Link Reit(0823.HK):Over-pricing risk

Div yield at 14-month high; too much bearishness priced in

We believe Link Reit’s 20% share-price correction from its recent peakwas driven by concerns about the slowing HK retail market, expansioninto China and a possible US rate hike. However, the de-rating looks setto reverse when the equity market differentiates between the stillgrowingHK mass-end malls from the flagging high-end malls/streetfrontshops. Swapping older, lower-yielding HK properties for younger,higher-yielding China properties also seems to be a right move thatdeserves re-rating rather than de-rating. Lastly, with the dividend yield ata 14-month high and the yield gap over US Treasuries at 1 SD above thehistorical average, we think US rate hike concerns have been over-priced.

Reiterate O-PF with a HK$50.08 target price (down from HK$52.15).

HK retail sales: Flagging at the high end but growing at mass end

Overall HK retail sales may be weakening (YTD 7M15 down 1.8%), but nondiscretionarysales stayed up 1.6% YoY. Tenant sales at mass-end-focusedmalls in “catchment areas” are still posting double-digit sales growth, withLink’s portfolio +5-6% YTD FY16. Our 16/17CL rental reversion rate forecastof +16.5% is based on our Econ team’s HK non-discretionary sales growth of+2.4%, plus 2.1pp for Link’s track record of tenant sales outperforming themarket and a 1pp contribution from on-going asset/tenant upgrades.

China expansion: Older, lower-yield assets for younger, higher-yield

Link has underperformed peers, namely Champion/Fortune/Sunlight Reitssince acquiring its first asset in China in March 2015. However, given Link’sportfolio of >170 properties, of which 41% are now aged >25 years, thecompany’s disposal of 20-27-year-old HK assets yielding 3.9% in order toacquire 6-12-year-old China assets at a 4.2% NPI yield with ~30% rentalgrowth potential in the next lease terms (our forecast) seems a good moveand deserves applause.

Share buybacks: Affordable DPU enhancement

Link has repurchased 40.9m units for HK$1.8bn since CY15, which has beenthe most active buyback action among HK property names, resulting in1.8% DPU uplift. Link’s cashflow stays neutral given the buybacks are mostlyfunded by asset disposals, and hence we see this as affordable DPUenhancement and in the interest of minority shareholders.

Dividend yield at 14-month high

The shares are now yielding 4.8/5.1% in 16/17CL with the dividend yield gapover US 10-year Treasuries widening to 1 SD above the historical average of232bps, the highest since 2011. The current stock price implies a 41bp USrate hike, more than our 25bp House forecast. Maintain Outperform.