• Festival Walk has been resilient
• Weaker RMB mitigated by HKD strength
• Opportunity to bargain hunt

Dip in Share Price Largely Sentiment Driven, in Our View

Despite reporting a set of sturdy 1QFY20 results on 29 Jul (DPU +3.7% YoY), Mapletree North Asia Commercial Trust’s (MNACT) share price has tumbled 7.3% since (total returns: -5.9%). We believe this has been largely sentiment driven, given the ongoing violent protests in Hong Kong, which shows no signs of abating at the moment.

Festival Walk (FW), which is located in a prime location in Kowloon Tong, Hong Kong, contributed 61.9% of MNACT’s 1QFY20 NPI, and 65.3% of its portfolio AUM.

Festival Walk Has Historically Weathered Uncertainties

While FW would not be immune to the political instability and economic slowdown in Hong Kong, we highlight that the mall has traditionally been very resilient. During the Global Financial Crisis, FW recorded a 4.0% increase in its gross revenue in 2008, followed by a further 3.2% growth in 2009. In terms of retail sales at FW, it rose 4.9% in 2008 and saw only a marginal dip of 0.6% in 2009. We also note that average retail passing rents at FW rose more than 5% in FY09.

Looking back even further in 2003 during the SARS epidemic, FW managed to grow its gross revenue and retail sales by 0.9% and 1.6%, respectively. During the Occupy Movement which largely took place over 4QCY14, FW’s occupancy remained full at 100%, while tenants’ sales and footfall saw an improvement of 5.1% and 4.4% YoY, respectively.

More recently, although retail sales and footfall declined 3.2% and 1.8% YoY in 1QFY20, respectively, rental reversions remained firm at +12% (retail component), while we believe gross turnover rents forms less than 5% of FW’s overall retail rental income. Furthermore, FW largelycaters largely to the residential catchment within the Kowloon Tong District and less dependent on tourists.

RMB Weakness Offset by HKD Strength

Another possible reason for MNACT’s share price decline could have been driven by the depreciation in RMB. MNACT’s China assets contributed 26.6% of its 1QFY20 NPI. That said, we believe the weakness in RMB would be offset by the recent strength in HKD. The SGD-RMB exchange rate has a correlation of -0.25 with the SGD-HKD exchange rate since the start of 2017 and the correlation was -0.82 since the beginning of 2018.

We maintain our forecasts and S$1.43 fair value estimate, and see bargain hunting opportunities with MNACT trading at FY20F distribution yield of 6.1% and P/B of 0.90x (as at 13 Aug close).

Source: OCBC Research - 14 Aug 2019