Fortune Reit rebound in HK retail sales in Nov 2012

Fair value HK$7.28


• Retail rebounds in Nov
• Active AEI programme
• Maintain BUY

Strong tourist arrivals boost retail
HK retail sales by volume grew by 8.1% YoY in Nov 2012, representing a rebound from the 3.6% YoY growth in Oct 2012. For 11M12, retail sales by volume grew by a solid 7.1% YoY. Tourist arrivals were a contributing factor, growing by 18.7% YoY in Nov (vs. +15.8% YoY for 10M12). 11M12 tourist arrivals totaled a whopping 44m. As we have previously calculated, tourists account for one quarter of overall HK retail sales (in terms of value), with mainland Chinese tourists accounting for one fifth of overall retail sales. The long term growth of the Chinese economy bodes well for HK retail properties.

Healthy rental growth to continue
Portfolio passing rent for FRT’s original portfolio (excluding the two properties purchased in Feb 2012) was up by 8.4% YoY for 9M12. We believe that for 2013, the increase in the passing rent will also be in the healthy high single digit percentages, particularly because of the recent completion of the HK$100m AEI at Fortune City One, its largest asset, with target ROI of

Fortune Reit - HK retail sales grew slower in May

Fair value HK$5.22


Retail rents climbed in Apr
The HK private retail rent and price indexes set new records in Apr, the third consecutive highs starting from Feb. Compared to the Mar figures, the rent index and the price index were up 1.4% and 2.9% respectively. New Territories, where the majority of Fortune’s malls are located, saw average private retail rents climb a respectable 15.2% YoY in Apr.

Retail sales grew slower in May
For May, retail sales in HK climbed 8.8% YoY to HK$36.0b. While this is the lowest pace of growth since Sep 2009 (excluding seasonal distortions during Jan and Feb each year due to Chinese New Year), we believe that Fortune will continue to have good positive rental reversions this year. China’s slowdown is manifesting itself in the decline in HK luxury sales - jewellery, watches and clocks, and valuable gifts saw a 2.9% YoY decline in sales volume in May.

Supermarket sales beat luxury sales
In contrast, supermarket sales climbed

Fortune Reit with healthy balance sheet

Fair value HK$5.22

Surpassing forecasts
1Q12 results were above our and the street’s forecasts. Net property income of HK$185m was up 15.1% YoY; 9.9ppt came from organic growth, while the other 5.2ppt was from two properties acquired in mid Feb. Retail continues to remain a bright spot in the HK economy. Average passing rent for the original portfolio rose 11% YoY due to good rental reversions in 2011. Net property income margin declined from 73.6% to 71.5% mainly due to one-off costs associated with the acquisition. DPU climbed 14% QoQ to 7.78 HK cents. With the next three quarters seeing full contributions from the two properties, we raise our FY12 DPU forecast from 29.4 HK cents to 31.7 HK cents, up 20.5% YoY from FY11 DPU.

Strong financial position
As of 31 Mar, Fortune’s effective interest cost is at