Here Is Why Champion REIT Could Be Massively Undervalued Right Now

Listed in May 2006, Champion REIT has matured into the second biggest REIT in Hong Kong with a market capitalisation of HK$ 39.1 billion as of 24 May 2019. It currently owns and derives income from two landmark properties in Hong Kong namely, Three Garden Road and Langham Place.

In this article, I’ll cover its fundamental strengths, its latest financial results, and calculate its valuation figures based on the current unit price of HK$ 6.68. Thus, the following is a list of 9 things to know about Champion REIT before you invest.

1. Portfolio Composition
   Champion REIT’s property portfolio is valued at HK$ 83.1 billion in 2018 and its breakdown is as follows:
   
   

No.	Properties	Valuation 2018(HK$ Billion)	Valuation 2018 (%)
1	Three Garden Road	49.9	60%
2	Langham Place	33.2	40%
Total Portfolio	83.1	100.0

Source: Champion REIT’s Annual Report 2018

1. Three Garden Road (TGR)
   Champion REIT was initially listed with TGR as its only property asset. It was formerly known as Citibank Plaza and Champion REIT initially had a 91.5% stake in the property. In July 2013, Champion REIT has invested a total of HK$ 2.16 billion to acquire the remaining four floors and hence, owned the entire asset ever since.
   
   
   
   Property Details:
   TGR is a modern glass and steel office complex that comprises of:
   
   – Champion Tower, a 47-Storey Building.
   – ICBC Tower, a 37-Storey Building.
   – A Retail Podium.
   – A 3-Level Basement Garage.
   
   
   Financial Results:  
   Overall, TGR has delivered stable results to Champion REIT over the last 10 years. There were two instances where TGR has recorded a marginal dip in rents. The first was in 2010 and it was caused by tough economic situation due to the global financial crisis in 2008 / 09. Meanwhile, TGR had reported its second drop in rent in 2015 as a result of an expiry of TGR’s main lease that accounted for 14.3% of the building floor area in 2014.
   
   Since then, Champion REIT has replaced its tenant for TGR and its asset had recorded a steady increase in both gross revenue and net property income (NPI) for the last 3 years. Gross revenues have increased to HK$ 1.39 billion in 2018 from HK$ 0.97 billion in 2015. NPI had increased to HK$ 1.27 billion in 2018 from HK$ 0.82 billion in 2015.
   
   
   

Source: Champion REIT’s Annual Reports

1. Langham Place (LP)
   Langham Place is a mixed-use development consisting of:
   
   – Langham Place Office Tower.
   – Langham Place Mall.
   
   
   Langham Place Office Tower (LPOT)
   LPOT is a 59-storey office tower in Mongkok, a major transport hub and busy shopping district in Kowloon. It has enjoyed above 99% occupancy rates over the last 10 years. After a slight drop from 2009 to 2011, both gross revenues and NPI has increased consistently over the last 7 years. Gross revenue had grown to HK$ 349.8 million in 2018 from HK$ 254.3 million in 2011. This led to a growth in NPI to HK$ 321.9 million in 2018 from HK$ 204.8 million in 2011.
   
   
   

Source: Champion REIT’s Annual Reports


Langham Place Mall
It is a 15-storey mall which is linked to the Mongkok subway station. As I write, it has been enjoying full occupancy rate since 2011 and has also been recording consistent growth in both gross revenue and NPI for the past 10 years. Gross revenue increased to HK$ 937.0 million in 2018, up from HK$ 451.0 million in 2009. NPI had increased to HK$ 813.0 million in 2018 from HK$ 341.7 million in 2009.

Source: Champion REIT’s Annual Reports

1. Profitability
   Overall, Champion REIT has generated slow but stable increments in its gross revenue and distributions to unitholders for the last 10 years. The amount of gross revenue has increased to HK$ 2.97 billion in 2018 from HK$ 2.04 billion in 2009. It had led to higher amounts in distributions to HK$ 1.53 billion in 2018 from HK$ 1.24 billion in 2009. Distributions per unit (DPU) had gradually fell from 26.09 cents in 2009 to 19.83 cents in 2015 before recovering to 26.17 cents in 2018 as Champion REIT grown in both gross revenue and NPI, particularly over the last 3 years.
   
   
   

Source: Champion REIT’s Annual Reports

1. Balance Sheet Strength
   As at 31 December 2018, Champion REIT has reported to have as much as HK$ 15.0 billion in total debt, hence, having a gearing ratio of 17.6%. Its effective interest rate is 3.14% per year. 54.2% of its debt is currently based on fixed interest rates.
   
   
   
2. Top 10 Tenants
   Here, I’ll list down the top 10 tenants of Champion REIT:
   
   – Allianz Global Investors
   – Beauty Avenue
   – Blackrock
   – Bloomberg
   – Cinema City
   – Citibank
   – Dr. Reborn & Union Medical Healthcare
   – industrial and Commercial Bank of China  
   – Neo Derm
   – Pure Fitness & Pure Yoga
   
   
   
3. Land Lease Period
   Government leases of lands for the properties, TGR and Langham Place would end on the same date: 30 June 2047.
   
   
   
4. P/B Ratio
   First, Champion REIT has successfully increased its net asset value from HK$ 5.86 per unit in 2009 to HK$ 11.42 per unit in 2018. This is resulted from continuous price appreciation from TGR and Langham Place in the 10-year period. Second, its stock price is trading at HK$ 6.68 an unit. Its current P/B Ratio is 0.585, which is above its 10-Year Average of 0.494.
   
   
   

Source: Champion REIT’s Annual Reports

1. Dividend Yields
   In 2018, Champion REIT had paid out 26.2 cents in dividends per share (DPS). At current unit price of HK$ 6.68, Champion REIT’s dividend yield is 3.92% a year, which is the lowest in 10 years.
   
   
   

VIA’s Verdict

Overall, Champion REIT has delivered sustainable growth in revenue and profits to its unitholders over the last 10 years, despite experiencing a few tiny glitches along the way. As I write, there is a sharp spike in its unit price as shown below:

Source: Google Finance

Thus, in terms of current valuation figures, Champion REIT is now trading at P/B Ratio of 0.585 (the second highest in 10 years) and dividend yields of 3.92% per year (the lowest in 10 years). So, the question is:

‘Would you invest in Champion REIT at HK$ 6.68 per unit today?’

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