Morningstar Equity Research analyst Xavier Lee is maintaining his fair value estimates on Swire Properties, CapitaLand Investment (CLI), Mapletree Pan Asia Commercial Trust N2IU (MPACT) and Link REIT after visiting their office and retail assets in Shanghai.
Swire Properties and Link REIT are listed in Hong Kong, while CLI and MPACT are listed in Singapore.
“We think China’s slowing economic growth remains a key headwind for consumer spending and business expansion. For retail malls, we note that vacancy rates for Shanghai downtown retail districts remain healthy at 5.4% as of 3Q2024, according to Cushman and Wakefield,” writes Lee in an Oct 15 note. “This should provide some support for market rents that are being weighed down by weak retail sales performance and supply of new retail malls, albeit in the secondary retail areas.”
On the other hand, Lee says office rents remain “soft” in Shanghai given the elevated central business district vacancy rate of 16.6% as of 3Q2024, according to Cushman and Wakefield.
“While the Chinese government is looking to revive its economy with a series of policy stimulus efforts, we think that business owners and consumers may still exercise caution until they are convinced of a durable economic recovery,” he adds.
For landlords and REITs with mainland China exposure, Lee’s preferred pick is Swire Properties, which is trading at a 29% discount to Lee’s fair value of HK$22.50 ($3.79). Lee has maintained his four-star rating on Swire Properties, against Morningstar Equity Research's five-tier scale.
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“Swire Properties remains steadfast in its long-term plan to invest in China, allocating half its HK$100 billion investment plan to China. We expect these projects to start contributing from 2026, with the bulk of it coming from 2027,” says Lee.
Among the malls that Lee and his team visited on Oct 14, Lee says Link REIT’s Link Plaza Qibao had one of the best footfalls. “We think this is due to its strategic location that is well-connected to the metro station. We also visited competing malls in the vicinity and note that Link Plaza Qibao is the most dominant mall in that area.”
Lee has a four-star rating on Link REIT, along with a fair value of HK$45.
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As for Swire Properties’ HKRI Taikoo Hui and Taikoo Li Qiantan, Lee notes that Swire competes in the “highly competitive” luxury retail market. “While Hang Lung Properties’ Plaza 66 and Sun Hung Kai Properties’ Shanghai IFC remain the leaders in this category, we think that Swire’s malls are high-quality developments and have the potential to upgrade their tenant mix over time to catch up with Plaza 66 and Shanghai IFC,” he adds.
For Shanghai office, Morningstar’s visit to MPACT’s Sandhill Plaza reveals that the environment remains challenging given weak demand and elevated supply, says Lee.
“We think a recovery will only happen at the earliest in 1H2026, when excess supply is gradually absorbed by improving demand,” he adds. “That said, we note that MPACT is actively marketing its vacant spaces, fitting out show units and offering lease incentives.”
Lee and his team also visited CLI’s LuOne integrated development in Shanghai. “We understand that the office component has benefited from flight-to-quality given its good location and high office specification. The attached CapitaMall LuOne also enhances this development, providing amenities to the surrounding office tenants and population,” says Lee.
Compared to Lee’s four-star rating for Link REIT and Swire Properties, Lee only has a three-star rating on CLI, with a target price of $3.30. Meanwhile, Lee’s has a four-star rating on MPACT with a target price of $1.68.
CapitaLand Investment price vs. fair value, according to Morningstar
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China restaurant names ‘undervalued’
Meanwhile, Morningstar Equity Research senior analyst Ivan Su says China restaurant shares are still undervalued despite the recent rally, and the Oct 1 to Oct 7 Golden Week holiday only reinforces Su’s positive outlook.
“Encouraging Golden Week data from leading restaurant operators in China reinforces our above-consensus earnings estimates and positive outlook for the sector. Our top pick remains wide-moat Yum China, given its diverse store formats and robust supply chain, which provide resilience during economic downturns and enable rapid expansion in prosperous times,” writes Su in an Oct 15 note.
According to Su, shares of Yum China are trading at a 40% discount to his HK$595 per share fair value estimate. Su also has a five-star rating on Yum China, the largest restaurant chain in China with almost 13,000 units and US$10 billion ($13.08 billion) in systemwide sales in 2022. Key concepts include KFC (9,094 units) and Pizza Hut (2,903).
Yum China price vs. fair value, according to Morningstar
While some investors may attribute this improvement to the wealth effect of China’s recent stock market rally, Su says his investment thesis is “not premised on continued stock market strength”.
“Although stimulus measures may temporarily boost dining demand, the key long-term drivers for the restaurant operators remain: smaller family sizes; ongoing urbanisation; and rising incomes,” he adds. “With these three secular drivers remaining intact, we continue to view investing in restaurant operators as one of the safest ways to gain exposure to the growth of the Chinese middle class, presenting a compelling combination of free cash flow growth and safe harbour from geopolitical risks.”
Other names in the sector include Xiabuxiabu Catering Management (China), on which Lee has a four-star rating and HK$2 fair value; Jiumaojiu International Holdings, with a five-star rating and HK$10.50 fair value; and Haidilao International Holding, with a three-star rating and HK$17.10 fair value.
Charts: Morningstar Equity Research
