Champion REIT (2778 HK): Recent Outperformance Unjustified, Reiterate Reduce Amidst Office Challenges

CGS International Securities Hong Kong Limited April 29, 2025
Champion REIT (2778 HK): Unjustified Surge? CGS International Reiterates Reduce Amid Market Headwinds

Introduction: Recent Outperformance Under Scrutiny

Champion REIT (CREIT) has seen a notable appreciation in its unit price, climbing 26% year-to-date (YTD) as of April 29, 2025. This performance significantly outpaces Link REIT (823 HK, Add), which rose 17%, and the Hang Seng Property Index, which gained 22% over the same period. Despite this strong run, fundamental challenges persist, particularly within the Hong Kong office market. CGS International finds the significant outperformance unjustified, citing ongoing negative rental reversions expected in FY25F/26F and a low probability of value-unlocking corporate actions like privatization. Consequently, the recommendation remains “Reduce,” with a slightly adjusted target price of HK$1.53, implying a 9.02% FY25F DPU yield.

Champion REIT: Price Surge vs. Fundamentals

The 26% YTD surge in CREIT’s units has occurred without any apparent significant corporate developments, such as major asset disposals or privatization moves, that would typically drive such appreciation.
Currently, CREIT trades at a 56% discount to its Net Asset Value (NAV). While this discount is substantial, it is narrower than the average 62% discount observed across the Hong Kong landlords and REITs covered by CGS International. This relatively less steep discount makes a privatization offer from its controlling shareholder, Great Eagle (41 HK, NR), less probable in the near term, according to the analysis. Great Eagle holds a 69.2% stake in Champion REIT.

Hong Kong Office Market Challenges Impact CREIT

The outlook for the Hong Kong office sector remains challenging, directly impacting CREIT’s portfolio.

Vacancy and Rental Reversions

The vacancy rate for Grade-A offices in Hong Kong’s Central district remained largely stable quarter-on-quarter in 1Q25, standing at 11.5% as of March 31, 2025, based on data from Jones Lang LaSalle (JLL). However, this market-wide rate is considerably lower than the 17% vacancy recorded at CREIT’s key asset, Three Garden Road (3GR) in Central, during 2024.
A significant portion of leases at 3GR, specifically 43%, are set to expire in the fiscal year 2025 (FY25F). Given the market conditions, CGS International anticipates negative rental reversions of approximately -10% for these expiring leases, as management is likely to prioritize tenant retention over pushing rents higher. This pressure is expected to drag 3GR’s average office passing rent down to HK$83 per square foot by the end of 2025, a decrease from HK$87 per square foot at the end of 2024. Despite the rental pressure, the office vacancy rate at 3GR is projected to remain stable year-on-year at 17% in 2025F.
The following charts illustrate historical occupancy and passing rent trends for CREIT’s major assets:

Financial Outlook & Valuation Adjustments

CGS International has fine-tuned its financial forecasts for CREIT based on revised assumptions for operating expenses (opex) and interest costs. The interest cost assumption is now 4.5% for FY25F and approximately 4% for FY26F-27F.

DPU Forecasts and Target Price

These revised assumptions lead to minor adjustments in the Distribution Per Unit (DPU) forecasts:
FY25F DPU: +0.1% change
FY26F DPU: -3% change
FY27F DPU: -3% change
The DPU payout assumption remains constant at 90% of distributable income for FY25F-27F.
The valuation period has been rolled over to May 2015-April 2025. This, combined with the updated forecasts, results in a new target FY25F DPU yield of 9.02% (down slightly from 9.1% previously). Consequently, the target price (TP) for CREIT is increased marginally by 1% to HK$1.53.

*Benchmark rate = US 10-year Treasury yield; FY25F DPU for both old DPU and new DPU

Financial Summary

The following table provides a summary of key financial forecasts:

NAV Breakdown

The estimated Net Asset Value (NAV) breakdown for the end of FY25F highlights the portfolio composition:

Cap rates (gross basis) used: 5.0-5.5%

Investment Thesis: Reiterate Reduce

CGS International reiterates its “Reduce” rating on Champion REIT. The core reasons for this stance are:
A turnaround in the office rental performance appears unlikely within the next 6-12 months due to persistent market headwinds.
The likelihood of significant corporate actions, such as privatization or major asset sales to unlock value, seems low at the current valuation.
Given these factors, the recent relative outperformance of CREIT’s unit price is viewed as unjustified.
Potential de-rating catalysts include:
Stronger-than-expected negative rental reversions.
Increases in asset vacancies.
Key upside risks to the rating and target price are:
Higher-than-anticipated rental income.
Lower-than-expected borrowing costs.

