Champion REIT Posted Weak First-Half Results

Champion REIT reported weak first-half net property income of HKD 1 billion, declining 8.2% against the same period last year, with the underlying trends within expectation. With uncertainties in the economic environment and the Hong Kong border remaining closed, Three Garden Road continues to struggle from a quiet leasing market. Occupancy was weaker than expected, declining to 83.8% from the 2021 level of 89.0%. On a positive note, the recovery of Langham mall was slightly ahead of our expectation, with turnover rent increasing to HKD 51 million from HKD 15 million, although negative rental reversion persisted as pressure on base rent remains. As such, we have fine-tuned our assumptions to reflect weaker demand for Three Garden Road offices, partly offset by a quicker-than-expected recovery in Langham Place mall. We lower our fair value estimate slightly to HKD 3.90, but our 2022 distribution per unit forecast of HKD 0.21 is unchanged. First-half distribution of HKD 10.64 cents represented a 11.1% decline on the same period last year. While we think Champion’s shares are undervalued with a 11% discount to our fair value estimate and a 6% 2022 distribution yield, as of market close on Aug. 19, we think the timing of a full recovery remains uncertain as both the retail and office segments depend on border reopening. We continue to prefer Link REIT, given its focus on the more resilient nondiscretionary trade.