Bocom International released a research report stating that Fortune REIT (00778) is scheduled to announce its full-year 2025 results in early March 2026. Taking into account the company's operational performance, the impact of fluctuating borrowing costs, and changes in the Hong Kong retail market environment, the firm has updated its financial model and forecasts, maintaining a Buy rating and a target price of HK$5.92. The key points from Bocom International are as follows.
Following the completion of previous asset enhancement initiatives (+WOO, Wah Do Avenue, and Laguna City Mall) and the postponement of the Fortune Metropolis asset enhancement plan, the broker anticipates a further slight improvement in Fortune's overall occupancy rate in the second half of 2025. The recent introduction of more specialty dining options, new brands, and fitness centers within the portfolio is expected to help boost customer traffic and mitigate some of the impact from retail sector churn.
The firm observes a stabilization in the retail sales market, primarily benefiting from increased tourist numbers driving sales growth in core areas and for non-essential goods. Fortune REIT's major tenants are focused on essential consumption serving surrounding residents, a segment still partially affected by cross-border e-commerce and consequently experiencing a relatively slower recovery. Concurrently, the broker expects that tenants such as supermarkets, which previously had a higher rental base, will face a relatively larger impact during lease renewals in 2025.
Approximately 50% of the company's debt is floating-rate debt. With the overall HIBOR level in 2025 projected to be lower than in 2024, this is expected to help reduce overall financing costs and partially offset the impact of rental adjustments. The firm has made minor adjustments to its revenue and distribution forecasts.
Given that the Hong Kong retail market may still require time for consolidation, Bocom International has slightly lowered its revenue and distribution forecasts for Fortune for 2025-2027. However, it believes that improvements in the stock market and property performance could generate a wealth effect, contributing to market stability in the medium to long term. The broker forecasts that distributions for 2026 and 2027 are expected to grow year-on-year by approximately 1-2%.
The target price remains unchanged, and the Buy rating is maintained. The company's Hong Kong retail portfolio, predominantly focused on essential consumption, demonstrates resilience and is expected to largely maintain high occupancy rates. The probability of further interest rate cuts by the US Federal Reserve this year could potentially benefit the company's share price performance. Furthermore, the broker views potential inclusion in the Stock Connect programs as a key catalyst over the next 12 months, with the combined effect of interest rate cuts likely outweighing the impact of changes in rental adjustment expectations.