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ASIAN INSIGHTSed-TH / sa- AH / CS
8 Jan 2018 DBS Group Research . Equity
Property landlords to shine
A recent spate of policies has led us to believe that the
long-awaited C-REIT is imminent; this should help
improve the liquidity and value of commercial properties
Re tail mall and hotel assets to benefit more from the
l iquidity improvement and consumption upgrade
La ndlords to outperform pure residential developers: CR
La nd, Yuexiu, CFLD, Joy City and Vanke
Ready for onshore China REITs. In our view, C-REITs are imminent as the government has reiterated plans to kick start REITs in China. Yet, given the current legislative and taxation restrictions, the initial structure of C-REITs could take the shape by allowing mutual funds to invest in onshore pre-REITs. Currently, most onshore pre-REITs are debt-like vehicles, offering less attractive risk/return profile compared to offshore China REITs. Yet, the pre-REITs for long-lease rental apartments that was listed lately has more equity elements. We expect more to follow suit.
Property landlords to outperform residential developers. As China reiterated that housing is for occupation, not for speculation, we expect residential properties’ attractiveness as investments to weaken. However, the upcoming C-REITs should improve the liquidity and unlock the values of commercial properties. The history of Japan and HK shows that price growth of commercial properties outpaced that of residential properties after the establishment of REITs. We expect retail mall and hotel assets to benefit more from lower supply on the road and the consumption upgrade.
Potential beneficiaries. (i) Developers with businesses encouraged by the government - PPP (public-private-partnership), long-term rental apartment, senior housing - such as CFLD, Vanke, Longfor, Sino-Ocean, and Poly CN; (ii) Developers with a high proportion of hotels and investment properties, such as SOHO, Joy City, Shui On Land, Yuexiu Property, Jinmao Hotel, CR Land, BJ Cap Land, and Sino-Ocean; and (iii) Companies that have property funds, such as Vanke, Sino-Ocean, and Joy City. Among offshore China REITs, we continue to like Yuexiu REIT as its low-cost funding should enable it to have further successful acquisitions. We also like MAGIC given its higher yields and good assets quality.
HSI: 30,814 ANALYST Ken HE CFA, +86 21 6888 3375 [email protected] Carol WU +852 2863 8841 [email protected] Danielle WANG CFA, +852 2820 4915 [email protected] Jason LAM [email protected]
Attributable investment property (IP) book value as %
of market cap
0%50%
100%150%200%250%300%350%
Shui O
n L
and
SOH
O*
Joy
City
Yue
xiu P
rop
BJ C
ap L
and
Jinm
ao H
ote
l
Sino-O
cean
CR L
and
Chin
a Jin
mao
Longfo
r
GZ
R&
F
KW
G
Shim
ao
CO
LI
CO
GO
Attributable IP book value as % of enterprise value
(market cap + total debt – cash)
0%50%
100%150%200%
SOH
O*
Joy
City
Shui O
n L
and
Yue
xiu P
rop
Jinm
ao H
ote
l
CR L
and
BJ C
ap L
and
Sino-O
cean
Longfo
r
CO
LI
KW
G
Shim
ao
Chin
a Jin
mao
CO
GO
GZ
R&
F
Source: Company, Bloomberg, DBS Bank
*excl. latest asset disposal
Our proprietary research is based on interviews with China developers, property consultants, Shanghai/Shenzhen stock exchanges, domestic brokers, and other industry experts.
Asian Insights SparX
China REITs Sector Refer to important disclosures at the end of this report
Asian Insights SparX
China REITs Sector
Page 2
The DBS Asian Insights SparX report is a deep dive look into thematic angles impacting the longer-term investment thesis for a sector, country or the region. We view this as an
ongoing conversation rather than a one-off treatise on the topic, and invite feedback from our readers, and in particular welcome follow on questions worthy of closer examination.
Table of Contents
Investment summary 3
China REITs are lagging behind 6
An early start, but limited progress in the past ten years 7
Edging towards onshore REITs 8
Categories of onshore REIT-like products 8
Structure of onshore pre-REITs 10
Risk/return profile of onshore pre-REITs 12
The key differences between onshore pre-REITs and offshore REITs 12
Major obstacles in fostering an onshore REIT regime 16
The first obstac le is the lack of a suitable platform to hold assets, as const rained by regulat ions. 16
Another obstacle is the current tax regime in China, which leads to multiple levels of taxation for China REITs. 16
CMBS/CMBNs are growing faster 20
C-REITs are imminent 21
Stock picks 40
Appendix: 44
Stock Profiles 51
Yuexiu REIT 51
J inmao Hotel and J inmao 58
Hui X ian REIT 64
Spring REIT 66
Maplet ree Greater China Commercial Trust 68
CapitaLand Retail China T rust 78
Note: Prices used as of 5 Jan 2018
Asian Insights SparX
China REITs Sector
Page 3
Investment summary
China is the last ‘big’ economy that has yet to kickstart the
equity REIT sector. The real estate investment trust (REIT) has
become an important investment vehicle as ev idenced by its
separation from the financial sector in the Global Industry
Classification Standard (GICS) as a sector of its own. Major
Asian countries/regions have joined western countries to
kickstart local versions of REITs, leav ing China the last big
economy that has yet to have such an investment vehicle.
Two major technical obstacles. In our v iew, removing legislative
obstacles (publicly traded funds are not allowed to hold
commercial properties) is the first step that the government
needs to take towards establishing a modern REIT regime.
Near-term relaxation could be allowing mutual funds to invest
in onshore pre-REITs. Currently , governor is fine-tuning the
regulations that a single mutual fund is not allowed to invest
over 10% of its total NAV in one single security and a single
fund management company is not allowed to invest over 10%
stake in one single security .
Taxation is a more complicated obstacle as there are
central/local tax (國稅地稅) systems in place. We think a waiver
of taxes related to asset transfers is required to develop a REIT
regime, as this is one of the biggest concerns for – and a huge
burden on – landlords to build a REIT platform. So far, under
the current taxation scheme and regulations, onshore pre-REITs
have complicated structures to save on/avoid some taxation.
Having said that, taxation, in our v iew, is a factor determining
the market size of C-REITs, rather than an obstacle preventing
the establishment of C-REITs, as offshore China REITs also need
to pay various taxes in China.
Other areas that China needs to fine-tune to foster a eco
system for C-REITs include: a unified product structure, a
standardised valuation methodology, a transparent credit
rating system, and superv ision of special purpose vehicles
(SPVs).
Const rained by the current legislative and taxation regime,
onshore pre-REITs display a less favourable risk/return profile.
The origin of China REITs can be traced back to 2005, when
the first red-chip REIT – Yuexiu REIT – was launched on the HK
Stock Exchange (HKEx). However, the development of the
sector has largely stagnated until the emergence of onshore
REIT-like securities in 2014. Currently , there are 28 quasi-/pre-
REITs (類/准 REIT) which are primarily debt-like vehicles and
barely resemble an equity -REIT in other countries, as the
government aims to manage the risks of such products at the
initial stages and believes that a debt structure is more secure
than an equity structure. But the fact is those pilot debt-like
products have a less favourable risk/return profile compared to
offshore China REITs: (i) their leverage is high, ranging 50-70%
versus 20-40% of their offshore peers’, (ii) the coupon rate
was low at 4-7%, versus an average y ield of 6-9% of offshore
peers’ (total returns could be higher, including capital gains),
(iii) those pre-REITs are all held by private funds with fewer
than 200 investors, pointing to limited liquidity. Other
problems existing in some products include low interest
coverage, having a single underly ing asset or single end-
customer, the parent company ’s credit enhancement, and a
vague credit system. In our v iew, relaxation of policy and
taxation is needed to foster a better ecosystem for growing
equity-REITs.
CMBS (commercial mortgage-backed securities) are growing at
a faster pace. The big difference is, compared to REITs, that
CMBS does not involve asset transfers, avoiding the two key
obstacles faced by onshore REITs. Compared to traditional
bank loans, CMBS enjoy lower funding costs and better
liquidity. CMBS kicked off in August 2016 and has witnessed
faster growth since then.
A recent spate of policies has led us to believe that the long-
awaited C-REIT is imminent, even if the initial structure of the
REIT may not be similar to that of offshore REITs.
( i) Continuous deleveraging efforts. Top governors have
reiterated the need to put more effort into ensuring financial
security and healthy economic growth. This can be tracked
from the deceleration in the growth in banks’ assets.
According to Standard & Poor’s, growth in banks’ assets was
5.5% in 8M17, much lower than an average of 15.2% during
the past five years, and also the first time this figure has dipped
below the corresponding GDP growth. The government has
been pushing other sectors to swap debt for equity to help
them deleverage. But unfortunately, property sector is one of
the few sectors that have been gearing up despite strong
property sales YTD. We believe the government may switch its
focus to deleveraging in the sector after successful destocking,
and C-REIT could be an effective way.
(ii) Weaken resident ial propert ies’ attractiveness as investments.
Local governments have implemented a series of policies
(including purchase/sell/mortgage limitations) with the
intention of managing residents’ expectations on housing
prices. Meanwhile, the central government has attached more
importance to long-lease rental apartments, proposing to give
more incentives (including land supply and tax incentives) to
this segment. Three million units of rental housing are targeted
to be supplied in trial cities, which is huge compared to the
average annual sales of 1.7m units during 2013-2016 in those
cities. And we believe China needs the REIT platform to hold
these rental-housing assets over the long term. In addition, the
first pre-REIT for long-lease rental apartments has just been
launched on the Shenzhen Stock Exchange on 3 November,
2017, prompting some industry experts to expect the
breakthrough in onshore REITs to come from long-lease rental
apartments.
(iii) Dev elop commercial properties’ function as investments.
The regulators have been speeding up the drafting of the REIT
code lately . In addition, the issuance of onshore pre-REITs has
Asian Insights SparX
China REITs Sector
Page 4
also accelerated. Apart from this, a new policy which aims to
encourage the conversion of commercial land/properties to
long-lease rental apartments was introduced. As mentioned
above, the upcoming C-REITs could be public funds with
investment targets in onshore pre-REITs, which do not look
exactly like REITs envisioned by overseas investors. Yet, this
vehicle should greatly improve the liquidity of commercial
properties and unlock book value.
Commercial properties to outperform residential properties?
We expect the investment focus to gradually switch from
residential properties to commercial properties. Based on our
study, the capital value of commercial properties in Japan and
Hong Kong has outperformed residential housing prices after
the introduction of local REITs. In addition, we’re seeing big
potential in C-REITs. REITs’ market cap as a percentage of local
GDP average 6.0% in major Asia-Pacific countries. Even if we
conservatively assume a 1% figure for China, C-REITs’ market
cap could potentially be US$115bn. In our v iew, the required
y ield return of C-REITs will likely fall in the 5.5-6.0% range,
compared to the current China ten-year government bond
y ield of 3.9%, the latest weighted-average rate of 4.5% for
wealth management products (WMP), and the current offshore
China REITs’ y ield of between 6% and 9%. The y ield spread
(above China ten-year government bond y ield) is likely to be
2%, compared to c.3% for HK REITs and S-REITs, which could
be justified by higher asset appreciation potentials in China.
Which asset type to benefit more? We expect hotel and retail
malls assets to benefit more from liquidity improvement. In
addition, in anticipation of C-REITs, active property asset
management / redevelopment and conversion of hotel or retail
malls to offices are rising, especially in Beijing and Shanghai.
Modern logistics properties and Grade-A offices: relatively
stable rents, but capital value to keep growing. Both assets
generate relatively stable cashflow and require less operating
capability . Therefore, both assets have been chased by financial
investors and insurance companies during the past two years.
As the RMB has reversed its downward trend year-to-date,
foreign capital has also been flowing into these two assets.
This, coupled with stricter capital outflow, should continue to
drive up the capital value of both assets.
We are positive on the logistics property sector and we expect
state-owned enterprises (SOEs) and market consolidators that
have better access to industrial land to benefit more from the
potential C-REITs. Shenzhen Chiwan (200053.CH, BUY) used
to be the second-largest warehouse play in China, but its
development over the last two years has been dragged by its B-
share status. The company is expected to leverage on the
potential C-REITs to quicken its asset turnover and grow its
portfolio. Vanke-H/A (2202.HK, BUY; 000002.CH, HOLD),
being the largest warehouse play (a part of a consortium
involved in an ongoing transaction to take GLP private), is also
a key beneficiary.
For Grade-A offices, we are positive on Shanghai, Guangzhou,
and Shenzhen, but cautious on Beijing traditional core areas as
long-term demand in Beijing will likely be diluted by the rise of
Tongzhou and Xiong An New District. We expect SOHO
(410.HK, BUY) to benefit more from asset disposals, given
investors’ appetite for prime office assets. Trading at 0.6x P/BV,
asset disposal and special div idends after asset disposal is a
value-unlocking process for SOHO China.
Premium retail malls: both fixed rents and turnover rents likely
to benefit from continuous sales recovery in brick-and-mortar
stores. In our v iew, the market is overestimating the risk of
oversupply and underestimating the recovery in retail sales. Our
analysis suggests that four types of malls will outperform: (i)
existing luxury malls in tier-1 cities, as they will benefit from
strong retail sales recovery in the luxury segment, (ii) suburban
malls in high-tier cities with strong population influx; (iii) malls
with first-mover advantage in low-tier cities; and (iv ) malls with
strong management teams. We expect CR Land (1109.HK,
BUY) and Joy City (207.HK, BUY) to benefit more from the
recovery in retail sales, given a high proportion of turnover
rents. Both companies could also potentially benefit from C-
REITs to quicken their asset turnover and expand their national
footprint. In the US, the largest REIT in terms of market cap is
Simon Property (SPG.US, not-rated), which focuses on retail
malls.
Luxury hotels: should benefit more from policy and the trading
up by consumers. Hotels have been the least favourable assets
among commercial properties, due to low profitability and
oversupply concerns. But we are positive on luxury hotels in
tier-1 cities, as (i) the trading up by consumers has already
driven up occupancy, and will eventually reverse the downward
trend in room rates; (ii) EBITDA will likely see a larger rebound,
given a high operating leverage; (iii) hotel supply has slowed
down substantially over the past two years. In addition, judging
from the experience of hotels in the US which also suffered
from oversupply in early 1990s, we believe there will be a
gradual recovery in profitability after the supply of new assets
slows down. Coupled with the emergence of modern equity
REITs, this has resulted in mounting acquisition activ ity by REITs
and a larger number of hotel rooms being controlled by fewer
players. This has also led to a continuous increase in revenue
per room (RevPAR), except during the two ’Black Swan’ periods
(9/11 and the housing/banking crisis). Hotels in China will likely
follow suit.
Mature hotels in prime locations in top-tier cities should benefit
more. J inmao Hotel (6139.HK, BUY), owning eight luxury
hotels in key tier-1 cities and tourist hotspots, should ride on
the recovery of the hotel business. Guangzhou R&F (2777.HK,
not rated) currently owns 18 luxury hotels in key tier ½ cities
and is acquiring 77 hotels from Wanda. We think it could be a
potential beneficiary.
To sum up, we expect three categories to potentially benefit
from the upcoming C-REITs:
Asian Insights SparX
China REITs Sector
Page 5
(i) developers with businesses encouraged by the government –
PPP projects, long-term rental apartments, and senior housing
– as these areas would be the first to see a breakthrough in C-
REITs. Companies like CFLD (600340.CH, BUY), Vanke, Longfor
(960.HK, BUY), Sino-Ocean (3377.HK, BUY), and Poly CN
(600048.CH, not-rated) have one or more of those businesses.
(ii) developers with a high proportion of hotels and investment
properties. In terms of attributable investment properties as a
percentage of enterprise value, SOHO (410.HK, BUY), Joy City,
Shui On Land (272.HK, HOLD), Yuexiu Property (123.HK, BUY),
CR Land, BJ Cap Land (2868.HK, not rated), and Sino-Ocean
top the table among major developers.
(iii) companies with property funds, such as Vanke, Sino-Ocean,
and Joy City. Their property funds are existing structures which
might be more easily converted to C-REITs in the future.
Among HK/SG-listed China REITs/business trusts:
We continue to like Yuexiu REIT (405.HK, BUY). Past success,
low funding costs, and multiple acquisition channels should
lead to further successful acquisitions ahead. In addition, its
valuation is attractive with a 6.9% yield, higher than that of HK
REITs with similar market cap and onshore pre-REITs.
We also like J inmao Hotel (6139.HK, BUY) as the company will
benefit from the rebound in the hotel business. In addition,
management aims to leverage potential C-REITs to unlock part
of its book value and enjoy lower funding costs.
We continue to like Mapletree Greater China Commercial Trust (MAGIC.SP, BUY). MAGIC has rallied over 15% since our out-of-consensus call in late April that MAGIC’s y ield should compress significantly given its strong track record and investors’ incorrect perception of the stock’s exposure to forex
volatility despite the earnings resilience shown by MAGIC. However, we believe the share price rally can continue given improving macro conditions in HK and the discount it trades to its HK peers.
Asian Insights SparX
China REITs Sector
Page 6
China REITs are lagging behind
REITs were separated from the GICS (Global Industry
Classification Standard) financial sector as a sector of their
own, indicating the importance of REIT products globally . This
also raises the question about the time frame for the
development of China REITs, given that China has already
become the world's second-largest economy as well as the
second-largest market for commercial real estate transactions
(according to J LL). Shanghai was ranked as the top city for real
estate investment in Asia-Pacific in 2016.
So far, China has no real equity REITs or any investment trust
commonly acknowledged as one domestically . However,
neighbouring countries/regions have experienced tremendous
growth in the past decade. Japan introduced its first REIT in
2000 and has since then launched more than 50 REITs, with an
aggregate market cap of US$106bn, making up 2.1% of its
2016 GDP. REITs’ market cap as a percentage of 2016 GDP
averaged to 6.0% in key countries in Asia-Pacific. Even if we
conservatively assume a 1% figure for China, its REIT market
cap could potentially be US$115bn. India kicked off its
infrastructure REIT sector in 2014, leaving China the last big
economy that has yet to have such investment vehicles.
REIT markets in Asia and the US
63 REITs (1)
US$12.5b
13 REITs US$34.8b
5 REITs US$2.1b
6 REITs US$1.6b
58 REITs US$105.5b
18 REITsUS$10.2b
41 REITsUS$60.6b
Count ry /
region
The y ear
the f irst
REIT was
launched
No. of
REIT s as
of Sep
2017
Mkt cap
of all
REIT s (US$
bn)
Mkt cap
of REIT s
as % of
2016 GDP
2016 GDP
(US$ bn)
US 1960s 190 998.7 5.38% 18,569
Australia 1971 53 93.7 7.78% 1,205
Malaysia 1980 18 10.2 3.44% 296
Japan 2000 58 105.5 2.14% 4,939
Korea 2001 6 1.6 0.11% 1,411
Singapore 2002 41 60.6 20.40% 297
Hong Kong 2003 13 34.8 10.85% 321
Taiwan 2003 5 2.1 0.39% 531
Thailand 2003 63 12.5 3.08% 407
(1) inclusive of Property Funds for Public Offerings (“PFPOs”) Source: NAREIT, Bloomberg Finance L.P., DBS Bank, CEIC
Asian Insights SparX
China REITs Sector
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An early start, but limited progress in the past ten years
The development of China REITs can be traced back to
2005, when the first offshore REIT- Yuexiu REIT (405.HK)
was launched on HKEx. Yuexiu REIT’s structure was
relatively simple, with four BV I companies holding the four
domestic buildings, respectively . The four BV Is were fully
owned by a holdco which is the REIT platform. However, the
government subsequently announced a new regulation on
the entry and administration of foreign investments in the
real estate market, which banned offshore holding
companies from holding domestic properties directly . The
government also raised the requirement for the registered
capital of foreign-invested onshore real estate companies,
making it more difficult for offshore China REITs. As a result,
CR Land and Wanda had to abandon their plans to follow in
Yuexiu REIT’s footsteps.
