Dasin Retail Trust - DBS Research 2020-08-11: Right Place, Ripe Time

SGinvestors.io

DASIN RETAIL TRUST (SGX:CEDU)

Dasin Retail Trust - Right Place, Ripe Time

• Net property income set to see c.20% y-o-y boost in FY20F despite COVID-19.
• ROFR over 18 quality assets built by Zhongshan Dasin, a dominant Greater Bay Area real estate player.
• Unique pure play retail REIT with exposure to Greater Bay Area.

Dasin Retail Trust - Company Background

• Dasin Retail Trust (SGX:CEDU) was established primarily to invest in retail properties in Greater China with an initial focus on retail malls. Armed with a mandate to invest in or develop land, uncompleted developments or income-producing real estate,Dasin Retail Trust was listed in Jan 2017 and has seven retail malls in its portfolio. The trust is managed by Dasin Retail Trust Management Pte. Ltd and is sponsored by Zhongshan Dasin Real Estate Co., Ltd, a leading real estate developer in Zhongshan City.
• In Jan 2017, Dasin Retail Trust listed with three properties - Xiaolan Mall, Ocean Mall and Dasin E-Colour. Since then, the Trust has added Shiqi Mall, Doumen Mall, Shunde Mall and Tanbei Mall to its portfolio. Shiqi and Doumen have doubled retail net leasable area (NLA) from c.157,000 sqm as at listing to c.319,000 sqm in FY19. Shunde Mall and Tanbei Mall acquisitions have further boosted retail NLA to c.395,000 sqm for FY20F.
• As at end-FY19, Xiaolan Mall and Shiqi Mall were the top contributors to Dasin Retail Trust’s net property income (NPI) with the former contributing 30% and the latter 29% of total NPI. These two malls are matured assets having commenced operations in 2005 and 2004 respectively.
• On the other hand, Ocean Mall, Dasin E-Colour and Doumen Mall provide growth opportunities with the three properties beginning operations relatively later in 2014, 2015 (renovation completion) and 2018 respectively. The acquisition of Shunde Mall and Tanbei Mall should further add to the Trust’s growth as both malls are relatively new having opened in 2018.

Diversified tenant mix.

• Dasin Retail Trust has a diversified tenant base with no sector contributing more than 20% of total gross rental income (GRI). As at March 2020, the top three trade sectors by GRI were food and beverage (20%), fashion (14%) and department stores (14%). A larger food and beverage sector exposure enables the Trust to lower its risk to disruptive trends led by e-commerce. In addition, a significant supermarket presence (10%) will help generate footfall amid the COVID-19 pandemic.

Pure play retail Trust with exposure to high growth Greater Bay Area.

• Dasin Retail Trust’s malls are situated in the Chinese prefectures of Zhongshan, Foshan and Zhuhai within the Greater Bay Area (GBA). The region is marked by the economic powerhouses of Hong Kong, Shenzhen, Guangzhou and Macau and is slated for further development as outlined in a government blueprint released in February 2019. Under the plan, Zhuhai and Foshan will be developed into an industrial belt for advanced equipment manufacturing while Zhongshan will focus on innovation of biomedical technologies. The interconnectivity between prefectures in the region is good with the Hong Kong-Zhuhai-Macau Bridge that is already completed and will be given an added boost upon completion of the Shenzhen- Zhongshan Bridge in 2024.

Disposable income in GBA has soared at CAGR of 8-9%.

• Zhuhai, Foshan and Zhongshan recorded CAGR of 8.5%, 9.2% and 8.4% in urban disposable income per capita from 2008 to 2019. This has correspondingly driven retail sales growth with retail sales expanding at a faster clip of 10.3%, 11.8% and 11.1% CAGR respectively over the same period. The higher retail sales growth could partially be attributed to the growth in the population in these cities, which has accelerated since 2017.

China retail sales normalising post-COVID19.

• Retail sales in China appear to be on a recovery track after the shock from COVID-19. We observed that non-online retail sales have significantly recovered in June 2020, down 9.0% y-o-y compared to -25.9% and -23.0% y-o-y in Jan-Feb and March respectively. While risks of a second wave remain, Dasin Retail Trust’s long WALE of 6.7 years provides good earnings visibility, in our view.

Strong track record in tenant acquisition.

• We note that as at end FY18, Dasin E-Colour’s lease expiries amounting to 49% of net lettable area (NLA) or 46% of Gross Rental Income (GRI)) for 2019. Management was successful in addressing this with occupancy declining slightly from 98.3% at end-FY18 to 96.3% at end-FY19. Given that NPI for Dasin E-Colour had risen by 0.9% y-o-y in FY19, this signals management’s ability in securing new tenants while maintaining rents. Additionally, this highlights the strength of Dasin Retail Trust’s property attributes with tenants remaining attracted to its properties.

