Fortune REIT: Still a safe haven?

One of the stocks that I bought early in July was Fortune REIT (I’ve owned Fortune since June 2019). 

During the March market meltdown, Fortune’s share price went down to as low as HKD6.20.  Since March, the share price has not gone above HKD7.50.  I took that as an opportunity to average down on Fortune REIT, buying it at HKD7.15.  The share price has since my purchase gone below HKD7.00 … oh, well.

Introduction

Founded in 2003, Fortune REIT is the first REIT to hold assets in Hong Kong. Fortune currently holds a portfolio of 16 private housing estate retail properties in Hong Kong comprising of 3.0 million square feet of retail space and 2,713 car park spaces.   The total worth of Fortune’s portfolio, as at 30 June 2020, amounted to HKD40.33 billion (down from HKD42.82 billion as at 31 Dec 2019).

Highlights 

As Fortune’s retail malls are all surrounded by residential areas, it predominantly relies on non-discretionary consumer spending for its revenue.  About 68% of its retail focus is on necessity trades such as restaurants and eateries, supermarkets and education providers.  This kind of tenant mix ensures Fortune’s business remains resilient regardless of economic conditions.

Results and Ratios

In the latest interim report (June 2020), Fortune reported the following:

1. Revenue DROPPED 2.3% year-on-year to HKD951.8 million (from HKD974.3 million).  This lower revenue was a result of negative rental reversion and lower carpark income.  The Hong Kong economy has entered a technical recession following two successive quarters of contraction. The ongoing Sino-USA trade tensions and unprecedented social unrest had hurt Hong Kong’s trade and retail activities.  The Covid-19 virus outbreak just made the entire business sentiment in Hong Kong all the more worse.  The retail environment remains very difficult with the uncertain development of COVID‐19. 

2. Net asset value per unit CONTRACTED 8.6% to HKD15.37 compared to HKD16.81 a year ago.  However, Fortune’s NAV per unit has increased from HKD6.18 in 2010 to  HKD16.81 in 2019.

3. Net property income DECREASED 4.1% year-on-year to HKD718.2 million (from HKD748.7 million). 

4. Distribution per unit was 51.28 HK cents (FY2019 ending 31 Dec), keeping the same as DPU for FY2018.  For the past 10 years, Fortune has paid a growing distribution per unit, from 24.35 HK cents in 2010 to 51.3 HK cents in 2019.  For the interim, a payout of HK22.60 cents (44% of total payout in 2019) were paid out over a 90% payout ratio.  A cut in DPU is expected for FY2020 (some Singapore REITs such as Capital Mall Trust, Frasers Centrepoint Trust and Mapletree Commercial Trust have already reduced their DPU this year).

5. Fortune’s gearing ratio ROSE slightly to 21.6 % (2019: 19.8%).  Fortune’s financial management is still conservative.  With gearing ratio at this level, Fortune has a debt headroom amounting to HKD17.3 billion to make further yield accretive acquisitions.  Fortune currently possesses sufficient financial resources to satisfy its financial commitment and working capital requirements. As at 31 December 2019, available liquidity stood at HKD530.4 million (down from HKD1,242.9 million in 2018), comprising committed but undrawn facilities of HKD394.0 million and cash and bank deposits of HKD136.4 million.

6, Fortune’s interest coverage ratio is healthy at 4.6x (my criteria: above 3%).

7. Occupancy rate for Fortune’s portfolio shrunk slight to 95% from 97.4% a year ago.  Fortune experienced a slightly negative rental reversion but nevertheless strong tenant retention. 

8. As of 24 July, Fortune has a NAV per unit of HKD16.84.  Fortune’s current PB ratio is 0.39 at the price of HKD6.65, which is in line with the HK REITs industry average.  Fortune has consistently traded below its fair value, and its current trading price makes Fortune a very undervalued stock.

9. Fortune’s current yield distribution is 7.18% (10-year average yield distribution:5.76%)

Why did I average down on Fortune REIT?

The 2nd half of 2019 wasn’t a good period for Fortune as a result of the protest movement and the slowing of the Hong Kong economy.  And 2020 definitely looks set to be worse, what with the severe disruption caused by the Covid-19 pandemic on retail shopping in Hong Kong.  