CapitaRetail China was the first offshore China REIT under
the new regulation. Compared to Yuexiu REIT, CapitaRetail
China needs to form one onshore holding company, adding
additional operation costs and audit expenses. In terms of
taxes, Yuexiu REIT is only subjected to 10% withholding tax
(on revenue) for the four projects in its initial portfolio, while
CapitaRetail China has to bear 25% corporate income tax.
Milestones of China’s REITs
Year Ev ent
2003 Trust financing started becoming an important source of funding for developers
2005 The first offshore REIT, Yuexiu REIT (405.HK), listed on HKEx
Banking regulator raised threshold for the issuance of REITs
Onshore ABS kicked off
2006 Regulation on the entry and administration of foreign investments in the real estate market
CapitaRetail China Trust (CRCT.SP) listed on SGX
2007 RREEF China Commercial Trust (625.HK) listed on HKEx
2008 PBOC encouraged the initiatives in the financial sector and planned to launch REITs
Insurance companies were allowed to invest in real estate
2009 PBOC worked out a pilot programme for REITs in Beijing, Shanghai, and Tianjin
2011 The first RMB REIT, Huixian REIT, listed on HKEx
Perennial China Retail Trust (PCRT.SP) listed on SGX
Penghua US REIT (206011.CH) was listed
2013 NC REIT (1275.HK) and Spring REIT (1426.HK) listed on HKEx
Mapletree Greater China (MAGIC.SP) listed on SGX
2014 Regulator promoted the pilot programme for REIT products
Two onshore debt-like REITs, CITIC Qihang and CITIC Suning, kicked off
J inmao Investment (6139.HK, renamed J inmao Hotel) was listed on HKEx
RMBS kicked off
2015 More onshore debt-like REITs issued
The first onshore quasi-REIT, Penghua Vanke Qianhai, was listed
BHG Retail REIT (BHGREIT.SP) listed on SGX
A number of developers issued various ABS products
HPF RMBS kicked off
2016 Insurance companies were allowed to invest in ABS products
EC World REIT (ECWREIT.SP) listed on SGX
CMBS kicked off
2017 Dasin Retail Trust (DASIN.SP) listed on SGX
Pre-REIT asset-backed note (ABN) on the interbank market
Golden Eagle issued the first CMBN
The first long-term rental apartment pre-REIT (with Equity element) issued
Source: DBS Bank
Asian Insights SparX
China REITs Sector
Page 8
Edging towards onshore REITs
The regulator had also made some progress towards
fostering an onshore REIT platform, albeit at a slow pace,
until 2014, when it gradually relaxed the approval process
for domestic ABS (asset-backed securities) and encouraged
the pilot programme for REIT products. The successful
issuance of CITIC Qihang in May 2014 was a milestone for
onshore China REITs, although it is not a “real” REIT like the
ones in other countries and it is under a private fund
structure as constrained by Law on Securities Investment
Fund (證券投資基金法). Onshore RMBS (residential
mortgage-backed securities) also kicked off in 2014.
Subsequently , onshore REITs (or pre-REIT/quasi-REIT, as we
call them), RMBS and other ABS enjoyed rapid growth in
2015. In 2016, ABS and RMBS (including HPF RMBS,
housing provident fund RMBS) continued their growth, with
the emergence of CMBS (commercial mortgage-backed
securities) or CMBN (commercial mortgage-backed notes).
Onshore development of ABS, REITs, CMBS, RMBS, and HPF CMBS
R m b b n n o . R m b b n n o . R m b b n n o . R m b b n n o . R m b b n n o .
2011 1 1
2012 22 7
2013 23 14
2014 322 94 10 2 7 1
2015 610 317 13 4 26 8 10 9
2016 905 509 13 8 21 4 105 15 39 9
11M17 1,559 744 25 13 45 14 171 19 0 0
O v e r a l l AB S HPF R MB SR MB SCMB SPr e -R EI T
Source: CNABS, DBS Bank
Categories of onshore REIT-like products
Constrained by regulations, the prototype onshore REITs are
not similar to traditional equity REITs and there are vague
classifications or various definitions of onshore REITs. We
classify these REIT-like products into two categories –Quasi-
REIT (類 REIT) and Pre-REIT (准 REIT). An example of a quasi-
REIT is Penghua Vanke Qianhai, which is a publicly traded
fund half invested in Vanke’s rental property in Qianhai
(RMB1.27bn) and half (RMB1.73bn) invested in fixed-
income securities. Actually , the Vanke Qianhai office is
owned by the local government and managed by Vanke.
Therefore, Penghua Vanke Qianhai looks like a combination
of income rights ABS (收益權 ABS) and fixed-income
securities.
The 27 widely-discussed REIT-like products are classified as
pre-REITs, as they are all under a private fund structure and
hold certain commercial properties, with expectation of
being converted to real REITs in the future after the
relaxation of regulations. Such products are similar to
Taiwan’s REATs (real estate asset trusts), which are slightly
different from REITs, given the limited number of assets in
the portfolio and no capability to acquire new assets. Also,
there is no need to actively manage assets in the portfolio.
Most pre-REITs are tradable in the Shanghai or Shenzhen
stock market, despite being regulated by the CSRC and
having limited liquidity .
These pre-REITs are all debt-like vehicles and barely resemble
an equity -REIT familiar to investors, as the government aims
to manage the risks of such products at the initial stage and
believes a debt structure is more secure than an equity
structure. Given the debt-like structure, such products also
extended into the interbank market. The first ABN (asset-
backed note) with property being the underly ing asset is
Industrial Wanxin Media (興業皖新閱嘉). It is regulated by
PBOC.
Asian Insights SparX
China REITs Sector
Page 9
Different types of Chinese REITs and other securitisation
Category Market St ructure Examples
Hong Kong Listed REITs / BTs (business trusts) on HKEx Yuexiu REIT, Huixian REIT, New Century REIT, Spring REIT, J inmao
Hotel (BT)
Singapore Listed REITs / BT on SGX Mapletree Greater China, CapitaRetail China Trust, BHG Retail REIT,
EC World REIT, Dasin Retail Trust
Shenzhen
stock
exchange
Quasi-REITs, mutual fund structure with full
rights to the rental of certain commercial
properties
Penghua Vanke Qianhai (鵬華前海万科)
Shanghai /
Shenzhen
stock
exchange
Pre-REITs, private fund structure holding
certain commercial properties, with
expectation of being transformed into real
REITs in the future, after the relaxation of
regulations
CITIC Qihang (中信啟航), CITIC Suning
(中信華夏蘇寧雲創/雲享), Hengtai HNA SPDB
(恒泰浩睿海航浦發), CM Chuangrong Rainbow
(招商創融天虹商場), Hengtai Caiyun Hotel
(恒泰浩睿彩雲之南), TF AVIC Redstar (天風中航紅星愛琴海),
Oriental Injoy Plaza (東證資管青浦吾悅廣場), EBP Capital Imix
Park (首譽光控安石大融城), CITIC SanPower Nanjing IFC
(中信華夏三胞南京國際金融中心), CITIC Wanxin Yuejia
(中信皖新閱嘉), Changjiang Chuyue Zhongbai (長江楚越中百),
Pingan Suning Plaza (平安蘇寧廣場 ), TF Everbright Elion
(天風光大億利生態廣場), Hengtai Hongze HNA
(恒泰弘澤廣州海航雙塔 ), BOC Inv CMS Kaiheng
(中銀招商北京凱恒塔樓 ), Kaiyuan HNA
(開源北京海航實業大厦), CM Chuangrong Fusheng
(招商創融福晟), F irst Qianhai Fund LerThai
(中聯前海開源勒泰一號), GoHigh Red Star (暢星高和紅星),
Bohai Huijin Yuefang ID mall (渤海匯金中信資本悅方ID mall),
Bohai Huijin CYPA (渤海匯金新派公寓權益型)
Interotc* Pre-REIT, not public traded Hengtai Hongze Yindu (恒泰弘澤華遠盈都商業), CITIC
Goldstone Country Garden (中信金石碧桂園鳳凰飯店)
Interbank Pre-REITs, ABN (asset-backed note) Industrial Wanxin Media (興業皖新閱嘉)
Shanghai /
Shenzhen
stock
exchange
Publicly traded CMBS (commercial mortgage-
backed security )
Go High CM Chemsunny (高和招商金茂凱晨), Hengtai Yintai
Centre (北京銀泰中心), Sinolink Sinar Mas Arch
(國金金光金虹橋國際中心 ), Shenzhen YT Holiday Plaza
(深圳益田假日廣場), Huifu J IC SOHO Fuxing Plaza
(匯富建投匯宇搜候復興廣場), TF China Central Place SKP
(天風華貿SKP), F inancial street (金融街), HTAM Poly Property
(華泰資管保利置業), CITIC Poly RE (中信保利地產), Hongbo
(紅博會展), CICC SCPG SCP Plaza (中金印力深國投廣場), Pingan
Winbond Intime (平銀國君華邦銀泰城), Harvest Capital
Zhongjieneng (嘉實資本中節能綠色建築), GoHigh Tebon Forte
(高和德邦複地商業物業)
Interotc* CMBS, not publicly traded Minsheng FuWah J inbao (匯富富華金寶大厦)
Interbank CMBN (commercial mortgage-backed note) Shimao Int'l ABN (世茂國際ABN), Golden Eagle ABN (金鷹ABN),
Future Land ABN (新城控股ABN)
Other
securitisation
Shanghai /
Shenzhen
stock
exchange
Various types of ABS (asset-backed security )
on property management fee or receivables,
as well as RMBS (residential mortgage-
backed security ) and HPF (housing provident
fund) RMBS
So far, there are 18 HPF RMBS, 43 RMBS listed and a number of
developers have issued various ABS products
Offshore China
REITs
Onshore China
REITs
Onshore
CMBS/CMBN
* The quotation and service system of private products for institutions (機构間私募產品報價與服務系統) Source: DBS Bank
Asian Insights SparX
China REITs Sector
Page 10
Structure of onshore pre-REITs
Currently , pre-REITs have quite a complicated structure, in
order to save/avoid taxes under the existing tax regime.
F irstly , target properties (標的物業) are usually held by
project companies, with the aim of reducing land
appreciation tax and deed tax during asset transactions. So
far, there has been one exception – CM Chuangrong
Rainbow (招商創融天虹商場). The target property - 天虹商
場 - was directly held by an asset-backed programme (資產
支持專項計畫), but has been facing various taxation
problems.
Secondly, a special purpose vehicle (SPV) is needed to hold
both the equity and debt of project companies. The equity-
plus-debt structure is to reduce income taxes and enhance
return/y ield, as interest on debt is tax-deductible. Therefore,
most underly ing assets (底層資產) of pre-REITs are equity -
plus-entrusted loans of project companies. Two exceptions
are CITIC Qihang (中信啟航) and CITIC Suning
Yunxiang/Logistics (中信華夏蘇寧雲享). Both only own
equity of project companies.
Thirdly, there is the Private Equity Fund (契約型私募基金)
holding the abovementioned SPV(s). The purpose is to set
up a platform which could be easily transferred into a public
REIT after policy relaxation in the future. In addition, the
structure enables potential introduction of professional real
estate investors as PE fund managers for managing
operations of the target properties.
On top of private PE funds, there usually is another SPV
(trust or asset-backed programme), which is designed for
securitisation.
Typical structure of onshore pre-REITs
Project companies
SPV
Private equity fund (契約型私募基金)
SPV(trust or asset-backed
programme)
Compared to an asset transfer, a share transfer of a project company could reduce land appreciation tax and deed
Senior tranche A(more ilke bonds/CMBS)
Subordinated tranche(more like equity)
100% equity
and debt
Interest on debt + income on equity
The equity + debt structure is to reduce income tax, as interest on debt is tax-deductible.
The reasons for the PE fund structure are: (i) for potential transfer into public REITs and (ii) for potential introduction of a professional real estate investor as PE fund manager in the future.
Senior tranche B(more like bonds/CMBS)
AAA AAA, AA+, AA normally no rating
Domestic rating
3.8-5.8% 4.3-7.0% no guaranteed return
Required return
Target property (標的物業 )
Source: DBS Bank
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China REITs Sector
Page 11
There are 2-3 tranches of end securities for each pre-REIT,
including 1-2 senior tranches and 1 subordinated tranche
(some may not have subordinated tranche). Senior tranches
resemble bonds or CMBS and require high credit (onshore)
ratings as well as fixed returns, while subordinated tranches
(usually fully or mostly owned by originator) look like equity
and usually no credit rating or guaranteed return is needed.
While most pre-REITs are debt-like instruments, some have
equity elements built in the subordinated tranches. We are
also seeing pre-REITs gradually evolv ing towards equity -
REITs. The first pre-REIT for rental housing, Bohai Huijin
CYPA (渤海匯金新派公寓), was issued on 3 November,
2017. Investors could also invest in its equity tranche and
are entitled to 80% of asset appreciation when they exit.
The key characters of pre-REITs with equity elements are
summarised in the table below. Investors of those
subordinated tranches usually enjoy asset appreciation. Poly
CN (600048.CH) is issuing the first batch of its rental
housing pre-REIT (保利地產租賃住房一號), with an initial
size of RMB1.7bn. Different from other pre-REITs, this
product is scalable in the future, with a potential size of up
to RMB5bn.
Some pre-REITs have equity elements
Pr e -R EI Ts w i th e q u i ty e l e m e n ts O th e r p r e -R EI Ts
Structure Senior + subordinated (or equity) tranche 2-3 senior tranches
Rating High rating for senior tranche, but no rating for
subordinated tranche
High rating for senior tranches
Tenure Usually 3-5 years Usually 18-24 years , with interest-rate adjustment
or call/put option every 3 years
Investors Previous asset owner usually subscribes to all or part of
subordinated (or equity) tranche; investors of the
subordinated (or equity) tranche may enjoy asset
appreciation
Senior tranche investors won't enjoy asset
appreciation
Examples CITIC Qihang (中信啟航), CITIC Suning Yunxiang
(中信華夏蘇寧雲享), CM Chuangrong Rainbow (招商創融天虹商場 ), Bohai Huijin CYPA (渤海匯金新派公寓)
Others
Source: DBS Bank
Typical structure of offshore equity REITs
Debt(lenders)
Property manager
REIT
Sponsor Unitholders
Serv ice
Equity stake
Ownership
REIT manager TrusteeServ ice
Fees Fees
Cash distributions
NPI
Service
Fees
Real estate assets
Source: DBS Bank
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China REITs Sector
Page 12
Risk/return profile of onshore pre-REITs
As abovementioned, the government aims to manage the
risks of such products at the initial stage and believes that a
debt structure is more secure than an equity structure. In
fact, those pilot debt-like products appear to be riskier, as
gross gearing ratios (if treating senior parts as debt and
subordinated parts as equity) ranges from 50-70%,
compared to a cap of 45% as required by REIT codes in
Asian countries. The coupon rate or interest rate of those
products has gradually fallen from 7% at early -2014 to
<4% in mid-2016 and rebounded to >5% lately , compared
to an average y ield of 6-9% for offshore China REITs listed
in HK/SG. This has made such products less attractive to
investors who want to climb up the risk curve to generate
higher returns. Also, those pre-REITs are all held by private
funds, with fewer than 200 investors in total, pointing to
limited liquidity. Moreover, offshore China REITs are usually
issued at a price below net asset value (NAV), providing a
cushion in the case of any decline in asset value; onshore
pre-REITs are usually issued on par with valuers’ valuation,
leading to potential risks if assets devalue.
Other problems faced by onshore pre-REITs include:
(i) The domestic system of credit ratings is confusing and
remains a black-box to most investors, especially offshore
investors. For example, the underly ing assets of Hengtai
Caiyun Hotel (恒泰浩睿彩雲之南) are two five-star hotels in
Beijing and Yunnan, but they generate a negative cashflow.
Yet, three tranches of the product were initially rated
AAA/AA+/AA+, respectively , and were upgraded to
AAA/AAA/AAA one year later. The upgrade was mainly due
to credit enhancement from the originator which is a local
SOE in Yunnan. Normally , a high-quality portfolio would
have higher credit rating and attract cheaper capital.
Offshore REITs usually have higher or equivalent credit
ratings than those originators/parentcos, while onshore pre-
REITs usually need credit enhancement from
originators/parentcos.
(ii) Interest coverage ratios for some products are close to
1x. CM Chuangrong Rainbow (招商創融天虹商場)’s cash
flow in 2015 was only 1.03x of annual coupon payments.
(iii) Some products have only a single underly ing asset or
underly ing assets that serve a single end-customer. Half of
those pre-REITs have only one underly ing asset, which may
expose investors to concentration risks. For example, the
CITIC Suning series (中信蘇寧系列) has multiple underly ing
assets, but those assets are serv ing only one end-customer,
which is Suning.
(iv ) The valuation methodology of onshore valuers are
unknown to investors. Domestic valuers look more
aggressive than international valuers. For example, China
J inmao’s Beijng Chemsunny World in Beijing was valued at
RMB12.9bn when issuing CMBS, compared to its book
value of RMB8.3bn. CITIC Qihang (中信啟航) bought back
the first pre-REIT in mid-2016. Subordinate (or equity)
tranche investors were supposed to enjoy 90% of asset
appreciation when exiting, but failed to enjoy such returns,
as the manager of the asset-backed plan changed its valuer
in 2016 and recorded an asset depreciation in 2016, which
is contrary to market reality .
(v ) There is limited information on pre-REITs, as current pre-
REITs are based on the private equity platform and
information is only disclosed to selected investors.
(v i) As domestic brokers are striv ing to design a better
structure under the current legislative and taxation regime,
there is no standardised structure for these pre-REIT
products, which makes transacting those products more
difficult, as it takes time for investors to study the structure
case by case.
The key differences between onshore pre-REITs and offshore REITs
In terms of structure, most onshore pre-REITs are under
private funds with a multiple-tranche debt structure. As
abovementioned, only a couple of them have an equity
element with the equity tranche enjoying or entitled to asset
appreciation or be converted to shares of a public REIT if the
product is listed in the future. Pre-REITs are tradable on the
Shanghai and Shenzhen stock markets or interbank market.
Offshore China REITs are all equity REITs listed on stock
markets.
In terms of credit rating, onshore REITs usually need credit
enhancements from their parentcos or originators, while
offshore REITs usually have an equal or higher credit rating
than their parentcos or originators.
Yet, offshore China REITs usually face currency -mismatch
problems, while onshore pre-REITs bear no foreign
exchange risks, which could lead to lower costs of capital.
