In recent years, commercial office buildings have been under great pressure due to multiple factors, such as the continuous increase in supply in the current market, relative shortage of effective office demand, and the transformation of corporate office methods to be more flexible and diversified. Despite the industry facing uncertain development, some companies have still shown a trend of bucking the trend through outstanding operating capabilities.

On August 14th, China Merchants Commercial REIT announced its mid-year performance for 2024. During this period, the fund recorded a profit of 0.266 billion yuan, a YoY increase of 11.9%; the net property income was 0.201 billion yuan, a YoY increase of 12.5%; and the distribution per unit of the fund was 0.06 Hong Kong dollars, a significant increase of 26.3% compared to the same period last year.

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From the financial report, the highlight of this report is the significant increase in the distribution per unit of the fund. This data sends a positive signal to the public, demonstrating China Merchants Commercial REIT's healthy operating status and good profit prospects.

For investors seeking stable returns, higher distribution is an important attractive factor. This increasing trend will undoubtedly further enhance the company's appeal in the market.

Undoubtedly, the growth of distribution is usually based on the company's sound financial foundation, which is strongly supported by China Merchants Commercial REIT's mid-term report.

Specifically, the company's income mainly comes from the combined rental income of its properties, of which the operating performance of multiple assets is stable.

During the reporting period, the company's property rental income reached 0.238 billion yuan, a significant increase of 9.7% YoY.

(Source: Company Announcement)

The rental rate of each property also performed well. In the first half of the year, the overall rental rate of the company's property portfolio rose from 86.8% to 92.7%, an increase of 5.9 percentage points compared to the end of 2023. The average rental rate of office buildings also increased to 94.7%, a growth of 4.7 percentage points.

(Source: Company Announcement)

Specifically, the Tech Tower and Tech Tower Phase II are fully occupied, and the rental rates of the other three office buildings have also increased significantly. Among them, the rental rate of the Digital Master Mansion increased by 9.7 percentage points to 91.1%, and the rental rate of the China Merchants Aviation Science and Technology Trading Center increased by 9.2 percentage points to 91.1%. After upgrading and renovation, the rental rate of the Garden City has increased significantly by 11.3 percentage points to 85.0%.

It can be seen that even in the complex and ever-changing external environment, the steady operation of China Merchants Commercial REIT can still be clearly seen from various business data.

And this achievement is inseparable from the company's excellent operating capabilities.

On the one hand, despite fierce competition in the office building market and considerable pressure overall, China Merchants Commercial REIT has adopted a relatively flexible strategy, such as attracting and retaining tenants by adjusting rental prices to an appropriate level, thus maintaining high rental rates and the liquidity of assets. Although this strategy may have certain short-term impact on income, in the long run, it is conducive to stabilizing the company's cash flow and market position.

In addition, the company has increased the attractiveness and competitiveness of its assets through measures such as optimizing tenant structure, improving service quality, and upgrading properties. In terms of tenant structure, the company focuses on introducing high-growth potential industries such as technology and medical care, which provide a more reliable source of rental income for the company due to the stability and growth potential of these industries.

Just looking at the Tech Tower Phase II and Digital Master Mansion, the proportion of technology and information technology tenants reached 50% and 38% respectively. And the tenant of Tech Tower is from the medical industry and has maintained a 100% rental rate. The rent has also steadily increased. The rental price per square meter on June 30, 2024 was 137.4 yuan, an increase of 3.8 yuan/sqm.

(Source: Company Announcement)

In addition, the renovation and upgrading of properties has become an important driving force for the company to move towards a new level of operation.

Looking at the Garden City project, it completed the enclosed area decoration by the end of 2023 and has been open for business since 2024. The company has adopted an active leasing strategy, providing more attractive rental prices, and has achieved good results. In the first half of the year, the rental rate increased rapidly by 11.3%. It not only enhances the commercial vitality of the property, but also lays a solid foundation for future operations.