The social protest movement is very much gone now. Vaccines are currently being developed for Covid-19. Hong Kong’s economy will improve. Things might get worse before they get better but eventually all things will blow over … recessions will end and economic expansion will take over.  Remember these words, “These too shall pass”.

Hong Kong’s economy will improve, unemployment rate will go down, people will have enough for discretionary spending and spend they will.  Fortune’s fortune will improve over time, I believe.

I decided to average down on Fortune for these reasons:

1. Management track record:  Fortune’s management has done well in the past. Over a 10-year period, the management has consistently grown the property valuation, gross revenue, NPI, DPU, etc, year after year after year.  There is no reason to think that they will not continue to execute well both now and in the future.  By the way, I do believe good assets can be mismanaged.  So a capable management is paramount in any form of asset management.

2. Impeccable track record in AEIs:  All Fortune’s properties that have undergone AEIs have reported impressive ROI.  Like most good REITs, Fortune regularly engages in AEI to sustain the long-term growth of its shopping malls and present a sustainable business environment for its tenants.  The latest AEI (HKD150 million renovation) at +WOO (new branding image) in the Tin Shui Wai residential area, which now provides enriched offerings of retail, food and beverages, education services, has yielded positive return.  Phase 1 has been completed and Phase 2 is currently being planned. Within the immediate vicinity of +WOO, a large-scale residential development of over 1,500 flats at Tin Wing Station is to be completed in 2021.  This new and growing catchment will continue to support the business at +WOO.  Fortune’s AEIs have unlocked value from and generated growth in its properties, and could definitely help spur further growth in the future.

3. Good sign of crowd returning during Covid-19 lull period: During the lull period of the on-going pandemic in May and June, footfall in Fortune’s malls actually increased.  

In May and June social distancing rules were relaxed and the crowd returned: public gathering rule relaxed from 8 people to 50 people; F&B limit rule of 8 per table in May completely removed in June.  Hong Kong people, just like Singaporeans, need their malls … love their malls.  Fortune’s management has been doing its best by launching the Fortune Mall App and introducing a Fortune+ membership in an attempt to “take the edge off” the retail devastation caused by the COVID‐19 outbreak.  

Unfortunately, the flickering embers of the pandemic has been rekindled and now social distancing rules are back … sigh.  As of 28 July, public gatherings are now limited to two instead of four.  In-restaurant dining, previously permitted until 6pm, is now banned altogether.  The pandemic situation is worsening by the day with rates of new infection repeatedly shattering single day record.  Blame it on complacency in society; blame it on lack of decisiveness and firmness in the government in securing compliance and cooperation from the whole community.  Anyway, let’s hope this third wave will abate soon and life will return to as close to normalcy as possible in Hong Kong.

4. Robust neighbourhood shopping mall portfolio: Suburban malls are more resilient than city malls as they are often frequented by local shoppers who go there for their daily non-discretionary needs.

5. Strong balance sheet and prudent financial management: A strong balance sheet puts Fortune in a great position to grow should an investment opportunity appears in the horizon.  Fortune’s financial management has been conservative.  It is interesting to note that Fortune holds no perpetual securities (debt instruments commonly treated as equities), so the gearing ratio of 21.6% is pretty much “what you see is what you get”.  With the gearing ratio well below the 45% regulatory ceiling, Fortune has ample debt headroom to meet any yield-accretive acquisitions.

Conclusion

I am slowly expanding my investments in China/HK market.  

In the short term, the China/HK market will be pretty volatile, and a lot of it will come from the escalating US-China tension, maybe even more so than from the Covid-19 pandemic.  

The USA has been doing a lot these days to antagonise China and destabilise it, for example, the passing of the Hong Kong Autonomy Act, the massive sale of weapons to Taiwan, and the military presence in the South China Sea.  

There is no coming back to a benign relationship between the two countries, I think (let’s hope I’m wrong … world peace, fellas!).  This will really be the new normal.  The USA will do its best to prevent the ascent of China just so to secure its own #1 position in the world.  It’s quite a scary and unstable world out there, and hence we are seeing the price of gold hitting record high these days.

The HK market itself is still volatile also in part due to the new Security Law and the upcoming Legislative Council Election.  Things will become clearer after the first case involving transgression of the new Security Law goes to court.  There many be some social unrests in the weeks leading to the September Legislative Council Election, unless the Hong Kong government decides to cancel it and put it off till next year in view of the spread of the virus.

