Fortune REIT - Global Research

l Equity Research l
Singapore l Real Estate Investment Trusts
12 November 2014
Fortune REIT
High rental reversion rate continues
 Fortune REIT reported strong 3Q14 results. 3Q14 DPU was OUTPERFORM (unchanged)
HKD 0.1030, up 24.4% YoY, mainly driven by robust PRICE as of 11 Nov 2014
PRICE TARGET
reversion (24.6% YTD) in its existing portfolio.
HKD 7.25
HKD 7.62
 We continue to like Fortune’s exposure to suburban malls
for the segment’s defensiveness, non-discretionary focus,
rental growth from a low base and continuous AEI.
 Its occupancy rate dropped to 97.1% due to fractional
vacancy from AEIs at Belverdere, which commenced in
September. Excluding this, the occupancy rate of the rest of
the portfolio was high at 99.1%.
UP/DOWNSIDE
+5.1%
Bloomberg code
Reuters code
FRT SP
FORT.SI
Market cap
12-month range
HKD 13,503mn (USD 1,741mn)
HKD 5.60 - 7.53
EPU adj. est. change
2014E
-
2015E
-
 Maintain Outperform. Including a 5.9% 2015E dividend yield,
our price target implies potential return of 11%.
An encouraging set of 3Q14 results. Fortune reported 3Q14
DPU of HKD 0.1030, up 24.4% YoY. NPI rose 33% YoY to HKD
287mn. Average passing rent was up 8.5% YoY to HKD 35.7psf.
Reversion rose to 24.6% YTD from 21.2% in 1H14. Excluding
Kingswood, the rental reversion rate was close to 20% and for
Kingswood alone, it was above 30%, management said.
Higher cost-to-revenue ratio in 3Q14. The cost-to-revenue ratio
was 29.1% in 3Q14 (1H14: 26.3%). Management attributed this to
seasonality from higher utility expenses in the summer, and higher
leasing commission fees for more leasing activity. We expect the
cost-to-revenue ratio to fall in 4Q14, as only 13.1% of GFA will be
renewed in 4Q14 vs. 16.7% in 3Q14. Management expects the
cost-to-revenue ratio to remain at 26-28% for the full year.
Slight drop in NAV due to seasonality. NAV per unit dropped
0.18% to HKD 10.99 in 3Q14 from HKD 11.01 in 1H14, while
valuation remains unchanged. This is mainly due to a decline in
cash after paying dividends in August. As seen in Figure 5, this
decline in NAV is the lowest in the past 10 years.
Kingswood continues to shine. After the acquisition of
Kingswood, Fortune’s passing rent rose 10%, without any AEI.
Management said it is conducting a feasibility study on the mall
and may undergo AEI, likely in 2015-16; we are confident about its
rental growth potential, as its spot rent is 30% below the
neighbouring mall owned by Link REIT. This should bode well for
Fortune’s rental reversion in the coming two years.
Reiterate Outperform. Fortune is currently trading at 5.9% 2015E
Year-end: December
Revenue (HKD mn)
Net property income (HKD mn)
NPI margin (%)
Associates and JCEs (HKD mn)
Revaluation gains (HKD mn)
Interest expense (HKD mn)
Management fees (HKD mn)
Net profit (HKD mn)
Net profit adj. (HKD mn)
Net profit adj. growth (%)
EPU (HK¢)
EPU adj. (HK¢)
EPU growth adj. (%)
DPU (HK¢)
DPU growth (%)
EV/EBIT (x)
Net debt / assets (%)
PBR (x)
PER adj. (x)
Dividend yield (%)
Net asset value/unit (HK¢)
Prem./(disc.) to NAV (%)
2013
1,317
928
70.5
0
(154)
(71)
561
560
33.1
31.47
31.42
26.5
36.00
11.3
22.1
29.6
0.61
21.5
5.3
-
2014E
1,694
1,200
70.8
0
(263)
(89)
676
676
20.8
36.15
36.15
15.0
40.75
13.2
20.9
30.7
0.70
20.1
5.6
-
2015E
1,763
1,249
70.8
0
(260)
(90)
718
718
6.2
38.10
38.10
5.4
42.72
4.8
20.2
30.4
0.69
19.0
5.9
-
2016E
1,824
1,291
70.8
0
(323)
(91)
700
700
-2.6
36.82
36.82
-3.4
41.46
-2.9
19.6
30.1
0.69
19.7
5.7
-
Source: Company, Standard Chartered Research estimates
Share price performance
Fortune REIT
STRAITS TIMES INDEX (rebased)
7.6
6.5
5.4
Nov-13
Feb-14
Share price (%)
Ordinary shares
Relative to index
Relative to sector
Major shareholder
Free float
Average turnover (USD)
May-14
Aug-14
Nov-14
-1 mth
-3 mth -12 mth
5
3
15
3
3
11
Cheung Kong Holdings Ltd (28.4%)
72%
412,795
Source: Company, FactSet
dividend yield versus the 10-year HK EFN yield of c.1.87%.
