Mapletree Greater China Commercial Trust - DBS Research 2018-01-29: Catching The Rising Sun In Japan

Mapletree Greater China Commercial Trust - DBS Vickers 2018-01-29: Catching The Rising Sun In Japan MAPLETREE GREATER CHINACOMM TR RW0U.SI

Mapletree Greater China Commercial Trust - Catching The Rising Sun In Japan

  • Mapletree Greater China Commercial Trust's 3Q18 DPU growth of 3.6% y-o-y in line with expectations.
  • Growth led by higher contribution from Festival Walk.
  • Concerns over Festival Walk to allayed as tenant sales growth accelerates to 6.4% y-o-y.
  • Expansion to Japan to accelerate MAGIC’s growth and lead to “Mapletree Group premium”; Target Price raised to S$1.40.

Still offers upside.

  • We maintain our BUY call with a revised Target Price of S$1.40 for Mapletree Greater China Commercial Trust (MAGIC). 
  • MAGIC has rallied over 20% since our out of consensus call in April-17 that MAGIC’s yield should compress given its strong track record and investors’ incorrect perception of the stock’s exposure to forex volatility despite the earnings resilience shown by MAGIC. However, we believe Mapletree Greater China Commercial Trust's share price rally can continue given improving macro conditions in HK and its discount to its HK peers, and plans to expand to Japan.

Where we differ –

Yield to compress further. 

  • Consensus’ Target Price of S$1.27 implies a HOLD call for MAGIC which we believe is unwarranted. While acknowledging that some of MAGIC’s HK listed peers have a lower gearing, we believe MAGIC should re-rate closer to the low-mid 5% forward yield of its peers, from its current 5.8% yield given its strong record and MAGIC recording the fourth best total cumulative return for a SREIT since its listing as well as having a portfolio with well-located assets. 
  • Moreover, we believe MAGIC’s proposed expansion to Japan, kick starting its inorganic strategy should accelerate its DPU growth. This also justifies a lower trading yield.

Improving HK retail scene. 

  • MAGIC’s share price performance in 2016/1H17 was mixed, partially due to weakness in HK retail sales that led to concerns over the ability of Festival Walk (c.70% of NPI) to increase rents. While MAGIC has since rallied, we believe the continued positive news flow from improving retail sales should be a tailwind to MAGIC’s share price.


  • After incorporating an assumed S$250m acquisition in Japan at 4.25% NPI yield and S$150m equity placement in FY19 at S$1.20 per unit, we raised our DCF-based Target Price to S$1.40 from S$1.30.

Key Risks to Our View

  • The key risk to our view is a significant downturn in the HK and Chinese economies, causing a decline in rents.

WHAT’S NEW - Positive signs from HK

3Q18 DPU up 3.6% y-o-y

  • MAGIC reported 3Q18 DPU of 5.582 Scts (+ 3.6% y-o-y) which represented c.25% of our FY18F DPU and was in line with our expectations.
  • While overall NPI was flat y-o-y, the jump in DPU was mainly attributed to lower interest costs and realised exchange gains.

Mixed operating performance

  • MAGIC had a mixed 3Q18 quarter with NPI in SGD terms for Festival Walk falling 4.8% y-o-y owing mainly to a weaker HKD. However, on a constant currency basis, NPI was flat y-o-y. Increased maintenance, marketing and promotion costs negated the impact of higher rents/revenue (+2% y-o-y in constant currency terms). Festival Walk continues to be fully occupied.
  • Gateway Plaza had a strong performance, with NPI in SGD terms jumping 17.5% or 18.4% in RMB terms. The improvement was due to higher rents and lower accrued revenue in the prior year due to application of higher assumed VAT rate. As guided in the prior quarter, occupancy at Gateway Plaza experienced some weakness, dropping to 94.0% from 95.8% in 2Q18 and 96.9% in 3Q17.
  • Contribution from Sandhill Plaza was down 3.5% y-o-y in SGD terms or 2.7% in RMB terms as occupancy dipped to 98.3% from 100% in 3Q17. Post balance date, we understand Sandhill Plaza’s occupancy has risen closer to the 100% level.
  • Overall portfolio occupancy remains healthy at 96.9% although slightly down from 98.2% in 2Q18 and 98.6% in 3Q17 on account of the weakness at Gateway Plaza and Sandhill Plaza.

Accelerating foot traffic and tenant sales with positive rental reversions

  • On the back of a pick-up in the retail scene in HK, growth in foot traffic at Festival Walk picked up to 3.5% y-o-y in 3Q18, from 0% in 2Q18. Likewise, tenant sales jumped 6.4% y-o-y, compared to 2.9% increase and 9.4% drop in 2Q18 and 3Q17 respectively.
  • Key trade sectors that did well at Festival Walk include F&B, services, cosmetics, home furnishing, and jewelry.
  • MAGIC also maintained it track record of achieving positive rental reversions. Signing rents were 10% higher than expiring rents for 9M18 (11% for 1H18) at Festival Walk.
  • Gateway Plaza also reported a slight decrease in rental reversions from 10% for 1H18 to 9% for 9M18.
  • Conversely, Sandhill Plaza had a better quarter, with 16% rental reversions for 9M18 versus 14% reported for 1H18.
  • Overall passing rents at Festival Walk (retail) now stand at HK$149.10 psf/mth, with Gateway Plaza and Sandhill at RMB430 psm/mth and RMB5.41 psm/day respectively. Asking rents for Gateway Plaza are RMB320-340 psm/mth with Sandhill Plaza at RMB5.5-6.0 psm/day.
  • Post the leases that were renewed or re-let in 3Q18, there are minimal expires for remainder of FY18 (of 0.6% leases) with another 23.1% of leases due to expire in FY19.

