We value CMC REIT at HK$1.90/sh based on a dividend discount model, which is commonly used to value REIT vehicles. Our DDM assumes a discount rate of 6.65%, which is based on a risk-free rate of 3.0%, risk premium of 6.8% and an equity beta of 0.85x. We also assume a terminal growth rate is fixed at 0.6% p.a., which we believe reflects the longer-term inflation-adjusted rental growth potential of properties owned by the REIT. As an alternative valuation method, we calculate the NAV of CMC REIT, though it is not commonly used for REIT vehicles. By using a cap rate of 6.5% for Grade A office, 8.0-9.0% for Grade B office and 6.5-7.0% for shopping mall, we estimate the NAV to be HK$6/unit.

Key downside risks that could cause CMC REIT shares to trade below our target price include: (1) economic risks, any weaker-than expected GDP growth for the Chinese and/or global economy could negatively affect buyer sentiment in the property market, which could render our sales and earnings estimates for CMC REIT inaccurate; (2) stronger-than-expected pick-up in inflation and property prices could affect housing affordability for homebuyers. Key upside risks that could cause CMC REIT shares to trade above our target price include: (1) any stronger-than-expected economic growth in China and sharper-than-expected appreciation in property prices, rentals and capital values; (2) decreasing competition from new supplies in Shekou and Shenzhen.