Esther Liu
+852 3983 8514
Equity Research
Standard Chartered Bank (HK) Limited
Important disclosures can be found in the Disclosures Appendix
All rights reserved. Standard Chartered Bank 2014
FRT SP
HKD 7.25
HKD 7.62
http://research.standardchartered.com
Equity Research l Fortune REIT
Figure 1: Summary of 3Q14 results
HKD mn, year-end Dec
Total gross revenue
Property management expenses
Other operating expenses
3Q13A
315.7
-7.3
-86.2
3Q14A
416.6
-9.7
-111.3
YoY % chg
32%
34%
29%
Property income pre managers
fees
Manager's Performance fees
Net property income
222.3
295.6
33%
-6.7
215.6
-8.9
286.7
34%
33%
-34.1
-16.8
-22.6
1.9
144.0
-31.0
113.1
40.3
153.3
0.0828
27.7%
-53.3
-23.4
2.6
2.8
215.4
-41.9
173.5
19.6
193.1
0.1030
29.1%
56%
39%
-111%
48%
50%
35%
53%
-51%
25.9%
24.4%
Interest expenses
Manager's base fees
Other trust expenses/income
Interest income
Pre-tax profit
Tax
Net profit
Adjustment for non-cash items
Profit for distribution
Distribution per unit
Cost-to-revenue ratio
YTD through 3Q
as a % of FY14E Remarks
73% Strong reversion of 24.6%
73%
73% Higher expenses due mainly to higher utility costs
and higher leasing commission in 3Q14
73%
72% NPI rose 33 % to HKD 286.7mn, of which 8.8% was
from organic growth and 24% from the acquisition of
Kingswood last year
61%
76%
288%
164%
71%
81%
69%
76%
Cost-to-revenue ratio of 29.1% (compared to 26.3%
in 1H14) is due mainly to higher utility costs and
higher leasing commission in 3Q14. Management
guided for 26-28% for the full year
Source: Fortune REIT, Standard Chartered Research
Figure 2: Occupancy rate and average passing rent
Figure 3: Rental reversion rate
Rental reversion rate (YTD)
Occupancy rate (overall porfolio) - LHS
105%
Avg passing rent (HKD psf/month) - RHS
100%
40
30
95%
90%
20
85%
10
80%
30%
25%
20%
15%
10%
5%
0%
2Q05
4Q05
2Q06
4Q06
2Q07
4Q07
2Q08
4Q08
2Q09
4Q09
2Q10
4Q10
2Q11
4Q11
2Q12
4Q12
2Q13
4Q13
2Q14
0
2Q04
4Q04
2Q05
4Q05
2Q06
4Q06
2Q07
4Q07
2Q08
4Q08
2Q09
4Q09
2Q10
4Q10
2Q11
4Q11
2Q12
4Q12
2Q13
4Q13
2Q14
75%
Source: Fortune REIT, Standard Chartered Research
Source: Fortune REIT,, Standard Chartered Research
Figure 4: NAV has been increasing
Figure 5: The NAV decline in 3Q14 was due to seasonality
(after paying dividends in August)
The 0.18% drop in NAV is the lowest in the past 10 years
NAV/unit (HK$)
12
HKD/ unit
10
8
6
4
2
1Q04
3Q04
1Q05
3Q05
1Q06
3Q06
1Q07
3Q07
1Q08
3Q08
1Q09
3Q09
1Q10
3Q10
1Q11
3Q11
1Q12
3Q12
1Q13
3Q13
1Q14
0
Source: Fortune REIT, Standard Chartered Research
12 November 2014
NAV/unit (HKD)
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2Q
5.22
6.75
7.70
8.52
9.02
7.89
5.70
7.52
8.34
10.01
11.01
3Q
5.12
6.68
7.59
8.41
8.90
7.77
5.67
7.48
8.32
9.73
10.99
QoQ (%)
-1.92%
-1.04%
-1.43%
-1.29%
-1.33%
-1.52%
-0.53%
-0.53%
-0.24%
-2.80%
-0.18%
Source: Standard Chartered Research
2
Equity Research l Fortune REIT
Income statement (HKD mn)
Cash flow statement (HKD mn)
Year-end: Dec
Revenue
Property expenses
Net property income
NPI growth (%)
Management fees
Other income
Other expenses
EBIT
2012
1,114
(325)
788
22.8
(80)
(54)
655
2013
1,317
(389)
928
17.8
(71)
(15)
843
2014E
1,694
(495)
1,200
29.2
(89)
(18)
1,093
2015E
1,763
(515)
1,249
4.1
(90)
(18)
1,140
2016E
1,824
(533)
1,291
3.4
(91)
(18)
1,181
Interest expense
Interest income
Associates
JCEs
Property reval. gain/(loss)
