Property – Retail Sector - UOB Kay Hian 2019-10-23: The Inexorable Rise Of E-commerce

Property – Retail Sector - UOB Kay Hian Research | SGinvestors.io CAPITALAND LIMITED (SGX:C31) CITY DEVELOPMENTS LIMITED (SGX:C09)

Property – Retail Sector - The Inexorable Rise Of E-commerce

  • We believe that as e-commerce takes ever bigger bites out of the retail pie, the secular downtrend for physical retail will continue apace. CapitaLand has a larger exposure to retail malls both here in Singapore and in China vs City Developments (SGX:C09). As a result, we prefer City Developments (BUY/Target: S$12.00) over CapitaLand (HOLD/Target: S$3.80/Entry Price: S$3.30).
  • Maintain MARKET WEIGHT on the property sector.

The Singapore retail sector is on a secular downtrend

  • The Singapore retail sector is on a secular downtrend, in our view, and it appears that this will not abate anytime soon. According to URA data, retail vacancies have been trending up in the past five years from an average of 5.3% over the 2011-13 period to 7.8% in 1Q17-2Q19. At the same time, price and rental indices have shown steady declines from their respective peaks in 2014 and 2011.
  • This downtrend has been playing out over the past few years, and will continue to do so due to the growth of e-commerce. In Southeast Asia, Frost & Sullivan estimates that gross merchandise value (GMV) for e-commerce will grow at a 28% CAGR over the 2017-23 period to US$88b by 2023 while a Google-Temasek report forecasts US$240b by 2025. In China, GMV is expected to be many times larger at US$1.1t by 2023.

The Inexorable Rise Of E-commerce

The Singapore retail sector is on a secular downtrend, in our view,

  • The Singapore retail sector is on a secular downtrend, in our view, and it appears that this will not abate anytime soon.
  • On the real estate side, the data is telling us that things have been getting worse with retail vacancies trending up while price and rental indices have been trending down.
  • On the demand side, shopping habits have already started changing and will likely continue to change in the next few years.


  • According to URA data, retail vacancies have been trending up in the past five years from an average of 5.3% over the 2011-13 period to 7.8% for the 1Q17-2Q19 period. At the same time, price and rental indices have shown steady declines from their respective peaks in 2014 and 2011. We note that while the price indices have declined, the Central Region index has done better relative to the Central Area. For rental indices, the Fringe Area has not risen as high as the Central Area and Central Region, and thus has fallen by a lesser magnitude.
  • This downtrend has been playing out over the past few years, and will continue to do so due to the growth of e-commerce, in our view. In Southeast Asia, Frost & Sullivan estimates that GMV for e-commerce will grow at a 28% CAGR over the 2017-23 period to reach US$88b by 2023 while a recent joint report by Google and Temasek entitled “e-Conomy SEA 2018” forecasts that e-commerce in Southeast Asia will grow from a 1% market share to 6.4% by 2025; in dollar terms, this equates to a growth from US$72b in sales in 2018 to US$240b in 2025, or a 7-year CAGR of 19%.

All segments of the consumer pie will be affected.

  • Frost & Sullivan believes that e-commerce will impact food, fashion, personal care, beauty and electronics - all of which form the backbone of malls in Singapore and in China where the bulk of CapitaLand’s and, to a lesser extent, City Developments’s mall assets are located.
  • Forrester Research believes that fashion and cosmetics will lead category growth in e-commerce, although consumer electronics remains the largest category in Asia with about 25% of total online retail sales. However, fashion (including apparel, footwear and accessories) and cosmetics will be the key drivers of future growth, mostly due to the lack of availability of many brands in offline retail channels.

Singapore and China lead in terms of e-commerce penetration

  • with the latter being the global leader in e-commerce online sales with 24% of total retail sales in 2018, while Singapore has the highest e-commerce penetration in ASEAN at 6% of its retail sales online. On our estimates, 38% of CapitaLand’s and 10% of City Developments’s respective RNAVs are in malls.