Organic growth driven by built-in escalation lease structure presents stability.

• Most of Dasin Retail Trust’s non-anchor tenant leases are in the form of fixed rents with built-in escalations. On a portfolio basis, 66% (by GRI) of Dasin Retail Trust’s tenants are on fixed rent with built-in escalation leases. We note that as at June 2016, the rental escalations of non-anchor tenant leases are relatively high at 5-10%. While not disclosed, we believe current rental escalations still range between 5-10%. Having a high proportion of built-in escalation leases within the lease structure bodes well for Dasin Retail Trust as it offers stability and visible growth in gross rental income.

Strong anchor tenants to underpin sustained footfall.

• Dasin Retail Trust’s portfolio of malls are mostly occupied by at least one hypermarket or supermarket. These tenants can enhance footfall as many of the goods sold are groceries and other staple products. In addition, most of the malls are tenanted by top Chinese retailers.
• Out of China Chain Store and Franchise Association’s list of top chain retailers, three (Suning.com, Gome and Sun Art) have leased space in Dasin Retail Trust’s malls.

Well established Sponsor with portfolio of high-quality properties.

• Dasin Retail Trust’s sponsor, Zhongshan Dasin Real Estate Co., Ltd is a reputable developer that has been ranked as one of China’s top 10 commercial real estate development companies from 2012 to 2018. The Trust enjoys a right of first refusal (ROFR) over 18 properties that include projects under construction such as Sanjiao Metro Mall and Golden Horse Metro Mall.
• In addition, the Sponsor is strongly aligned to Dasin Retail Trust’s interest given the Zhang Family’s c.60% ownership in the Trust and recent injections of Doumen Mall, Shunde Mall and Tanbei Mall.
• Overall, Dasin Retail Trust stands to gain from the support of an experienced developer and points to further injections from the pipeline.

Shunde and Tanbei mall to boost NPI by c.S$11m in FY20F.

• The acquisitions of Doumen, Shunde and Tanbei mall could increase NPI by 18.4% y-o-y to c.S$71m for FY20F. NPI growth for FY21F is expected to improve, rising by c.35.4% to S$96.2m driven by a recovery from COVID-19 and full year recognition of income from Shunde and Tanbei. DPU may dip in FY20F to 5.69 Scts due to COVID-19 and the reinstatement of distribution entitlements for units previously waived for distributions.
• We expect Dasin Retail Trust's DPU to rise to 6.87 Scts in FY21F.

Brick and mortar retail is here to stay.

• COVID-19 has undoubtedly accelerated e-commerce growth. However, while brick and mortar retail has been weak recently, the segment appears to be on a rebound. Prior to COVID-19, non-online retail sales grew 5.0% y-o-y in 2019 compared to a decline of 1.0% in 2018. Indeed, the concept of “New Retail” has seen online and offline retail channels combining to offer a new experience. Alibaba is a leader in this field, operating an estimated 250 HeMa stores in 2019. Dasin Retail Trust may also be a beneficiary of this trend, with tenant Suning.com present in over half of its portfolio malls.
• Going forward, while the online channel will lead retail sales growth, brick and mortar retail still has a role.

Dasin Retail Trust - Valuation & Peers Comparison

Initiate with BUY and DCF-based Target Price of S$0.86.

• We believe there is significant upside for to Dasin Retail Trust underpinned by
  1. exposure to China’s high potential Greater Bay Area
  2. strong net property income (NPI) growth and
  3. support from an established Sponsor with right-of-first-refusal (ROFR) over 18 quality assets.
• Despite COVID-19, we believe NPI growth for FY20F and FY21F could reach c.18% and c.35% respectively, driven by new acquisitions of Doumen, Shunde and Tanbei, and the high proportion of built-in rental escalation clauses in its lease structure. Dasin Retail Trust is also currently trading at an attractive FY21F yield of 8.8% versus peer average of 8.0%. See PDF report attached below for peer comparison details.
• Our DCF model assumes China-based risk-free rate of 3.0% and market return of 11.2% giving us a market risk premium of 8.2%. We further assume a beta of 0.8, target gearing of 40.0% and after-tax cost of debt of 3.9% which gives a WACC of 7.3%. Using a terminal growth rate of 2.5%, we derive an equity value of S$645.8m for Dasin Retail Trust, which represents S$0.86 Target Price and implies FY21F target yield of 8.0%.
• See Dasin Retail Trust Share Price; Dasin Retail Trust Target Price; Dasin Retail Trust Analyst Reports; Dasin Retail Trust Dividend History; Dasin Retail Trust Announcements; Dasin Retail Trust Latest News.

See the 28-page PDF report attached below for complete analysis on Dasin Retail Trust (SGX:CEDU).

Singapore Research DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2020-08-11

SGX Stock Analyst Report BUY INITIATE BUY 0.86 SAME 0.86