Mapletree Logistics Trust - UOB Kay Hian 2022-09-06: Upgrading Of Domestic Consumption Drives Growth In Greater China

MAPLETREE LOGISTICS TRUST (SGX:M44U)

Mapletree Logistics Trust - Upgrading Of Domestic Consumption Drives Growth In Greater China

Mapletree Logistics Trust (SGX:M44U)’s China portfolio has recovered from localised lockdowns. Leasing activities have resumed and demand for logistics space is expected to pick up rapidly in 3Q22. Hong Kong suffers from undersupply. Rent for logistics space increased 4.8% in 1H22 and is projected to increase 0-5% in 2H22.

Mapletree Logistics Trust has embarked on the redevelopment of 51 Benoi Road in Singapore and its Subang Jaya site in Selangor, Malaysia.
Mapletree Logistics Trust's FY23 distribution yield has improved to 5.4%. Maintain BUY. Target price: S$2.08.

E-commerce platforms Alibaba, JD.com and Pinduoduo are competing head-on to reduce delivery time to within 24 hours. To achieve this feat, they must secure prime logistics space close to consumers, especially in Tier 1 and 1.5 cities.
Based on China’s 14th 5-year plan, online retail sales is projected to increase 44% from 2020 to 2025, driven by live broadcasting, online grocers, and cross-border e-commerce platforms. The projected growth must be supported by additional 70m sqm of logistics space. Online retail sales grew 5.6% y-o-y in 1H22. Online share of physical goods sales reached 25.9%, up 1.0ppt y-o-y.

Unlike office and retail properties, the logistics sector is resilient and relatively unaffected by COVID-19-related restrictions. The government has emphasised safeguarding logistics operations. There were localised outbreaks in Yangtze River Delta, Pearl River Delta and Northeast China but these regions resumed growth in May and June. Exports from Shanghai, which was the most affected, returned to growth in Jun 22.

Net absorption of logistics space increased 57% to 6.6m sqm in 2021, driven by e-commerce platforms and 3PL providers, which accounted for 80% of total annual leasing volume. Net absorption is expected to exceed 6m sqm for the second consecutive year in 2022.
According to CBRE, supply of logistics space is projected to reach a record of 7m sqm in 2022, with the bulk coming from Tier 1 and satellite cities. Beijing, Shanghai, Guangzhou-Foshan and Shenzhen-Dongguan continue to register relatively low vacancies. Guangzhou and Shenzhen, in particular, are short on logistics space.
On a nationwide basis, rents have increased 1.3% y-o-y in 2Q22. CBRE expects demand for logistics space to pick up rapidly in 3Q22.

The Chinese government has introduced measures to support growth of the e-commerce sector, such as anti-monopoly rules to lower barriers to entry and laws to prevent industry consolidation via M&A.
The government plans to develop the logistics sector with incentives, including lower value-added tax and cutting road tolls across provincial borders. The authorities also plan to establish 120 national transportation hubs and scale up development of cold chain logistics.

Online retail sales grew 24% y-o-y in 1H22. Leasing activities were mainly driven by domestic demand in 2Q22, including three leasing transactions by 3PL operators totalling 315,700sf (CN Logistics, Horstrong Group and Smart Target Logistics) and short-term requirements from government departments.
DHL leased 166,600sf at two locations as it was forced to relocate because its existing building was earmarked for redevelopment.

Leasing demand remains resilient despite uncertainties created by the Russia-Ukraine war.
- Mapletree Logistics Trust’s logistics properties in Singapore benefit from growth from e-commerce and inventory stockpiling.
- In Hong Kong, it enjoys firm rental rates and high occupancies due to favourable demand-supply dynamics.
- Japan, South Korea and Australia provide stable income streams due to increased e-commerce penetration.
Mapletree Logistics Trust achieved strong positive rent reversion of 3.4% in 1QFY23 (Singapore: +4.3%, India: 4.1%, Vietnam: +3.9%, Japan: +3.7%, Malaysia: +3.5%, South Korea: +3.0%, Hong Kong: +2.8% and China: +2.8%). Rent reversion picked up sequentially compared to 2.9% in 4QFY22 with continued growth post COVID-19 pandemic.

Leases accounting for 24.2% of portfolio NLA would expire in FY23, of which about half comes from Mapletree Logistics Trust’s China portfolio.
China has eased lockdowns imposed to control the spread of COVID-19 since early-June. Tier 1 cities enjoy stable take-up for logistics space, supported by continued growth in domestic consumption. Tier 2 cities have experienced slower take-up. Tenants are cautious and some have signed shorter leases of 1-2 years.
Occupancy for Mapletree Logistics Trust’s China portfolio eased 0.2ppt q-o-q to 92.9% in 1QFY23. Management expects continued weakness in 2QFY23 but recovery is in sight from 3QFY23. Key tenants, such as JD.com and Cainiao, are keen to renew their leases.

We see Mapletree Logistics Trust placing more emphasis on redevelopment projects in the near term:
1. 51 Benoi Road will be redeveloped into a six-storey ramp-up logistics property with modern specifications. The redevelopment provides an uplift to GFA by 2.3x to 80,360 sqm (865,000sf). Management estimated yield on cost at 6.2% based on total development cost at S$232m. The redevelopment is scheduled to be completed by 4QFY25.
2. Mapletree Logistics Trust plans to amalgamate two newly-acquired industrial land parcels with its existing Subang 3 and 4 logistics properties into a huge 492,000sf site to be redeveloped into a six-storey ramp-up mega hub with 1.4msf of logistics space, five times their current size. Management estimated yield on cost at 7% based on total investment cost of RM500m (S$157m). The redevelopment will not contribute to income in the initial years and is expected to complete by 2027.

We maintain our existing DPU forecasts for Mapletree Logistics Trust. Maintain BUY recommendation on Mapletree Logistics Trust. Our target price of S$2.08 is based on the Dividend Discount Model (cost of equity: 7.0%, terminal growth: 2.8%).
See
Catalysts:
- Accretive acquisitions to rejuvenate and reposition towards modern specifications logistics facilities, domestic consumption and e-commerce.
- Positive contributions from redevelopment projects.

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-09-06

SGX Stock Analyst Report BUY MAINTAIN BUY 2.080 SAME 2.080