  • According to various industry reports, there are a few factors stimulating growth in Asian e-commerce:
    1. growth of the consumer class;
    2. growth of the middleweight cities;
    3. digital finance inclusion;
    4. improvement in logistics networks; and
    5. Internet and social media penetration.
  • In our view, the above factors have led to long-term changes in consumer behaviour and will continue to do so in the coming years. The market has clearly recognised this potential given that Southeast Asian e-commerce companies attracted US$8b in equity funding in 1H18. Both the e-commerce and ride-hailing segments together attracted $3 out of every $4 invested in the region in 1H18.

In ASEAN, the consumer class is forecast to double by 2030

  • In ASEAN, the consumer class is forecast to double by 2030, implying a significant growth in consumer spending. And just like it has in the past, these new consumers will be looking for wide product choices, low costs and fast delivery.

Growth of the middleweight cities.

  • To date, e-commerce has had relatively nascent growth in Southeast Asia’s mid-tier cities, constrained by internet connection and speeds as well as limited logistics networks. However, these cities offer huge e-commerce potential as they are forecast to experience the fastest economic growth in the region.
  • In China, it is the less developed cities that have a huge potential for e-commerce – a 2019 South China Morning Post report on the China Internet industry highlighted that there are 74m people living in tier-1 and -2 cities vs 128m people in cities classed as tier-3 and below.

The highly-distributed population in Southeast Asia is a constraint on e-commerce growth with mid-tier cities mostly still out of reach.

  • The most obvious examples are the archipelagos of Indonesia and Philippines and their thousands of islands which make logistics complex. In addition, many of the mid-tier cities in Southeast Asia are far from the principal capital cities, thus resulting in high delivery costs. However, Google believes that once demand is established, distribution centres can be set up closer to areas of demand and over time, the cost of delivery should decline.

Digital finance inclusion.

  • The ease of e-commerce sales will increase as many ASEAN countries are working to bring a larger proportion of the population into the formal banking system. The bypassing of landlines and the movement of the new middle class directly to mobile phones, combined with the ease of digital payment systems, should increase the size of the e-commerce market.
  • Importantly, mobile internet has become more affordable in Southeast Asia and China with the cost of 1GB of mobile data dropping by an aggregate of 60% over the 2014-18 period.

Improvement in logistics networks.

  • As e-commerce volumes have increased, this has helped to drive down the cost of last mile delivery, while sourcing products from dispersed distribution hubs and neighbourhood retailers may reduce delivery costs in the future.

Higher social media penetration = Greater e-commerce opportunities.

  • According to Google, the average person in Southeast Asia and China spends 3.5 and 3.0 hours a day on social media respectively vs 1.0 hour in the US. Thus, social media has emerged as a “shadow marketplace” to become an increasingly important source of e-commerce transactions as lower start-up costs push entrepreneurs to go online to start their businesses via Facebook, Instagram, Alibaba, Pinduoduo, Carousell, etc. Indonesia alone has 130m Facebook users (third-largest globally) while the Philippines, Vietnam and Thailand are also on the top 10 global list of Facebook users.
  • In addition, Indonesia ranks fourth in terms of WhatsApp users worldwide. Overshadowing all this are Weixin and Wechat which as of May 19 had 1.11b monthly active users.

Transitioning to e-payments reduces e-commerce friction

  • Transitioning to e-payments reduces e-commerce friction as small businesses can then more easily access a much wider customer base throughout a country, region or across the globe, while consumers face greater convenience and more choices. E-payments help overcome the time-consuming, complex and extremely expensive process of cash payments for buyers and sellers for a product purchased or sold online. Simply put, e-payments make e-commerce possible and practical.

Many choices for e-payments in Asia, wholeheartedly adopted by consumers.