Anyway, I’m investing for the long term, so I should be able to stomach any short-term volatility.

And I almost forgot to answer my own question. Is Fortune REIT still a safe haven? Yes, I think it is … at least for now, it is.

Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.

Paul Samuelson

Disclaimer: I am only an amateur investor and nothing you read here on my blog constitutes financial advice.  I write here to detail my investments, strategies, and analyses.  Feel free to read at your own risk.  Should you need financial advice, consult a licensed financial advisor.

Value Investing with Valuetronics

While I have invested more in the China and Hong Kong markets recently (Ping An Insurance, Link REIT and Fortune REIT), I have not forgotten the Singapore market.  I still have a plan that I set up during the earlier part of the year to accumulate more Singapore dividend stocks.  This plan I call my FORVER portfolio:

Recently, I added Valuetronics to my FOREVER portfolio.  After accumulating Valuetronics, I still have 5 counters that I have not been able to buy because their prices have gone up considerably since the March market meltdown:

Ascendas

Ascendas India

Keppel DC

MapleT Logistics

Vicom (should I replace it with SBS or Comfort Delgro?  Still undecided)

I’m perfectly okay if the ideal prices of these 5 stocks continue to elude me and I don’t get to have them in my portfolio.  No plan should ever be set in stone.  When it comes to investing, as with everything else in life, being flexible helps one to remain stable and balanced.  Buy when the price is right; move on when the price is less appealing.

I really should have bought Valuetronics at S$0.46 in March, but I didn’t.  I fired several bullets at a few REIT counters in March and April, and didn’t spend sufficient attention on small/mid-cap stocks until recently.  Valuetronics’s share price recovered in May, shooting to as high as S$0.69 (but not to its 52-week high of S$0.86).  After a short rally, the price collapsed again to the 50 cents region.  I viewed this 50 cents range as a good price to enter a position on Valuetronics. 

Introduction

Valuetronics Holdings Limited, which was founded in 1992 and is headquartered in Shatin, Hong Kong, provides integrated electronics manufacturing services (EMS) in the United States and internationally. 

There are two primary segments to Valuetronics’s operations: Consumer Electronics (CE), and Industrial and Commercial Electronics (ICE).  Valuetronics provides EMS to CE and ICE products that include such things as smart lighting products, temperature sensing devices, communication products, automotive products and medical equipment.  

Valuetronics also offers design, engineering, manufacturing, and supply chain support services for electronic and electro-mechanical products, and original equipment design and manufacturing services.   Valuetronics serves several multinational and mid-size companies in the telecommunications, industrial, commercial, and consumer fields. 

Highlights

1. Market Cap: HKD1209 million (as at 3 June 2020).

2. Revenue for FY2020 came mainly from the USA (41.3%), and China and Asia-Pacifc regions (43.7%).

3. For FY2020, the CE segment contributed 38.9% while the ICE segment contributed 61.1%

Results and Ratios

Valuetronics reported the following in its latest financial report (2020):

1. Total Revenue DROPPED 16.8% from HKD2828.8 million (2019) to HKD2354.4 million (2020).

2. Gross Profit DECREASED 15.7% from HKD430.3 million (2019) to HKD362.8 million (2020).

3. Net Profit FELL 10.3% from HKD199.5 million (2019) to HKD178.9 million (2020).

4. Net Asset Value GREW steadily from HKD857.3 million (2016) to HKD1231.6 million (2020).

5. EPS Growth has not always been consistent since 2008.  Compared to 10 years ago, the EPS of HKD41.20 in 2020 is more than double the EPS of HKD15.20 in 2010.  However, the EPS dropped from a height of HKD48.10 (2018) to HKD41.20 (2020).

