EQUITY RESEARCH

November 15, 2007 Hong Kong

Asia REITs
Link REIT (0823.HK - HKD 17.02) 1-Overweight
Earnings Review/Sales Analysis Paul Louie Jackie Choy
852.2252.6189 852.2252.6226
Early Signs of Turnaround plouie@lehman.com jackie.choy@lehman.com
LBAL, Hong Kong LBAL, Hong Kong

Investment Conclusion
‰ Link REIT reported 1HFY08 DPU of HK$0.3611, FY Mar 2007A 2008E 2009E 2010E
up 10.1% YoY and implying a 4.22% distribution Currency HKD Actual Old New Old New Old New
yield. Although revenue and DPU growth were Net Income (m) 1441.0 1626.6 1588.9 1769.4 1737.6 1877.7 1837.4
slightly behind our estimates, at the operating level EPS ($) 0.67 0.76 0.74 0.83 0.81 0.88 0.86
there were encouraging signs that the long EPS Change (%) 8.00 12.80 9.70 8.80 9.40 6.10 5.70
anticipated turnaround of its portfolio is gaining P/E (x) 25.2 22.4 23.0 20.5 21.0 19.3 19.9
some traction. Retail rental rate reversions DPS ($) 0.67 0.76 0.74 0.83 0.81 0.88 0.86
accelerated and rose 15.4% while car park income Div. Yield (%) 4.0 4.5 4.3 4.9 4.8 5.2 5.0
per bay also rose 4.6% YoY. Furthermore, the 7% NAV ($) 12.53 12.57 13.77 12.60 14.07 12.63 14.37
upward revaluation of Link's investment property Premium/(Disc.) 36.0 35.0 24.0 35.0 21.0 35.0 18.0
portfolio also suggested a 10bps compression in
cap rates. We believe these are encouraging signs Market Data Financial Summary
that efforts made in trade/tenancy mix is starting to Market Cap (mn) 36593 Proj 3-Yr EPS Grth(%) 8.3
make Link's portfolio more market driven. Link's
Market Cap (US$ mn) 4698 RoE FY07 (%) 6.4
4.35% distribution yield now offers +70bps spread
on 10-yr EFN, we believe Link offers good long- Shares Outstanding (mn) 2148.4 Current BVPS ($) 13.6
term risk-return ratio. Our HK$20.54 price target 6mth Daily T/O (US$ mn) 20.12 Net Debt ($) 10460.0
offers 21% potential upside, maintain 1-OW. Free float (%) 100.00 Net Debt/Debt+Equity (%) 26.3
Share per ADR N/A Revenue FY07 (m) 3954.0
Summary Dividend Yield (%) 4.00
‰ Tenants with turnover rents rose from 408 last Stock Overview
year to 752. 20
x10-3
14/11/07
1.20 Reuters 0823.HK
‰ NAV per share +8.7% to HK$13.62. Bloomberg 823 HK
19
‰ 59.9% of its rental income up for lease renewal in 1.10
18 ADR
next 18 months. 1.00
17

16 0.90
Performance 1M 3M 12M
15 0.80 Absolute % -2.1 5.7 7.8
Stock Rating Target Price 14
0.70
Rel. Market % -0.8 -22.5 -29.4
New: 1-Overweight New: HKD 20.54 13 Rel. Sector % - - -
0.60
Old: 1-Overweight Old: HKD 20.54 12

11 0.50
N D J FMAM J J A SOND J FMAM J J A SON 52 Week Range 19.90 - 15.20
Sector View: 1-Positive LINK RL.EST.INV.TST.
K:LREI/HNGKNGI(R.H.SCALE)
Source: DATASTREAM

Link REIT (823 HK, 1-OW) reported interim results that were generally in line with market expectations but slightly behind our forecasts.
Top line revenue grew by 5.1% YoY to HK$2,056m while interim DPU rose 10.1% YoY to HK$0.361, implying an annualized yield of
4.22%. Although the interim results were slightly below our estimates, there are encouraging signs that the long anticipated turnaround
appears to be making some progress.

Operating Data Suggest Turnaround Progress Accelerating

Looking at the operating data, we were encouraged to see the following areas of progress being made:
(1)Tenants with turnover rents rose from 408 last year to 752. Turnover rent doubled over this period from HK$12m to HK$23m.
Although turnover rents is still just 1.1% of overall revenues (up from 0.6%), we believe turnover reporting is an important management
tool for Link to monitor the overall performance of its portfolio.