  • In Asia, AliPay and WeChat Pay, Go-Jek’s Go-Pay, Grab’s GrabPay and other such e-payment solutions and platforms have accelerated the adoption of non-cash payment methods. And consumers have taken up e-payments wholeheartedly:
    • in Singapore, for example, PwC estimates that mobile payment usage has increased from 34% of all payments in 2018 to 46% in 2019.
    • In China, Worldpay’s 2018 global payments report noted that almost two-thirds of online sales and more than one-third of payments in stores were now made through leading mobile wallet operators including Alipay and WeChat Pay.
  • China is already the world's largest mobile payment market and is also a leader in peer-to-peer payments, in which people are able to pay each other by text.


Anchor tenants, and therefore baseload revenue, are harder to come by in Singapore.

  • In the past decade, the make-up of shopping malls has changed substantially with many anchor tenants giving up either partially or entirely. Some examples include:
    1. Carrefour’s exit from Singapore (and Asia) in 2010 with DAIRY FARM (SGX:D01)’s Giant taking up part of its space at Suntec City,
    2. ISETAN (SGX:I15) withdrawing from Wisma Atria in 2015 and consolidating at Shaw Centre,
    3. closure of John Little in 2017 after 174 years in Singapore, and
    4. closure of METRO (SGX:M01)’s flagship store at The Centrepoint on Orchard Road in 2019.

Less and less square feet needed.

  • Internationally, 2018 saw many store concepts, such as Ikea, Barnes & Noble and Nike – which traditionally take up large areas in malls or buildings – announce that they would be opening small format stores. In addition, we have seen major international retailers and brands file for bankruptcy in the past decade: Sears, Barneys New York, Toys R Us, Diesel, True Religion, Nine West, Karen Millen, American Apparel (two rounds), Sonia Rykiel, etc.
  • Note that these stores and brands run the gamut from high-end to fast fashion, kids to adults. While we cannot attribute their bankruptcies entirely to e-commerce, the broad implication, in our view, is that retailing is tough and e-commerce has made it tougher for retail malls to survive, let alone grow.

Which categories have been the most disrupted?

  • Fast fashion leads all segments in online purchasing, with over one in three shoppers (35%) preferring e-commerce as their primary purchase channel (Figure 6). For in-app purchases, quick-service restaurants lead all other segments with 18% of shoppers preferring to make purchases via that channel, followed by beauty at 10%.
  • Global payment company Adyen found that Singapore is a regional leader when it comes to consumer preference for in-app purchases. While in-store purchases continue to dominate the Singaporean retail segment, consistent with other markets surveyed in the Asia-Pacific region, the high percentage lends itself to further disruption in the future, in our view.

What’s left are experiential concepts like indoor gyms and core retail sales,

  • all of which consumers have to experience first-hand instead of via their smartphones or tablets. Examples of core retail sales include dining out which cannot be done online, as well as grocery shopping which is not realistically possible to do completely online, especially for fresh foods and frozen foods.
  • Meanwhile, large spaces in some malls have been taken up by concepts such as indoor parks like SuperPark, Polliwogs or Amazonia, or the Manulife Sky Nets at CapitaLand’s Jewel that allows the mall to innovatively monetise airspace (which had been trialled at City Developments’s City Square Mall in Singapore more than a year ago).

Even parts of core retail sales have been disrupted by e-commerce.

  • In Singapore, Alibaba’s Lazada acquired online grocer RedMart in 2016 for a rumoured price of S$30- 40m. While consumers may not elect to buy fresh/frozen meat or fresh fruit and vegetables from online grocers, laundry detergent, dishwashing liquid, rice, tissues and toilet paper are perfect for online shopping as it provides speed and convenience.


  • We prefer City Developments over CapitaLand. On our estimates, it appears that City Developments is less expensive vs CapitaLand as it trades at a lower PE and P/CF. However, its dividend yield is over 1ppt less than that of CapitaLand – for some investors, it may be worthwhile to note that CDL pays dividends twice a year unlike CapitaLand which pays once a year.
  • On a P/B basis, CapitaLand appears inexpensive relative to City Developments, however we point out that the latter is trading at a 25% discount to its 10-year historical P/B of 1.2x while CapitaLand at its current 0.8x 2019F P/B is close to its 10-year historical average of 0.9x.



