Sasseur REIT - UOB Kay Hian 2019-04-02: Differentiated Concept To Attract Its Target Shoppers

SASSEUR REIT (SGX:CRPU)

Sasseur REIT - Differentiated Concept To Attract Its Target Shoppers

We recently visited Sasseur REIT’s outlet malls in Chongqing and Hefei, and witnessed its 1+N concept first-hand. Its experiential concept aligns well with target shoppers from middle-income young families.
Sasseur REIT has recovered well and is trading near its IPO price of S$0.80 with a 9MFY18 DPU of 5.1 S cents.
Sasseur REIT’s projected 2019 DPU of 6.2 cents translates to a yield of approximately 7.9%, 30-40% higher than peers.

SASSEUR REIT (SGX:CRPU) consists of four outlet malls located in fast-growing tier-2 cities in China. The malls are mainly differentiated based on their 1+N concept, wherein the “N” represents the lifestyle experiences located at the malls, such as entertainment and ecological activities (eg indoor zoo) which serve to attract footfall into the mall and provide a unique shopping experience for shoppers.
We noted that middle-income young families are the target group, with various activities (eg magic shows, concerts) catered to draw such a crowd. This provides a differentiated leisure environment compared with online shopping.

Chongqing Outlet mall has been operational since 2008 and is located approximately 20 minutes from the city centre, and also situated next to Ikea.
On our visit, we witnessed the Spring Festival promotions with malls opening till 2am at night. The mall’s products mainly consist luxury and high-end brands, with international names such as Coach, Calvin Klein, Michael Kors as well as local brands.

Hefei Outlet mall is located in the High-Tech Industrial Development Zone which has attracted a number of high-tech companies and research institutes, and is expected to experience a growing population size. Hefei outlet consists an indoor zoo, one of only three in the country, and is popular among the target group of young parents.

Outlet malls are still a nascent sector in China’s retail space compared with the likes of shopping malls and departmental stores. Sasseur REIT’s outlets are also strategically located in fast-growing tier-2 cities that look set to benefit from increasing urbanisation and development in the surrounding areas. For example, Chongqing appears to be a beneficiary of the One Belt One Road initiative, while the University of Science and Technology of China’s new campus is located in Hefei’s High-Tech Industrial Development Zone, approximately 2.5 km away from the outlet.
According to Sasseur REIT’s FY18 results, its two newest outlets Hefei and Kunming experienced retail sales growth of 58% y-o-y and 67% y-o-y respectively.

Sasseur REIT works on an entrusted management agreement (EMA) structure, which relies mainly on sales commission from stores rather than a conventional lease structure. Commissions typically range between 10-15% depending on merchant type, and staff members are incentivised to hit their sales target as a team.
Sasseur REIT’s EMA model comprises a fixed component as well as a variable component. The fixed component occupies not more than 70% of the resultant rent, and is slated to increase with inflation, while the variable component is pegged to a percentage of sales for each outlet, ranging from 4.0-5.5%.

Tenant leases are kept relatively short as the outlet matures, allowing the outlet to replace non-performing tenants with popular brands in the market. Building up the outlet’s popularity also means that Sasseur REIT will have a higher bargaining power and a pick of tenants to choose from.
Pop-up store brands are also seen in the outlets, which maximises rental income.

Sasseur REIT’s share price has recovered from its early dip and is currently trading near IPO price of S$0.80 with a 9MFY18 DPU of 5.1 S cents (8.7% annualized yield).
According to the company’s projections in its IPO prospectus, 2019 DPU is expected to be 6.2 S cents, which translates to a forward yield of approximately 7.9%, 30-40% higher than peers.

Lucas Teng UOB Kay Hian Research | John Cheong UOB Kay Hian | https://research.uobkayhian.com/ 2019-04-02

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