Lehman Brothers does and seeks to do business with companies covered in its research reports. As a result, investors
should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.

Investors should consider this report as only a single factor in making their investment decision.

This research report has been prepared in whole or in part by research analysts employed by foreign affiliates of Lehman
Brothers Inc. who, while qualified in their home jurisdictions, are not registered/qualified with the NYSE or NASD.

PLEASE SEE ANALYST(S) CERTIFICATION(S) ON PAGE 6 AND IMPORTANT DISCLOSURES

INCLUDING FOREIGN AFFILIATE DISCLOSURES BEGINNING ON PAGE 8
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 EQUITY RESEARCH
Figure 1: Tenants with Turnover Rents up 84%
Sep-06 Sep-07 YoY
Tenants with Turnover Rents Clause 408 752 84%
Turnover Rent (HK$m) 12 23 92%
Turnover Rent as % of Total Revenue 0.6% 1.1% 0.5%
Source: Company data, Lehman Brothers research

(2) Average rental reversions up to 13.69% with retail category at 15.44% - The magnitude of retail rental reversion increase has
picked up consistently over the past three reporting period, accelerating from 5.4% in H1FY07 to 15.44% in the current period. At
15.44% and assuming three year lease terms, the average 5% uplift is now tracking in line with our estimates. We expect this number to
accelerate further as trade/tenancy mix continues.

Figure 2: Composite Reversion Rate, Average Base Rents and Car Park Income
6-mth ended Yr ended 6-mth ended
Composite Reversion Rate Sep-06 Mar-07 Sep-07
Retail 5.4% 11.1% 15.4%
Market 5.1% 6.4% 7.6%
Cooked food stalls 7.6% 7.2% 17.7%
Education / Welfare 1.1% 0.8% 0.6%
Ancillary 9.1% 11.2% 11.7%
Overall 4.9% 9.9% 13.7%
Overall excl. Education/Welfare 5.2% 10.3% 13.9%

Average base rents excl. self use

office, education/welfare, HD office
and ancillary (HK$psf) 25.4 25.9 26.6

Effective income per car park bay

per month (HK$) 913 923 955
Increase in effective income per
car park bay per month na 1.10% 3.24%
Source: Company data, Lehman Brothers research

(3) Car park revenues now rising – Car park revenues rose an unexpected 4.8% YoY to HK$456m. The increase was driven by
average income per car park bay which rose from HK$913/month to HK$955/month while utilization was kept steady at about 72%. In
light of the effective increase in monthly parking tariff, we have revised up our car parking revenue from previously flat outlook to 2.1-
3.8% p.a. growth in the next 3 years.

(4) Cap rate compression suggests some re-rating of Link’s portfolio – Link REIT’s investment property portfolio was revalued up
7% over the past six months to HK$42,352m. Compared against average base rents which only rose by 6.09%, this suggest some cap
rate compression. Based on passing NPI against Link’s property valuation, Link’s portfolio cap rate has compressed slightly from 5.97%
as at March 07 to 5.86%. As cap rates start to compress and trend towards the private sector, we believe this is an encouraging sign of
the asset reposition and improved pricing power of Link’s portfolio.

NAV per Share Up 8.7% to HK$13.62

Flowing the 7% investment portfolio revaluation through, Link REIT’s book NAV rose 8.7% since March 07 to HK$13.62. As book NAV
continues to rise, Link REIT’s valuation begins to look more attractive. P/BNAV now only sits at 1.25x.

Figure 3: Book NAV Rising with Upward Rental Reversions

14.00 13.62
13.50
13.00
12.50 12.53

12.00
11.50 11.48
11.00 11.09
10.50
10.00
Mar-06

Mar-07
Sep-06

Sep-07

Source: Company data, Lehman Brothers research

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 EQUITY RESEARCH
Lease Expiry Profile Suggest Scope for Catch Up in H2 and 2008
In the next 18 months, Link REIT should see 59.9% of its rental income up for lease renewal. With rental reversions for retail now
tracking at 15.44% and accelerating, we believe Link’s top line rental growth has scope to accelerate in the next 18 months.