6. Dividend Payout Ratio for FY 2020 was 49%, well covered by earnings.  I like Valuetronics’s medium payout ratio as it strikes a good balance between paying dividends and keeping enough cash to grow its business.  A moderate payout ratio also suggests that Valuetronics’s future dividends should be sustainable, for as long as its revenue does not drop precipitously.  For the past 7 years, dividend payouts remain pretty consistent at HKD0.20 (except HKD0.27 and HKD0.25 for FY 2018 and 2019 respectively) 

7. Cash Balance: Valuetronics INCREASED its cash balance (cash and bank deposits) by 13.2% from HKD930.4 million in 2019 to HKD1053.1 million in 2020.  Compared to 5 years ago, the cash balance grew by about 53% (from HKD689.3 million in 2016).  Valuetronics has built a steady track record of increasing its cash flows.  Over 92% of Valuetronics’s cash and bank deposits were placed in reputable financial institutions in Hong Kong, UK and Singapore. The remaining balance of the cash and bank deposits, mainly in China and Vietnam, were placed in reputable financial institutions. 

8. ROE DROPPED to 14.5% from 17.2% (2019).  I would have preferred the ROE to be 15% and above.  So Valuetronics is just barely meeting this criteria of mine.

9. ROA DROPPED to 8.9% from 9.9% (2019)(my criteria: above 5%)

10. Current Ratio: 2.2 (my criteria: more than 2)

11. Fair Value: Estimated to be between SGD0.60-0.65.  Thus, I was comfortable buying Valuetronics at SGD0.56.

12. Dividend Yield: 7.69%, slightly more than its 10-year average of 7.3% per annum.

Why did I buy Valuetronics?

Judging from Valuetronics’s growth in revenue, net profit, cash balance and EPS while maintaining a low to no debt position over the years since 2015, it is an excellent company to invest in. However, the growth projection of Valuetronics became unclear as it was besieged by double jeopardy: the global Covid-19 pandemic and the escalating US-China trade dispute.  Valuetronics is confronted with the toughest business environment since its IPO days. 

My decision to buy Valuetronics was contingent on its ability to mitigate these twin challenges that it currently faces.

The US-China Trade Tensions:  As a result of Washington’s attempt to curtail the technological advancement of China and induce US companies to move their operations and supply chains out of China, all shipments due for US shores were subjected to tariffs ranging from 7.5% to 25%.  The tariffs were imposed after the first phase of the US-China trade deal was signed in January 2020.

Tariffs are an impediment to free trade, and Valuetronics is unfortunately caught in this situation as it operates out of its factory in Guangdong Province, China.  

With the tariffs in place, the products of Valuetronics has become more expensive in the USA.  US Importers often pass the costs of tariffs on to manufacturers and customers in the USA by raising their prices.  

An orange-haired clown, who is well-known for his belligerent and xenophobic behaviour and who has the extraordinary ability to inspire revulsion, has wrongly said that China pays the tariffs worth hundreds of billions of dollars on Chinese exports to the USA. 

Valuetronics’s products being now more expensive, its customers in the USA are therefore sourcing for alternatives.  They are accelerating their procurement sources and strategies outside China.  This is quite a blow to Valuetronics as it derives about 40% of its revenue from the USA (43.1%, 45% and 41.3% in FY2018, FY2019 and FY2020 respectively).

To attenuate the effect of US-imposed trade tariffs, Valuetronics has shifted part of its operations to Vietnam.  

Why Vietnam and not anywhere else like Thailand or Taiwan?  

Very likely for these reasons: (1) young, hardworking, skilled and cheap labour, (2) fairly good infrastructure such as port facilities along a long sea coast facing the busy South China Sea, (3) geographical proximity to China, (4) cultural and political comparability with China and its communist system, (5) far lesser bureaucratic torpidity in Vietnam’s autocratic governance as compared to other democratic countries with their cumbersome labour laws and often cantankerous trade unions.  

Valuetronics will find operating in Vietnam to be very similar to operating in China in terms of the type of workers it employs and the general cost of running a factory. 

Several Valuetronics’s customers have started diversifying their productions between Valuetronics’s China factory and Vietnam plant.  In spite of Valuetronics’s effort to migrate part of its operations to Vietnam to avoid the tariff problem, it looks set to lose some US customers (auto industry and CE segment) who have decided to switch to other suppliers within the USA for their own US market.  Nevertheless, Valuetronics has expanded its US business development team to source for new and additional customers.

Valuetronics’s first Vietnam leased manufacturing facility started production last year while the second leased facility has successfully launched a trial production in May 2020. Valuetronics’s plan to commence mass production at its own factory/campus will come to fruition come the last quarter of FY2022 (ending 31 March 2022).  