Other exceptional items
Pre-tax profit
Taxation
Minority interests
(129)
6
0
532
(112)
-
(154)
5
1
695
(134)
-
(263)
5
0
834
(158)
-
(260)
5
0
885
(167)
-
(323)
5
0
863
(164)
-
420
420
549
549
561
560
642
642
676
676
765
765
718
718
808
808
700
700
791
791
Year-end: Dec
Investment properties
PP&E
Associates and JCEs
Other non-current assets
Total non-current assets
Cash & equivalents
Short-term investments
Prop. under dev./held for sale
Inventory
Trade and other receivables
Other current assets
Total current assets
Total assets
2012
20,208
0
0
20,208
578
0
55
0
633
20,841
2013
29,338
0
67
29,405
858
0
67
0
925
30,330
2014E
29,711
0
67
29,778
514
0
98
(0)
612
30,390
2015E
30,088
0
67
30,155
496
0
102
0
598
30,754
2016E
30,469
0
67
30,536
459
0
106
0
565
31,101
Short-term debt
Pre-sale deposits
Trade and other payables
Income taxes payable
Other current liabilities
Total current liabilities
Long-term debt
Deferred tax
Other long-term liabilities
Total long-term liabilities
Total liabilities
Shareholders' funds
Minority interests
Total equity
Total liabilities and equity
940
692
15
1,647
3,879
193
145
4,217
5,864
14,978
0
14,978
20,841
970
897
106
1,973
8,860
346
41
9,248
11,221
19,109
0
19,109
30,330
970
548
106
1,624
8,860
370
41
9,271
10,895
19,496
0
19,496
30,390
970
570
106
1,646
8,860
395
41
9,296
10,942
19,811
0
19,811
30,754
970
590
106
1,665
8,860
420
41
9,321
10,986
20,115
0
20,115
31,101
4,819
4,241
1,700
9,830
8,972
1,863
9,830
9,316
1,877
9,830
9,334
1,892
9,830
9,371
1,908
Net profit
Net profit adj.
Distributable income
Distributed income
Balance sheet (HKD mn)
Gross debt
Net debt (cash)
YE fully diluted units (mn)
Year-end: Dec
EBIT
Depreciation & amortisation
Net interest
Tax paid
Changes in working capital
Others
Cash flow from operations
2012
655
0
123
(84)
39
100
731
2013
843
0
149
(112)
36
37
804
2014E
1,093
0
258
(134)
(319)
89
729
2015E
1,140
0
255
(142)
26
90
1,115
2016E
1,181
0
318
(139)
23
91
1,157
Capex
Acquisitions & Investments
Disposals
Others
Cash flow from investing
(1,860)
10
(1,851)
(5,733)
5
(5,728)
(80)
5
(75)
(80)
5
(75)
(80)
5
(75)
Dividends
Issue of shares
Change in debt
Other financing cash flow
Cash flow from financing
(496)
0
1,620
(158)
966
(588)
958
5,053
(219)
5,204
(734)
0
0
(263)
(998)
(798)
0
0
(260)
(1,057)
(795)
0
0
(323)
(1,118)
Change in cash
Exchange rate effect
Free cash flow
(154)
731
280
804
(344)
729
(18)
1,115
(37)
1,157
2012
2013
2014E
2015E
2016E
58.8
37.8
22.5
31.7
30.6
30.6
23.2
130.2
64.0
42.5
18.3
33.4
26.7
26.5
11.3
114.4
64.5
39.9
28.6
20.6
14.8
15.0
13.2
112.7
64.7
40.7
4.1
6.2
5.4
5.4
4.8
112.1
64.8
38.4
3.4
-2.6
-3.4
-3.4
-2.9
112.6
3.0
3.7
2.2
3.3
3.5
2.2
3.5
3.8
2.2
3.7
3.9
2.3
3.5
4.0
2.3
28.3
20.3
25.1
5.1
0.4
47.0
29.6
34.7
5.5
0.5
47.8
30.7
34.2
4.1
0.4
47.1
30.4
33.8
4.4
0.4
46.6
30.1
33.4
3.7
0.3
24.85
24.85
32.35
31.47
31.42
36.00
36.15
36.15
40.75
38.10
38.10
42.72
36.82
36.82
41.46
17.9
20.1
0.72
6.5
22.1
21.5
0.61
5.3
20.9
20.1
0.70
5.6
20.2
19.0
0.69
5.9
19.6
19.7
0.69
5.7
Financial ratios and other
Year-end: Dec
Operating ratios
EBIT margin (%)
Net margin adj. (%)
Sales growth (%)
Net income growth (%)
EPU growth (%)
EPU growth adj. (%)
DPU growth (%)
DPU/EPU (%)
Efficiency ratios
ROE (%)
ROCE (%)
ROA (%)
Leverage ratios
Net gearing (%)
Net debt/assets (%)
Net asset value/unit (HK¢)
