Wednesday, March 21, 2018

Sasseur Reit IPO Analysis

Sasseur Reit is the latest investment trust to file a lodging to list in the attractive Singapore Reits platform, is offering 266.6m units at 80 cents per share.



This comprises of 252.8m placement shares, which are mostly taken up by institutional investors and  public tranche of 13.8m which are available for the public.

Public can start bidding from the 21st March and closes noon on the 26th March.

It is expected to commence trading on the 28th March.


Business Overview

Sasseur Reit will debut with an initial portfolio comprising of 4 retail outlet malls located across the growing city of the PRC, namely Chongqing, Bishan, Hefei and Kunming.

Their occupancies rate as of 23rd Feb 2018 are at 96.4%, 91.5%, 95.8% and 96.1% respectively.

They are the first outlet mall to be listed as a Reit in Asia.

Business Moats

The portfolio offers an unique proposition to investors in the form of an integrated "1+N" outlet business model by providing not only a traditional shopping experience but also the various lifestyle options to shopping goers.

An outlet is defined as a form of retail trade selling private label items from past seasons, surplus stocks or exclusive lines directly to customers at a discounted price. It carries various brands, including branded and local.

The current market size of the overall PRC outlet mall is at USD7.4B, which is higher than the Japan outlet malls, but is very much smaller than their counterparts in Europe (USD16.1B) and USA (USD47.4B).



There has been a recurring selling point for PRC retail reits listed in Singapore market such as the recent BHG retail and Dasin Retail Trust on the spending power of the Chinese middle market, and this is not different from others. The per capita consumption pattern is expected to grow between 6% to 8% over the course of next 5 years.



The outlet spending per consumption started at an even lower base, and this is why there are much more room to grow once the industry grows and the per capita consumption goes higher.


It is expected that in the year 2030, China outlet malls will grow to become the biggest in the world, surpassing the already giant Europe and USA, with a CAGR of over 24.2% per annum. If that materializes, this could be a gem in the well making.



Rental Business Model

There are 3 business models currently being adopted in the China's outlet market.

They are the leasing model, direct sales model and concessionary sales model.

The leasing model follows a traditional model where the tenant pays a fixed rental agreement based on the agreement signed.

The direct sales model follows a model where it buys inventory from the manufacturer and borns the risk of having an unsold stock at the end of the day.

The concessionary sales model is where retailers pay a fixed sum or percentage of revenue to the operator and it outsources the running of the retail malls operations such as the merchandising, cashiering, store management back all to the operator.

The concessionary sales model is where the Sasseur Reit will be using.

What this means is in a retraction period where sales are low, they will then pay a lower overhead cost subsequently to the operator as well and in periods of good turnover sales, they will pay higher. The key lies in the margins they earn. This will cap the risk they are taking but also the gain they could be making.

Risks

Two of the properties in Hefei and Kunming are only recently operational in 2016, which means they do not have a long track record to speak with.

As written above, the China outlet industry is in the infant baby stage so a lot are just starting and they start with a low base.

The use of the land right is also usually limited to maximum of 40 years based on China regulation and owners are required to submit an extension application should they wish to extend. This is subject to the public tender bidding or auction.

The properties have a land use right of up until 11 May 2047, which gives approximately 29 years from now. This is in line with all the other properties you have with the other PRC commercial and retail reits listed here.


Why choose to list in SGX?

There are always the same queries on why companies choose to list in SGX market and not in their home country.

I believe the answer to this is because of regulations and tax laws which opens up to a lot of debates.

In Singapore where it is a tax haven for Reits offering platform, Reits listed here enjoy a preferential taxation status and Reits are considered a special vehicle income transmission tool and are thus exempted from corporate and income tax.

Under the China taxation system, your rental income first get taxed at 12% under the real estate tax law and a subsequent 11% VAT is then imposed. In addition, there are also the 25% income tax on the profit from the corporate level. Based on total, net income only amounts to 60% to 70% of the rental income received before it reaches the hand of the shareholder.



Sponsor & Cornerstone Investors

The sponsor to the Reit is Sasseur Cayman Holding and is one of the largest retail outlet operators in China. Currently, it operates 9 retail outlet malls, some of which are pipelines to be injected in years to come for outlets in Guiyang and Xian.

The sponsor will be the largest single unitholder in the range of 55%, which is a good sign of alignment of interest. The closest we can find in our local listed Reits is SPH Reit, which the parent owns around 67%.

The management fee structure is also very much aligned to unitholders as they will receive 10% base fee as distributional income and performance fee of 25% of the difference in DPU between the financial years. This is to ensure that DPU objective is aligned with investors.