Asian Insights SparX
China REITs Sector
Page 13
Key differences between onshore pre-REITs and offshore REITs
Onshore pre-REIT Of f shore China REIT
St ructure
Platform Private fund Corporates or trusts, publicly traded
Assets transferred to platform Yes Yes
Underly ing assets Usually equity + debt of target properties Equity
Target properties Office, mall, hotel, warehouse, rental housing Office, mall, hotel, serv iced apartment,
warehouse
Transparency Limited public information Public announcement
Operation Passively managed Actively managed
Scalability No capability to acquire new assets Can acquire new assets as long as gearing is
below cap
Tenure 3-5 years Nil
Exit Limited liquidity; normally need to wait for
expiry, public listing, buyback from originators
and selldown to third parties, senior tranche
could also exit v ia CMBS
Dispose on the stock market
Market Stock market and interbank market Stock market
Risk prof ile
Rating agencies Domestic rating agencies Foreign rating agencies
Credit enhancement A pre-REIT usually needs credit enhancement
from originator/parentco
No such need as the REIT usually has an equal
or higher rating than that of its
originator/parentco
Underly ing asset Some have a single asset, or multiple assets
serv icing a single end-customer
Multiple assets with multiple tenants
Leverage (gross gearing) 50-70% 20-40%
Currency risk No Yes
Return prof ile
Capital gain Subordinated tranche might enjoy capital gain,
but normally ownded by previous asset owners
or originators
All shareholders enjoy capital gain
Interest / div idend Fixed coupon rate Depending on cashflow
Yield / coupon AAA: 4-6% 6-9%
AA+: 5-7%
AA: 6-7%
Source: DBS Bank
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China REITs Sector
Page 14
Hong Kong-listed China REITs
Yuexiu REIT Huix ian REIT New Century REIT Spring REIT J inmao Hotel
Stock code 405 HK 87001 HK 1275 HK 1426 HK 6139 HK
IPO background
Listing date 12-Dec-05 10-Apr-11 10-Jul-13 5-Dec-13 2-Jul-14
Structure REIT Rmb REIT REIT REIT Business trust
Major shareholder Yuexiu property CK Property New Century RCA Fund China J inmao
IPO portfolio 1 wholesale mall, two
Grade-A offices, 1
retail mall in
Guangzhou
1 commercial complex
(1 shopping mall, 8
office buildings, 2
serv iced apartments, 1
five-star hotel) in
Beijing
5 self-branded hotels
in Hangzhou, Ningbo,
and Changchun
Office space of one
commercial complex
building in Beijing
1 landmark building in
Shanghai + 8 five-star
hotels in Beijing,
Shanghai, Shenzhen,
Lijiang, and Sanya
Asset value at IPO (Rmb bn) 22.8 37.2 4.4 7.7 24.1
NAV per share 3.02 5.18 3.94 5.99 5.97
IPO price per share 3.08 5.24 3.50 3.81 5.35
Premium/(discount) to NAV 2% 1% (-11%) (-36%) (-10%)
Special feature The first China
offshore REIT
Rmb-denominated REIT The first China hotel
REIT
Pure office play Business trust structure
Current port folio
No. of properties 7 3 8 1 7
No. of cities 2 3 6 1 5
Acquisition history Guangzhou Neo
Metropolis (2008),
Guangzhou IFC
(2012), Shanghai
Hongjia Tower (2015),
Wuhan Yuexiu
Fortune Centre and
Starry V ictoria
Shopping Centre
(2017)
Sofitel Shenyang Lido
(2011), Chongqing
Metropolitan Oriental
Plaza (2014), Harbour
Plaza Chongqing
(2017), Sheraton
Chengdu Lido Hotel
(2017)
2 hotels in
Shanghai/Kaifeng
(2015), Holiday Inn
Eindhoven Netherlands
(2016)
Commercial properties
(for car serv ice-related
business) in the UK
(2017)
nil
Total GFA (sm) 734,656 1,030,165 457,306 145,372 717,134
- office 313,319 364,169 0 120,245 137,121
- wholesale 50,199 0 0 0 0
- retail 123,877 239,938 0 0 35,649
- hotel 91,461 204,166 457,306 0 542,479
- serv iced apartment 51,102 81,603 0 0 0
- logistics & industrial 0 0 0 0 0
- car park & others 104,698 140,289 0 25,127 1,885
Earnings and v aluat ions
Income/earnings structure Rental income Rental income Master lease in place,
base rent + profit
sharing
Rental income No master lease, 100%
hotel profit/loss
FY16A revenue (Rmb m) 1,838 3,106 317 501 2,451
- office 815 1,118 0 478 440
- wholesale 0 0 0 0
- retail 1,370 0 0 56
- hotel & serv iced apartment 484 618 280 0 1,809
- others 0 0 36 23 146
Latest GAV (Rmb bn) 28.7 35.6 5.7 9.0 25.6
Latest book value (Rmb bn) 13.5 26.4 2.4 6.0 6.5
Current mkt cap (HK$ bn) 15.4 17.7 2.3 4.3 9.9
FY17F div idend y ield (%) 6.9% 8.6 8.2 6.9 6.9
Debts to GAV or LTV 1H17 0.37 0.24 0.31 0.38 0.32
Latest price 5.12 3.16 2.37 3.38 4.97
Book value per share (Rmb) 4.63 4.84 2.49 5.32 3.27
538
Source: Company, DBS Bank
Asian Insights SparX
China REITs Sector
Page 15
Singapore-listed China REITs
CapitaRetail
China
Perennial China
Retail T rust
Maplet ree
Greater China
BHG Retail REIT EC World REIT Dasin Retail
T rust
Stock code CRCT SP PCRT SP MAGIC SP BHGREIT SP ECWREIT SP DASIN SP
IPO background
Listing date 8-Dec-06 9-Jun-11 7-Mar-13 11-Dec-15 28-Jul-16 20-Jan-17
Structure REIT Business trust REIT REIT REIT Business trust
Major shareholder CapitaLand Perennial Real Estate Temasek BJ Hualian Forchn Group Zhang Zhencheng
IPO portfolio 7 CapitaMalls in
Beijing, Shanghai,
Wuhan,
Zhengzhou,
Hohhot, and Wuhu
1 completed
commercial complex
in Shenyang, 2
suburban malls in
Chengdu/Foshan,
and three pipleline
malls in
Xi'an/Chengdu/Cha
ngsha
1 commercial
complex in
HongKong and 1
commercial complex
in Beijing
5 malls in Beijing,
Dalian, Hefei,
Xining and
Chengdu
6 logistics
properties in
Hangzhou
3 retail malls in
Zhongshan, and 4
more retail malls to
be injected into the
listco
Asset value at IPO (Rmb bn) 3.5 5.9 21.7 2.8 6.4 4.6
NAV per share 0.98 0.67 0.91 0.82 0.88 1.02
IPO price 1.13 0.70 0.93 0.80 0.81 0.80
Premium/(discount) to NAV 15% 4% 2% (-3%) (-8%) (-21%)
Implied IPO y ield 5.4% 5.3% 5.5% 6.3% 7.1% 8.5%
Current portfolio
No. of properties 11 3 5 6 3
No. of cities 7 3 5 1 1
Total GFA (sm) 604,087 302,554 263,688 698,478 314,885
- office 0 190,257 0 0 0
- retail 604,087 112,297 263,688 0 314,885
- logistics & industrial 0 0 0 698,478 0
Earnings and valuations
Earnings structure Master lease and
multi-tenants
Multiple tenants Multiple tenants Master lease and
multi-tenants
Multiple tenants Multiple tenants
1H17A revenue (Rmb m) 582 868 153 231 105
- office 0 312 0 0 0
- retail 582 522 153 0 105
- hotel & serv iced apartment 0 0 0 0 0
- others 0 35 0 231 0
Latest GAV (Rmb bn) 12.80 30.20 3.89 6.41 7.47
Latest book value (SG$ bn) 2.43 5.96 0.81 1.31 1.53
Current mkt cap (US$ m) 1,105 2,637 286 449 357
FY17F div idend y ield (%) 6.1 5.9 n.a. n.a. n.a.
Debts to GAV or LTV @1H17 0.37 0.39 0.30 0.32 0.32
Latest price (SGD) 1.65 1.26 0.77 0.77 0.88
Privatised by
Perennial Real Estate
Holdings (PREH SP)
on 5-Feb-2015
Source: Company, DBS Bank
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China REITs Sector
Page 16
Major obstacles in fostering an onshore REIT regime
The first obstacle is the lack of a suitable platform to
hold assets, as constrained by regulations.
A bsence of a specific REIT code. One obstacle is the
specification that a public-traded fund platform is not
allowed to hold underly ing assets. According to existing
laws/regulations (Law of PRC on Partnerships 合夥企業法,
Trust Law 信託法, Law on Securities Investment Fund 證券
投資基金法), publicly traded funds are not allowed to hold
commercial properties, which is why existing onshore pre-
REITs are set up as private funds. This could lead to liquidity
concerns as the number of investors under a private fund
structure is capped at 200.
33 countries/regions have drafted REITs code so far
Bahrain, 2015 w
Kenya, 2014 w
India, 2014 w
Ireland, 2013 w
South Africa, 2013 w
Hungary, 2011 w
Mexico, 2010 w
Philippines, 2009 w
Finland, 2009 w
Spain, 2009 w
German, 2007 w
Pakistan, 2006 w
Israel, 2006 w
Dubai, 2006 w
UK, 2006 w
Bulgaria, 2005 w
Taiwan, 2005 w
Hong Kong, 2005 w
Malaysia, 2005 w
France, 2003 w
Japan, 2001 w
Korea, 2001 w
Rissia, 2001 w
Singapore, 1999 w
Turkey, 1995 w
Belgium, 1995 w
Italy, 1994 w
Canada, 1993 w
Brasil, 1993 w
Australia, 1971 w
New Zealand, 1969 w
Netherland, 1969 w
US, 1960 w
Source: NAREIT, DTZ, DBS Bank
F ollowing in Hong Kong’s and India’s footsteps in setting up
a REIT code. In our v iew, this obstacle should be easy for the
government to remove. A specific REIT code is required to
foster an ecosystem for REITs.
In 2003, the Hong Kong Housing Authority had planned to
fund welfare housing v ia REITs, and Link REIT listed on HKEx
in late-2005. Subsequently , the REIT platform was expanded
to include non-government sponsors. In 2014, India also
kicked off its first REIT to fund infrastructure projects. This is
targeted to open new investment avenues to private capital
as well as foreign investors.
In our v iew, China could follow HK and India in kickstarting
the REIT code for the first REIT to fund welfare/infrastructure
projects. This could allev iate local governments’ burden and
their reliance on bonds, and the established REIT code could
gradually expand from the public sector to the private
sector.
Another obstacle is the current tax regime in China,
which leads to multiple levels of taxation for China REITs.
Mult iple levels of taxation currently . When injecting projects
or project companies into the REIT platform, there will be
transaction taxes such as stamp duty tax, deed tax, value-
added tax (VAT), appreciation tax (LAT), and income tax,
although some taxes might be negotiable with local
governments. Yet, project companies with offshore
structures are not subject to transaction taxes, and
therefore, they could save on tax expenses when setting up
an offshore REIT platform; an example is J inmao Hotel
(6139.HK, BUY). The holding of assets is also subject to
property tax, VAT (previously business/sales tax), and income
tax, which will dampen y ields.
Tax “conduit” by nature. Being a “mutual fund” investing
in commercial properties instead of listcos, REITs see most of
Asian Insights SparX
China REITs Sector
Page 17
their income go to investors after deducting management
fees. Therefore, a REIT can be seen as a tax “conduit”, and
is exempt from corporate income tax. A pass-through
income tax structure when injecting assets into a REIT
platform is also needed to attract interest. However,
different countries have different tax regimes, and it may
not be easy to come up with a clear-cut solution.
Hav ing an appropriate tax regime is key to the development
of REITs. In the US and major European countries such as
Germany, France, and the UK, REITs usually enjoy tax
benefits and are exempt from capital gains tax for asset
transfers as well as corporate income tax. This is attractive to
investors and makes the REITs’ pricing-correction role more
effective. Asian countries are generally cautious on REIT
taxation. The Singapore government has been quite
supportive of REITs, and S-REITs are exempt from any
transaction tax as well as income tax on profits to be
distributed. As a result, the S-REIT sector has grown at the
fastest pace in Asia. By comparison, HK REITs are subjected
to stamp duty tax for asset transfers. HK REITs are also
subjected to income tax, given the absence of taxation on
div idends. Thus, HK REITs are less attractive than S-REITs;
the development of HK REITs has been lagging that of S-
REITs’.
Dif f iculties in balancing the central government’s and local
gov ernments’ interests. In China, most taxes related to asset
transfers and commercial property operations are local
taxes. Therefore, the central government has an incentive to
remove these taxes to develop the REIT sector, but there
could be resistance from local governments. The situation is
becoming even more complicated after VAT reform (from
business tax to VAT), as tax revenue collection continues to
be in the hands of the central government, which further
weakens local governments’ taxation capability . As a result,
local governments have started to strengthen the levy of
remaining local taxes lately . The Beijing government has
unified its property tax from either 0.84% of the cost of
buildings or 12% of rental income previously to 12% of
rental income, which has had a large impact on old
buildings in premium locations as they carry relatively low
costs but high rent.
Taxes related to commercial property transactions/operations in China
Ta x Central or local tax (國稅 or 地稅) Ta x base Ta x rate
Ta xes related to asset transfers
Stamp duty local transaction price 0.05%
Deed tax local transaction price 3%
Value-added tax centra l depends on price and cost 11%
Land appreciation tax local depends on price and cost 30-60%
Income tax mainly local tax; central SOEs’ and financial
ins titutions' income tax is central tax
profit before tax 25%
Ta xes related to commercial property operations
Property tax local original cost / rental income 0.84% / 12%
Value-added tax centra l revenue - deductible items hotel/industrial: 6% office/retail:
11%
Income tax mainly local tax; central SOEs and financial
ins titutions' income tax is central tax
profit before tax 25%
Source: DBS Bank
Asian Insights SparX
China REITs Sector
Page 18
T ax waiver related to asset transfers necessary to develop
REIT regime. Based on our study, the land appreciation tax
(LAT) for project transfers or income tax for transfers of
project companies are major considerations for landlords
that want to inject their properties into a REIT structure.
Local governments may need to change their mind-set as
removing one-time transaction taxes could help digest idle
assets in cities and enhance taxes from operations of those
idle assets. Again, welfare/infrastructure projects could be a
good start to enjoy tax benefits while allev iating local fiscal
burdens.
Pass- through income tax structure may not be easy to
implement in the short term, given the absence of capital
gains tax and div idend tax (nil for onshore incorporated
companies, 10% withholding tax for offshore companies;
for indiv idual investors: 20%/10%/nil if holding shares <= 1
month/ 1-12 months / > 12 months). But, we think there
could be some tax benefits in some pilot cities like Beijing,
Shanghai, and Tianjin. For example, CIT IC Qihang (中信啟航)
has two SPVs in Tianjin holding two buildings in Beijing and
Shenzhen, respectively . Property tax and VAT will be taxed
in Beijing and Shenzhen, respectively , while income tax will
be at 18% in Tianjin (versus the normal level of 25%). Also,
welfare/infrastructure projects could be packaged as pilot
programmes to enjoy tax benefits. The central government
has just drafted regulations on housing lease and sales
management (住房租賃和銷售管理條例), proposing to
extend tax incentives to housing lease operators. This could
be easily extended into welfare/infrast ructure projects.
Having said that, taxation, in our v iew, is more a factor
determining the market size of C-REITs, rather than an
obstacle preventing the establishment of C-REITs, as
offshore China REITs also need to pay various taxes in China.
So far, only Yuexiu REIT’s initial batch of four assets in
Guangzhou and Spring REIT’s office in Beijing are directly
owned by offshore SPVs/funds before the new regulation in
2006, and subject to 10% withholding tax on revenue; the
rest of the assets under offshore China REITs are subject to
25% income tax. All China assets owned by offshore China
REITs are subject to property tax and VAT.
Current tax-saving measures. As discussed previously, there
are several techniques used by pre-REITs to avoid some taxes.
For asset transfers, transactions of project companies
instead of a direct asset transfer are generally implemented
to avoid LAT and deed tax. Domestic securities companies
are also working on the design of the pre-REITs’ structure to
further reduce taxes incurred during asset transfers.
To reduce income taxes for target properties’ operation, a
SPV is structured to hold both equity and debt of project
companies. Most underly ing assets of pre-REITs are equity
plus entrusted loans of project companies.
Simplified structure of Yuexiu REIT
Offshore
Yuexiu REIT
Four initial assets
Four offshore SPV/BVIs
GZI REIT 2005 Co. Ltd.
Four assets acquired
Offshore SPV/BV Is
Onshore project companies
Onshore
Source: Company, DBS Bank
Asian Insights SparX
China REITs Sector
Page 19
Simplified structure of Spring REIT Typical structure for offshore China REITs
Offshore
Spring REIT
Initial assets in Beijing
RCA01
UK properties
RUK01
Onshore
Offshore
Of fshore China REITs
RE assets in China
Onshore project companies
Offshore SPVs
Onshore
Source: Company, DBS Bank Source: Company, DBS Bank
Asian Insights SparX
China REITs Sector
Page 20
CMBS/CMBNs are growing faster
Higher potential in the near term. CMBS is a type of
mortgage-backed security with commercial properties being
the underly ing asset. Compared to pre-REITs, the big
difference is there is no asset transfer – avoiding the two
key obstacles faced by onshore REITs. Compared to
traditional bank loans, CMBS enjoy lower funding costs and
better liquidity. Compared to other property -related ABS
(such as property management ABS or receivables ABS), the
underly ing assets of CMBS are commercial properties that
generate rental income from institutions, which are more
stable and predictable than other underly ing assets.
The first public-traded CMBS – Go High CM Chemsunny
(高和招商金茂凱晨) kicked off in August 2016, although
some say that Hengtai Yintai Centre (北京銀泰中心) was the
first one. The missing element of Hengtai Yintai Centre is an
indiv idual serv icer to manage assets and isolate risks, while
Go High CM Chemsunny has a joint venture between Go
High Fund and China J inmao as an indiv idual serv icer.
Originators – China J inmao and China Yintai – have
subscribed for all the subordinated tranche of both CMBS.
This is slightly different from CMBS in US, where the
subordinated tranche is usually purchased by serv icers.
Key differences between CMBS and other property-
related ABS
CMBS Other property-related ABS
Underlying
asset
Commercial
property
Various debts, residential
mortgages, property management
fees, and receivables
Cash source Rental income Debtors' repayment
Underlying
credit
Tenants' credit
(mainly
institutions)
Debtors' credit (mainly individual)
Source: DBS Bank
So far, we have seen 18 CMBS issued, worth about
RMB66bn, compared to 27 existing pre-REITs worth
RMB61bn. The average size of CMBS is larger than those of
pre-REITs. The reason for this is CMBS could be seen as a
substitute for investment loans (經營貸) on those
commercial properties and needs more scale to enjoy
greater cost sav ings. The US had witnessed tremendous
growth during 1995-2007. After the global financial crisis,
the annual issuance of CMBS has recovered to the level of
US$80-100bn. Given the simplicity of the structure, CMBS
may have better growth prospects than onshore pre-REITs in
the near term. However, the pace of development may be
controlled by regulators. As we learnt, a number of
potential CMBS are in the pipeline, awaiting approval from
the stock exchange. Shimao (813.HK, HOLD) and Golden
Eagle (3308.HK, BUY) recently issued CMBN products on
the inter-bank market.