With the existing leased facilities and the new campus in Vietnam, Valuetronics is well positioned to meet the changing supply chain needs of its customers who are avoiding to pay hefty tariffs imposed under the US-China trade deal. 

Covid-19 pandemic: As a manufacturing entity, Valuetronics suffered much when the Covid-19 pandemic led the Chinese government to shut factories across the country.  

In Guangdong province where Valuetronics’s campus is located, the provincial government imposed strict measures such as the screening of travel histories, limited transportation facilities and quarantine requirements for returning non-Guangdong employees.  This caused a constrain in the supply of manpower even when factories reopened across the province.  Like other beleaguered plants in China, Valuetronics faced a slower than normal recovery of production capacity after Chinese New Year.  

It didn’t help that Valuetronics’s customers in Europe and the USA also had to shut down their operations in response to anti-Covid-19 measures implemented by their respective governments in a bid to control the spread of the virus.  With reduced demand came reduced orders, and Valuetronics’s products had no where to go.  The Covid-19 pandemic has indeed weakened global economic activity and outlook.

When exactly this pandemic will end nobody knows for sure.  Everyone is hoping for sooner rather than later.  It will hopefully end when there is global access to Covid-19 treatment and vaccines.

There is a lot of talk about vaccines and a whole lot more questions on that.  For example: (1) at what level of efficacy will the vaccine stop the pandemic? (2) how affordable is this vaccine? (3) how quickly can this vaccine be manufactured and deployed globally? (4) does this vaccine provide long-term immune protection? If not, how many booster shots are needed after the initial shot? (5) what might some side-effects of this vaccine be?  

Even should the Covid-19 pandemic last beyond 2020, Valuetronics is in a good position to ride it out.  It is sitting on a mountain of cash to help it survive this health crisis and meet the challenges that come from any disruption to its manufacturing operations.  Its cash reserves of HKD1053.1 million is equivalent to 52.3% of its total assets (HKD2013.46) and 87.1% of its market capitalisation (HKD1209).  What a beacon in the night!

With the Covid-19 pandemic and unresolved US-China trade tensions, Valuetronics is facing an unprecedented crisis and a lacklustre FY2021 financial results (one that is very likely lower compared to FY 2020) is to be expected.  Nevertheless, I have no doubt Valuetronics will turn the corner and things will look up for its business eventually.  Companies with liquidity issues will not survive this prolonged pandemic period, but Valuetronics, by virtue of its huge cash reserves and consistent track record of positive free cash flow generation, will pull through this health crisis.  Let’s not forget to mention its strong balance sheet, strategic plans to diversify out of China and other precautionary measures taken to reduce operating costs.

The management has been efficient and prudent in running Valuetronics’s operations and both Tse Chong Hing, Chairman and Managing Director, and Chow Kok Kit, Founder and Executive Director, have skin in the game.  Together, both gentlemen hold close to 25% of the company’s shares.  Both gentlemen are influential and aligned owners of Valuetronics’s business.  This makes me feel more secure owning Valuetronics’s shares as their interest is aligned with mine.

Will my investment in Valuetronics turn out to be a profitable one?  Again, time will tell.  I do take a long view on all my stock investments.  The market has rebounded although not quite back to its pre-pandemic level.  So, until a viable vaccine is available, everything will move on and forward in the “new normal”.  Life goes on and so does investing.  Really, its TINA … there is no alternative. 

Hence, instead of burying my money in a hole, perhaps it was better to invest it in the stock market.  And Valuetronics was one of a few choice picks for the month of June.

Disclaimer: I am only an amateur investor and nothing you read here on my blog constitutes financial advice.  I write here to detail my investments, strategies, and analyses.  Feel free to read at your own risk.  Should you need financial advice, consult a licensed financial advisor.

Confidence in Link REIT and the Hong Kong Market

It was confirmed on May 28 that the Chinese government would start to carry out legislative work for a tailor-made national security law for Hong Kong.  Fear and uncertainty flooded the market. In the weeks that ensued, both the Hong Kong stock and property markets entered a state of flux, and the Hang Seng index witnessed some severe volatility.

During those period of volatility, I bought some more Link REIT shares, doubling my existing position on Link REIT.