Figure 4: Lease Expiry Profile – 59.9% of Rental Income Up for Renewal

40.0% 59.9%
36.5% % of Total IFA % of Rental Income
35.0%
30.7%
30.0%
23.4% 24.4% 24.2%
25.0% 22.4%

20.0%

15.0%
10.9%
9.5%
10.0% 8.1%
4.9%5.0%
5.0%
0.0%
0.0%
6-mth to Mar-08 2008/09 2009/10 2010/11 2011/12 and Vacant
beyond

Source: Company data, Lehman Brothers research

Gradual Reduction in Political Risk Premium Should Compress Distribution Yield Spread
As Link’s portfolio becomes less politically driven and more market driven, we believe there is scope for Link’s current +70bps
distribution yield spread to compress. Furthermore, as 10-yr EFN has fallen by 92bps over the past three months, we believe Link
REIT’s current +70bps distribution yield spread already offer an attractive risk-return proposition.

Figure 5: Link REIT Yield and Spread on 10-Year EFN

5.0 70bps spread 100

above 10 Yr EFN Yield 80
4.8
60
4.6
40
4.4 20
4.2 0

4.0 -20
-40
3.8
-60
3.6 -80
3.4 -100
May-07

Jun-07

Jul-07

Oct-07

Nov-07
Sep-07
Apr-07

Aug-07

Spread over 10 Yr EFN Yield (bps) (RHS) Link's FY08 Distribution Yield (%) 10 Yr EFN Yield (%)

Source: Datastream, Lehman Brothers estimates

Consistent with our existing valuation approach, we continue to value Link REIT using a 10-yr DDM with risk-free rate of 5.0%, beta of
0.5, equity risk premium of 5.0% and terminal yield of 7.25%. Our DDM fair value of HK$20.54 offers 21% equity upside, maintain 1-OW.

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 EQUITY RESEARCH
Figure 6: DDM Valuation for Link REIT
FY ending Mar-08E Mar-09E Mar-10E Mar-11E Mar-12E
Distribution per unit 0.674 0.740 0.809 0.855 0.960 1.113
...growth 9.7% 9.4% 5.7% 12.2% 15.9%

Distribution yield - on book NAV 4.95% 5.43% 5.94% 6.28% 7.05% 8.17%
Distribution yield - on current price 3.96% 4.35% 4.75% 5.02% 5.64% 6.54%
Distribution yield - on fair value 3.28% 3.60% 3.94% 4.16% 4.67% 5.42%

Differential - Current price (bps) 32 70 111 138 200 290

Differential - Fair price (bps) (36) (4) 30 52 103 178

CAPM Key valuation statistics Fair value

Terminal Yield 7.25% DDM 20.54 Current Price 17.02
Long run risk free rate 5.00% Growth rate: 2007e-11e 10.55% Book NAV 13.62
Market risk premium 5.00% Price/NAV 25%
Estimated beta 0.50 PV of terminal value 12.17
Equity Risk Premium 2.50% Terminal value % of DDM 59% Upside/Downside 20.69%
Cost of Equity 7.50% Dividend yield 4.35%
10 Year Local Bond 3.64% IRR 8.9% Total Return 25.03%
Source: Lehman Brothers estimates

Change in Our Estimates

While we have raised our FY09 growth estimates, we have had to adjust our historical base lower the time that it has taken to work
through the trade and tenancy changes. We have tweaked down our revenue estimates marginally by 0.5% to 1.3% between FY08-
FY11 and our DPU figures are adjusted down by 1.9% to 2.8%.

Figure 7: Change in Our Estimates

FY08 FY09 FY10 FY11
Revenues (HK$m)
Previous 4,256 4,539 4,784 5,166
Current 4,199 4,500 4,746 5,143
Change (57) (39) (38) (23)
Change -1.3% -0.9% -0.8% -0.5%

NPI (HK$m)
Previous 2,610 2,826 2,980 3,251
Current 2,551 2,784 2,937 3,221
Change (59) (42) (43) (30)
Change -2.3% -1.5% -1.5% -0.9%

Distribution (HK$m)
Previous 1,626 1,769 1,878 2,092
Current 1,589 1,738 1,837 2,062
Change (37) (32) (40) (30)
Change -2.3% -1.8% -2.1% -1.4%

DPU (HK$)
Previous 0.7605 0.8278 0.8785 0.9787
Current 0.7396 0.8088 0.8552 0.9599
Change -2.8% -2.3% -2.6% -1.9%

