Facing multiple factors, such as the continued increase of market supply, relative shortage of effective office needs, and the transformation of corporate office methods towards more flexible and diversified, commercial office buildings have encountered great pressure in recent years. Despite the uncertainty of the industry's development, there are still enterprises that have demonstrated the ability to go against the current through excellent management skills.

On August 14th, China Merchants Commercial REIT announced its mid-term performance for 2024, recording a profit of 0.266 billion yuan, an 11.9% year-on-year increase; net property income of 0.201 billion yuan, a 12.5% year-on-year increase; and a distribution of 0.06 Hong Kong dollars per fund unit, an increase of 26.3% from the same period last year.

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From the financial report, the core highlight of this report is that the company's distribution per fund unit has achieved a significant increase. This data released a positive signal to the outside world, showing the healthy operating status and good profit prospects of China Merchants Commercial REIT.

For investors seeking stable returns, higher distribution is an important attraction, and this upward trend will obviously further enhance the company's attractiveness in the market.

Undeniably, the growth of distribution is usually based on the company's sound financial foundation, and China Merchants Commercial REIT's mid-term report provides strong evidence for this.

Specifically, the company's revenue mainly comes from the composite income of the property, and the operating performance of multiple assets is stable.

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

(Source: Company Announcement)

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

(Source: Company Announcement)

Specifically, Tech Tower and Tech Tower Phase II are fully leased, and the rental rates of the other three office buildings have also increased significantly. Among them, the rental rate of Digital Mansion increased by 9.7 percentage points to 91.1%, and the rental rate of China Merchants Hang Hua Science and Technology Trading Center increased by 9.2 percentage points to 91.1%. After undergoing upgrade and renovation, Hua Yuan City's rental rate 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 operating situation of China Merchants Commercial REIT can still be clearly seen from its various operating data.

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

On the one hand, although the office building market is fiercely competitive and the overall pressure is not small, China Merchants Commercial still adopts relatively flexible strategies, such as adjusting rental prices appropriately to attract and retain tenants, thereby maintaining high occupancy rates and asset liquidity. Although this strategy may have a certain impact on income in the short term, it is helpful for stabilizing the company's cash flow and market position in the long run.

In addition, the company has also enhanced the attractiveness and competitiveness of its assets through measures such as optimizing tenant structure, improving service quality, and upgrading and renovating the property. In terms of tenant structure, the company focuses on introducing high-growth potential industries such as technology and medical, which provide more reliable sources of rental income for the company due to their stability and growth potential.

Just looking at Phase II of Tech Tower and Digital Mansion, the proportion of tenants from the technology and information technology sectors reached 50% and 38%, respectively. Tech Tower's tenants are in the healthy medical industry, where the occupancy rate not only maintains 100%, but the rental price has also steadily increased, with a rental unit price of 137.4 yuan per square meter as of June 30, 2024, an increase of 3.8 yuan/square meter.

(Source: Company Announcement)

In addition, the renovation and upgrading of the property has also become an important driving force for helping the company's operations move towards a new level. Taking Hua Yuan City project as an example, it completed the enclosed partition decoration at the end of 2023 and opened for business in 2024, and the company adopted an active leasing strategy, providing more attractive rental unit prices, which has achieved good results. In the first half of the year, the occupancy rate increased rapidly by 11.3%, which not only strengthened its commercial vitality but also laid a solid foundation for future operations.

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

Its assets are mainly located in core commercial areas of first-tier cities, which usually have high economic vitality and market demand. This not only provides a solid foundation for asset preservation and appreciation, but also effectively avoids the risk of asset depreciation caused by market fluctuations. In fact, even under unfavorable market conditions in recent years, the company's property valuation has remained stable, demonstrating strong market resistance. Product structure, 10-30 billion yuan products operating income of 401/1288/60 million yuan respectively.

(Source: Company Announcement)

In addition, in 2023, China Merchants Commercial REIT significantly reduced its financing costs through loan replacement, which not only reduced the company's financial burden, but also effectively enhanced its ability to resist risks in an uncertain market environment. The interim report also specifically mentioned that last year's refinancing is expected to save nearly 15 million yuan in interest expenses this year, which further proves the company's forward-looking financial management. Through prudent financial management and cost control, China Merchants Commercial REIT not only maintains a healthy financial situation, but also makes sufficient preparations to deal with market uncertainties.

2. Multiple factors catalyze and help value enhancement.

Looking ahead, we can clearly see that China Merchants Commercial REIT is facing multiple potential catalysts.

First of all, from the policy perspective, under the package of policies that support economic recovery, it provides driving forces for economic recovery and provides a good external environment for China Merchants Commercial REIT's operations.

At the same time, the deepening reform of capital markets has brought new opportunities for REITs. From the REITs market, as early as April of this year, the China Securities Regulatory Commission and the Hong Kong Securities Regulatory Commission jointly announced that real estate investment trust funds (REITs) have been included in the Shanghai-Hong Kong Stock Connect mechanism.

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

Secondly, the current expectation of the Fed's interest rate cut is continuously increasing, which is also bullish for the Hong Kong stock market.

In this regard, Guotai Junan Securities previously stated that based on historical experience, some US economic data has reached the level of the start of the interest rate cut cycle. With the start of the Federal Reserve interest rate cut cycle, the policy space in China is broader. After the US Federal Reserve interest rate cut cycle starts, the space for the Hong Kong stock market to rise further. Under the stimulating effect of the Hong Kong stock market, investment tools like China Merchants Commercial REIT that have stable income and high-quality assets are expected to attract more investors' attention.

Finally, let's go back to the fundamentals of China Merchants Commercial REIT.

The company's major property assets are located in core commercial areas of first-tier cities and are closely related to local consumption vitality. As the policy results in the second half of the year become apparent, the growth of office and consumption demand is expected to further boost the company's performance.

In particular, in terms of property renovation and upgrading, the potential of China Merchants Commercial REIT is expected to be further released. Looking at the Garden City project, the market promotion activities and membership benefits after the renovation and upgrading have effectively increased customer traffic and memberships. Since the brand new opening in early 2024, its customer traffic has increased by about 50% compared with before the opening. The number of members in the Garden City exceeded 0.19 million people for the first time in July.

It is worth mentioning that the G floor of Haiwan Subway Station in Garden City was officially put into use in July, and the convenience of transportation has been significantly improved. At the same time, China Merchants Commercial REIT also attracts more Hong Kong visitors by providing free shuttle buses to the Shenzhen Bay Port, which further enhances its income visibility.

In conclusion, the results achieved in the first quarter demonstrate that AI capabilities have brought new opportunities to the company. With the continuous increase in the penetration rate of large models, continuous enhancement of product performance, diversification of landing scenarios, and further expansion of overseas business, Cheetah Mobile is expected to welcome a broader development space.

Recently, Huaxia Shouchuang Outlet REITs public offering received enthusiastic subscription from investors, creating a new peak for public offering multiples of consumer REITs. This to some extent reflects the market's favor for REITs products.

At present, with the continuous introduction of policies to boost the economy and promote consumption, the economy has ushered in a trend of recovery. At the same time, the market's expectation that the Fed's current interest rate hike cycle is about to end is gradually increasing, which brings opportunities for the upward movement of low-volatility and stable-yield REITs fund products.

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.