Sasseur REIT - DBS Research 2018-09-18: Up Up And Away


Sasseur REIT - Up Up And Away

  • First S-REIT with exposure to China’s fast growing outlet mall industry.
  • Downside protection via entrusted management agreement with minimum revenue guarantee by Sponsor.
  • Further upside from tapping visible acquisition pipeline.
  • Initiate with BUY call and Target Price of S$0.91.

Rapidly growing China outlet mall portfolio.

  • Sasseur REIT (SASSR) is the first S-REIT with exposure to the fast growing Chinese outlet mall industry which is projected to grow at a CAGR of 24% between 2016-2021. Its initial portfolio consists of four outlet malls located in Chongqing, Bishan, Hefei and Kunming.
  • Thus far, tenant sales for the malls have exceeded IPO forecasts, growing at 13-136% y-o-y in RMB terms and we project overall portfolio tenant sales to increase by 16-24% p.a. over the next two years.

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Unique model provides upside but also downside protection.

  • Sasseur REIT has a unique model via the Entrusted Management Agreement (EMA) with its Sponsor. Under the EMA, 70% of the group’s revenues are fixed, growing at 3% per annum providing the REIT with downside protection. The remaining 30% of revenues is pegged to 4-5% of a property’s tenant sales which provides leverage to the success of the mall.
  • Furthermore, all operating costs for the mall are borne by the Sponsor, with the Sponsor guaranteeing a minimum revenue for at least two years should the REIT not hit its IPO forecasts. 

Upside from acquisitions.

  • Sasseur REIT’s Sponsor has extended the right of first refusal (ROFR) over two properties and three pipeline properties which would triple the REIT’s gross floor area (GFA). With gearing at 33-34%, the SASSR is well positioned to execute its inorganic strategy, providing upside risk to our estimates.
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Investment Summary

First REIT in Asia focusing on outlet malls in China.

  • Sasseur REIT is the first outlet mall REIT to be listed in Asia. Its initial portfolio comprises outlet malls located in China, and consists of four outlet malls located in selected cities of Chongqing, Bishan, Hefei and Kunming valued at c.RMB 7.3bn (S$1.5bn). These cities have enjoyed a track record of sustainable growth in GDP per capita, per capita disposable income, and retail sales, which bodes well for performance of the outlet malls.

Exposure to fast growing retail outlet sector.

  • Sasseur REIT offers investors the opportunity to gain exposure to the fast- growing retail outlet mall sector in China. According to China Insights Consultancy, the retail outlet mall sector is expected to grow from RMB49.1bn (US$7.1bn) in 2016 to RMB144.9bn (US$21bn) by 2021 or CAGR of 24.2% per annum. 
  • In the medium term, the retail outlet industry in China is set to be the largest globally to surpass the US by 2030, reaching annual sales revenue of c.RMB640.2bn (US$92.9bn). This strong growth outlook is underpinned by growing consumption levels in China as well as the emerging middle- class.
  • Based on China Insights Consultancy, the per capita disposable income is expected to increase to RMB34,700 (US$5,036) by 2021 at a CAGR of 7.8% from 2016 to 2021. Furthermore, outlet mall penetration in China remains low at 0.4 sqm of GFA per 100 residents compared to the US, EU and Japan at 2.4 sqm, 1.0 sqm and 0.5 sqm respectively. This represents an opportunity for expansion through higher operating performance or acquisitions for Sasseur REIT.

Sponsor is the leading privately owned outlet mall operator.

  • Sasseur REIT’s Sponsor, Sasseur Cayman Holding Limited, is the leading privately-owned outlet operator in China, with six outlet malls and two additional outlet malls planned for. Due to the Sponsor’s proven track record and brand reputation, Sasseur REIT should benefit from its Sponsor’s expertise to secure the right tenants and drive income going forward.
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First mover advantage in Tier 2 Chinese cities.

  • The initial portfolio is strategically located across three fast growing Tier- 2 Chinese cities of Chongqing, Kunming, and Hefei. With the Sponsor’s early entry into these high growth markets, the REIT is well positioned to capture the rapid growth in consumption. Consumption growth in these Tier-2 cities are projected to increase at CAGR of 8.2% per annum between 2016 and 2012, faster than that in Tier-1 and even Tier 3 & 4 cities at 6.7% and 6.8% respectively.

Rental formula empowers the REIT to enjoy a balance of growth and stability.

  • Sasseur REIT derives rental income from a lease arrangement (called the Entrusted Management Agreement) with the Entrusted Manager. The Entrusted Manager oversees the day-to-day operations, marketing and cash collection. Rentals paid to the REIT under the Entrusted Management Agreement (EMA) is based on a mix of fixed component rent (c.70% of FY18F-19F gross revenues) and a variable rent that is tied the performance of underlying tenant sales.
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  • This rental income structure enables Sasseur REIT to deliver a balance of stability (through fixed rental structure) and growth through variable income tied to underlying tenant sales. We project FY18F-19F (annualised basis) revenues to grow by 8% p.a.

Visible acquisition pipeline that could approximately triple the GFA of the initial portfolio.

  • The Sponsor has given Sasseur REIT a voluntary right of first refusal (ROFR) over 2 properties and 3 pipeline properties, where most are in Tier 2 cities. Assuming the REIT acquires all of the Sponsor’s ROFR and pipeline properties, Sasseur REIT could potentially triple its GFA with the addition of 0.7m sqm of GFA. 
  • Sasseur REIT’s current gearing is 33-34%, implying ample financial capacity and flexibility to execute on acquisitions.

Sasseur REIT is helmed by an experienced and dedicated team

  • Sasseur REIT is helmed by an experienced and dedicated team comprising Mr. Anthony Ang as CEO, Mr. Richard Tan as CFO and Mr. Ken Chew as CIO. They have over 10-20 years of experience in the REIT industry, international real estate, retail management, investments, and accounting and finance. 
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  • We believe that Sasseur REIT will benefit from their expertise and vast experience in this field.

Key risks we have identified include:

  1. concentration risk due to a small property portfolio,
  2. reliance on the Entrusted Manager to deliver tenant sales and traffic growth,
  3. rising capital values in China which may make it difficult for the REIT to pursue DPU accretive acquisitions, and
  4. potential decline in DPU if the underlying sales growth rate falters in an economic downturn.


Discounted Cash Flow Method (DCF)

  • As Sasseur REIT’s investor base is sourced from Singapore, our DCF analysis has factored in a normalised Singapore risk free rate of 3%, Singapore market return of 9.4%, beta of 1.2x (a premium to CapitaLand Retail China Trust (SGX:AU8U)’s beta of 1.0x due to Sasseur REIT’s smaller size and limited track record), cost of debt of 5.7% and cost of equity of 10.7%. This translates to a WACC of 8.9%. 
  • Coupled with a terminal growth rate of 2.0%, we derive a DCF valuation of S$0.91 per unit. This implies a FY19F yield of 6.9%.
  • In terms of sensitivity, Sasseur REIT’s valuation is more sensitive to changes in WACC than terminal growth. For every 0.5ppt movement in WACC, our DCF valuation would move by 8-9% while a 0.5ppt change in terminal growth would move the DCF valuation by 4%.

Complete analysis on initial portfolio, REIT structure, financial, sector outlook, key risks, etc in the report attached.

Derek TAN DBS Group Research | Mervin SONG CFA DBS Research | Carmen TAY DBS Research | 2018-09-18
SGX Stock Analyst Report BUY Initiate BUY 0.91 Same 0.91