They have also engaged a strong set of cornerstone investors with the likes of:

  • Adroit Ideology Limited - Subsidiary of JD.com (largest e-commerce in China)
  • Bangkok Life Assurance
  • CKK Holding - Owned by Charles & Keith group
  • Entrepolis Limited - Private investment vehicle of Dr. Yap
  • Great Achievement and Success Ltd
One thing to note however though is that these cornerstone investors do not have a lock up period but with an even spread across strong institutional investors, I think this won't be a problem.

Valuations

The offering is forecasted to be at 7.5% yield for FY18 and 7.8% yield for FY19. 

This is based on 100% mandatory payout based on their policy, which they can then reduce to provide of up to 90% the years after that.

Like most young operational Reits in its infant stage, there will be some form of financial engineering used in order to boost the operational yield.

For Sasseur Reit, they will be entitled to receive a Minimum Rent for FY18 and FY19, provided that the aggregate resultant rent of the properties do not exceeds RMB 472.9m (~S$98.2m) for FY18 (9 months) and RMB 611.4m (~$127.1m) for FY19.

Based on the prospectus,  the DPU and distribution yield for the initial portfolio will be $0.05 or 7.5% based on annualized basis for FY18 and $0.06 or 7.8% based on annualized basis for FY19. In the absence of the financial engineering, the DPU and distribution yield for the initial portfolio will be $0.04 and 6.1% based on annualized basis for FY18 and $0.06 or 7.8% based on annualized basis for FY19.

This is way much smaller form of financial engineering as compared to other Reits like Dasin Retail Trust, which trades at an attractive P/BV level and close to 9% yield but take away the financial engineering and it will collapse to sub 4% yield. It's interesting to see what will happen to Dasin later in 2021.

Final Thoughts

Overall, I thought the offering was fair and it is currently at an infant stage where it can provide explosive growth if the cards are play right.

I also like the fact that the financial engineering is kept to the minimal which means it can functionally operate at sustainable yield in the future and also participate in future growth and acquisitions.

The strong cornerstone investors also provide a butterfield stamp that they are into this and the sponsor holding a large stake similar to SPH would mean that they would be in control and are align with the expectation of investors.

Based on the past results of BHG and Dasin, this seems like a 1 to 1 ratio for balloting and in view of this, I will be applying for a small 20,000 shares on this in view that I like the business model and other criterias abovementioned.





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18 comments:

  1. Hi B,

    I see that you’re using OCBC 360 account :p
    I’m surprised that you gone for the IPO bidding. I do agree with the area where there is significantly lesser financial engineering and growth prospect that is listed in the IPO prospectus. Similarly, I’ve done an analysis on Sassuer days ago on the pre-IPO prospectus.

    However, personally I’m not very comfortable by the sales driven rental and the lack of MOS for the risk I’m taking here for Sasseur. This will mean that my DPU will be inconsistent and largely dependent on the sales of each shop.

    Nonetheless, all the best in your IPO!!

    ReplyDelete
    Replies
    1. Hi Sleepydevil

      It's a very small position and it allows me to understand the regulations there and I like the business model in general.

      Thanks, I probably will just keep in cold storage as dividend meanwhile as and when I understand better I would then take a bigger position.

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  2. May I know what is the NAV of Sasseur Reit ? Thanks.

    ReplyDelete
    Replies
    1. Hi Betta man

      ThE NAV is around 78 cents.

      Delete
  3. Good Insights. Thanks for the writeup.

    ReplyDelete
  4. NAV Stated Approximately 25% Overvalued?

    http://www.probutterfly.com/blog/qualitative-analysis-of-upcoming-sasseur-reit-ipo

    ReplyDelete
    Replies
    1. Hi Anonymous

      The author derived his own valuation methodology. The prospectus stated NAV at $0.773.

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  5. Nice analysis B. I'm usually wary of IPOs as a general rule having seen the other side of so many of them, but sounds like a decent business with a great initial yield.

    ReplyDelete
    Replies
    1. Hi Frankie

      Like you I'm probably wary of it as well hence just a small water to test. It could become a long term holding to breakeven, hope not come to that haha.

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  7. Hi Brain,

    Thanks for the very comprehensive analysis, I had been reading your blog and learnt quite abit from you. =)
    I would like to have your advice on Keppel Infra Trust. As it is a Utility trust, I know we can't analyse it like other reit. Do you have any idea what to look out for in this case? The price is coming down, and yield is at around 7% base on 53cents. Do you think it's a good opportunity to get some?

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