Monday, 26 March 2018

Sasseur Reit and Peers Comparison

The newest Reit to IPO on local bourse is Sasseur Reit, touted to be the first outlet mall Reit to be listed in Asia. It comprises an initial portfolio of four outlet malls located in Chongqing, Kunming and Hefei and offers investors the opportunity to invest in China's fast-growing retail outlet mall sector.

Local investors now have another option to gain exposure to the retail consumption sector in China, dovetailing into the trend of growing middle class with increasing affluence.

But are there alternatives in the local stock exchange that grant similar exposure to investors? You bet. Off the top of my mind, there are 3 other retail Reits with comparable assets : Capitaland Retail China Trust (CRCT), BHG Retail Reit (BHG) and Dasin Retail Trust (Dasin).

There are many good analysis on sasseur done by other bloggers (mentioned later part of article). This article should supplement their analysis as icing on the cake, to help decide whether to apply for this ipo. Application closes 12pm today.

Brief Introduction of 3 Other REITs
CRCT is the first China shopping mall Reit listed in Singapore (2006) that holds a diversified portfolio of retail properties in key urban centres. Its market cap is around $1.5b.

BHG, listed in Dec-2015, owns retail properties in areas with growing middle and upper-income families. In each mall, the anchor tenant is the Beijing Hualian Hypermarket Co. Ltd operated by the sponsor. Its market cap is around $395m.

Dasin was listed in Jan-2017. Its assets are all found in Zhongshan, a third-tier city near Hong Kong in the Pearl River Delta. Its market cap is $485m.

Assets Overview

CRCT has the largest asset portfolio in terms of number of properties, valuation and Net Lettable Area (NLA). Not surprising given that it has the longest listing history and a big sponsor - Capitaland. BHG, on the other hand, has the smallest portfolio with just $822m worth of assets and 5 malls. (Vivocity's NLA is about 97,300 sq m)

All four Reits have presence in major urban centre, either a tier-1 city or direct-controlled municipality in China, except for Dasin with all its assets located in Zhongshan.

Occupancy rate wise, Dasin fared the best with 100% of its retail space leased out.

Net Property Income (NPI) Yield
NPI Yield is defined as Net Property Income over Gross Revenue. It indicates Reit manager's efficiency in day-do-day mall management to generate good returns. Based on latest quarterly report and IPO prospectus, numbers are as follow:

It seems that Dasin management is doing the best job in maximising net returns for shareholders from the mall rental. Sasseur seems to fare the worst here.

Gearing Ratio
Gearing is defined as loans and borrowing over total assets. Generally, lower gearing means lower debts and less interest payments which is good for the Reit. It also means it has more headroom to raise debts for asset acquisition, without exceeding the gearing limit.

All 4 Reits have gearing ratio well below the limit of 45%. CRCT and Dasin can be said to have healthy balance sheet based on gearing of 30% and below.

Price to Net Asset Value (NAV)
Majority of a Reit's assets will be its investment properties which valued are appraised regularly. Taking away all the loans and borrowing, a Reit's NAV can be easily calculated. In theory, the market value should not be too far off the Reit's NAV, and a ratio of less than 1 can be considered as undervalued, from a Price to NAV perspective. 

Dasin stand out in this compartment, with its P/NAV of 0.58 far below the rest that is around 1. The market could be mispricing Dasin's assets at a big discount due to reasons such as its portfolio concentration in one city, dim growth prospect of Zhongshan's commercial property sector (its a tier-3 city), or due to its income support in the form of Distribution Waiver to Reit Manager.  

Dividend Yield
Lastly, Dividend Yield. Dasin fare the best here with CRCT having the lowest yield. 

However, an excessively high yield could mean the dividends are too high such that it is unsustainable, or the market is pricing the Reit too lowly due to reasons mentioned in paragraph above. For Dasin's case, I suspect its the latter and it could well due to the income support. 

End of the day, investors have to weigh the various choices of investment available and make the best decision to earn good returns with reasonable risks. A sound decision is dependent upon the level of understanding and knowledge about the company's (or Reit's) business, financials, management and valuation.

There are many good analysis put up by financial bloggers on Sasseur Reit:
-Pro Butterfly
-The Sleepy Devil 
-The Fifth Person
-Path to Forever Financial Freedom 

After reading the above analysis, coupled with peers comparison presented in this article, I am taken aback by the seemingly complex income support mechanism and the rather optimistic growth projections presented in the prospectus. I am usually sceptical towards too rosy growth story, in case the growth doesn't materialise.

Reits are positioned as stable income payer in my portfolio. I would prefer Reits with stable profile, and mature solid assets that give out comfortable and sustainable dividends. In Sasseur's case, it seems more like a growth stock riding on the outlet mall sector expansion. This could be a fast growing counter if the retail outlet mall sector really grow at the projected rate. On the other hand, dividends could be at risk if there is economy downturn affecting sales of outlet malls.

So based on above reasons, I will sit out of this IPO.

*Counters mentioned in this article are for illustration and education purposes. They do not constitute a buy or sell call.

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