Fortune – OCBC

DOWNGRADE TO HOLD

• Jun retail sales could signal turnaround
  
• Resilient non-discretionary purchases
  
• Downgrade to HOLD on valuation Grounds
  

HK Jun retail sales beat expectations

In Jun, the value of HK retail sales climbed 11.0% YoY due to resilient local demand and an increase in the number of tourists. The rise was greater than the comparatively low 8.7% YoY increase seen in May, and was above the 8.2% median forecast from a Dow Jones Newswires poll. Given that the indexes for private retail rents and prices for May were up 2.4% and 3.8% MoM, we are mildly optimistic that there could be further increases in the months ahead.

Non-discretionary purchases

FRT is arguably exposed to one of the more resilient sectors in the HK real estate market – suburban retail. We note that 57.5% of the gross rental income is in the non-discretionary categories (Services & Education, F&B, Supermarkets, Homewares, Wet Markets and Community Services). We have just visited Fortune City One, Ma On Shan Plaza, Fortune Metropolis and Provident Square, which was recently acquired in Feb 2012, and observed that a substantial component of FRT’s tenant sales were resilient in nature, e.g. F&B outlets were quite full during weekday lunch and dinner periods.

Attractive yield compared to The Link

FRT’s closest peer is The Link REIT. FRT is the purer HK retail play since The Link has about a fifth of its revenue from carparks. The Link is offering a consensus FY13 (end Mar 2013) DPU yield of 4.2%. In comparison, FRT’s estimated FY12 yield is reasonably attractive at 5.9%.

Downgrade to HOLD

Fortune is trading at a P/B of 0.66x (NAV per unit of HK$8.34) and an estimated FY12 dividend yield of 5.9%. We last wrote about FRT on 23 Jul following its excellent 2Q12 results. The share price has since jumped 10.2% to HK$5.49. We maintain our fair value of HK$5.33 but downgrade FRT to HOLD on valuation grounds.