I wrote about Link REIT back in February (https://mypecunia2020.home.blog/2020/02/26/2020-feb-my-corona-portfolio-2/).  At that time, Hong Kong was going through a difficult time brought on by the protest movement, the pandemic and the US-China trade war.  Even so, I was confident then of Link REIT being an excellent stock on the account of its first-rate track record and superior growth potential.  And till today, my confidence in Link REIT remains unchanged. It’s still a mighty good stock to accumulate.

Some Quick Facts

1. Link REIT is world’s second-largest retail-focused trust (the first being the US-based Simon Property Group).

2. Its largest shareholders include Blackrock, The Capital Group Companies, State Street, JPMorgan Chase and Stichting Pensioenfonds ABP.

3. Its portfolio Value: HKD196 Billion (129 retail properties, 3 office properties, 57000 car park spaces).

Results and Ratios

In the latest annual report (2020), Link REIT reported the following:

1. Revenue reached HKD10,718 million, an increase of 6.8% year-on-year (2019: HKD10,037).  

2. Net asset value per unit FELL 13.3% to HK$77.61 (vs HK$89.48, Mar 2019).

3. Net property income increased by 6.9.3% year-on-year to HKD8,220 million (2019: HKD7,689). 

4. Distribution per unit was HK287.19 cents, an increase of 5.9% year-on- year (2019: HK271.17 cents.

5. As at 31 March 2020, Link’s total debt increased to HK$34.6 billion (31 March 2019: HK$24.5 billion). 

6. Link’s gearing ratio increased to 16.7% (31 March 2019: 10.7%), partly due to the valuation decline of Link’s investment properties. 

7. As at 31 March 2020, Link’s EBITDA interest coverage stands at 7.8 times (30 September 2019: 8.4 times), which stands favourable against the requirement of more than 3.5 times to 4.0 times set by Moody’s, and against Fitch’s requirement of more than 3.5 times.  With its prudent asset and capital management, Link has maintained a “3A” credit rating from S&P Global, Moody’s and Fitch ratings.  The stable “3A” credit rating will support lower financing costs and potential debt-funded acquisitions.   

8.  As at 31 March 2020, the retail occupancy rate for Link’s HK portfolio and China portfolio remained stable at 96.5% and 97.8% respectively.  The retail reversion rate for Link’s HK portfolio slowed to 12.6%.  The retail reversion rate for Link’s China portfolio remained stable at 29.6% respectively.  The average monthly unit rent for Link’s HK portfolio improved mildly by 3.4% year-on-year to HK$70.3 psf.  The operating landscape for Link in Hong Kong has been challenging since months of social unrest.  The pandemic further weakened business sentiment and deepened Hong Kong’s recession (in Q1, GDP was -8.9% and unemployment rate was 4.2%) and disrupted a wide range of economic activities.   Retail sales and tourist arrivals have fallen drastically.  Even so, Link’s non-discretionary sales (64% of Link’s monthly income comes from food-related tenants) continue to demonstrate high resilience in spite of overall weakened economic situation.  Office leasing demand also took a substantial hit. 

9. Link’s PB Ratio was 0.81 when I made my purchase on June 2nd. The purchase was an attractive value play for me.

10. Based on my purchase price of HKD63, Link’s distribution yield was about 4.5%.

Why did I accumulate more Link REIT?

I mentioned it before, and I reiterate, Link is an excellent stock because of its growth potential and predominant track record.  

It has already added an office property (100 Market Street) in Sydney, Australia to its portfolio.  It is now in negotiations to buy a grade A office property (Morgan Stanley’s European headquarters) in London, in what would be Link’s first acquisition in Europe.  Link is still pursuing its Vision 2025 goal of having Hong Kong represent 70-75% of its portfolio value, China about 20%, and the rest of the world around 10%.

To date, Link has completed 85 asset enhancement projects and has another 19 or more projects in the pipeline.  For a REIT, engaging in AEIs is a viable way to keep its properties up to date with modern designs, reconfigure its properties for expanded commercial use, and increase the value of its properties and hence improve the rentability of its properties.  With its AEIs, Link is able to provide new and attractive shopping experiences for its shoppers.  Link’s goal with its AEIs is to “[create] environments that people want to frequent and enjoy, not just to shop.”