Issuance of CMBS in the US
0
50
100
150
200
250
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
US$bn
Source: Commercial Mortgage Alert, JLL, DBS Bank
Asian Insights SparX
China REITs Sector
Page 21
C-REITs are imminent
Weaken residential properties’ attractiveness as investments.
Currently , Chinese residents prefer to put their money
directly into property assets, given the lack of REIT products
and limited investments channels. Housing prices used to
jump every three years (policy cycle). In addition, direct
ownership usually enables substantial leverage (20-30%
down payment when policy loosens). Leverage is a powerful
tool, which could amplify the return on investment on
residential properties. Local governments have implemented
a series of policies (including purchase/sell/mortgage
limitations) with the intention of managing residents’
expectations on housing prices. In addition, this should
greatly weaken the liquidity of residential properties.
Normally , price expectations should be negatively affected
by tightening leverage and liquidity .
The government has attached more importance to long-
lease rental apartments, proposing to give more incentives
(including land supply and tax incentives) to this area.
However, during the 19th CPC National Congress, the
government reiterated that housing is for accommodation,
not for speculation. Therefore, we expect housing prices to
be more stable than before.
Dev elop commercial properties’ function as investments.
The regulators have been speeding up the drafting of the
REIT code lately . In addition, the central government has
been iterating the pilot programme for REIT products. The
first pre-REIT for long-lease rental apartments was issued on
3 November, 2017, and some industry experts are expecting
the breakthrough in onshore REITs to come from this
segment. Moreover, the issuance of onshore pre-REITs has
also accelerated lately . As such, we think C-REITs are
imminent, although the initial structure might not resemble
that of international REITs’, as the industry is constrained by
existing legislation and taxation. As abovementioned,
upcoming C-REITs could be public funds with investment
targets of onshore pre-REITs. Yet, they should greatly
improve the liquidity of commercial properties and unlock
value.
Commercial property to outperform residential property,
based on international experience. Rising risks in the
residential sector after the rapid increase in land prices and
the Chinese government’s latest cooling measures have led
investors to switch their focus from residential to
commercial properties, on expectations that this class will
offer stable y ields with potential for asset appreciation. In
fact, several developers are building their commercial
property portfolio in top-tier cities. Based on our
observations, the capital value of commercial properties in
Japan and HK have outperformed residential housing prices
after the introduction of local REITs.
Initial onshore REITs structure
Mutual fund (公募基金 )
Pre-REITs Pre-REITs
Target property (標的物業 )
Target property (標的物業 )
Source: DBS Bank
Commercial land prices have outperformed residential
land prices in Japan since 2000
700,000750,000800,000850,000900,000950,0001,000,0001,050,0001,100,0001,150,0001,200,000
180,000
190,000
200,000
210,000
220,000
230,000
240,000 2
000
2002
2004
2006
2008
2010
2012
2014
2016
Avg residential land price (LHS)
Avg commercial land price (RHS)
Source: CEIC, DBS Bank
Asian Insights SparX
China REITs Sector
Page 22
Office/retail prices have outperformed residential prices
in HK, especially after 2005
0.000
100.000
200.000
300.000
400.000
500.000
600.000
1Q
2000
1Q
2001
1Q
2002
1Q
2003
1Q
2004
1Q
2005
1Q
2006
1Q
2007
1Q
2008
1Q
2009
1Q
2010
1Q
2011
1Q
2012
1Q
2013
1Q
2014
1Q
2015
1Q
2016
1Q
2017
Grade A Office Retail Residential
1999=100
Source: CEIC, DBS Bank
In our v iew, the required y ield of C-REITs will likely fall into
the 5.5-6.0% range, compared to the current China ten-
year government bond y ield of 3.9%, the latest weighted-
average rate of 4.5% for wealth management products
(WMP), office/retail assets’ investment y ield of 5.6-6.3% in
Beijing/Shanghai, and current offshore China REITs’ y ield of
between 6% and 9%. The y ield spread (above China ten-
year government bond y ield) is likely to be 2%, compared to
c.3% for HK REITs and S-REITs, which could be justified by
higher asset appreciation potentials in China.
Differences in returns of banks’ wealth management
products and pre-REITs
3
4
5
6
7
8
Dec
-13
Mar-
14
Jun-1
4
Sep-1
4
Dec
-14
Mar-
15
Jun-1
5
Sep-1
5
Dec
-15
Mar-
16
Jun-1
6
Sep-1
6
Dec
-16
Mar-
17
Jun-1
7
Sep-1
7
AAA AA+ AA
%
Weighted average rate of wealth management products
Source: CEIC, DBS Bank
Differences in returns of banks’ wealth management
products and pre-REITs
3
4
5
6
7
8
Dec
-13
Mar-
14
Jun-1
4
Sep-1
4
Dec
-14
Mar-
15
Jun-1
5
Sep-1
5
Dec
-15
Mar-
16
Jun-1
6
Sep-1
6
Dec
-16
Mar-
17
Jun-1
7
Sep-1
7
Weighted average rate of pre-REITs/CMBS
%
Weighted average rate of wealth management products
Source: CEIC, DBS Bank
We compared the weighted average rate of return of banks’
wealth management products (WMPs) and the AAA tranche
of existing pre-REITs and found the average difference is
0.86 percentage point. We also compared the weighted
average rate of return of WMPs and the weighted average
coupon rate of existing pre-REITs and found the average
difference is 1.47 percentage point.
Which asset type will benefit more?
A sset types: There are six HK-listed REITs holding 31
properties in mainland China, including 17 hotels, five
offices, five retail/wholesale malls, and four commercial
complexes. Eleven S-REITs hold 49 properties in China,
including 19 retail malls, 16 logistics properties, 11
hotel/serv iced apartments, and one commercial complex. 27
onshore pre-REITs hold a total of 77 properties, including 45
retail malls/chain stores, 10 offices, six logistics properties,
and 16 hotels. So far, 18 CMBS/CMBN has been issued
based on 25 IPs, including eight commercial complexes, ten
offices, and seven retail malls. 18 of these IPs are in tier-1
cities and seven in tier-2 cities. In addition, CMBS’s IP are
larger than those of pre-REITs’.
Asian Insights SparX
China REITs Sector
Page 23
Asset types owned by onshore pre-REITs and offshore
REITs
Locations of assets owned by onshore pre-REITs and
offshore REITs
0
10
20
30
40
50
60
70
80
90
HK-listedREITs
S-REITs Onshore pre-REITs
OnshoreCMBS/CMBN
Retail/wholesale OfficeComplex Hotel/apartmentIndustrial Residential
0
10
20
30
40
50
60
70
80
90
HK-listedREITs
S-REITs Onshore pre-REITs
OnshoreCMBS/CMBN
Tier 1 Tier 2 Tier 3
Source: Company, DBS Bank Source: Company, DBS Bank
IPs owned by HK-listed REITs
Co m p a n y S to c k c o d e Pr o p e r ty Ty p e Lo c a ti o n
Yuexiu REIT 405 HK White Horse Building Wholesale Guangzhou
Victory Plaza Retail Guangzhou
City Development Plaza Office Guangzhou
Fortune Plaza Office Guangzhou
Neo Metropolis Retail Guangzhou
Guangzhou IFC Complex Guangzhou
Yuexiu Tower Office Shanghai
Wuhan Yuexiu Fortune Centre Complex Wuhan
Huixian REIT 87001 HK Beijing Oriental Plaza Complex Beij ing
Chongqing Metropolitan Oriental Plaza Retail Chongqing
Sofite l Shenyang Lido Hotel Shenyang
Harbour Plaza Chongqing Hotel Chongqing
Sheraton Chengdu Lido Hotel Hotel Chengdu
New Century REIT 1275 HK New Century Grand Hotel Hangzhou Hotel Hangzhou
New Century Grand Hotel Songjiang Shanghai Hotel Shanghai
New Century Hotel Xiaoshan Zhejiang Hotel Hangzhou
New Century Resort Qiandao Lake Hangzhou Hotel Hangzhou
New Century Grand Hotel Ningbo Hotel Ningbo
New Century Grand Hotel Changchun Hotel Changchun
New Century Grand Hotel Kaifeng Hotel Kaifeng
Spring REIT 1426 HK China Central Place T1&2 Office Beij ing
Jinmao Hotel 6139 HK Jinmao Tower Complex Shanghai
The Westin Beij ing Chaoyang Hotel Beij ing
JW Marriott Hotel Shenzhen Hotel Shenzhen
The Ritz-Carlton, Sanya Hotel Sanya
Hilton Sanya Resort and Spa Hotel Sanya
Hyatt Regency Chongming Hotel Chongming
Renaissance Beij ing Wangfujing Hotel Hotel Beij ing
Grand Hyatt Lij iang Hotel Lij iang
Link REIT 823 HK Ecmall Retail Beij ing
Source: Company, DBS Bank
Asian Insights SparX
China REITs Sector
Page 24
IPs owned by S-REITs
Co m p a n y S to c k c o d e Pr o p e r ty Ty p e Lo c a ti o n
CapitaRetail China CRCT SP CapitaMall Xizhimen Retail Beij ing
CapitaMall Wangjing Retail Beij ing
CapitaMall Grand Canyon Retail Beij ing
CapitaMall Qibao Retail Shanghai
CapitaMall Saihan Retail Hohhot
CapitaMall Minzhongleyuan Retail Wuhan
CapitaMall Wuhu Retail Wuhu
CapitaMall Anzhen Retail Chengdu
CapitaMall Erqi Retail Zhengzhou
CapitaMall Shuangjing Retail Beij ing
Mapletree Greater China MAGIC SP Gateway Plaze Office Beij ing
Sandhill Plaza Office Shanghai
BHG Retail REIT BHGREIT SP Beij ing Wanliu Mall Retail Beij ing
Chengdu Konggang Mall Retail Chengdu
Dalian Jinsanjiao Property Retail Dalian
Hefei Mengchenglu Mall Retail Hefei
Xining Huayuan Mall Retail Xining
EC World REIT ECWREIT SP Chongxian Port Investment Industria l Hangzhou
Chongxian Port Logis tics Industria l Hangzhou
Fu Zhuo Industria l Industria l Hangzhou
The Stage 1 Properties of Bei Gang Logis tics Industria l Hangzhou
Fu Heng Warehouse Industria l Hangzhou
Hengde Logis tics Industria l Hangzhou
Das in Retail Trust DASIN SP Xiaolan Metro Mall Retail Foshan
Ocean Metro Mall Retail Foshan
Das in E-colour Retail Foshan
Mapletree Logis tics Trust MLT SP ISH Waigaoqiao Industria l Shanghai
Mapletree AIP Industria l Guangzhou
Wuxi Logis tics Park Industria l Wuxi
Xi'an Dis tribution Centre Industria l Xi'an
Yangshan Bonded Logis tics Park Industria l Shanghai
Zhengzhou International Logis tics Park Industria l Zhengzhou
Northwest Logis tics Park phase 1 Industria l Shanghai
Northwest Logis tics Park phase 2 Industria l Shanghai
Ouluo Logis tics Centre Industria l Shanghai
Ascott Res idence Trust ART SP Ascott Guangzhou Apartment Guangzhou
Citadines Biyun Shanghai Apartment Shanghai
Citadines Gaoxin Xi'an Apartment Xi'an
Citadines Xinghai Suzhou Apartment Suzhou
Citadines Zhuankou Wuhan Apartment Wuhan
Somerset Grand Central Dalian Apartment Dalian
Somerset Heping Shenyang Apartment Shenyang
Somerset Xuhui Shanghai Apartment Shanghai
Somerset Olympic Tower Property Tianjin Apartment Tianjin
Ascendas Hospita lity Trust ASCHT SP Novotel Beij ing Sanyuan Hotel Beij ing
Ibis Beij ing Sanyuan Hotel Beij ing
Cache Logis tics Trust CACHE SP Jinshan Chemical Warehouse Industria l Shanghai
OUE Commercia l REIT OUECT SP Lippo Plaza Complex Shanghai
Source: Company, DBS Bank
Asian Insights SparX
China REITs Sector
Page 25
Different IPs’ operating characteristics
Modern logistics
property
Grade A office Premium retail mall Luxury hotel
Land use right Industrial Commercial Commercial Commercial
Development cycle 1-2 years 3-5 years 3-5 years 3-5 years
Key demand drivers 3rd party logistics, e-
retailers, and industrial
Tertiary industry End user demand,
population catchment
Tourist arrivals
Key barriers Land, network and
transportation
Location, unless new
district/area planned by
government
Population catchment,
operating execution
Location, operating
execution
Replacement or substitute Co-working space Overseas shopping and
E-retailers
Home stay
Lease term Long Short
Maintenance Low High
Management Light Heavy
Operating costs Low High
Margin High Low
IFRS accounting treatment Investment properties:
revalue but no
depreciation
Investment properties:
revalue but no
depreciation
Investment properties:
revalue but no
depreciation
Investment properties
under master lease
arrangement, otherwise
PPE with depreciation
but no revaluation
Property tax 12% 12% 12% 12%
VAT 6% 11%, or 5% for old
buildings
11%, or 5% for old
buildings
6%
Income tax 25% 25% 25% 25%
Source: Company, DBS Bank
We have summarised the key characteristics of the four
different types of commercial properties in the table above.
As shown, the performance of hotels and retail malls is
highly dependent on the management’s expertise, while
logistics properties and offices are relatively simple and
require less management.
Modern logistics properties: positive on coastal cities but
inland c ities to suffer from oversupply in the near term.
A ccess to land is key. Modern warehouses generate
relatively stable cashflow and require less operating
capability . Our analysis shows that access to land, low-cost
funding, talent, and tenants are key success factors. As local
governments have lower incentives to supply industrial land,
this creates a high entry barrier for newcomers.
Demand f rom e-commerce has rebounded YTD. Alibaba’s
online sales on Singles’ Day surged 39% y-o-y to
Rmb168.2bn in 2017, vs. 32% in 2016. E-commerce retail
sales sped up with 32% y-o-y growth registered in 10M17,
outpacing the 26% in 2016 and iResearch’s full-year
projection of 25.4% for 2017. Major e-retailers are actively
expanding the categories of consumer goods, especially in
fresh food and cross-border merchandise. Both export and
import activ ities have picked up strongly YTD, mainly led by
imports. Imports increased by 17% in value terms in 10M17
while exports grew 7%.
Declining land supply points to a deceleration in warehouse
supply from 2018 onwards. Rentals at logistics properties in
major coastal cities were relatively flat quarter-on-quarter (q-
o-q) in 3Q17, while Chongqing/Chengdu continued to
suffer from oversupply. Looking ahead, rents are likely to
edge up in key cities in the coming six months, with
Shanghai and Shenzhen to lead rental growth due to limited
supply as well as potential demolit ion of ageing warehouses.
Industrial land supply in 14 key cities dropped 19% y -o-y in
1H17, mainly due to substantial cut in Chengdu, Chongqing,
and Wuhan. Growth in warehouse investments also
remained low at 4% in 8M17, vs. 5%/28% in 2016/2015,
which will likely slow down warehouse supply from 2018
onwards and support rental growth.
Asian Insights SparX
China REITs Sector
Page 26
More capital to chase warehouse assets, likely to push up
capital values further. As the RMB has reversed its
downward trend YTD, foreign capital has also been flowing
into logistics property assets/companies lately , such as
Invesco and Allianz’s investments in e-Shang/Redwood.
Domestic players and funds continue to chase warehouse
assets, and the rebound in e-commerce growth has
triggered industry -chain plays to compete for warehouses.
This should drive up capital values further.
SOE and market consolidator that have better access to
industrial land to benefit more from the potential C-REITs.
Shenzhen Chiwan (200053.CH, BUY) used to be the
second-largest warehouse play in China, but its
development over the last two years has been dragged by
its B-share status. The company is expected to leverage on
the potential C-REITs to quicken its asset turnover and grow
its portfolio. Vanke-H/A (2202.HK, BUY; 000002.CH,
HOLD), the largest warehouse play (a part of a consortium
involved in an ongoing transaction to take GLP private), is
also a key beneficiary.
Logistics prosperity index* (LPI) China E-retailers’ logistics index^
45
47
49
51
53
55
57
59
61
Mar-
13
Nov-
13
Aug-1
4
May-
15
Feb-1
6
Nov-
16
Aug-1
7
%
115
117
119
121
123
125
127
Sep-1
6
Oct
-16
Nov-
16
Dec
-16
Jan-1
7
Feb-1
7
Mar-
17
Apr-
17
May-
17
Jun-1
7
Jul-17
Aug-1
7
Sep-1
7
Oct
-17
Nov-
17
J an2015=100
Source: China Federation of Logistics & Purchasing (CFLP), DBS Bank
* above 50 means expansion, below 50 means contraction
Source: China Federation of Logistics & Purchasing (CFLP), DBS Bank
^ reflecting overall logis tics s tatus from e-commerce, including nine sub-indexes.
Industrial land supply in 14 major cities Rental performance of 14 major cities
0
20
40
60
80
100
120
1H
10
2H
10
1H
11
2H
11
1H
12
2H
12
1H
13
2H
13
1H
14
2H
14
1H
15
2H
15
1H
16
2H
16
1H
17
mn sm
0%0%
2%
0%0%
2%
3%2%2%
1%
3%
-5%
-2%-2%
-6%-5%-4%-3%-2%-1%0%1%2%3%
05
101520253035404550
Qin
gdao
Shenya
ng
Bei
jing
Tian
jin
Dal
ian
Shangh
ai
Nan
jing
Han
gzh
ou
Nin
gbo
Guan
gzh
ou
Shenzh
en
Chen
gdu
Chongqin
g
Wuhan
Rents (LHS) y-o-y, change
RMB/sm/month
Source: CRIC, DBS Bank Source: CBRE, DBS Bank
Asian Insights SparX
China REITs Sector
Page 27
Rental growth estimates for 4Q17-1Q18 Major players’ landbank
-3
-2
-1
0
1
2
3
4
Shangh
ai
Shenzh
en
Bei
jing
Nan
jing
Guan
gzh
ou
Nin
gbo
Tian
jin
Dal
ian
Shenya
ng
Qin
gdao
Han
gzh
ou
Wuhan
Chen
gdu
Chongqin
g
%
m n sqm 2 0 14 1 H17
GLP 10.7 29.2
Goodman 1.3 4.2
e-Shang/Redwood 0.6 4.1
CNLP (Yupei) 0.7 4.0
Mapletree 0.8 2.6
Vanke 0.2 2.6
Shenzhen Chiwan (Blogis) 0.9 1.9
Beij ing Properties 1.1 1.7
Source: CBRE, DBS Bank Source: Company, DBS Bank
Grade-A offices: Positive on Shanghai, Guangzhou and Shenzhen, but cautious on Beijing in the medium term
Location is key. Offices require less management compared to retail malls. There are two basic parameters – occupancy and rental rate, and management needs to balance the two. Grade-A office space is usually preferred by REITs as it
usually houses multi-national and large enterprises, which are less affected by cycles. The key barrier facing the segment is location. Yet, such advantages may be moot if the government plans to develop a new area. The famous example is Shanghai’s Pudong, which has seen better growth than Puxi, given the policy inclinations. This also applies to cities, as new planning of cities/regions could greatly affect mid-term demand.
