MGCCT

MGCCT: Post 1HFY14 results, HSBC maintains Neutral with TP of $1.05 (from $1.07). Operationally, MGCCT has made advanced progress with lease renewals, having committed 95-100% and 78% of leases expiring in FY14e at Festival Walk (FW) and Gateway Plaza (GP) office as of Sep 2013 (up from 84-90% and 43% as of June 2013). Rental uplifts of 22% and 81% have been achieved at FW and GP office, still tracking ahead of the company’s guidance of 15% and 65% during IPO. HSBC believe strong rental reversions and high occupancy (99% as of Sept 2013) should support MGCCT's distributable income growth (+4.6% q-o-q in 2QFY14). On the financing side, MGCCT has taken steps to reduce earnings risks from potential interest rate hikes, including 1) the repayment of HK$695m term loan, helping lower gearing by 1.4pp q-o-q to 40.1% as of Sept 2013 and 2) increasing the portion of debt hedged to fixed interest costs from c.67% to c.71%. While MGCCT is well positioned to deliver solid rental growth, HSBC believe its near-term share price performance, like other REITs, will likely be driven by long-term bond yield trends, such as in HK and US. Fluctuations in these would affect discount rates and cap rate assumptions.