Sasseur REIT - UOB Kay Hian 2019-10-29: Growth Underpinned By Consumption Upgrade For Middle Income Households


Sasseur REIT - Growth Underpinned By Consumption Upgrade For Middle Income Households

  • SASSEUR REIT (SGX:CRPU) provides exposure to fast-growing outlet malls in tier-2 cities in China, where demand is driven by aspiration consumption and expansion of middle income households.
  • Leases are structured with 70% fixed rent with built-in 3% annual rental escalation, and 30% variable rent pegged to tenant sales. The unique lease structure provides a balance between stability and growth.
  • Initiate with BUY.
  • Our target price of S$0.97 is based on DDM (required rate of return: 8.7%, terminal growth: 1.5%).

Sasseur REIT’s Investment Highlights


Outlet market a sunrise industry in China.

  • Sasseur REIT’s portfolio provides investors opportunity to tap into the fast-growing Chinese retail outlet industry, which is the fastest growing retail segment in the country. China’s outlet industry is at an early stage of development and has significant potential for continued growth.
  • According to China Insights Consultancy, annual sales in the outlet industry are projected to expand at a 5- year CAGR of 24.2% to Rmb144.9b by 2021. By 2030, China would surpass the US as the largest outlet market in the world with annual revenue of Rmb640.2b in 2030.
  • Currently, the supply of outlet malls is not able to meet China’s voracious appetite for branded consumer goods. According to China Insights Consultancy, outlet mall GFA per 100 residents in the US and EU stood at 2.4sqm and 1.0sqm respectively in 2016, compared to just 0.4sqm for China.

Growing Chinese middle-class drive increased consumption.

  • Sasseur REIT’s outlet malls are located in tier-2 cities characterised by a burgeoning middle class population, and this particular demographic constitutes the majority of outlet shoppers.

Tier-2 cities benefit from consumption upgrades.

  • Tier-2 cities stand to benefit from the Chinese government’s initiatives to support rapid urbanisation through improved infrastructure and better connectivity and accessibility. The government has raised the minimum threshold for personal income tax by 43% from Rmb3,500/month (Rmb42,000/year) to Rmb5,000/month (Rmb60,000/year). It also created six special expense deductions, such as children’s education, continuing education, treatment for serious diseases, mortgage interests and rents. These benefits are expected to increase the disposable personal income for 80m taxpayers. These factors will support the positive momentum for sales growth at Sasseur REIT’s outlet malls.


Unique experiential shopping concept differentiates malls from competitors.

  • All of Sasseur REIT’s malls are designed according to its signature “1+N” concept.
    • “1” represents the fundamental value-for-money basis of the outlet mall business.
    • “N” reflects the various lifestyle activities that are offered at their outlets, such as food and beverage options, entertainment activities for children and the unique architectural aesthetic of each outlet mall.
  • For example, the Hefei outlet is designed with a family-friendly concept, and features a large indoor zoo which is popular with families and young children. The Hefei outlet also boasts the first five-star cinema in the city, with 17 cinemas equipped with state-of-the-art audio and visual systems. This availability of sought-after international and domestic brands in a family-friendly environment encourages higher footfall and increases dwell time in the outlet malls.

Strong brand authentication safeguards.

  • Internal control procedures involving tenant and brand authentication have been carefully designed and implemented for all outlet malls to detect and prevent the sale of counterfeit goods and ensure that only genuine merchandise are sold to customers. Designated staff members are responsible for conducting daily spot checks on in-store merchandise as well as verifying customs clearance declaration for every batch of imported goods.
  • In addition, a zero-tolerance policy towards counterfeit goods has been adopted, which requires tenants to refund the customer ten times the the retail price of any counterfeit product sold in its outlet malls should such situations arise. Moreover, tenants found to have sold counterfeit products are unlikely to have their leases renewed in subsequent periods, providing a strong deterrent to safeguard the reputation of the outlet malls.


EMA formula enables Sasseur REIT to enjoy growth and stability.

  • Sasseur REIT’s leases are structured to provide downside protection while capturing upside potential should the malls perform better than expected. The Entrusted Management Agreement (EMA) formula is designed for long-term interest congruency between the Entrusted Manager (EM) and unitholders. The EMA was put in place from 1 Mar 18 for a period of 10 years.
  • Unlike a conventional lease agreement, the EM oversees the outlet mall’s day-to-day operations, such as tenant management, ensuring brand authenticity and cash collection. Rentals are then paid to the REIT based on a mix of fixed rent (not more than 70% of EMA Resultant Rent with a 3% annual built-in escalation) and a variable component (30% of EMA Resultant Rent), of which the latter is tied to the underlying performance of tenant sales. The variable component is pegged to tenant sales of the four outlet malls (ranges between 4.0-5.5% of tenant sales).
  • The lease structure with two components of EMA Resultant Rent (RR) provides stability by cushioning unitholders from large fluctuations in outlet sales while concurrently enabling them to partake in the positive growth in the Chinese retail outlet industry.

Sasseur REIT's Valuation

  • We forecast DPU of 6.5 S cents for 2019 and 6.7 S cents for 2020. Our key assumptions for growth in outlet sales and the renminbi are tabled in Figure12 of attached PDF report.

Peer comparison.

  • We compare Sasseur REIT against China-based REITs and Singapore retail REITs. Sasseur REIT’s distribution yield of 8.2% for 2019F is higher than the average for other China-based REITs (6.8%) and Singapore retail REITs (5.2%). See Sasseur REIT Analyst Reports; Sasseur REIT Dividend History.
  • With a P/B ratio of 0.80x which is only slightly higher than the average of other China-base REITs (0.74x), we believe the stock has potential upside.

Attractive yield spread.

Initiate with BUY.

Jonathan Koh CFA UOB Kay Hian Research | Nicola Ho UOB Kay Hian | 2019-10-29
SGX Stock Analyst Report BUY INITIATE BUY 0.97 SAME 0.97