ESG Considerations

Champion REIT holds an LSEG ESG Combined Score of ‘B’. The trust integrates sustainability into its operations through long-term strategies aligned with nine UN Sustainable Development Goals (UNSDGs) established in 2019. A Sustainability Working Group reports quarterly to the board on ESG progress.

ESG Highlights and Trends

* **Governance:** Robust governance structure with board oversight. * **Climate Action:** Established a climate risk and resilience policy in 2021. Initiatives include installing solar panels and over 40 electric vehicle (EV) charging stations at Three Garden Road and Langham Place. * **Energy Efficiency:** Reduced energy consumption by 0.3% in 2023. Launched the “Green Champion Challenge” to encourage tenant participation in energy saving. * **2030 Blueprint:** Set 14 ESG targets, including: * Reducing carbon emissions intensity by 42% (vs. 2011 baseline). * Reducing water consumption intensity by 25% (vs. 2014 baseline). * Increasing average employee training time by 50%. * Increasing volunteer service hours by 25%.

Implications

CGS International sees no immediate ESG issues of concern for CREIT. The demonstrated commitment to ESG could potentially support a re-rating if further progress is made. Currently, no explicit ESG premium or discount is applied in the fundamental valuation. Continued improvement in ESG metrics could attract greater interest from ESG-focused investors.

Peer Analysis: Hong Kong Property Sector Valuations

The following table provides a comparative valuation summary for key Hong Kong property developers, landlords, and REITs as of April 28, 2025:

* HKL data stated in US\$

Historical Performance & Ratings (Spitzer Chart)

The chart below illustrates Champion REIT’s price performance over the past two years, alongside the historical recommendations and target prices set by CGS International. It visually represents the context for the current “Reduce” rating and target price adjustments over time.

Analyst Information & Disclosures

Analyst(s):
Raymond CHENG, CFA (T: (852) 2539 1324, E: raymond.cheng@cgsi.com)
Will CHU, CFA (T: (852) 2539 1327, E: will.chu@cgsi.com)
Steven MAK (T: (852) 2539 1328, E: steven.mak@cgsi.com)
Analyst Certification: The analyst(s) responsible for this report certify that the views expressed accurately reflect their personal views about the subject issuer(s) or securities and that no part of their compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed herein.
Disclosures:
As of April 28, 2025, CGS International did not report a proprietary position in the securities covered or recommended in this report.
As of April 29, 2025, the analyst(s) who prepared this report, and their associate(s), did not report having an interest in the securities covered or recommended in this report.
CGS International does not receive any compensation or other benefits from any of the listed corporations mentioned relating to the production of research reports.
CGS International or its affiliates may from time to time perform or seek to perform significant investment banking, advisory, underwriting or placement services for or relating to the company(ies) covered in this report.

Recommendation Framework

Stock Ratings Definition:
Add: The stock’s total return is expected to exceed 10% over the next 12 months.
Hold: The stock’s total return is expected to be between 0% and positive 10% over the next 12 months.
Reduce: The stock’s total return is expected to fall below 0% or more over the next 12 months. (Total expected return = % difference between target price and current price + forward net dividend yields. Investment horizon: 12 months)
Sector Ratings Definition:
Overweight: Stocks in the sector have, on a market cap-weighted basis, a positive absolute recommendation.
Neutral: Stocks in the sector have, on a market cap-weighted basis, a neutral absolute recommendation.
Underweight: Stocks in the sector have, on a market cap-weighted basis, a negative absolute recommendation.
Country Ratings Definition:
Overweight: Investors should be positioned with an above-market weight in this country relative to benchmark.
Neutral: Investors should be positioned with a neutral weight in this country relative to benchmark.
Underweight: Investors should be positioned with a below-market weight in this country relative to benchmark.