The cost structure is simple. Less management leads to lower operating costs. The major costs are property tax and VAT. Offices are classified as investment properties, which could enjoy revaluation and no depreciation. Therefore, the operating margin of office assets is usually around 80%.
Beijing offices: headwinds in the medium term. Demand
from domestic professional firms and IT-related companies
remains decent. However, Beijing’s municipal government is
moving to Tongzhou while the central government targets
to build up Xiong An New District to take up some functions
from Beijing, which will dilute mid-term demand for offices
in Beijing’s core areas. A wave of new supply in 2018-2021
should also drive up overall vacancy from 3.9% as of end-
2016 to 9.7% in 2021. In addition, we are seeing more
supply coming from other commercial properties (discussed
in the ‘The rise of active property asset management’
section on page 34).
Overall rental will likely edge up in 2017 and should see
downward pressure starting from 2018, especially in CBD
areas. Capital value growth will slow down, despite the
strengthening RMB this year and stricter capital outflow.
The Beijing municipal government's move to change the
basis of property tax from cost to revenue from 2H16 will
aggravate the tax burden, especially for owners of old office
buildings in prime locations.
Shanghai offices: rental hiccup in the near term, but bright
in the medium term. Demand for office space in core areas
in Shanghai is still on the rise, driven by domestic financial
serv ices, professional serv ices, and IT-related firms.
Additional opportunities might come from SOE
consolidation, as some shipping and financial SOEs may
move their headquarters from Beijing to Shanghai after
consolidation. New supply will peak in 2017, and shrink in
2019-2021. Including decentralised areas, total Grade-A
office stock in Shanghai was 11m square metres as at end-
1H17, still lower than 13m square metres in Hong Kong and
38m square metres in New York (Manhattan).
Rental will likely stay steady , given new supply pressure. But
we are positive on the mid-term outlook, as rental rates in
Shanghai is still lower than those in Beijing and other
international financial centres, pointing to upside potential
in the mid-term. According to J LL, Shanghai was ranked as
the top city for real estate investment in Asia-Pacif ic in 2016.
Investment momentum has remained strong YTD; yet,
buying interest has been mainly from developers, PE funds,
and foreign capital this year, vs. insurers being the key
buyers last year. We expect buying sentiment to stay strong,
given stricter controls on capital outflows and a relatively
high effective y ield among gateway cities globally .
Guangzhou offices: high-growth potential on low base.
Demand from domestic financial serv ices, professional
serv ices, IT-related firms, and real estate companies remains
decent. Despite a new supply peak in 2016, total prime
Asian Insights SparX
China REITs Sector
Page 28
office supply remained the lowest among the four tier-1
cities. In addition, new supply will slow down in 2017-2020,
with major supply contributor being Pazhou. Therefore,
occupancy should gradually trend down from 12% as of
end-2016.
After the new supply peak in 2016, we expect rental rates
to post CAGR of 4-5% in 2017-2020. Grade-A office space
in Guangzhou is still the cheapest among major cities in
Greater Bay Area. This, coupled with limited buildings
available for sale, will continue to drive up capital value.
Shenzhen offices: investment and headquarter demand to
driv e growth. Domestic securities and asset-management
companies have been active in taking up prime office space
in Shenzhen since 2016, given the Hong Kong-Shenzhen
Stock Connect as well as the geographical proximity and the
large rental difference between the two cities. A wave of
new supply is coming, but a quarter will be occupied by
developers.
The rental rate in Shenzhen will likely post CAGR of 3-4%
in 2017-2020, as rental looks still low compared to that in
Hong Kong. The healthy economic structure, young
population, and the government’s aim to build up the
Greater Bay Area will continue to attract investment
demand and demand for headquarters as high-tech firms
tend to form a cluster (agglomerate) to enjoy knowledge
spillover.
SOHO is the only pure play in China’s office segment. We
expect SOHO to benefit more from asset disposal, given
investors’ appetite for prime office assets. Trading at 0.6x
P/BV, asset disposal and special div idends after asset
disposal is a value unlocking process.
Prime office stock and rental rate comparison, 2Q17 Comparison of office rental yield, risk premium, (end-2016)
75%
80%
85%
90%
95%
100%
05
10152025303540
Beijin
g
Shanghai
Shenzhen
Guangzhou
HongK
ong
London
New
York
Stock (LHS) Occupancy (RHS)
m sm
rental 382 314 254 163 713 588 356
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
Bei
jing
Chen
gdu
Guan
gzh
ou
Han
oi
Ho C
hi M
inh
HongKong
Jaka
rta
Manila
Seoul
Shangh
ai
Shenzh
en
Singap
ore
Taip
ei
Tokyo
Ave
rage
Effective yield Risk premium
Source: JLL, DBS Bank Source: Savills, DBS Bank
Office rental outlook, tier-1 cities Office capital value outlook, tier-1 cities
Near-term Mid-term
Beijing → ↓
Shanghai → ↑
Guangzhou ↑ ↑
Shenzhen → ↑
Near-term Mid-term
Beijing → →
Shanghai ↑ ↑
Guangzhou ↑ ↑
Shenzhen ↑ ↑
Source: DBS Bank Source: DBS Bank
Asian Insights SparX
China REITs Sector
Page 29
Prime retail malls: don’t underestimate rental upside.
Execution is key. Compared to offices, retail malls require more operating expertise and are more related to the end-customer. Rental income is usually a percentage of sales (tenants’ occupancy cost is usually 15-20%) in the mall and there are three basic parameters of sales – shoppers’ traffic, conversion rate, and sales per ticket. Cashflow from rents is usually a composition of fixed rents and turnover rents (a certain percentage of sales). Giv en the management involved, the cost of running a retail mall is usually higher than that of office. Therefore, the operating margin of a retail asset is usually 50-70%. Retail malls are also classified as investment properties, which
could enjoy revaluation and no depreciation. The supply risk is overestimated. Based on data from J LL, the total number of malls (with gross floor area of over 10,000 square metres and not operating on a strata-titled basis) in China’s top 30 cities is expected to increase from 998 currently to 1,445 in 2019. J LL data also shows that shopping mall stock in Tier-2 cities will rise 58% on average by end-2019. But our analysis shows that the oversupply risk is overstated for several reasons: (1) New mall supply that has been delayed or cancelled is included in the analysis that points to an oversupply risk. J LL estimated that over 30% of the new malls expected to open in 2017 would be delayed or cancelled. Also, empty malls do not compete for shoppers, as tenants usually start renovations only after the pre-leasing of the whole project reaches a certain level,
usually 60-70%; (2) The supply risk in high-quality mall space might also be overstated, as brand mix and rental rates could be divergent between different malls; (3) the latest trend to convert mall space to offices and China’s new policy to allow conversion of commercial land to land for residential leasing housing will reduce the supply risk, too. The market has underestimated the recovery in retail sales in key areas. We believe the consistent growth in disposable income will continue to drive retail sales in these cities. In addition, retail sales for the top 50 retailers, especially for affordable luxury and jewellery/watch players, have
witnessed above-market growth since 4Q16, and we believe such momentum could hold up. Given that the top 50 retailers are the main tenants of shopping malls operated by listed mall players, their sales recovery data may more accurately reflect the rental prospects of such malls than the overall retail sales data for China.
New emerging trends support rental growth of retail malls. We recently interv iewed key retailers in China, including retailers of global luxury goods, jewellery, watches, sportswear, cosmetics, and lingerie. The interv iews suggest that a few new trends are supporting rental growth: (i) Branded retailers have resumed expansion of their retail
stores (3-8% CAGR in 2017-2018); (ii) Foreign brands continue to enter the Chinese market; and (iii) Price harmonisation supports luxury retail sales recovery. F our types of malls will outperform: (1) existing luxury malls in tier-1 cities; (2) suburban, mass market-focused malls in districts with continuous population influx in tier-1 cities; (3) the first high-quality malls opened in tier-3 cities; and (4) malls that are managed by a strong retail management team. Key beneficiary: CR Land and Joy City. They have a greater number of malls falling into the above categories. In addition, both companies generated relatively high y ield on costs, given their management expertise. CR Land has a wide range of malls that could benefit from the retail sales
recovery in the luxury segments and enjoys first-mover advantage in lower-tier cities, while Joy City could leverage its property fund platform to expand its national footprint. Both also have a high percentage of turnover rents and could ride the rebound in retail sales in their malls. Therefore, we expect both to potentially benefit from C-REITs to quicken their asset turnover and expand their national footprint. In the US, the largest REIT in terms of market cap is Simon Property (SPG.US, not-rated), which focuses on retail malls.
Asian Insights SparX
China REITs Sector
Page 30
Top retailers will continue to see growth momentum
6.4%
11.6%
14.6%
10.3%
16.9%
6.0%
9.1%
4.8%
9.5%
15.0%13.7%
7.7%
10.3%
15.8%
10.6%
13.5%
9.2%9.9%
7.8%
3.5%
5.5%
8.8%
-0.6%
2.1%
-7.0%
1.7%
-0.2%
-2.2%
1.4%
-0.3%-0.1%
0.8%0.4%
1.8%0.6%
-0.3%
0.4%
2.0%
0.3%
-1.4%-1.1%
-0.8%-1.2%
-5.6%-6.2%
-2.3%
2.9%
-4.1%
-0.2%
1.3%
-0.8%
2.3%
1.6%2.6%
5.1%
1.6%3.1%
5.5%
4.1%2.8%
4.9%
7.1%
3.2%4.5%
-10%
-5%
0%
5%
10%
15%
20%
Jan-F
eb 2
012
Apr 2012
Jun 2
012
Aug 2
012
Oct
2012
Dec
2012
Mar 2013
May
2013
Jul 2
013
Sep 2
013
Nov
2013
Jan-F
eb 2
014
Apr 2014
Jun 2
014
Aug 2
014
Oct
2014
Dec
2014
Mar 2015
May
2015
Jul 2
015
Sep 2
015
Nov
2015
Jan-F
eb 2
016
Apr 2016
Jun 2
016
Aug 2
016
Oct
2016
Dec
2016
Mar 2017
May
2017
Jul 2
017
Sep 2
017
Source: China Nation Commercial Information, DBS Bank
China shopping centre development index 2H17 forecast for different city tier
0
10
20
30
40
50
60
70
80
90
100
Overall index Current Future (upcomingsix months)
threshold: 50.0
0
10
20
30
40
50
60
70
80
90
100
Tier 1 Tier 2 Tier 3 and below
Current Future (upcoming six months)
threshold: 50.0
Source: CBRE, DBS Bank Source: CBRE, DBS Bank
Asian Insights SparX
China REITs Sector
Page 31
Upper upscale/luxury hotels: growth rebound.
Management is usually outsourced. Hotels have been the
least favoured assets among commercial properties, given
the complexity of operation and oversupply concerns.
Developers generally don’t have the operating expertise to
run luxury hotels and usually outsource the day-to-day
operations to international hotel managers. Hotels’ revenue
is mainly derived from end-user demand and will directly
benefit from consumers’ trading up in China.
Demand is picking up. Demand for luxury hotels has been
affected by government’s anti-corruption campaign since
early 2014, but has been picking up in top-tiered cities
lately , driven by private demand. We are seeing better-than-
expected improvement in occupancy. Some traditional
business hotels in tier-1 cities saw occupancy of over 80% in
1H17, as rooms were filled by private/tourism demand on
weekends.
Hotel supply has been under control over the past several
years as hotel investments from developers or local
governments have become more rational, reflected in the
declining number of hotels since 2014. In addition, the
central government is encouraging the long-lease rental
apartment and allowing the conversion of commercial
projects to long-lease rental apartments (hotels should be
the major beneficiary). Our channel check reveals that a
number PE funds are actively acquiring hotel assets and
turning those into long-lease rental apartments. Developers
are also turning their hotels into long-lease rental
apartments or senior housing. Hotels in core areas in Beijing
and Shanghai may also be redeveloped into offices
(discussed in the ‘The rise of active property asset
management’ session on page 34). This could be ev idenced
by the increasing number of hotels closed over the past
three years.
F ive-star hotels’ revenue is resil ient. We have compared the
revenue of all hotels with that of 5-star hotels. As shown in
the chart below, 5-star hotels’ revenue is more resilient than
that of the whole industry. Despite a decline in overall hotel
revenue, 5-star hotels’ revenue has been picking up lately . In
addition, as occupancy in tier-1 cities has returned to c.75%
YTD. Based on STR Global’s study, luxury hotels’ ideal
occupancy is 75-85%, where could generate the best GOP
(gross operating profit). Therefore, we think the high
occupancy in tier-1 cities should gradually transform into
higher ADR, resulting in faster growth in RevPAR (revenue
per room).
High operating leverage leads to a larger rebound in
EBITDA. Hotels’ operating margin is relatively low compared
to that of other commercial properties. GOP margin for
well-managed hotels is usually 35-40%. Hotel managers
usually charge 4-8% of revenue, based on operating
performance. Therefore, landlords’ EBITDA margin for well-
managed hotels is around 30-35%. F ive-Star hotels usually
have a high operating leverage as they need to keep hotel
staff to maintain serv ice quality even during tough periods
and it takes time for them to train hotel staff. The high
operating leverage and recovery in revenue could lead to a
larger rebound in EBITDA. We have run regressions on hotel
EBITDA and hotel revenues for the mature hotels of J inmao
(three hotels in Beijing/Shanghai/Shenzhen over the past
eight years) and Shimao (three hotels in Shanghai over past
nine years), respectively . Both correlations are 99% and
slope is 2.6x and 2.0x for J inmao and Shimao, respectively ,
which means EBITDA growth is usually above 2x of revenue
growth.
Mature hotels are usually undervalued. Hotels are usually
booked under “property plant and equipment”, with
depreciation over time and there is no revaluation.
Therefore, their book value does not indicate their true
economic value. In addition, mature hotels are usually
located in prime locations. Potential redevelopment of
existing hotels into office space could also unlock the value
of these hotels. We have seen this trend play out in Beijing
and Shanghai.
Consumers’ trading up and well-controlled supply to drive
long-term growth in China. Hotels in the US also suffered
from oversupply in the early 1990s. Yet, a gradual recovery
in profitability happened after a supply slowdown. In
addition, the emergence of modern equity REITs has
contributed to fast market consolidation, resulting in a
larger number of hotel rooms being owned/controlled by
fewer landlords/operators. This, in turn, has led to a
continuous increase in RevPAR, except during the two
“Black Swan” periods (9/11 and the housing/banking crisis).
Hotels in China will likely follow suit.
J inmao Hotel is well-positioned to ride the recovery in the
hotel business and should be a major beneficiary.
Guangzhou R&F (2777.HK, not-rated) currently owns 18
luxury hotels in key tier-1 and -2 cities and is taking over 77
hotels from Wanda. We think it also could be a potential
beneficiary.
Asian Insights SparX
China REITs Sector
Page 32
No. of hotels and no. of hotels closed in China 5-star hotels’ revenue is more resilient (RMB m)
11,000
11,500
12,000
12,500
13,000
13,500
14,000
14,500
0
200
400
600
800
1,000
1,200
1,400
1,600
1Q
2011
3Q
2011
1Q
2012
3Q
2012
1Q
2013
3Q
2013
1Q
2014
3Q
2014
1Q
2015
3Q
2015
1Q
2016
3Q
2016
No. of hotels closed (LHS) No. of hotels (RHS)
10,000
12,000
14,000
16,000
18,000
20,000
22,000
30,000
35,000
40,000
45,000
50,000
55,000
60,000
65,000
70,000
3Q
2010
1Q
2011
3Q
2011
1Q
2012
3Q
2012
1Q
2013
3Q
2013
1Q
2014
3Q
2014
1Q
2015
3Q
2015
1Q
2016
3Q
2016
Total revenue (LHS) 5-Star hotel revenue (RHS)
Source: CEIC, DBS Bank Source: CEIC, DBS Bank
Beijing 5-star hotels’ ADR and occupancy Shanghai 5-star hotels’ ADR and occupancy
30
35
40
45
50
55
60
65
70
75
80
600
650
700
750
800
850
900
950
1,000
Jan-1
1
Jul-11
Jan-1
2
Jul-12
Jan-1
3
Jul-13
Jan-1
4
Jul-14
Jan-1
5
Jul-15
Jan-1
6
Jul-16
Jan-1
7
Jul-17
Room rate (LHS) Occupancy (RHS)
Rmb/night %
40
45
50
55
60
65
70
75
80
600
700
800
900
1,000
1,100
1,200
Jan-1
1
Jul-11
Jan-1
2
Jul-12
Jan-1
3
Jul-13
Jan-1
4
Jul-14
Jan-1
5
Jul-15
Jan-1
6
Jul-16
Jan-1
7
Jul-17
Room rate (LHS) Occupancy (RHS)
Rmb/night %
Source: CEIC, DBS Bank Source: CEIC, DBS Bank
Asian Insights SparX
China REITs Sector
Page 33
RevPAR in the US has kept y-o-y growth Ideal occupancy and maximum GOP in the US
-20%
-15%
-10%
-5%
0%
5%
10%
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
10M
17
9/11
Housing/ banking crisis
111months
56 months 92 months
Class Maximum GOP Ideal Occupancy
Luxury 40.2% 82.4%
Upper Upscale 39.7% 84.6%
Upscale 47.9% 75.1%
Based on 2015 HOST Almanac data of 5,000+ hotels
Source: STR Global, Hotel News Now, DBS Bank Source: STR Global, Hotel News Now, DBS Bank
Value enhancement process
V alue enhancement
Renantingimprove tenant mix
Identify underperforming
assets
Renovation/repositioningupgrade and refurbishment
Redevelopmentchange asset use/type
Enhance rental return and capital
value
V alue enhancement
Retenantingimprove tenant mix
Identify underperforming
assets
Renovation/repositioningupgrade and refurbishment
Redevelopmentchange asset use/type
Enhance rental return and capital
value
Source: DBS Bank
Asian Insights SparX
China REITs Sector
Page 34
The rise of active property asset management
In anticipation of C-REITs, there has been a rise in active
property asset management. This, coupled with divergent
returns of commercial properties, could speed up the
conversion/redevelopment of hotels and retail malls into
offices, especially in Beijing and Shanghai.
Redevelopment more likely in Beijing. Office rents in Beijing
are the highest among mainland cities. Rents of prime
offices in core Beijing are 19% higher than that in Shanghai.
Yet, other assets in Beijing may not be superior to assets in
other tier-1 cities. For example, revenue per room (RevPAR)
for 5 -star hotels in Beijing averages RMB629/night, 11%
lower than that in Shanghai. Based on our rough estimate,
EBITDA per square-metre-per-day could rise from
RMB3.07/sqm/day to RMB10.22/sqm/day if a 5-star hotel is
converted to offices in Beijing. Although the redevelopment
is dependent on suitability of the structure and conversion
costs, the gap between returns of different asset types in
Beijing could provide more room for redevelopment.