Increase in gearing with dip borrowing costs

  • Gearing increased to 39.3% from 38.5% at end 2Q18, due to forex movements over the quarter. This also resulted in NAV per unit falling to S$1.228 versus S$1.246 at end September 2017.
  • However, MAGIC’s effective interest rate fell to 2.69% from 2.71% in 2Q18.
  • The proportion of fixed rate date remains steady at 75%.

Expansion into Japan

  • MAGIC announced on 16 January 2018 that it would be expanding its investment mandate beyond Greater China to include Japan. The rationale for expanding the mandate is to better diversify its portfolio and enhance the ability for the trust to provide "balanced and long-term returns" for unitholders.
  • We were initially surprised that MAGIC is keen to expand its mandate, however we believe this follows on from management’s previous guidance that it is difficult to acquire decentralised offices in China give the heightened competition for these assets.
  • Post 3Q18 results, management clarified that it is more interested in office assets rather than retail assets, with cap rates for Japan offices ranging from high 3% to 5%. It would consider buying both from its Sponsor (though it does not have a right of first refusal for Japanese assets) or from third parties. No time frame was given on when it would acquire a property/portfolio of properties in Japan.
  • In terms of potential assets that MAGIC could buy from its Sponsor, we understand there is a Japanese office fund managed by its sponsor called MJOF. Based on information on Mapletree's website, the fund size is JPY65bn (c.S$800m) with a 5-year fund life (ends in June 2019). The portfolio consists of 10 offices in the greater Tokyo area. Mapletree itself also owns an office building in Tokyo.
  • While understanding the potential DPU accretion arising due to the low cost of debt (1% or less for 5- year tenure of debt), we were initially neutral on the potential move to Japan given property prices in Japan have risen substantially over the last few years. However, on reflection, due to the positive GDP growth in Japan, management’s strong track record and its Sponsor Mapletree Group’s record of delivering outstanding value to MAGIC’s sister REITs which have been accorded “Mapletree Group premium” resulting in these sister REITs trading at P/Bk of 1.3-1.5x, we have turned more positive on MAGIC’s proposed expansion to Japan. 
  • In addition, with the move to Japan which should drive MAGIC’s medium-term growth outlook, we believe the market should start to accord MAGIC a growth premium and over time apply a “Mapletree Group premium”, which should result in MAGIC’s yield compressing from its current forward yield of 5.8%.
  • Based on an assumed acquisition of a S$250m office building with 4.25% NPI yield funded through S$150m equity placement at S$1.20 per unit and S$100m worth of debt at 1%, we estimate a 2-4% accretion to our original FY19-20 DPU. MAGIC’s gearing would also remain around 39% level.
  • While we have assumed a S$150m equity placement, we do note that there is a possibility that MAGIC may not raise equity to fund the acquisition but rather debt fund the S$250m acquisition, if MAGIC’s valuers increase the valuation of its properties. Currently, the cap rate for Festival Walk, Gateway Plaza and Sandhill Plaza stand at 4.5%, 6.5% and 5.75% respectively.

Adjustments to our DPU forecasts

  • To incorporate MAGIC’s planned expansion into Japan, we have assumed a S$250m acquisition at a 4.25% NPI yield and S$150m equity placement into our numbers. The boost to our DPU is partially offset by weaker SGDHKD to better reflect the recent depreciation of the HKD versus SGD (5.60 to 5.70- 5.80) and slightly weaker than expected occupancies at Sandhill Plaza. Therefore, we have adjusted our FY17/18/19F DPU by -0.2%/1.3%/-0.7%.
  • Thus, all in, we have raised our DCF-based Target Price to S$1.40 from S$1.30 after increasing our terminal growth rate from 1.5% to 2.0%.

Future growth driven by Festival Walk and Sandhill Plaza

  • With passing rents at Gateway Plaza approaching market rents, we believe earnings profile for Gateway Plaza should start to plateau.
  • The growth going forward will be driven by Festival Walk and Sandhill Plaza which are still relatively under rented. Thus, we expect positive rental reversions to continue going forward.
  • Near term, for 4Q18, we do note that reported DPU should be down y-o-y; in 4Q17 MAGIC had reversed some of the VAT that it had accrued in the prior 3 quarters. MAGIC had previously assumed a higher property tax at Gateway Plaza which was subsequently reduced upon further discussions with the authorities in Beijing.

Maintain BUY with revised Target Price of S$1.40

  • With 3Q18 results in line with expectations and more than 15% total return expected over the next 12 months, we reiterate our BUY call with a revised Target Price of S$1.40.
  • We continue to like MAGIC for its attractive yield of 5.8% which remains too high in our view considering the quality of its assets.
  • Furthermore, we expect the continued improvement in the HK retail scene as well as the expansion to Japan to sustain the re-rating over the past 6-9 months.

Mervin SONG CFA DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2018-01-29
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.40 Up 1.300