Distribution Yield 4.35% 4.75% 5.02% 5.64%

Source: Lehman Brothers estimates

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 EQUITY RESEARCH
Interim Results Review
Figure 8: Interim Results Review
(Figures in HK$m) Sep-06 Sep-07 YoY LEH Est. Var Comment
Gross Revenues 1,956 2,056 5.1% 2,094 -1.8%
...Retail 1,401 1,477 5.4% 1,522 -3.0% Retail rentals rose 3.2% HoH, faster than the 13.69% reversion would suggest
...Car Parks 435 456 4.8% 444 2.6%
...Other charges 120 123 2.5% 127 -3.4%
Property Expenses (792) (813) 2.7% (812) 0.2% Cost to income ratio fell from 40.5% to 39.5%, expenses generally in-line with forecasts
...Property mgrs' fees, staff costs, security and cleaning (350) (339) -3.1% (348) -2.7%
...Government rent and rates (54) (50) -7.4% (54) -6.8%
...Repairs and maintenance (101) (106) 5.0% (122) -12.9%
...Utilities (211) (211) 0.0% (185) 13.9%
...Promotions and marketing expenses (22) (27) 22.7% (38) -28.3%
...Other property operating expenses (54) (80) 48.1% (65) 23.1%

Net Property Income 1,164 1,243 6.8% 1,282 -3.0%

Interest Income 28 39 39.3% 29 33.4%
G&A expenses (41) (47) 14.6% (45) 5.0%
Finance costs (292) (310) 6.2% (295) 5.0%
PBT 859 925 7.7% 971 -4.8%
Change in fair value 707 2,655 275.5% -
Tax (274) (602) 119.7% (169) 255.6%
Profit After Tax 1,292 2,978 130.5% 802 271.4%

Adjustments
FV (707) (2,655) 275.5% - na
Deferred tax 124 465 275.0% - na
Other (7) (12) 71.4% - na
Distributable Income 702 776 10.5% 802 -3.2%

DPU (HK$) 0.328 0.361 10.1% 0.375 -3.7% This suggest an annualised yield of 4.22%.

Operating Statistics
Cost-to-income ratio -40.5% -39.5% -0.9% -38.8% 0.8%
Source: Company data, Lehman Brothers estimates

z Top-line revenues grew at 5.1% YoY to HK$2,056m, but 1.8% below our forecasts.
z Retail rentals rose 5.4% YoY and 3.2% HoH. This 3.2% HoH gain is faster than the 13.69% reversion would suggest (13.69%/6
periods = 2.3%).
z Car park income rose 4.8% YoY to HK$456m, 2.6% ahead of our estimates.
z Cost to income ratio fell from 40.5% to 39.5% with expenses generally in-line with our forecasts.
z NPI rose 6.8% YoY but was 3% below our forecasts
z DPU of HK$0.361 was up 10.1% YoY but 3.7% below our forecast amount. This suggests an annualised yield of 4.22%.
z Book NAV continued to see upward revaluation, up 8.7% to HK$13.62.

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 EQUITY RESEARCH
Figure 9: Link REIT Profit & Loss Statement
Period ending Mar-08E Mar-09E Mar-10E Mar-11E Mar-12E
Retail Base Rentals 3,031.5 3,290.7 3,501.8 3,860.8 4,345.8
Car park revenues 914.8 938.0 957.3 977.0 997.2
Other revenues 252.7 271.6 286.9 305.0 329.4
Total revenues 4,199.1 4,500.3 4,746.0 5,142.8 5,672.4

Property mgrs' fees, staff costs, security and cleaning (694.8) (729.9) (766.1) (808.3) (853.5)
Utilities (398.7) (384.5) (406.2) (431.4) (458.5)
Repairs and maintenance (229.7) (254.2) (269.9) (288.7) (308.8)
Government rent and rates (114.2) (134.3) (141.7) (153.8) (170.1)
Promotions and marketing expenses (65.2) (78.4) (83.0) (88.3) (94.1)
Other property operating expenses (145.8) (134.9) (142.6) (151.5) (161.1)
Property operating expenses (1,648.4) (1,716.2) (1,809.4) (1,922.0) (2,046.0)