Risks that confront Link REIT

1. Economic Downcycle: The contraction of Hong Kong’s economy has put pressure on retail sales performance.  The social upheaval of 2019 and the pandemic of 2020 have disrupted a wide range of economic activities and plunged the city into a deep recession (GDP growth dropped to around 9%, unemployment rate surged to 4.2% for 1Q 2020 and median household income registered a 4.1% decline).  Tourist arrivals have also fallen drastically due to the pandemic.  

Amid such a lacklustre economic climate, non-discretionary sales at Link’s properties continue to demonstrate high resilience.  Link’s retail tenant mix is non-discretionary and tends to provide better performance in market downturns.  Even so, should the unemployment situation worsen, non-discretionary sales will still get hampered and in turn harm Link’s rental rate.

Leasing demand for Link’s office properties has also taken a hit in this period of economic contraction.  It is hoped that with government support measures and stimuli, economic recovery will come sooner rather than later for Hong Kong.  

2. Political Instability: With the introduction of the security law, protests are now smaller in size and hopefully less frequent.  Will another huge protest erupt some time in the future? Maybe.  Maybe not.  Link’s properties have thus far been quite insulated from the ills caused by social disturbance and political agitation.  Link’s properties are mainly found in neighbourhold areas and are not in the vicinity of major protest sites.  

3. Covid-19: Indeed, social unrest has brought almost every aspect of Hong Kong to a standstill.  The US-China trade war too has brought instability to Hong Kong’s economy.  But these paled in comparison to the Covid-19 pandemic which has already killed millions around the world, shut down cities and countries, and paralysed global economies.  There is no running away from this monster of the century.  Few businesses, except maybe tech-related companies, will emerge from this year unscathed.  

Hong Kong as a whole has done well in dealing with the pandemic, having learnt well from the experience dealing with SARS 20 years ago.  Malls are beginning to see more footfall as social distancing measures are relaxed.  36% of Link’s monthly rent comes from non-food-related tenants.  Barring a very severe resurgence of the virus in the community, mall activities should still pick up across the city and overall retail gross sales psf should improve for Link retail properties.  Link has also set up delivery pick-up points to facilitate shoppers who have placed their grocery and fresh produce purchases on-line.

14 new cases were discovered yesterday (7 July).  The Hong Kong Health authority is saying Hong Kong is now going through the 3rd wave of the pandemic.  Will social distancing measures be tightened soon?  Let’s hope not.

Still confident of the Hong Kong market

I wouldn’t have accumulated more shares of Link REIT just a week from purchasing Ping An Insurance if I weren’t confident of the Hong Kong market.

But don’t you know, Hong Kong is dead? With the introduction of the new security law tailored for Hong Kong, the “one country, two systems” status of Hong Kong is dealt a death knell. Hong Kong, one of the freest places in the world as we know it, has gone the way of the dodos.

Well, wait a minute. Who has been peddling this announcement of the “death of Hong Kong” since the idea of a security act for Hong Kong was mooted more than a month back?

Ah, the western media, led by Chris Patten in Britain and Mike Pompeo of Washington. I really doubt the veracity of their perspectives on Hong Kong, especially that of Mike Pompeo who has been in a senseless crusade against China for years, and who has also been stepping up his attacks on China since the start of the global pandemic.

I’m not wading into the controversial waters of world politics and international relations, but truth be told, the people of Hong Kong, a great majority of them, welcome the new security law (don’t just read SCMP or news from the West only … read local news in Mandarin to get a good grasp of ground sentiments).

The common folks are sick and tired of the weekly mayhem and violent protests. They want the freedom to eat in restaurants without being harassed and inconvenienced. They want the freedom to make a decent living and not be forced “to go on strike” when radicals crippled the transport systems on working days. They want the freedom to open shops without having to worry about their shops being vandalised. They don’t want their children to be misled or pressured into taking part in protest activities.

Security and stability is good for life and business, and this is exactly what Hong Kong needs to survive and thrive. The new security law helps to safeguard the stability and security that Hong Kong so badly needs after a year of social upheaval. The common man in Hong Kong has nothing to fear since the law only targets secession, subversion, terrorism and collusion with foreign and external forces that endanger national security.

But … aren’t expats leaving; international companies relocating; funds exiting; Hong Kongers migrating? Will not Hong Kong sink further because of the mass exodus of foreigners and local brain drain, and outflow of capital? Maybe so, just as it happened in the years leading to the Handover in 1997. Nevertheless, to date, there has not been any palpable outflow of capital or the relocating of international companies. Expats and local Hong Kongers are still staying put in the city.