Comparison of EBITDA per sqm for 5-star hotels and Grade-A offices in Beijing and Shanghai
5-Star hotel A DR in 8M17 A ssumed room
rev enue as % of
total hotel rev enue
A ssumed GF A
per room (total
GF A / no. of
rooms)
EBITDA margin EBITDA per sm
Rmb/night /room % sm % Rmb/day /sm
Beijing 592 45% 150 35% 3.07
Shanghai 671 45% 150 35% 3.48
Grade-A of f ice Rental rate EBITDA margin EBITDA per sm
Rmb/day /sm % Rmb/day /sm
Beijing 12.47 82% 10.22
Shanghai 10.48 82% 8.59
Source: CEIC, DBS Bank
A number of examples already seen in Beijing . A few PE
funds, such as Go High Fund (高和資本), Z River Capital (中
融長河), EBP Capital (首譽光控) etc., are actively looking for
underperforming assets in Beijing and Shanghai and seeking
redevelopment/asset enhancement opportunities. Examples
of malls that have been turned into offices in Beijing include
COFCO Plaza (中糧廣場), Crosspoints (星街坊), Pacific
Century Place (盈科中心), and ZK Plaza at Big Bell Temple (
中坤廣場). According to COFCO, the rental rates of its
COFCO Plaza in Beijing is expected to rise from
RMB4.5/sqm/day to RMB12/sqm/day after conversion.
Meanwhile, EBITDA per sqm per day could see larger
enhancement. Examples of redevelopment of hotels or
partial conversion of hotels to office space include
Intercontinental Beijing F inancial Street (洲際金融街酒店),
Beijing Marriott Hotel (萬豪酒店), New Century Grand Hotel
Beijing (開元酒店) and W Hotel (disposed by Joy City on 8
December, 2017).
Shanghai also experienced the same trend. Shanghai JC
Mandarin Hotel (锦沧文华酒店) started redevelopment in
2H16 and is expected to be converted to offices in late-
2018. Blackstone also acquired Xuebao Mansion (雪豹商厦)
in late-2016 and plans to convert it to offices.
Comparison of EBITDA per sqm of COFCO Plaza, pre-/post-redevelopment
Rental rate EBITDA margin EBITDA per sm
Rmb/day /sm % Rmb/day /sm
Retail rate before redevelopment 4.50 66% 2.97
Expected office rate after redevelopment 12.00 82% 9.84
Source: DBS Bank
Asian Insights SparX
China REITs Sector
Page 35
New policy encourages conversion of commercial
land/properties to long-lease rental apartments. Apart from
conversion to offices, conversion of commercial
land/properties to residential uses, such as long-lease rental
apartments and senior housing, is also being encouraged by
new policies. This should benefit hotels and retail malls as
the existing/future supply will be diluted by the conversion.
Repositioning and tenanting. Instead of developing
commercial assets, some developers have begun to acquire
existing underperforming assets and repositioning/tenanting
these assets to enhance returns. Joy City has kicked off its
property fund to seek acquisition opportunities. Sino-Ocean
also formed a property fund to acquire office assets in tier-1
cities.
Some developers have also changed a part of their mall
space (usually the upper floor) into co-working space.
CapitaLand has announced that it has offered space in its
malls across China to UrWork, a Beijing-based operator of
co-working space. The first collaboration began with a
4,100-sqm space in CapitaLand’s mall in Wuhan. Longfor
has also ventured into the co-working space business with
its Beijing Paradise Walk mall and Shanghai Paradise Walk
mall under its self-developed brand – EasyWork. The
rationale is (i) rental rates will decrease substantially for
every additional floor, which makes co-working operations
affordable’ (ii) co-working space at the upper floor of a mall
could also bring in additional foot traffic and potential retail
sales.
The rise of active property asset management could change
the landscape of commercial properties. While not all the
structures are suitable for conversion, the ongoing
redevelopment trend should change the supply -demand
dynamics of different asset types and narrow the gap
between the returns of different asset types. Thus, we
expect hotel and retail malls to see improving supply -
demand dynamics, while offices will likely face additional
supply from redevelopment.
Asian Insights SparX
China REITs Sector
Page 36
Which developer will benefit from the upcoming C-REITs?
We expect four types of developers/companies to benefit
more f rom the upcoming C-REITs:
(i) Those with a high proportion of commercial properties
and hotels, as REITs are all about commercial properties.
Attributable investment property book value/valuation as % of market cap
0%
50%
100%
150%
200%
250%
300%
350%
Shui O
n L
and
SOH
O*
Joy
City
Yue
xiu P
rop
BJ C
ap L
and
Jinm
ao H
ote
l
Sino-O
cean
CR L
and
Chin
a Jin
mao
Longfo
r
GZ
R&
F
KW
G
Shim
ao
CO
LI
CO
GO
Source: Company, DBS Bank * excl. the latest disposal
Attributable investment property book value/valuation as % of enterprise value (market cap + total debt – cash)
0%20%40%60%80%
100%120%140%160%180%
SOH
O*
Joy
City
Shui O
n L
and
Yue
xiu P
rop
Jinm
ao H
ote
l
CR L
and
BJ C
ap L
and
Sino-O
cean
Longfo
r
CO
LI
KW
G
Shim
ao
Chin
a Jin
mao
CO
GO
GZ
R&
F
Source: Company, DBS Bank * excl. the latest disposal
In terms of attributable investment property book value
(1H17) as a percentage of market cap, Shui On Land tops
the table, followed by SOHO, Joy City, Yuexiu Property, BJ
Cap Land, J inmao Hotel, Sino-Ocean, CR Land etc. Yet, if
we factor in net debt and look at attributable investment
property book value as a percentage of enterprise value
(market cap + total debt – cash), SOHO leads, followed by
Joy City, Shui On Land, Yuexiu Property, J inmao Hotel, CR
Land, BJ Cap Land, Sino-Ocean etc. Along with their
investment property valuation methodology on the book
(namely capitalisation rate used and whether property under
development is revalued), we believe the key beneficiary
should be SOHO, Joy City, Yuexiu Property, J inmao Hotel,
CR Land, and Sino-Ocean.
(ii) Developers with businesses encouraged by the
government – PPP projects, long-term rental apartments,
and senior housing, as these areas are expected to be the
first to see a breakthrough in REITs.
F irst movers in long-lease rental apartments, including
Vanke and Longfor, could benefit from the potential
breakthrough in C-REITs to grow their portfolio and unlock
the value if their assets. In the US, the largest residential
Asian Insights SparX
China REITs Sector
Page 37
REIT operates 77,000 apartment units in total, rakes in
US$2.4bn in revenue, and has a US$24bn market cap. If
Vanke and Longfor can clinch their respective targets, the
number of rooms under management could reach and even
exceed the scale of top players in the US. Based on 10x P/S,
their target acquisitions could add c.10% to their market
cap by 2020.
F irst movers in senior housing, including Sino-Ocean and
Poly CN, could benefit from C-REITs to quicken their
expansion and strengthen their domination in the sector.
CFLD, one of the largest PPP operators, should also benefit
from the government’s continuous policy inclinations.
Local SOE developer Yuexiu Property is widely expected to
kick off the first C-REITs, as Yuexiu is the first to have an
offshore REIT platform and has experience in structuring
REITs. In addition, local governments may offer tax
incentives to support local financial initiatives.
(iii) companies with a property-fund business, such as Vanke,
Sino-Ocean, and Joy City. They have existing structures
which might be more easily converted to C-REITs in the
future.
Onshore CMBS: In our v iew, CMBS can keep growing
rapidly, given its simple structure and could be of more
benefit to private companies with low credit ratings and
good-quality assets.
As mentioned, the CMBS is supposed to replace investment
loans for commercial properties. Therefore, the key
motivation for CMBS is to save on interest costs. Therefore,
we think SOEs (especially HK-listed SOEs) have less
incentives to set up such products:
(i) SOEs, especially those owned by the central government,
(央企) usually can access funding with lower costs. The costs
of their investment loans for commercial properties is usually
on par with the benchmark rate or even lower than the
benchmark rate. Based on our observation, the cost of
CMBS or pre-REITs is more correlated to Shibor rates than
PBOC benchmark rates. The reason for China J inmao (817
HK) to have kicked off the first CMBS in mid-2016 is the low
cost of only 3.3% (when Shibor was relatively low at 3.0%
at that period). Yet, after recent liquidity tightening, the
Shibor one-year rate has jumped to 4.65%, lower than the
PBOC’s 1-5-year rate of 4.75%, but higher than the PBOC’s
one-year rate of 4.35%. Accordingly, the cost of the AAA-
rated tranche of the latest CMBS issued has climbed to
5.56%, versus PBOC’s 1-5-year rate of 4.75%.
(ii) Large SOEs such as COLI (688.HK) have access to cheaper
offshore bonds or syndicated loans. Meanwhile, those bond
covenants may restrict their commercial properties being
used as collateral.
So far, the majority of those CMBS is issued by private
developers. SOHO China (410.HK), Shimao (813.HK), Red
Star (1528.HK), Golden Eagle (3308.HK) have issued
CMBS/CBMN. A-share SOE developers like F inancial Street
(000402.CH, not-rated) and Poly CN (600048.CH, not-rated)
also issued CMBS recently .
CMBS could be of more benefit to private developers which
have good-quality investment properties but lack a high
credit rating.
Return/yield of pre-REITs/CMBS vs. benchmark rates
2
3
4
5
6
7
8
9
Jan-1
4
Aug-1
4
Mar-
15
Oct
-15
May-
16
Dec
-16
Aug-1
7
AAA AA+ AA
Shibor 1Y PBOC 1Y PBOC 1-5Y
Source: Bloomberg Financial L.P., DBS Bank
Asian Insights SparX
China REITs Sector
Page 38
Any picks in HK/SG-listed China REITs?
Rising investors interest lately. Given the absence of real
REITs onshore, we see rising interest from domestic investors
in offshore China REITs. China Life, Fosun, China
Construction Bank, and China Merchants Bank are all
among the cornerstone investors of the new IPOs of
offshore China REITs in Singapore. High-net-worth
indiv iduals are also actively investing in offshore China REITs
in Hong Kong and Singapore. Even after the establishment
of C-REITs, we expect some of HK-listed China REITs to
remain attractive to investors, given their superior y ields and
asset appreciation potential.
Do equity REITs carry higher risks like equities? Not
necessarily . During 2004-2016, US Equity REITs
outperformed the S&P500 Index for nine years with
div idend y ields continuously higher than US 10-year bond
y ields. Singapore, the largest REIT market in Asia (ex-Japan),
also experienced the same situation as shown. Although
listed equity REITs may be affected by sentiment in the
equity market, the REIT sector tends to be defensive and has
a low beta. This could be attributed to REITs’ underly ing
assets – commercial properties’ rent has generally increased
and their value has appreciated over the mid-to-long term
(although y-o-y growth could be volatile). Therefore, a REIT
is inherently a stable investment vehicle. REITs may carry
higher risks than bonds but also enjoy higher returns, which
meets the needs of those investors who want to climb up
the risk curve. In our v iew, current pre-REITs or bond-like
REIT products in China have higher risks than equity REITs in
other countries, but are offering low returns, which make it
less attractive for investors.
Critical factors for HK-listed REITs
We also analysed the share performance of 13 HK-listed
REITs/business trusts alongside that of the Hang Seng Index.
As shown from the chart below, HK-listed REITs were more
defensive than the index during the global financial crisis. In
addition, HK-listed REIT index has continuously
outperformed the benchmark since 2009, led by Link REIT
(823.HK, BUY). The correlation coefficient between HK-
listed China REIT index and the Hang Seng Index is +0.535.
For the five HK-listed China REIT/business trusts, the
correlation coefficient between HK-listed China REIT index
and HSI index is +0.588.
The key critical factor is DPU (div idend per unit). We found a
strong correlation between REITs’ share price and DPU. The
correlation coefficient between HK-listed REIT index and
annual distribution is +0.946. This is slightly lower at +0.731
between HK-listed China REIT index and annual distribution.
Interest rates and exchange rates also play a role, but
correlation is not as strong as commonly believed. While
interest-rate hikes will negatively affect REITs’ share price,
the actual impact is not strongly correlated. The correlation
coefficient is -0.529 between HK-listed China REIT index and
HK 10-year swap rate or 0.147 between HK-listed China
REIT index and China government 10-year bond rate. The
correlation coefficient between HK-listed China REIT index
and CNY exchange rate is -0.614.
HK-listed REIT index vs. HSI
Correlation coefficient: 0.535
HK-listed China REIT index vs. HSI
Correlation coefficient: 0.588
0
50
100
150
200
250
300
350
400
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
REIT Index HSI
Rebased 25 Nov 05 = 100
0
50
100
150
200
250
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
China REIT Index HSI
Rebased 21 Dec 05 = 100
Source: Bloomberg, DBS Bank Source: Bloomberg, DBS Bank
Asian Insights SparX
China REITs Sector
Page 39
HK-listed REIT index vs. annual distribution
Correlation coefficient: 0.946
HK-listed China REIT index vs. annual distribution
Correlation coefficient: 0.731
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
0
50
100
150
200
250
300
350
400
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
REIT Index (LHS) Annual distribution (RHS)
Rebased 25 Nov 05 = 100 HK$m
5.0
505.0
1,005.0
1,505.0
2,005.0
2,505.0
3,005.0
3,505.0
4,005.0
4,505.0
0
20
40
60
80
100
120
140
160
180
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
China REIT Index (LHS) Annual distribution (RHS)
Rebased 21 Dec 05 = 100
Source: Bloomberg, DBS Bank Source: Bloomberg, DBS Bank
HK-listed China REIT index vs. China government 10-year bond rate
Correlation coefficient: 0.147
HK-listed China REIT index vs. CNY exchange rate
Correlation coefficient: -0.614
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
0
20
40
60
80
100
120
140
160
180
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
China REIT Index (LHS) China gov't bond yield 10 yr (RHS)
Rebased 21 Dec 05 = 100 %
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
0
20
40
60
80
100
120
140
160
180
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
China REIT Index (LHS) CNY Currency (RHS)
Rebased 21 Dec 05 = 100
Source: Bloomberg, DBS Bank Source: Bloomberg, DBS Bank
HK-listed China REIT index vs. HK 10-year swap rate
Correlation coefficient: -0.529
0
1
2
3
4
5
6
0
20
40
60
80
100
120
140
160
180
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
China REIT Index (LHS) HK Swap 10 yr (RHS)
Rebased 21 Dec 05 = 100 %
Source: Bloomberg, DBS Bank
Asian Insights SparX
China REITs Sector
Page 40
Stock picks
Comparison of financial performance of Hong Kong-listed China REITs
Yuexiu REIT Huix ian REIT New Century
REIT
Spring REIT J inmao Hotel
Stock code 405 HK 87001 HK 1275 HK 1426 HK 6139 HK
Latest GAV (Rmb bn) 28.7 35.6 5.7 9.0 25.6
Debts to GAV or LTV @1H17 0.37 0.24 0.31 0.38 0.32
Revenue (Rmb m)
FY15A 1,710 3,312 318 523 2,390
FY16A 1,838 3,119 354 501 2,451
FY17F 2,181 3,179 n.a. 501 2,654
FY18F 2,435 3,235 n.a. 537 2,740
EBITDA (Rmb m)
FY15A 803 1,534 248 n.a. 900
FY16A 1,030 1,509 n.a. n.a. 921
FY17F 1,177 2,030 n.a. 303 1,044
FY18F 1,389 2,069 n.a. 324 1,090
EBITDA margin
FY15A 47% 46% 78% n.a. 38%
FY16A 56% 48% n.a. n.a. 38%
FY17F 54% 64% n.a. 61% 39%
FY18F 57% 64% n.a. 60% 40%
DPU (Rmb/unit)
FY15A 0.25 0.27 0.32 0.22 0.37
FY16A 0.29 0.28 0.36 0.20 0.30
FY17F 0.30 0.27 n.a. 0.20 0.31
FY18F 0.34 0.27 n.a. 0.20 0.33
DPU y-o-y growth
FY15A 5.2% 5.2% n.a. 0.0% n.a.
FY16A 15.8% 2.0% 15.0% -10.5% -17.7%
FY17F 2.4% -2.0% n.a. 1.5% 1.0%
FY18F 15.2% 0.0% n.a. 0.0% 5.5%Source: Company, DBS Bank
Asian Insights SparX
China REITs Sector
Page 41
Among the China REITs/business trusts listed in HKEx and
SGX, we prefer Yuexiu REIT, J inmao Hotel and MAGIC.
Yuexiu REIT (405.HK, BUY) Owning quality assets with a focus in its home base, Guangzhou, Yuexiu REIT has managed to deliver continuous y -o-y growth in div idends as well as capital value appreciation over the past several years. Our critical factors analysis shows that the stock performance has a high correlation with the performance of Guangzhou’s office sector. Given our positive v iew on Guangzhou’s office sector, we expect Yuexiu REIT to benefit from DPU upside and value appreciation. In addition, past success, low funding costs, and multiple acquisition channels will continue to facilitate successful acquisitions ahead.
It is now trading at 6.9% FY17 div idend y ield, which looks attractive compared to HK-REIT peers with a similar market cap. It has managed to grow its IP valuations over the past five years and we expect further value appreciation ahead.
J inmao Hotel (6139.HK, BUY) Owning eight luxury hotels in
tier-1 cities and key tourist hotspots, J inmao Hotel is
expected to fully leverage the recovery of the hotel sector.
Its hotel occupancy in Beijing/Shanghai topped 75% in
9M17, which lays a solid foundation for raising ADR ahead.
In 9M17, its RevPAR grew 9.1% y-o-y, and we also expect a
stronger rebound in hotel EBITDA, given high operating
leverage of its hotel business. We have run regressions on
hotel EBITDA and hotel revenues for the J inmao’s mature
hotels (three in Beijing/Shanghai/Shenzhen) over the past
eight years and observed that EBITDA growth is usually
above 2.6x of revenue growth.
It is now trading at 6.9% FY17 div idend y ield, with potential
positive surprise on future div idends, given the continuous
improving fundamentals in the performance of its hotels. In
addition, management has indicated that the company will
ride the potential C-REITs to enjoy lower funding costs and
unlock some of value.
Huix ian REIT (87001.HK, not rated) The key asset is a mega
commercial complex in Beijing – Beijing Oriental Plaza,
connecting Chang’an Avenue and Wangfujing. This is
owned v ia a joint venture and the land use rights was held
by Huixian’s partner, raising investors’ concerns over the
sustainability of this key asset. In addition, the company has
made several acquisitions in tier-2 cities in the past, some of
which have their value drop after the acquisition.
It is now trading at 8.6% FY17 div idend y ield. Yet, investors
are turning conservative on this name, given its acquisition
history.
Spring REIT (1426.HK, not rated) The key assets are two
office towers which are part of a commercial complex –
China Central Place in Beijing’s CBD. Yet, we are cautious
on the Beijing office sector and are concerned over potential
supply in the city ’s CBD. In addition, the company is
acquiring commercial properties (for car serv ices) in the
United Kingdom from its ultimate shareholder. This has
raised investors’ concerns over its strategy.
It is now trading at 6.9% FY17 div idend y ield, which is not
particularly attractive compared to Yuexiu REIT and J inmao
Hotel.