  • Too levered to retail. With nearly 40% of its RNAV exposed to retail malls in Singapore and China, we believe that CapitaLand is exposed to structural headwinds that may manifest in lower valuations for the business. In our view, the key global trend is e-commerce which has led to the demise of many large format department stores regionally and globally. With China leading the world in online shopping, both on a per capita participation basis and value transacted, the country may not be the growth oasis that many are hoping for.
  • Recent retail data from Singapore is not good. Singapore’s Department of Statistics recently released Aug 19 retail data which showed a 14.7% y-o-y growth in online sales. In addition, the retail sales environment continued to contract in August with sales falling 4.1% y-o-y and declining 2.6% y-o-y in 8M19. In addition, URA data shows retail vacancies trending up, while price and rental indices continue to decline from their peaks in 2014 and 2011 respectively.
  • There is still much to like. The company’s diverse asset base with exposure to 216 cities in over 32 countries allows it to tap on pockets of growth in a myriad of countries. As a result, any material decline in some of its business segments may not impact the company as much. Importantly, the company manages eight listed REITs and business trusts as well as over 20 private funds, thereby providing a foundation of revenue that is hard to match in the market.
  • Downgrade to a HOLD recommendation and lower our price target to S$3.80 which is a 20% (historical average discount to RNAV) discount to our RNAV of S$4.80. While we like the company's diverse revenue streams and strong management bench, we are somewhat concerned about the company's large exposure to China and Singapore retail malls given our belief that the retail segment will continue to come under pressure from e-commerce and the changing habits of shoppers.



  • Data and channel checks indicate solid interest in Singapore residential segment. The latest data from URA showed another month of strength with September's private new home sales surging 36% y-o-y and 13% m-o-m. Our channel checks with PROPNEX LIMITED (SGX:OYY) and APAC REALTY LIMITED (SGX:CLN) indicate that there remains a high level of interest in the Singapore residential market. At our recent GEMS conference, however, Propnex stated that while foreign purchases remain strong (led by China and Malaysia), Hong Kong buying has yet to materialise. With 1,270 private home units sold in Sep 19, the highest monthly number since the introduction of property cooling measures in Jul 18, it appears that buyers have become inured to the higher taxes.
  • Building out its recurring income base. As seen in City Developments's 1H19 results where PATMI declined by over 26% y-o-y, the company's current earnings stream is very lumpy due to the timing of profit recognition for its property development segment. Management is clearly cognisant of this issue and has been trying to build out its recurring income base in the past few years, eg privatisation of Millennium & Copthorne, and acquisition of Shanghai Hongqiao Sincere Centre for S$344m. In 1H19, recurring EBITDA totalled about S$661m, of which 70% was generated in Singapore.
  • Office demand appears strong but rentals may be approaching an inflection point. The demand side remains robust, driven by office-using employment, but the failure of the WeWork IPO in Oct 19 may lead to excess office space hitting the market. Over the next few quarters, we will need to keep an eye on rentals which we believe may be approaching an inflection point with a downward bias from mid-21.
  • We maintain our BUY recommendation on City Developments with a slightly higher target price of S$12.00 due to the incorporation of new projects. Our target price is a 20% discount to our RNAV and in-line with City Developments’s historical average discount to our assessed RNAV of S$15.00. The stock is trading at a one-year forward P/B of 0.9x which is -1SD below its 10-year average of 1.1x.

Adrian Loh UOB Kay Hian Research | Loke Peihao UOB Kay Hian | https://research.uobkayhian.com/ 2019-10-23
SGX Stock Analyst Report HOLD DOWNGRADE BUY 3.80 DOWN 4.400