Did you know that many of those who migrated in the years leading to 1997 returned when Hong Kong’s economy exploded after the Handover? Expats and international companies returned too. Why? Because there was money to be made in Hong Kong! Hong Kong provided them assess to the China market which has grown by leaps and bounds in the last 2 decades. And Hong Kong will continue to provide both expats and the people of Hong Kong opportunities galore to create and keep wealth. 

Interestingly, on the day the new security law was passed (30 June), the Hang Seng Index rose 0.52%, clearly reflecting positive business sentiment about stability.   And in the next few days that followed, the Hong Kong market continued to respond positively to the new security law.  

Richard Frost in his Bloomberg article wrote, “Hong Kong’s rallying stock market is defying predictions of the death of the city in the wake of a new security law. The Hang Seng Index jumped 7.8% in the three days after the law was imposed on July 1, its biggest rally since April 2015, and entered a bull market on Monday.”*

In another Bloomberg article, Richard Frost quoted Raymond Cheng, a property analyst at CSG-CIMB Securities: “Though there were protests yesterday, the number of people that took to the streets was much smaller, and the severity of the clashes was far less than some of the violence we saw last year … That’s reassuring for business.”**

The security law will bolster security and stability, and in my humble opinion, Hong Kong will continue to shine as one of the great financial capitals of the world, especially so when the central government is speeding up the integration of Hong Kong with the rest of the Greater Bay Area.  

The US is canceling Hong Kong’s special customs status but this is nothing more than just a “mosquito bite” for Hong Kong.  Hong Kong products made for export to the US account for only 0.1 per cent of Hong Kong’s overall exports.  The US government is enacting visa restrictions on Chinese officials who are deemed responsible for undermining Hong Kong’s autonomy and freedoms, but this doesn’t hurt Hong Kong at all on an economic level.

What about the US striking against the Hong Kong dollar peg as an option to punish China, which will limit the ability of Hong Kong banks to buy US dollars?  This is quite unlikely to happen.  As Stephen Innes at AxiCorp puts it, “the unthinkable instability that it would trigger in the dollar-based global financial ecosystem could drive a selloff in US equity markets — an outcome abhorrent to the White House ahead of the November presidential election.”***

This new cold war between China and the USA will go on for years to come.  And Hong Kong caught in the middle between the two giants will not come out pretty.  The US will not stop interferring in Hong Kong’s business, and neither will China budge, not after having gone mano a mano with the US in a battle for influence in Hong Kong for years.

What will become of Hong Kong?  Only time will tell.

For now, I choose to bet on a bright future for Hong Kong and her financial market.  Hong Kong is still China’s golden goose, and China will do every thing in her power to keep this golden goose alive and grow her to as big a size as possible. 

制裁香港是“七伤拳”,伤港亦伤己,美国对此不能不认真考虑。在贸易方面,去年美国对香港有260多亿美元贸易顺差,如两地齐加关税,美国损失更大。香港是国际金融中心,也是投资内地的跳板,如美国对港金融设限,不但影响美资金融机构,也打击不少有关服务企业。

《星岛日报》社论

一旦香港独立关税区待遇被取消,直接影响双边贸易。若美国政府强行要求美企和资金撤离香港,将严重损害美企利益。美国评级机构惠誉强调,香港引入国家安全立法也不会带来进一步降级压力,并相信香港在宏观制度上仍能保持高度自治,例如独立运作的货币、财政框架、金融管理体系及商业环境,反映美企跟美国政府未必一条心。

《香港经济日报》社评

* https://www.bloomberg.com/news/articles/2020-07-06/hong-kong-stocks-surge-into-a-bull-market-in-win-for-government

** https://www.bloomberg.com/news/articles/2020-07-02/hong-kong-s-stock-market-reopens-to-a-changed-reality-under-law

*** https://hongkongfp.com/2020/07/08/security-law-white-house-may-target-hong-kong-dollar-peg-as-punitive-response-report/

Disclaimer: I am only an amateur investor and nothing you read here on my blog constitutes financial advice.  I write here to detail my investments, strategies, and analyses.  Feel free to read at your own risk.  Should you need financial advice, consult a licensed financial advisor.