Sasseur REIT - DBS Research 2019-08-08: All Aboard China’s Consumption Growth Train

SASSEUR REIT (SGX:CRPU)

Sasseur REIT - All Aboard China’s Consumption Growth Train

We maintain our BUY call and Target Price of S$0.97 as we remain bullish on SASSEUR REIT (SGX:CRPU)’s prospects given its exposure to the fast-growing Chinese outlet mall industry. Its sales are projected to grow at a CAGR of 24% from 2016-2021 via its initial portfolio of four outlet malls located in Chongqing, Bishan, Hefei and Kunming.
Furthermore, at the current level, Sasseur REIT offers an attractive forward FY19 yield of 8.6%, which is among the highest in the S-REIT sector.

Sasseur REIT’s share price has recovered back to its IPO price of S$0.80 which, in our view, is partially attributed to its higher relative yield which may have incentivised investors to get familiar with its business model.
Via the Entrusted Management Agreement (EMA) with its Sponsor, 70% of the REIT’s revenues are fixed, growing at 3% per annum and providing the REIT with downside protection. The remaining 30% of revenues are pegged to 4-5% of a property’s tenant sales, which provide leverage to the success of Sasseur REIT’s malls.
Furthermore, we believe concerns over a depreciating RMB are overstated due to the rapidly growing tenant sales at its properties which grew by 29% y-o-y in 2018, beating its IPO and our DPU projections.

Sasseur REIT’s Sponsor has extended the right of first refusal (ROFR) over two properties and seven pipeline properties which would grow the REIT’s gross floor area (GFA) fivefold. A successful execution of an inorganic growth strategy may present upside risk to our earnings estimates.

Our BUY call and DCF-based Target Price maintained at S$0.97 after lowering risk free rate assumptions by 50bps to 2.5%.

Sasseur REIT delivered 1.3% y-o-y growth in DPU to 1.608 Scts in 2Q19, beating initial IPO projections by 10.5%. On a constant currency basis, DPU growth would have otherwise been considerably higher at 5.8% y-o-y to RMB 8.055 cts.
For 1H19, DPU of 3.264 Scts formed 49% of our full-year forecasts which was largely in line. See Sasseur REIT's dividend history.

Sasseur REIT's 2Q19 outlet sales jumped15.4% y-o-y to approximately RMB1.03 bn. Growth was led mainly by Sasseur REIT’s younger malls at Hefei, Kunming and Bishan which saw a 35.4%, 22.8% and 19.6% surge in outlet sales respectively, compared to a year ago. Meanwhile, Chongqing Outlets reported more modest sales growth of 4% y-o-y in 2Q19, partly as unfavourable weather conditions dampened shopper activity during the quarter. Considering the mall’s more mature (and thus more resilient) profile, this remains a strong result.
Despite the sequential dip in occupancy, Hefei led the pack on the sales growth front, mainly on the addition of new shop lots (which were fully occupied) during the quarter and trade mix adjustments.

The majority of Sasseur REIT’s outlet malls are still in the fairly nascent growth stage. The REIT is also taking the initiative to adjust its tenant mix to capitalise on increasing shopper preferences toward casual dining, sporting goods and “trending” brands. Thus, we remain confident that Sasseur REIT will continue to see strong tenant sales in 2H19, particularly as it gears up for its peak sales period in September.
In 2H19, c.42% of leases are expected to expire on a gross revenue basis. While this may be a concern for some investors, given the strong tenant sales performance across Sasseur REIT’s portfolio, we believe the ability to retain tenants is high.
Moreover, with c.71% of 1H19 DPU supported by underlying income from the properties (stripping out the impact of the EMA), we believe the large number of leases due gives the Sponsor and the REIT the ability to restructure the leases to gain a greater share of tenant sales and reduce the shortfall provided by the Sponsor over time.

Carmen TAY DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2019-08-08

SGX Stock Analyst Report BUY MAINTAIN BUY 0.970 SAME 0.970