Net Property Income 2,550.7 2,784.1 2,936.6 3,220.8 3,626.4

Cost-to-income ratio

Interest Income 69.2 39.3 31.6 35.5 41.1

Non-Property Expenses (94.7) (97.5) (99.9) (102.2) (104.6)

Property revaluation gain/loss 2,655.0 - - - -

EBIT 5,180.3 2,725.9 2,868.3 3,154.1 3,563.0

Net interest expense (614.5) (615.1) (634.2) (647.0) (657.9)

Profit Before Tax 4,565.7 2,110.8 2,234.1 2,507.0 2,905.1

Tax (773.8) (372.2) (395.6) (443.5) (513.5)

Effective tax rate -17% -18% -18% -18% -18%

Net profit 3,792.0 1,738.6 1,838.5 2,063.5 2,391.6

Adjustments for:
…Unrealised revaluation gains (2,655.0) - - - -
…Realised gains from disposal - - - - -
…Fair value gain from financial instruments (12.0) - - - -
…Deferred tax charges due to revaluation gains 465.0 - - - -

Dist. income before Strategic Partner Perf. Fee 1,590.0 1,738.6 1,838.5 2,063.5 2,391.6

Strategic Partner Performance Fee (1.0) (1.1) (1.1) (1.1) (1.1)

Distributable Income 1,588.9 1,737.6 1,837.4 2,062.4 2,390.5

Number of units in issues 2,148 2,148 2,148 2,148 2,148

DPU 0.7396 0.8088 0.8552 0.9599 1.1127

Source: Company data, Lehman Brothers estimates

Analyst Certification:
We, Paul Louie and Jackie Choy, hereby certify (1) that the views expressed in this research Company Note accurately reflect our
personal views about any or all of the subject securities or issuers referred to in this Company Note and (2) no part of our compensation
was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Company Note.

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 EQUITY RESEARCH

Company Description:
The Link REIT is Hong Kong first listed real estate investment trust. In June 2002, the HK government"s Review on the Institutional
Framework on Housing recommended the Hong Kong Housing Authority to divest of its non-core business including the management of
commercial premises. The Link was formed to hold and manage the HKHA"s portfolio. Its portfolio consists of 151 shopping centres and
29 standalone car parks totalling 960,000 sqm and nearly 80,000 car parking spaces, making The Link Hong Kong"s largest retail
landlords and car park operators.

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 EQUITY RESEARCH
Important Disclosures:
Link REIT (0823.HK) HKD 17.02 (14-Nov-2007) 1-Overweight / 1-Positive
Rating and Price Target Chart:

Currency=HKD
Date Closing Price Rating Price Target Date Closing Price Rating Price Target
31-Oct-07 17.48 1 -Overweight 21-Nov-06 16.28 18.40
24-Apr-07 17.92 20.54 28-Mar-06 16.85 17.95
24-Apr-07 17.92 2 -Equal weight 28-Mar-06 16.85 1 -Overweight
FOR EXPLANATIONS OF RATINGS REFER TO THE STOCK RATING KEYS LOCATED ON THE PAGE FOLLOWING THE LAST PRICE CHART.
Lehman Brothers Inc. and/or an affiliate trade regularly in the shares of Link REIT.
Valuation Methodology: Our price target for Link is based on a 10-year DDM using 5.0% risk free rate, 5.0% risk premium, beta of 0.5
and a terminal yield of 7.25%.
Risks Which May Impede the Achievement of the Price Target: We value Link REIT based on a 10 year dividend discount model
and termianl yield. The Link"s valuation is therefore very sensitive to change in interest rates. A material upward movement to Hong
Kong"s risk free rate could materially impact our valuation as well as The Link"s distribution yield spread.

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 EQUITY RESEARCH
Important Disclosures Continued:
The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total
revenues, a portion of which is generated by investment banking activities

Company Name Ticker Price (14-Nov-2007) Stock / Sector Rating

Link REIT 0823.HK HKD 17.02 1-Overweight / 1-Positive

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Brothers. All rights reserved. Additional information is available on request. Please contact a Lehman Brothers entity in your home jurisdiction.

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Ratings, earnings per share forecasts and price targets contained in the Firm's equity research reports covering U.S. companies are available at
www.lehman.com/disclosures.

Complete disclosure information on companies covered by Lehman Brothers Equity Research is available at www.lehman.com/disclosures.

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