Debt/capital (%)
Interest cover (x)
Current ratio (x)
Per share
EPU (HK¢)
EPU adj. (HK¢)
DPU (HK¢)
Valuation
EV/EBIT (x)
PER (x)
PBR (x)
Dividend yield (%)
Source: Company, Standard Chartered Research estimates
12 November 2014
3
Equity Research l Fortune REIT
Disclosures appendix
The information and opinions in this report were prepared by Standard Chartered Bank (Hong Kong) Limited, Standard Chartered Bank Singapore Branch, Standard
Chartered Securities (India) Limited, Standard Chartered Securities Korea Limited and/or one or more of its affiliates (together with its group of companies, ”SCB”)
and the research analyst(s) named in this report. THIS RESEARCH HAS NOT BEEN PRODUCED IN THE UNITED STATES.
Analyst Certification Disclosure: The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed and
attributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or other
subject matter as appropriate; and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views
contained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisals of analysts.
Where “disclosure date” appears below, this means the day prior to the report date. All share prices quoted are the closing price for the business day prior to the
date of the report, unless otherwise stated.
Recommendation and price target history for Fortune REIT
HKD
8.43
9
7.38
5
6.33
5.29
8
7
10
11
13
12
6
14
4
1
3
2
4.24
3.19
Nov-11
Date
Feb-12
May-12
Recommendation
Aug-12
Price target
Nov-12
Feb-13
Date
1 21 Nov 11 OUTPERFORM
4.57
6 31 Oct 12
2 30 Jan 12
OUTPERFORM
4.45
3 10 May 12 OUTPERFORM
4 23 Jul 12
OUTPERFORM
May-13
Recommendation
Nov-13
Price target
Feb-14
Date
May-14
Recommendation
Aug-14
Nov-14
Price target
6.40 11 12 Nov 13 OUTPERFORM
8.08
7 20 Dec 12 OUTPERFORM
6.90 12 25 Jan 14
OUTPERFORM
7.50
4.65
8 25 Jan 13
OUTPERFORM
7.00 13 26 Jul 14
OUTPERFORM
7.70
5.10
9 10 May 13 OUTPERFORM
8.40 14 22 Oct 14
OUTPERFORM
7.62
5 20 Sep 12 OUTPERFORM
6.25 10 10 Jul 13
Source: FactSet prices, SCB recommendations and price targets
OUTPERFORM
Aug-13
OUTPERFORM
8.20
Recommendation Distribution and Investment Banking Relationships
% of covered companies
currently assigned this rating
% of companies assigned this rating with which SCB has provided
investment banking services over the past 12 months
OUTPERFORM
55.6%
10.8%
IN-LINE
33.6%
9.4%
UNDERPERFORM
As of 30 September 2014
10.8%
9.7%
Research Recommendation
Terminology
OUTPERFORM (OP)
IN-LINE (IL)
UNDERPERFORM (UP)
Definitions
The total return on the security is expected to outperform the relevant market index by 5% or more over the next 12 months
The total return on the security is not expected to outperform or underperform the relevant market index by 5% or more over the next
12 months
The total return on the security is expected to underperform the relevant market index by 5% or more over the next 12 months
SCB uses an investment horizon of 12 months for its price targets.
Additional information, including disclosures, with respect to any securities referred to herein will be available upon request. Requests should be sent to
[email protected].
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12 November 2014
4
Equity Research l Fortune REIT
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12 November 2014
5

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