Tuesday, July 14, 2020
Martin Hennecke

Once normalcy returns, MTRC is a better bet than Link REIT
There were reports by foreign media that Beijing would put trade talks on hold after US President Donald Trump signed the Hong Kong Human Rights and Democracy Act into law last week. However, I have doubts about this, as Beijing's response this far has been to ban US military vessels and aircraft from visiting Hong Kong while sanctioning several US non-government organizations. It's clear that both sides don't want the law to derail their trade negotiations. To be fair, Beijing's retaliation was not that destructive or excessive and there's are still a chance that the two nations will cut a phase-one deal by the end of the year, even though Trump has now said it can wait till after next year's US elections, shortly after saying negotiators were in the final throes of a deal. Moreover, the so-called democracy law can be likened to the ring-tightening mantra chanted by Buddhist monk Tang Sanzang whenever he needed to chastise his disciple Sun Wukong, on whose head a band was placed, in the Chinese mythological novel Journey to the West. So, the disciple did not get an unbearable headache as long as didn't do anything out of turn! Also, the unrest in Hong Kong is not foremost on Beijing's mind right now, and the central government will not lose much sleep over protesters who continue to "fight on, at any cost." Meanwhile, MTR Corporation (0066) resumed its normal service hours on Monday, except at University station. It's noticeable that there is a positive correlation between the resumption of MTR service hours, or the closing time, and the recovery of the company's share price these days. And it's not hard to explain. Now that the district council election results are out, its possible that MTRC shares will trend upwards as long as the situation stabilizes. The unrest seem to be easing although some protests flared up again in several districts last week. So we can expect the stock will continue to rise once normalcy returns to the city. American investment bank Goldman Sachs said in a report last week that MTRC is poised to recover quickly when Hong Kong's situation eventually settles. The company was severely hit by an over 20 percent drop in ridership, but the bank still expects the stock to record a core return of 4 percent this year if the company can maintain its income from properties. MTRC's shares once slumped over 22 percent from its peak this year to a recent low of HK$43.5 and many investors are waiting to jump in at HK$40 but they might need to adjust their strategy as things stand. Like MTR Corporation, the Link Real Estate Investment Trust (0823) - another company which was identified by Chief Executive Carrie Lam Cheng Yuet-ngor as one of the "three mountains" that her government needs to conquer - also underperformed with an over 20 percent drop to HK$79.15 from its peak price. The two stocks have moved almost in tandem over the past year but MTRC is believed to be better placed when the uptrend comes. Investors should notice that the senior management of Link REIT have shown their willingness to talk with the new district council members on how to serve citizens better. They've obviously adopted a proactive strategy after pro-democracy candidates won a landslide victory over the pro-establishment camp. It may be better for Link to extend an olive branch rather than wait for trouble to find it, but it remains to be seen whether this strategy will work. Though Link REIT outperformed MTRC with a dividend yield of 3.39 percent compared with the latter's 2.73 percent, it is unlikely that its shares will reach the HK$100 mark amid the retail gloom in Hong Kong, and it's a long road ahead before The Link can return to its glory days.

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