Excerpts from Maybank Kim Eng report
Analyst: Chua Su Tye
|Initiate coverage with BUY
Sasseur REIT’s portfolio of four outlet mall properties in China’s fast-growing Tier-2 cities of Chongqing, Hefei and Kunming arguably offers a unique and compelling investment proposition.
(1) captures one of China’s most important consumer trends – ‘premiumisation’,
(2) is a front runner in China’s fastest-growing retail format,
(3) has downside protection to its distributions with minimum rental guarantees till FY19 while the embedded 10-plus-10-year entrusted management agreements (EMAs) enjoy growth upside from sales-based leases, and
(4) has a visible sponsor-led acquisition growth pipeline.
Initiate at BUY to our SGD0.90 DDM-based TP (WACC: 10.7%, LTG: 3.0%).
A play into China’s retail ‘premiumisation’ theme
Outlet malls are capturing a larger wallet share of China’s brand-conscious, yet price-sensitive ‘aspirational consumers’.
|Valuations compelling on growth relative to peers
We initiate at BUY, with 7.8% (annualised) dividend yield support to our DDM-based TP of SGD0.90, suggesting 24% total return.
Key risks are (1) increasing competition, (2) tenancy risks, mitigated by its shorter salesdriven leases, and (3) currency-exchange fluctuations given CNYdenominated revenue and SGD distributions.
The combination of premium product offerings, discounted prices and malls that incorporate lifestyle elements is a potent draw for China’s burgeoning middle class. The appeal to brand owners includes the opportunity to offload overstock, predominantly short-term and sales-based leases and outreach to new customers.
With this win-win arrangement, we envisage Sasseur’s addressable market to grow at 24% CAGR from 2017-2021E.
Protection from risk-absorbing EMAs, clear acquisition growth pipeline
Although leases are structured as a percentage of sales, FY18E and FY19E distributions should be stable as operational risks are transferred to its sponsor through embedded EMA structures.
EMAs provide for minimum fixed rents while integrating upside via a variable component linked to the sales performance of its retail tenants.
Higher occupancy and traffic from the relatively new Hefei and Kunming Outlets support near-term organic growth. Beyond that, acquisition outlook is supported by SGD700-850m debt headroom post-IPO, as two ROFR assets and three third-party pipeline properties potentially triple total NLA of its existing portfolio.
Full report here.