Mapletree Greater China Trust (MAGIC SP, BUY) We maintain our BUY call with a TP of S$1.30 for MAGIC. MAGIC has rallied over 15% since our out of consensus call in late April that MAGIC’s y ield should compress significantly given its strong track record and investors’ incorrect perception of the stock’s exposure to forex volatility despite the earnings resilience shown by MAGIC. However, we believe the share price rally can continue given improving macro conditions in HK and the discount it trades to its HK peers. CapitaLand Retail China Trust (CRCT.SP, BUY) We believe CRCT deserves to trade at a premium to NAV due to its high-quality assets with growth upside as well as acquisition potential. Organic growth will be led by positive rental
reversions. On top of that, we believe acquisition is on the radar, which will bring inorganic growth. CRCT’s gearing is around 35%, and could be further reduced to 31% if proceeds from the divestment of CapitaMall Anzhen is used to repay debt. This translates to a debt headroom of over S$450m which provides flexibility for debt-funded acquisitions. BHG Retail REIT (BHGREIT.SP, not rated) is the first retail REIT sponsored by an established Chinese home-grown retail property operator, Beijing Hualian Department Store Co., Ltd., or the Sponsor. BHG Retail REIT’s Sponsor, Beijing Hualian Department Store Co., Ltd., is one of the first companies in China to engage in the retail property management. BHG Retail REIT’s portfolio of five properties located in Beijing, Hefei, Chengdu, Dalian and Xining offers
exposure to cities that are key business hubs for their respective regions. Total NLA for the portfolio stands at approximately 156,000 sqm. The properties in Beijing, Chengdu and Hefei are multi-tenanted community malls while the malls in Dalian and Xining are master leased properties. BHG Retail Trust has ROFR over 11 properties with an aggregate GFA of around 620,000 sqm.
EC World REIT (ECWREIT.SP, not rated) offers investors the
opportunity to invest in quality and specialised e-commerce
logistics properties in Hangzhou, China. Its diversified
portfolio of assets in Hangzhou includes 1) Hangzhou’s
largest steel port and related warehouses, 2) E-commerce
logistics assets, and 3) large-scale specialised logistics assets.
Master leases for c. 70% of revenue provide income
certainty, with long term potential for growth in underly ing
rentals, especially for e-commerce logistics assets.
Sponsored by Forchn Group, a reputable China-based
Asian Insights SparX
China REITs Sector
Page 42
integrated property group with growing e-commerce
capabilities. Inorganic growth pipeline of over 300,000 sqm
GFA from sponsor ROFR. Stock offers a y ield of close to
7.5%.
Dasin Retail Trust (DASIN.SP, not-rated) is the first retail business trust with retail properties in Zhongshan, a city strategically located at the heart of the Pearl River Delta
(PRD) region. The PRD is an economic powerhouse with an average GDP-per-capita which is more than twice China’s national average. Dasin Retail Trust is sponsored by Zhongshan Dasin Real Estate Co., Ltd (“the Sponsor”) one of the leading developers in Zhongshan City, Guangdong Province, China. Notably it has developed a leading position
in the Zhongshan retail mall market under the Dasin Metro Malls brand. The Sponsor has 37% share of good-grade properties in the area (by GFA), more than double its nearest competitor. Dasin Retail Trust’s portfolio consists of four properties with combined NLA of approximately 244,000 sqm. They include: (1) Xiaolan Metro Mall, a property situated in a growing captive consumer market, (2) Ocean Metro Mall, located in an emerging urban area, (3) Dasin E-Colour, a recently opened community mall
strategically located next to a university with a 20,000 student and staff population and (4) Shiqi Metro Mall, a well-established mall in a prime location in Zhongshan.
Comparison of financial performance of Singapore-listed China REITs
CapitaRetail
China
Maplet ree
Greater China
BHG Retail REIT EC World REIT Dasin Retail
T rustStock code CRCT SP MA GIC SP BHGREIT SP ECWREIT SP DA SIN SP
Latest GAV (Rmb bn) 12.8 30.2 3.9 6.4 7.5
Debts to GAV or LTV @1H17 0.37 0.39 0.30 0.32 0.32
Revenue (Rmb m)
FY15A 1,005 1,611 293 195 156
FY16A 1,027 1,730 298 204 176
FY17F 1,192 1,780 325 210 327
FY18F 1,244 1,837 346 218 366
EBITDA (Rmb m)
FY15A 590 1,200 185 150 88
FY16A 613 1,310 189 158 113
FY17F 710 1,350 202 165 222
FY18F 765 1,395 220 170 246
EBITDA margin
FY15A 59% 75% 63% 77% 57%
FY16A 60% 76% 63% 77% 65%
FY17F 60% 76% 62% 79% 68%
FY18F 61% 76% 64% 78% 67%
DPU (Rmb/unit)
FY15A 0.48 0.36 n.a. n.a. n.a.
FY16A 0.49 0.35 0.26 0.12 N/A
FY17F 0.54 0.34 0.30 0.13 0.28
FY18F 0.56 0.39 0.32 0.14 0.35
DPU y-o-y growth
FY15A 7.9% 10.8% n.a. n.a. n.a.
FY16A 1.2% -4.0% n.a. n.a. n.a.
FY17F 10.1% -1.0% 14.9% 7.0% n.a.
FY18F 3.8% 14.2% 6.7% 3.8% 24.1%Source: Company, DBS Bank
Asian Insights SparX
China REITs Sector
Page 43
Peers’ valuation comparison
Target Mkt Yield Y ield P/Bk P/Bk ROE ROE
Currency Price Price Recom Cap F iscal 17F 18F 17F 18F 17F 18F
Company Name Code Local$ Local$ US$m Yr % % x x % %
HK REIT s
Champion Reit.Trust* 2778 HK HKD 5.77 5.38 HOLD 4,298 Dec 4.0 3.9 0.6 0.6 2.5 2.3
Fortune Rlst.Inv. (Hkg) Tst.* 778 HK HKD 9.75 10.38 BUY 2,388 Dec 5.2 5.3 0.7 0.7 3.3 3.3
Hui Xian Reit.Tst. 87001 HK CNY 3.16 4.55 NR 2,670 Dec 8.6 8.6 0.7 0.7 4.2 4.3
J inmao Htl.And J inmao (China) Htl.Invs.& Man.*6139 HK HKD 4.97 5.10 BUY 1,272 Dec 6.9 7.3 1.3 1.3 5.3 6.1
Langham Hospitality Inv. 1270 HK HKD 3.47 n.a. NR 927 Dec 6.4 6.2 0.6 0.6 3.0 3.0
Link Rl.Est.Inv.Tst.*# 823 HK HKD 74 65.80 HOLD 20,721 Mar 3.3 3.5 1.0 1.0 8.7 3.5
New Century Real Estate Inv.Tst. 1275 HK HKD 2.37 n.a. FAIL 291 Dec 8.2 7.3 0.9 0.9 (1.7) (1.8)
Prosperity Reit.Tst.* 808 HK HKD 3.38 3.65 BUY 635 Dec 5.3 5.4 0.6 0.6 6.4 2.5
Regal Reit.Trust 1881 HK HKD 2.43 n.a. NR 1,013 Dec 6.3 6.5 0.5 0.5 3.3 3.3
Rreef China Coml.Trust Susp - Susp.20/04/10625 HK HKD 4.35 n.a. NR 258 Dec n.a. n.a. n.a. n.a. n.a. n.a.
Spring Reit.Trust 1426 HK HKD 3.38 0.00 NR 544 Dec 6.9 6.9 0.6 0.6 2.1 2.2
Sunlight Reit.Trust* 435 HK HKD 5.4 5.52 HOLD 1,134 Jun 6.1 5.1 0.6 0.6 5.4 3.0
Yuexiu Real Estate Inv. Tst.* 405 HK HKD 5.12 6.46 BUY 1,974 Dec 7.0 8.0 0.9 0.9 3.9 4.8
SG- listed China REIT s
Capitaland Retail China Unit* CRCT SP SGD 1.65 1.75 BUY 1,105 Dec 6.1 6.9 1.0 1.0 7.7 6.2
Mapt.Gtch.Coml.Tst. Reit Uts.*# MAGIC SP SGD 1.26 1.30 BUY 2,637 Mar 5.9 5.9 1.0 1.0 4.4 4.5
Bhg Retail Reit Units BHGREIT SP SGD 0.77 n.a. FAIL 286 Dec n.a. n.a. n.a. n.a. n.a. n.a.
Ec World Reit.Tst. ECWREIT SP SGD 0.77 0.00 0 449 Dec n.a. n.a. n.a. n.a. n.a. n.a.
Dasin Retail Trust DASIN SP SGD 0.875 n.a. FAIL 357 Dec n.a. n.a. n.a. n.a. n.a. n.a.
Ascendas Real Estate It.*# AREIT SP SGD 2.8 2.85 BUY 6,087 Mar 5.8 5.8 1.4 1.4 7.6 7.7
Source: Thomson Reuters, *DBS Bank # FY17:FY18; FY18:FY19
Asian Insights SparX
China REITs Sector
Page 1
List
Date Name Pre-REIT or
CMBS
Original asset
onwer
Target asset Asset type Location Tranche Rating^ Scale (Rmb
bn)
Total scale
(Rmb bn)
Coupon Tenure*
(no. of yrs)
Exchange
11/3/2017 Forte A AAA 2.00 3.37 5.7% 18.0 Shanghai
Forte B AA+ 1.20 6.0% 18.0
Forte Sub nil 0.17 18.0
11/3/2017 CYPA A AAA 0.13 0.27 5.3% 5.0 Shenzhen
CYPA Equity nil 0.14 5.0
11/2/2017 Zhongjieneng A AAA 0.50 0.82 5.2% 11.6 Shenzhen
Zhongjieneng B AAA 0.28 5.3% 11.6
Zhongjieneng Sub nil 0.04 11.6
10/25/2017 Winbond A AA+ 0.46 0.77 6.0% 18.0 Shanghai
Winbond B AA 0.28 6.0% 18.0
Winbond Sub nil 0.03 18.0
10/23/2017 Future Land A AAA 1.50 2.11 5.4% 18.0 Interbank
Future Land B AAA 0.60 6.2% 18.0
Future Land Sub nil 0.01 18.0
10/20/2017 Yuefang A AAA 1.40 2.77 5.5% 4.0 Shenzhen
Yuefang B AA+ 0.42 5.8% 4.0
Yuefang C nil 0.06 0.5
Yuefang Sub nil 0.89 4.0
10/20/2017 SCPG A AA+ 2.60 3.79 5.5% 12.0 Shenzhen
SCPG B AA 1.00 6.5% 12.0
SCPG Sub nil 0.19 12.0
9/29/2017 Hongbo 01 AA+ 0.06 0.95 6.2% 1.0 Shanghai
Hongbo 02 AA+ 0.07 6.5% 2.0
Hongbo 03 AA+ 0.08 6.6% 3.0
Hongbo 04 AA+ 0.09 6.6% 4.0
Hongbo 05 AA+ 0.10 6.6% 5.0
Hongbo 06 AA+ 0.11 6.7% 6.0
Hongbo 07 AA+ 0.12 7.5% 7.0
Hongbo 08 AA+ 0.13 7.5% 8.0
Hongbo 09 AA+ 0.14 7.5% 9.0
Hongbo Sub nil 0.05 9.0
9/13/2017 Red Star A AAA 1.37 2.65 5.7% 5.0 Shanghai
Red Star B AA+ 0.43 6.1% 5.0
Red Star Sub nil 0.85 5.0
9/13/2017 Shimao ABN A AAA 3.80 6.50 4.5% 20.0 Interbank
Shimao ABN B AA+ 2.40 5.3% 20.0
Shimao ABN Sub nil 0.30 20.0
9/12/2017 Poly RE A AAA 3.50 3.53 4.9% 11.4 Shanghai
Poly RE Sub nil 0.03 11.4
9/7/2017 GE ABN A AA+ 1.45 2.00 5.4% 19.3 Interbank
GE ABN B AA 0.45 5.9% 19.3
GE ABN Sub nil 0.10 19.3
8/9/2017 Poly HK A AA+ 0.81 1.62 5.0% 17.7 Shanghai
Poly HK B AA 0.81 5.4% 17.7
Poly HK Sub nil 0.00 17.7
Residential
CMBS
Bohai Huijin CYPA Pre-REIT
ChengduHarvest Capital
Zhongjieneng
CMBS Chengdu
Lvcheng Jieneng
Chengdu Int'l
High-Tech
Office
Beijing, Shanghai,
Chengdu
Office3 office
buildings
Forte, 100%
owned by Fosun
(656.HK)
GoHigh Tebon Forte
China Young
Professionals
Beijing101 residential
units
Shanghai, Suzhou,
Changzhou
Commercial
complex
FutureLand
Tower in
Shanghai,
Future Land
(601155.CH)
CMBNFuture Land ABN
Pingan Winbond Intime CMBS Winbond Winbond Intime
mall
Retail Hefei
CICC SCPG SCP Plaza CMBS SCPG, 30%
owned by Vanke
(000002.CH/2202.
SCP Plaza Commercial
complex
Shenzhen
Bohai Huijin Yuefang
ID mall
Pre-REIT CITIC Capital,
22.31% owned by
CITIC (267.HK)
Yuefang ID mall Retail Changsha
Shimao Int'l ABN CMBN Shimao (813.HK) Shimao Int'l
Plaza
Commercial
complex
Shanghai
GuangzhouOfficeTwo office
buildings
Poly RE
(600048.CH)
CMBSCITIC Poly RE
TianjinRetailTwo furniture
malls
Red Star
(1528.HK)
Pre-REITGoHigh Red Star
HarbinRetailHongbo
Convention &
Exhibition
Centre
Harbin HIT
(600701.CH)
CMBSHongbo
ShanghaiOfficeShanghai Poly
Plaza
Poly HK (119.HK)CMBSHTAM Poly Property
NanjingCommercial
complex
Golden Eagle
Tiandi
Golden Eagle
(3308.HK)
CMBNGolden Eagle ABN
Source: DBS Vickers
Asian Insights SparX
China REITs Sector
Page 2
List (con’t)
Date Name Pre-REIT or
CMBS
Original asset
onwer
Target asset Asset type Location Tranche Rating^ Scale (Rmb
bn)
Total scale
(Rmb bn)
Coupon Tenure*
(no. of yrs)
Exchange
8/3/2017 LerThai A AAA 1.00 3.50 5.7% 5.0 Shenzhen
LerThai B AA+ 2.10 6.9% 5.0
LerThai Sub nil 0.40 5.0
7/28/2017 Elion PII A AAA 0.37 0.72 6.4% 18.0 Shenzhen
Elion PII B AA+ 0.12 7.0% 18.0
Elion PII C nil 0.10 7.0% 18.0
Elion PII Sub nil 0.13 18.0
7/12/2017 CG A AAA 0.95 3.51 6.0% 9.0 Interotc
CG B AA+ 2.21 6.8% 9.0
CG Sub nil 0.35 9.0
6/28/2017 Fusheng A AAA 0.85 1.70 7.5% 17.6 Shenzhen
Fusheng B AA+ 0.80 7.8% 17.6
Fusheng Sub nil 0.05 17.6
5/15/2017 Financial St. A AAA 6.32 6.65 5.1% 12.0 Shenzhen
Financial St. B AAA 0.27 12.0
Financial St. Sub nil 0.06 12.0
4/25/2017 Huamao A AAA 4.30 5.20 4.9% 17.9 Shanghai
Huamao B AA+ 0.70 5.6% 17.9
Huamao Sub nil 0.20 17.9
3/24/2017 Fuxing Plaza A AAA 3.80 3.81 4.6% 20.0 Shanghai
Fuxing Plaza Sub nil 0.01 20.0
3/16/2017 HNA Holding A AAA 1.00 2.20 5.2% 16.9 Shanghai
HNA Holding B AAA 1.00 6.2% 1.9
HNA Holding C AAA 0.20 6.9% 1.9
3/15/2017 Kaiheng A AAA 1.60 3.01 4.6% 10.0 Shanghai
Kaiheng B AA 0.85 5.2% 10.0
Kaiheng Sub nil 0.56 10.0
3/2/2017 HNA Tourism A AAA 1.13 2.70 5.0% 18.0 Shanghai
HNA Tourism B AAA 1.52 6.5% 18.0
HNA Tourism C AAA 0.05 7.0% 18.0
2/20/2017 Wanxin ABN A AAA 0.33 0.55 4.8% 18.0 Interbank
Wanxin ABN B AA+ 0.22 5.4% 18.0
2/9/2017 Yitian A AA+ 2.50 5.30 5.7% 13.0 Shenzhen
Yitian B AA 2.54 7.0% 13.0
Yitian Sub nil 0.27 13.0
1/24/2017 Huayuan A AAA 0.29 0.74 5.8% 18.0 Interotc
Huayuan B AAA 0.44 6.3% 18.0
Huayuan Sub AAA 0.01 6.5% 18.0
1/17/2017 Elion PI A AAA 0.59 1.08 5.2% 18.0 Shenzhen
Elion PI B AA+ 0.22 5.6% 18.0
Elion PI C nil 0.13 7.0% 18.0
Elion PI Sub nil 0.14 18.0
12/27/2016 Suguang A AAA 0.35 1.68 5.2% 21.0 Shanghai
Suguang B AA 1.10 6.0% 9.0
Suguang Sub nil 0.23 21.0
12/26/2016 Zhongbai A AAA 0.45 1.04 4.2% 5.0 Shanghai
Zhongbai B AA 0.33 5.2% 5.0
Zhongbai Sub nil 0.26 5.0
BeijingOfficeElion Eco PlazaElion (600277.CH)Pre-REITTF Everbright Elion
Phase II
First Qianhai Fund
LerThai
Pre-REIT LerThai (112.HK) LerThai mall Retail Shijiazhuang
CM Chuangrong
Fusheng
Pre-REIT Fusheng Group Fusheng Int'l
Centre
Office Fuzhou
CITIC Goldstone
Country Garden
Pre-REIT Country Garden
(2007.HK)
14 hotels Hotel Changsha and 13 tier 3
cities
TF China Central Place
SKP
CMBS Huamao Group China Central
Place SKP
Retail Beijing
BeijingOfficeFinancial Street
Centre
Financial Street
(000402.CH)
CMBSFinancial street
Kaiyuan HNA Pre-REIT HNA Holding HNA Holding
Tower
Office Beijing
ShanghaiOfficeSOHO Fuxing
Plaza
SOHO (410.HK)CMBSHuifu JIC SOHO Fuxing
Plaza
Hengtai Hongze HNA Pre-REIT HNA Tourism HNA Tower Office Guangzhou
BeijingOfficeKaiheng CentreBOC InvestmentPre-REITBOC Inv CMS Kaiheng
Shenzhen YT Holiday
Plaza
CMBS Yitian Goup YT Holiday Plaza Retail Shenzhen
Hefei and 7 tier 3 citiesRetail8 book storesAnhui Xinhua
Media
Pre-REIT/
ABN
Industrial Wanxin
Media
TF Everbright Elion
Phase I
Pre-REIT Elion (600277.CH) Elion Eco Plaza Office Beijing
BeijingRetailHuayuan
Yingdu
Hua Yuan
(600743.CH)
Pre-REITHengtai Hongze Yindu
Changjiang Chuyue
Zhongbai
Pre-REIT Zhongbai
(000759.CH)
2 shopping malls
in Wuhan
Retail Wuhan
Commercial
complex
NanjingSuning
(002024.CH)
Suning PlazaPre-REITPingan Suning Plaza
Source: DBS Vickers
Asian Insights SparX
China REITs Sector
Page 3
List (con’t)
Date Name Pre-REIT or
CMBS
Original asset
onwer
Target asset Asset type Location Tranche Rating^ Scale (Rmb
bn)
Total scale
(Rmb bn)
Coupon Tenure*
(no. of yrs)
Exchange
12/13/2016 Wanxin A AAA 0.36 0.56 4.2% 18.0 Shanghai
Wanxin B AA+ 0.20 4.7% 18.0
12/6/2016 Jinhongqiao A AAA 5.46 7.80 4.0% 24.0 Shanghai
Jinhongqiao B AA+ 1.54 4.3% 24.0
Jinhongqiao Sub nil 0.80 24.0
11/28/2016 SanPower A AAA 1.58 3.05 3.8% 24.0 Shanghai
SanPower B AA 1.48 7.0% 4.0
8/29/2016 Jinkai A AAA 4.00 4.00 3.3% 3.0 Shanghai
Jinkai Sub nil 0.00 3.0
8/19/2016 Yintai A AA+ 4.00 7.50 4.0% 18.0 Shanghai
Yintai B AA 3.30 5.3% 18.0
Yintai C AA 0.20 7.0% 18.0
8/5/2016 Imix Park A AAA 1.30 2.50 3.8% 7.0 Shenzhen
Imix Park B AA+ 0.30 4.3% 7.0
Imix Park Sub nil 0.90 7.0
6/24/2016 Yunxiang A AAA 1.20 1.85 4.0% 3.0 Shenzhen
Yunxiang Equity nil 0.65 3.0
6/16/2016 Wuyue A AAA 0.50 1.05 5.4% 5.0 Shenzhen
Wuyue B AA 0.25 6.5% 5.0
Wuyue Sub nil 0.30 5.0
6/15/2016 Jinbao 01 AA 0.07 1.35 5.6% 1.0 Interotc
Jinbao 02 AA 0.07 5.6% 2.0
Jinbao 03 AA 0.08 5.6% 3.0
Jinbao 04 AA 0.09 5.6% 4.0
Jinbao 05 AA 0.10 5.6% 5.0
Jinbao 06 AA 0.09 5.6% 6.0
Jinbao 07 AA 0.10 5.6% 7.0
Jinbao 08 AA 0.11 5.6% 8.0
Jinbao 09 AA 0.12 5.6% 9.0
Jinbao 10 AA 0.12 5.6% 10.0
Jinbao 11 AA 0.12 5.6% 11.0
Jinbao 12 AA 0.12 5.6% 12.0
Jinbao 13 AA 0.11 5.6% 13.0
Jinbao Sub nil 0.05 13.0