In addition to its excellent operating capabilities, the superior asset quality of the company is also an important support for the steady development of China Merchants Commercial REIT.

Its assets are primarily located in core commercial areas of first-tier cities, which typically have higher economic vitality and market demand, providing a solid foundation for asset preservation and appreciation, and effectively mitigating the asset devaluation risks brought by market fluctuations. In fact, it can be seen that even under unfavorable overall market conditions in recent years, the company's property valuation has remained stable, demonstrating a strong market resilience.

(Source: Company Announcement)

In addition, China Merchants Commercial REIT significantly reduced financing costs by loan substitution in 2023, a strategy that not only reduced the company's financial burden, but also effectively enhanced its risk resistance in uncertain market conditions. The interim report specifically mentioned that last year's refinancing is expected to save nearly 15 million yuan in interest payments for this year, further demonstrating the company's forward-looking financial management. Through prudent financial management and cost control, China Merchants Commercial REIT has not only maintained a healthy financial condition, but also made sufficient preparations to cope with market uncertainties.

2. Multiple factors catalyze and help to increase value.

Looking ahead, China Merchants Commercial REIT faces several potential catalysts.

First of all, from a policy point of view, under a package of policies to support economic recovery, China Merchants Commercial REIT's operations have provided a good external environment for driving economic recovery.

At the same time, the deepening reform of the capital market has also brought new opportunities for REITs funds. Looking at the REITs market, as early as April this year, the China Securities Regulatory Commission and the Hong Kong Securities Regulatory Commission jointly announced that Real Estate Investment Trust (REITs) funds would be included in the Shanghai-Hong Kong Stock Connect mechanism.

As a leading REITs fund in the market, if the relevant policies are implemented, China Merchants Commercial REIT is expected to become a direct beneficiary, attracting more investors and opportunities for valuation repair or even reevaluation.

Secondly, the continued enhancement of the expectation of a U.S. Federal Reserve rate cut is also good news for the Hong Kong stock market.

On this point, Guotai Junan Securities previously stated that based on historical experience, some U.S. economic data has already reached the level of the start of the rate cut cycle in the past. With the launch of the rate cut cycle by the U.S. Federal Reserve, the domestic policy space is even wider. With the stimulation effect of the Hong Kong stock market, investment tools such as China Merchants Commercial REIT, characterized by stable returns and high-quality assets, are expected to attract more investors' attention.

Finally, returning to China Merchants Commercial REIT's fundamentals.

All of the company's major property assets are located in core commercial areas of first-tier cities, closely related to local consumer sentiment. With the effects of policies becoming apparent in the second half of the year, the continued growth of office and consumption demand is expected to further drive the company's performance.

In particular, with regard to property renovation and upgrading, China Merchants Commercial REIT's potential is expected to be further released. For example, in the case of the Garden City project, market promotion and membership benefits after renovation and upgrading have effectively increased foot traffic and the number of members. Since its grand reopening at the beginning of 2024, foot traffic has increased by about 50% compared to before the reopening, and the number of members in July exceeded 190,000 for the first time.

It is worth noting that the G floor Seahai subway station at Garden City was officially opened in July, significantly improving transportation accessibility. At the same time, China Merchants Commercial REIT has also adopted methods such as providing free shuttle buses to the Shenzhen Bay Port to attract more Hong Kong visitors, which further enhances its income predictability.

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Under the current background of policies to boost the economy and promote consumption, the economy is undergoing a trend of recovery. At the same time, market expectations of the end of the current round of U.S. Federal Reserve interest rate hikes are gradually rising, which brings upward opportunities for low-volatility and stable-income property fund products. Against this backdrop, China Merchants Commercial REIT has shown greater stability in its operations, and is expected to become a focus of market attention, welcoming new opportunities for value appreciation.

In this context, China Merchants Commercial REIT has demonstrated stronger stability at the operating level, and is expected to become the focus of market attention and usher in new opportunities for value enhancement.