Friday, January 31, 2014

Spring REIT -CBD Prime Transforming IPO growth to yield (CS)

Spring REIT
Price (13 Jan 14, HK$) 3.15
TP (prev. TP HK$) 4.29 (NA)
Initiating Coverage with OUTPERFORM
New report: CBD Prime: Transforming IPO growth to yield

● We initiate coverage on Spring REIT with an OUTPERFORM rating and HK$4.29 TP (36% potential upside). The company offers direct exposure to the "premium grade" office market in Beijing that can potentially benefit from the growth in IPOs in China—it owns office towers 1 and 2 in China Central Place, with 120,245 sqm of office space in the southeastern corner of Beijing’s traditional CBD.


● The sizeable exposure to the financial tenants makes Spring REIT a key beneficiary of the robust growth of China's capital markets. Other competitive advantages include: (1) limited supply of grade- A offices in the Beijing CBD; (2) premium quality and young age of CCP; and (3) diversified and quality tenant mix.

● Given Spring REIT pays in USD and receives in RMB, our sensitivity analysis suggests that RMB appreciation should further leverage Spring REIT's DPU in FY14-15E.

● Our HK$4.29 TP is based on an FY14E target dividend yield of 6.50%. At the current level, Spring REIT offers an attractive 8.8% FY14E dividend yield, vs 7.1% and 7.0% FY14E yields of Mapletree Greater China and Hui Xian REIT, respectively. Click here for full report.


 All about premium grade offices and world-class tenants in Beijing
Spring REIT manages office towers 1 and 2 in China Central Place (CCP office) with 120,245 sqm of office space and approximately 600 parking spaces. They are located in the Beijing’s CBD and are classified as “premium grade” office buildings, according to DTZ, out of a total of 13 “premium grade” office buildings in Beijing. Its major tenants include Deutsche Bank, SAP AG, Conde Nast, Zhong De Securities and Global Law office.

Riding on China's IPO growth story
The sizeable exposure of CCP office to the financial tenants, and its location in CBD—the most sought-after district for Chinese and international financial institutions—make Spring REIT a key beneficiary of the robust growth of capital markets in China.

Other competitive advantages for Spring REIT include: (1) limited supply of grade-A offices in the Beijing CBD; (2) premium quality and young age of CCP; and (3) diversified and quality tenant mix.

A leveraged play on RMB appreciation
The rental receivables of Spring REIT are in RMB, so are the payables for the operating expense and taxes. On the other hand, the dividends payable to unitholders are in HKD. Therefore, the unitholders can benefit directly from RMB appreciation. Furthermore, the RMB appreciation could be further leveraged by the interest expense payable in USD, as Spring REIT is currently financed by a USD-denominated loan. Based on our sensitivity analysis for the movement of RMB versus USD, for 2%/4%/7%/9% appreciation, FY14–15E DPU would be enhanced by 3%/5%/11%/15% from our current estimates.

Initiate with OUTPERFORM and target price of HK$4.29
We derive our HK$4.29 target price for Spring REIT based on an FY14E target dividend yield of 6.50%, and our TP implies 36% potential upside from the current level. We initiate coverage with an OUTPERFORM rating as Spring REIT offers direct exposure to premium-grade offices in Beijing and can potentially benefit from the capital market growth in China. At the current level, Spring REIT offers an attractive 8.8% FY14E dividend yield, compared with 7.1% and 7.0% FY14E yields of Mapletree Greater China and Hui Xian REIT, respectively.

 Investment risks
Investment risks include: (1) Spring REIT's reliance on a single property for all of its revenue; (2) the risk of not being able to renew leases or re-lease the vacant space at the same or higher rentals or at all; (3) its property may face increased competition from others in Beijing and other cities in the PRC; and (4) the ratio of total borrowings against the total gross asset value being > 45%.




Source/Extract/Excerpts/来源/转贴/摘录: Credit Suisse
Publish date: 15/01/14

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