.com/entities/longfor-properties" target="_blank" data-smartkarma-citation="entities:8149:1" rel="noopener">Longfor Properties (960 HK)</a> while the impact on <a href="https://www.smartkarma.com/entities/alibaba-health-information-technology-ltd" target="_blank" data-smartkarma-citation="entities:453:1" rel="noopener">Alibaba Health Information Technology (241 HK)</a> and <a href="https://www.smartkarma.com/entities/haidilao-international-holding-ltd" target="_blank" data-smartkarma-citation="entities:27044:1" rel="noopener">Haidilao (6862 HK)</a> is lower, though still substantial.There are only 10 trading days to implementation of the changes, so the three stocks should move up on Monday and outperform their peers till implementation date.Hang Seng Indexes is scheduled to announce the conclusions of the market consultation on Monday, 1 March and there will be a lot more changes to the index. These changes should commence at the June 2021 review and will most likely be implemented in 4 tranches, concluding at the March 2022 review.

The Hang Seng Indexes Company Limited (HSIL) announced the results of its review of the Hang Seng Family of Indexes post market close on 26 February. The constituent changes will be effective after the close of trading on 12 March.For the Hong Kong Hang Seng Index (HSI INDEX), there are 3 inclusions - Alibaba Health Information Technology (241 HK), Longfor Properties (960 HK) and Haidilao (6862 HK). This takes the number of index constituents to 55 and sets the stage for a further increase in the number of stocks as a part of the market consultation, the conclusions of which are to be announced on 1 March.One-way turnover is estimated at 2.65% and will result in a one-way trade of HK$6.08bn. The highest impact is on Longfor Properties (960 HK) while the impact on Alibaba Health Information Technology (241 HK) and Haidilao (6862 HK) is lower, though still substantial.There are only 10 trading days to implementation of the changes, so the three stocks should move up on Monday and outperform their peers till implementation date.Hang Seng Indexes is scheduled to announce the conclusions of the market consultation on Monday, 1 March and there will be a lot more changes to the index. These changes should commence at the June 2021 review and will most likely be implemented in 4 tranches, concluding at the March 2022 review.

Hang Seng Index Rebalance: Three Adds; Market Consultation Conclusions on 1 March

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

*New Mainland China Deal Doesn’t Pass Smell Test: Link REIT (823.HK) [Link] announced the acquisition of a 50% stake in Qibao Vanke Plaza (QVP) - a retail shopping mall in Minhang, Shanghai, for CNY 2.8 bn. QVP will remain the shopping mall operator, while Link will have an equal number of board seats and committee representatives as the shopping mall operator. While its unclear if the numbers make any sense given the rental reversion and massive re-tenanting that would have to take place to cover the 3.0% plus per annum CNY financing cost, the lack of control over this property also raises significant risks for Link; and*Fundamental Risks Remain: Link remains in a real quandary - it continues to operate at a loss. Losses were attributed to negative fair value marks. While results on an operating basis were positive, the trend unfortunately remains negative for Link – 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 – begging the question of why mainland China acquisitions now?

*New Mainland China Deal Doesn’t Pass Smell Test: Link REIT (823.HK) [Link] announced the acquisition of a 50% stake in Qibao Vanke Plaza (QVP) - a retail shopping mall in Minhang, Shanghai, for CNY 2.8 bn. QVP will remain the shopping mall operator, while Link will have an equal number of board seats and committee representatives as the shopping mall operator. While its unclear if the numbers make any sense given the rental reversion and massive re-tenanting that would have to take place to cover the 3.0% plus per annum CNY financing cost, the lack of control over this property also raises significant risks for Link; and*Fundamental Risks Remain: Link remains in a real quandary - it continues to operate at a loss. Losses were attributed to negative fair value marks. While results on an operating basis were positive, the trend unfortunately remains negative for Link – 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 – begging the question of why mainland China acquisitions now?

*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.

*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 Set Of Metrics:Link REIT (823.HK) [Link] announced a poor set of FY 1Q21 operating metrics, which in fairness were well flagged as weak operational results and negative reversion appear to have been the culprits; and *Negative Market Readacross: Implications for retail landlords are such that there are risks of further rent concessions, negative reversions, and higher vacancies. Discretionary retail landlords could see greater impact than mass market.

*Weak Set Of Metrics:Link REIT (823.HK) [Link] announced a poor set of FY 1Q21 operating metrics, which in fairness were well flagged as weak operational results and negative reversion appear to have been the culprits; and *Negative Market Readacross: Implications for retail landlords are such that there are risks of further rent concessions, negative reversions, and higher vacancies. Discretionary retail landlords could see greater impact than mass market.

Link REIT – Tough Operating Environment To Persist

Hong Kong

Sun Hung Kai Properties is a leading diversified real estate developer in Hong Kong, specializing in the development of residential, office, and retail properties for sale and investment. The company also operates in property management, hotels, telecommunications, transport, and infrastructure. Headquartered in Wan Chai, Hong Kong, the group was founded in 1963.

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Sun Hung Kai Properties (16 HK)

Hang Seng Index Rebalance: Three Adds; Market Consultation Conclusions on 1 March

There are 3 inclusions to the HSI - Ali Health, Longfor Prop and Haidilao. With 10 days to implementation, the stocks should outperform....

Brian Freitas

Link REIT – Same Old, Same Old

LINK REIT: Link is acquiring a 50% stake in Qibao Vanke Plaza (QVP) in China. Its unclear if the numbers make sense given the variables, the lack...

Thomas J. Monaco

MTR Corp – Trainwreck

MTR CORP: MTR warned that it has faced significant operational and valuation challenges, which have led to a major loss. The border closure is...

Thomas J. Monaco

Link REIT – Bread and Butter Melting

LINK REIT: Almost Nothing Is Going Right For Link REIT. Rental Reversion Rates Weakening In Hong Kong; FV Marks Remain Negative; and Capital...

Thomas J. Monaco

Link REIT – Tough Operating Environment To Persist

*Weak Set Of Metrics: Link REIT (823.HK) [Link] announced a poor set of FY 1Q21 operating metrics, which in fairness were well flagged as weak...

Thomas J. Monaco

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