TL;DR

It has been reported that travellers into Hong Kong will soon not be required to serve a three day hotel quarantine. This could help to boost sentiment towards some stocks with Hong Kong assets.
Mapletree Pan Asia Commercial Trust owns Festival Walk, one of the largest malls in Hong Kong. The further easing of COVID-19 measures could potentially provide a boost to tenant sales and reverse the negative rental reversions.
DFI Retail Group generates the bulk of its revenue from Hong Kong through well-known brands such as Wellcome supermarket, Mannings health and beauty stores, 7-11 convenience stores, and Maxim’s restaurants. Management consider the China border closure to have the most material impact on its business.
Hongkong Land's property assets are predominantly in Hong Kong, including office and retail assets such as One & Two Exchange Square and Landmark Atrium. The company also recently announced an extension of its share buyback programme.

What happened?

If you miss the wanton mee and milk tea from your favourite Hong Kong Char Chaan Teng (café), you’d be excited to hear that you might be able to visit Hong Kong again soon without strict quarantine requirements.

According to press reports, travellers into Hong Kong will not be required to serve a three days hotel quarantine upon arrival with the planned changes. Instead, seven days of self-monitoring will be required.

As we eagerly await the announcement by officials, let’s take a look a some of the Singapore-listed stocks that could see an improvement in sentiment with Hong Kong's re-opening.

3 stocks that could benefit from Hong Kong’s re-opening

#1 – Mapletree Pan Asia Commercial Trust

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When Mapletree Commercial Trust (MCT) announced the merger with Mapletree North Asia Commercial Trust (MNACT), many investors were initially opposed to the transaction.

After all, why take the risk with assets in Hong Kong and China when its crown jewel in Singapore – Vivocity, was already benefiting from the recovery in retail sales in Singapore?

With the re-opening of Hong Kong, it might not be such a bad idea to have an asset that would benefit from the increase in consumer spending after all.

If you are not familiar with Festival Walk, it is one of the largest malls in Hong Kong located in the area of Kowloon Tong. It is home to over 200 brands and over 40 F&B outlets.

Following the merger of MCT and MNACT, Festival Walk represents 21% of the net property income (NPI) of MPACT. This is almost comparable to Vivocity’s contribution in the quarter ending June 2022.

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Tenant sales at Festival Walk have been impacted significantly by the COVID-19 restrictions. During the Omicron wave last year, tenant sales fell to as low of 38% of the pre-COVID levels.

With the gradual relaxation of measures, tenant sales at festival walk has recovered to close to 70% of pre-COVID levels.

Likewise, rental reversions also moderated to just negative 7% in the recent quarter, following two years of steep declines of more than 20% per year.

The further easing of COVID-19 measures could potentially provide a boost to tenant sales and reverse the negative rental reversions.

#2 – DFI Retail Group Holdings (DFIRG)

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You may be familiar with NTUC and Sheng Siong when doing your weekend grocery shopping.

It’s time to learn more about DFI Retail Group, which is one of the retail companies across the Asia Pacific region.

In Singapore, Cold Storage, Giant, Guardian and 7-11 are all owned by DFIRGH.

Despite its large presence in Singapore, South east Asia just represents less than 25% of DFIRG’s total sales in the first half of 2022.

North Asia, including Hong Kong, is where DFIRG’s generates the bulk of its revenue and profit.

Some of the familiar brands in Hong Kong, including Wellcome supermarket, Mannings health and beauty stores, 7-11 convenience stores, and Maxim’s restaurants are all owned by DFIRG.

It might hence not be a surprise that its profit has been significantly impacted by the COVID-19 restrictions in Hong Kong.

Looking at its operating profit in the first half of 2022, its convenience store business was made a small loss as customer traffic was significantly impacted by the fifth COVID wave in Hong Kong.

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Looking at the company’s outlook, DFIRH expects 2022 profitability to be lower than 2021, as supply chain challenges continue and inflation pressures impact short-term profitability.

However, management believes that the China border closure has the most material impact on its business.

The easing of travel restrictions into Hong Kong might be the first step towards helping to reverse some of the challenges faced across its businesses.

#3 – Hongkong Land

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Like Dairy Farm International Retail Group Holding, Hong Kong Land is also owned by the Jardine Group.

It is a landlord and developer with a diversified portfolio of properties across Asia. The bulk of these assets are in Hong Kong, which contributed 66% of its gross assets as at June 2022.

This would include office and retail assets such as One & Two Exchange Square and Landmark Atrium.

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With the weak consumer spending and business sentiment in Hong Kong, the performance of its assets in Hong Kong was less impressive compared to its assets in Singapore.

Average net rent on its Hong Kong offie assets continued on its downward trend and fell further to HK$112 psf/month in 1H22 from HK$115 psf/month in 2H21.

Its retail assets also faced lower tenant sales and it had to provide rent relief to tenants.

On a more positive note, Hongkong Land has announced an extension of its share buyback programme. With the extension, Hongkong Land has the ability to invest an additional US$500 million in its share buyback programme until December 2023.

What would Beansprout do?

The long awaited re-opening of Hong Kong is definitely good news to those looking to visit or find employment opportunities, as well as businesses which have been impacted by restrictions.

As we have seen from the re-opening experience of other countries like Singapore, there is usually an uneven impact across different industries.

Retail related sectors typically benefit directly as the recovery in inbound tourists lead to an increase in consumer spending.

At the same time, some companies may be impacted by an increase in operating costs as there may not be sufficient labour to cope with the sudden surge in demand.

We did a deep-dive on Mapletree Pan Asia Commercial trust (MPACT) earlier and shared that the easing of restrictions in Hong Kong would be a key event to look out for.

With a dividend yield of 5.2%, it might be a REIT worth looking at as Hong Kong is set to re-open its borders again.

DFI RETAIL GROUP HOLDINGS LIMITED

Analysis

Consensus Share Price Target: $3.295

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