6/14/2016 Hangxing A AAA 0.68 1.40 4.9% 18.0 Shanghai
Hangxing B AA+ 0.62 7.0% 5.0
Hangxing Sub nil 0.10 18.0
12/23/2015 Caiyun A AAA 0.77 5.80 4.5% 18.0 Shanghai
Caiyun B AA+ 4.93 6.4% 9.0
Caiyun Sub AA+ 0.10 8.0% 9.0
12/11/2015 Tianhong A AAA 0.94 1.45 5.2% 5.0 Shenzhen
Tianhong Equity nil 0.51 4.4% 5.0
12/2/2015 Shanghai SPDB A AAA 1.53 2.50 5.3% 18.0 Shanghai
SPDB B AA+ 0.97 6.9% 3.0
6/29/2015 Suning 2015 A AAA 1.68 3.34 5.6% 18.0 Shenzhen
Suning 2015 B AA+ 1.66 4.0
Sinolink Sinar Mas Arch CMBS Sinar Mas Group Arch Shanghai
Hongqiao
Office Shanghai
CITIC Wanxin Yuejia Pre-REIT Anhui Xinhua
Media
8 book stores Retail Hefei and 7 tier 3 cities
Go High CM
Chemsunny
CMBS Jinmao (817.HK) Chemsunny
Tower
Office Beijing
NanjingCommercial
complex
SanPower
Nanjing IFC
SanPower GroupPre-REITSanPower Nanjing IFC
ChongqingRetailEBP-EBA Imix
Park
Everbright
(165.HK)
Pre-REITEBP Capital Imix Park
Hengtai Yintai Centre CMBS Yintai Group Yintai Centre Commercial
complex
Beijing
Future Land
(601155.CH)
Qingpu Injoy
Plaza
Retail ShanghaiPre-REITOriental Injoy Plaza
CITIC Suning Yunxiang Pre-REIT Suning
(002024.CH)
6 logistics
properties
Logistics Guangzhou, 3 tier 2
cities, 2 tier 3 cities
TF AVIC Redstar Pre-REIT Shanghai Redstar Redstar Aegean
Shopping mall
Retail Kunming
BeijingOfficeBeijing Jinbao
Tower
FuWah Int'lCMBSMinsheng FuWah
Jinbao
CITIC Suning 2015 Pre-REIT
Pre-REITHengtai Caiyun Hotel
Office
Rainbow mall RetailRainbow Dept
(002419.CH)
Pre-REITCM Chuangrong
Rainbow
Hengtai HNA SPDB
Beijing, Xishuangbanna
Beijing, Shanghai, 6 tier
2 cities, 6 tier 3 cities
Shenzhen
Hotel2 hotelsYMCI (600239.CH)
Retail
Pre-REIT HNA Holding SPDB Tower
Suning
(002024.CH)
14 chain stores
Source: DBS Vickers
Asian Insights SparX
China REITs Sector
Page 4
List (con’t)
Date Name Pre-REIT or
CMBS
Original asset
onwer
Target asset Asset type Location Tranche Rating^ Scale (Rmb
bn)
Total scale
(Rmb bn)
Coupon Tenure*
(no. of yrs)
Exchange
12/16/2014 Suning 2014 A AAA 2.09 4.40 6.2% 18.0 Shenzhen
Suning 2014 B AA 2.31 4.0
4/25/2014 Qihang A AAA 3.65 5.21 7.0% 5.0 Shenzhen
Qihang Equity nil 1.56 5.0
CITIC Suning 2014
CITIC Qihang Pre-REIT
Pre-REIT Beijing, 5 tier 2 cities, 1
tier 3 city
11 chain stores Retail
Beijing, ShenzhenOffice2 office
buildings
CITIC (267.HK)
Suning
(002024.CH)
Source: DBS Vickers
Asian Insights SparX
China REITs Sector
Page 48
Taxes related to asset transfers in different countries
Country Transfer tax Stamp duty Deed tax Sales tax LAT Trade tax Income tax
China Tax base Transaction
price
Transaction
price
Transaction
price
Depending
on price and
cost
Capital gain
Tax rate 0.05% 3% 5% 30-60% 25%
Applicable to REITs nil nil nil nil Nil
Hong Kong Tax base Transaction
price
Capital gain
Tax rate 0.2%/3.75%
for acquiring
equity stakes
/properties
17%
Applicable to REITs Nil Exempted
Singapore Tax base Transaction
price
Capital gain
Tax rate 3.00% 18%
Applicable to REITs Exempted Exempted
Japan Tax base Transaction
price
Transaction
price
Transaction
price
Transaction
price
Capital gain
Tax rate 4% 0.011-0.15% 5% 5% 20%/39% if held
>5 years/<5 years
Applicable to
REITs
1% Nil 2% Nil Nil
Australia Tax base Transaction
price
Capital gain
Tax rate <=6.75% 45%
Applicable to REITs Nil Capital gain
distributed /not
distributed is
fully/50% tax US Tax base Transaction
price
Capital gain
Tax rate 15-30%
Applicable to
REITs
Nil Capital gain
distributed is
exempted
UK Tax base Transaction
price
Capital gain
Tax rate 1-4% 30%
Applicable to
REITs
Nil Self-developed
properties holding
<3 years is subject
to tax; otherwise
tax exempted
Germany Tax base Transaction
price
Capital
gain
Capital gain
Tax rate 5% 9.1-19.7% 25%
Applicable to
REITs
Nil Nil Exempted
France Tax base Transaction
price
Capital gain
Tax rate 5% 33%
Applicable to
REITs
Nil Capital gain
distributed is
exempted
Source: Su Jiang & Huang Zhigang – “Tax of Real Es tate Investment Trusts”, DBS Bank
Asian Insights SparX
China REITs Sector
Page 49
Taxes related to commercial property operations in different countries
Count ry Property tax Sales tax
Land use
tax V alue-add tax T rade tax Income tax
China Tax base Original cost /
rental income
Revenue -
deductible items
Profit before tax
Tax rate 0.84% / 12% 6% for hotel and
11% for other IPs
25%
Applicable to
REITs
Nil Nil Nil
Hong Kong Tax base Profit before tax
Tax rate 16.5%
Applicable to
REITs
Exempted
Singapore Tax base Profit before tax
Tax rate 18%
Applicable to
REITs
Profit distributed is
exempted
Japan Tax base Property value Rental income Property
value
Profit before tax
Tax rate 1.4% 5.0% 0.3% 42%
Applicable to
REITs
Nil Nil Nil Profit distributed is
exempted
Australia Tax base Profit before tax
Tax rate 45%
Applicable to
REITs
Profit distributed is
exempted
US Tax base Property value Profit before tax
Tax rate 1-3% 15-35%
Applicable to
REITs
Nil Rental income
distributed is
exempted
UK Tax base Profit before tax
Tax rate 30%
Applicable to
REITs
Exempted
Germany Tax base Property value Profit before tax Profit before tax
Tax rate 1-1.5% 9.1-19.7% 25%
Applicable to
REITs
Nil Nil Exempted
France Tax base Property value Profit before tax
Tax rate 3% 33.33%
Applicable to
REITs
Nil Profit distributed is
exempted
Was 5.65% on
revenue, but
no more after
VAT reform
Source: Su Jiang & Huang Zhigang – “Tax of Real Es tate Investment Trusts”, DBS Bank
Asian Insights SparX
China REITs Sector
Page 50
STOCK PROFILES
ed-JLC/ sa- CS / AH
BUYLast Traded Price ( 11 Dec 2017):HK$5.12(HSI : 28,965) Price Target 12-mth:HK$6.46 (26% upside) (Prev HK$5.98) Analyst Trista QIN+852 2863 [email protected] Carol WU+852 2863 [email protected] Danielle WANG CFA,+852 2820 [email protected] Ken HE CFA,+86 21 6888 [email protected] Jason [email protected]
What’s New · Acquisition of Wuhan assets is DPU-accretive;
revising up our FY18/19F DPU estimates by 5%
· First time tapping into Wuhan market and theWuhan assets account for 8% of the portfolio’sappraised value
· Favorable transaction terms via pure low-cost debtfinancing and guaranteed net income support
· Successful acquisition is key catalyst; reiterate BUYand raise TP to HK$6.46
Price Relative
Forecasts and Valuation FY Dec (RMB m) 2016A 2017F 2018F 2019F Gross Revenue 1,838 2,181 2,435 2,564 Net Property Inc 1,268 1,395 1,631 1,722 Net Profit 706 529 673 799 Distribution Inc 825 871 1,039 1,179
DPU (HK$) 0.34 0.35 0.40 0.44 DPU Gth (%) 15 4 15 10 Div Yield (%) 6.6 6.8 7.8 8.6 Gross Gearing (%) 39 40 39 38 Book Value (HK$) 6.11 5.40 5.34 5.29 P/Book Value (x) 0.8 0.9 1.0 1.0
DPU Rev (%): (0.6) 4.9 5.4 Consensus DPU (RMB): 0.278 0.293 0.306 Other Broker Recs: B: 9 S: 1 H: 0
Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX
Another favorable acquisitionThe acquisition of Wuhan assetsis positive to share price.As we have identified in our initiation report, successful acquisition is the key catalyst for Yuexiu REIT. Yuexiu REIT expectsto complete the acquisition of the Wuhan assets by 1Q18. The guaranteed net income supported by its parent would translate into 3.9%/4.8%/5.3% NPI yield on cost from FY18 to FY20, comparing HIBOR+1/1.3% financing cost. We believe the acquisition is DPU-accretive and have revised up our DPU estimates for FY18/19F by 5%. Reiterate BUY and raise TP to HK$6.46. Where we differ? Financing cost to stay low amid interest-rate hike cycle.Despite the overall credit-tightening environment, Yuexiu REIT is still able to obtain low-cost financing due to strong parental support and its quality portfolio. Yuexiu REIT plans to finance the acquisition with pure debt – with 60% of it settled by three-year offshore bank loan at HIBOR+1.3% and the remaining settled at HIBOR+1.0% within one year of the transaction.Estimated borrowing cost could further lower to c.2.8% by end-FY17 from 2.98% by end-1H17. Wuhan assets has promising growth potential.The Wuhan assets are still in the incubation phase, with the office launched last year and the shopping arcadehaving been operating for two years. We believe the occupancy rates of office building and shopping arcade could grow from the current 40.5% and 86.8% to 80-85% and 95-98% by end-2018 respectively. Rent for both is expected togrow at 5% annually till 2020. Estimated adjusted net income ofthe Wuhan assets will increase at 18.8% CAGR from FY18-20,higher than the 4.3% CAGR in DPU over the past six years. Valuation: We believe Yuexiu REIT deserves a narrower discount compared with other HK REITs, given its proven execution capability and continuous successful acquisitions. Dividend yields are decent at 6.8%/7.8%/8.6% in FY17/18/19F. Key Risks to Our View: Delay of the acquisition or worse-than-expected growth in rental rates.
At A Glance Issued Capital (m shrs) 2,936 Mkt. Cap (HK$m/US$m) 15,033 / 1,926 Major Shareholders
Guangzhou Yuexiu Holdings (%) 58.1 Free Float (%)0 (%) 41.90.0 3m Avg. Daily Val. (US$m)0 (%) 3.30.0 ICB Industry :Financials / REITs (HK)0 (%) 0.0 Free Float (%) 41.9
3m Avg. Daily Val. (US$m) 3.3 ICB Industry :Financials / REITs (HK)
85
105
125
145
165
185
205
3.2
3.7
4.2
4.7
5.2
5.7
Dec-13 Dec-14 Dec-15 Dec-16 Dec-17
Relative IndexHK$
Yuexiu REIT (LHS) Relative HSI (RHS)
DBS Group Research . Equity 11 Dec 2017
China / Hong KongCompany Guide
Yuexiu REIT Version 8|Bloomberg: 405 HK EQUITY| Reuters: 405.HK
Refer to important disclosures at the end of this report
Page 52
Company Guide
Yuexiu REIT
CRITICAL FACTORS TO WATCH Critical Factors: Guangzhou office sector performance and asset acquisitions.
Critical Factors Performance of the Guangzhou office sector.Focusing on the Guangzhou market and with heavy exposure to the office sector, Yuexiu REIT’s share price has a high correlation with the performance of Guangzhou’s office sector. The correlation coefficient between Yuexiu REIT and the Guangzhou office index is as high as 0.831.
The burst of supply in 2013 of Grade-A office in Guangzhou lead to a spike in vacancy rate and weakness in rental growth. As a result, the share performance of Yuexiu REIT was under pressure. Its shareshave recovered since 2014 as supply decreased.
After a blowout of new supply of Grade-A office in 2016 of c.920 k sm, new supply of Grade-A office should stabilise backto a low level in 2017 and 2018,judging from the pipeline ofprojects. The Guangzhou office index has picked up since mid-2017. We expect the uptrend to continue, given limitedsupply and the recovery of the economics. We think therecovery in Guangzhou’s office sector has not been fullyreflected in the share price of Yuexiu REIT, implying there ispotential upside.
Asset acquisitions.Yuexiu REIT successfully conducted three major asset acquisitions since listing. Except for its first acquisition, Neo Metropolis in 2008, the share price of Yuexiu REIT had entered on an upward channel after acquisitions and peaked after around a year. The plunge in share price after the acquisition of Neo Metropolis was mainly due to the financial crisis, in our view.
We believe the acquisition of Wuhan assets this time would drive its share price. Yuexiu REIT expected to complete theacquisition of 67% interest of Wuhan Yuexiu Fortune Center (68-storey office and commercial project) and Starry Victoria Shopping Center (5-storey shopping arcade) together with 1,509 carpark spaces in Wuhan from Yuexiu Property (123 HK; BUY) by 1Q18. Total consideration is Rmb2.28bn, which is equivalent to Rmb19,675/sqm and 5.1% discount to its appraisal value. With the guaranteed top-up payment from the parent, it could generate 3.9%/4.8%/5.3% NPI yield on cost in FY18-20.
Page 53
Company Guide
Yuexiu REIT
Appendix 1: A look at Company's listed history – what drives its share price?
Yuexiu REIT’s share price is highly correlated with the Guangzhou office index
1,500
1,600
1,700
1,800
1,900
2,000
2,100
2,200
2,300
2,400
0
1
2
3
4
5
6
Yuexiu REIT (LHS) Guangzhou office index
Source: CREIS; Bloomberg L.P.; DBS Vickers
Successful track record in acquisitionshad also driven up its shares
Source: Company; Bloomberg L.P.; DBS Vickers
0
1
2
3
4
5
6
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
Jul-1
2
Jan-
13
Jul-1
3
Jan-
14
Jul-1
4
Jan-
15
Jul-1
5
Jan-
16
Jul-1
6
Jan-
17
Jul-1
7
Yuexiu REIT
Yuexiu REIT
Price (HK$)
31/08/2015:Acquisitionof
Shanghai Yuexiu Tower
28/05/2012:Acquisitionof
GZ IFC
01/06/2008:Acquisitionof
Neo Metropolis
Dec
-17
Page 54
Company Guide
Yuexiu REIT
Balance Sheet: Healthy balance sheet. After the acquisition, Yuexiu REIT is still able to keep its gearing below 40% (and below the 45% cap). The company expects its gearing to increase to 38.6% after the acquisition from 37.1% in 1H17. We anticipate the gearing to edge up to c.40% by end-FY17 after factoring in additional capex for the unpaid construction cost.
Share Price Drivers: Recovery in Guangzhou’s office market. Despite the acquisition of the Wuhan assets, Yuexiu REIT still has high exposure to theGuangzhou office market. Yuexiu REIT is the only investment proxy for Guangzhou office listed on the HKEx. We think the recovery of Guangzhou’s office sector which started in 2017 would improve the rental income and thus the distribution income of Yuexiu REIT. The share price of Yuexiu REIT would eventually reflect the growth of rental ratesin the Guangzhou office market as well.
Successful value-accretive asset acquisitions. Yuexiu REIT has conducted three major asset acquisitions at reasonable prices and satisfactory yields since listing. We believe the acquisition of Wuhan assets with DPU-accretive terms would drive Yuexiu REIT’s share price as well.
Key Risks: Furtherinterest-rate hike to raise borrowing cost. After the acquisition, we estimate borrowings subjected to floating interest rates to be c. 85% of total borrowings, with 58% denominated in US$/HKD and 26% in RMB. Though Yuexiu REIT has strived for narrowing the spread, further interest-rate hike would result in a rise in borrowing costs for Yuexiu REIT.
Delay in the completion of the acquisition. We anticipate the acquisition could be completed in early 2018. The delay of the acquisition may lower the amount of top-up payment received in 2018.
Company Background Yuexiu REIT was established through the acquisition of four commercial properties (White Horse Building, Fortune Plaza, City Development Plaza, and Victory Plaza) from Yuexiu Property (“YXP”,123 HK). Yuexiu REIT was listed on the Main Board of HKSE in 2005 and raised more than HK$2bn. It is the first listed REIT with assets in the PRC. After listing, it acquired Neo Metropolis in 2009, GZIFC in 2012, and Shanghai Yuexiu Tower in 2015.
Gearing
Net Capital Expenditure
ROE
Price to book NAV band
Historical yield band
Source: Company, DBS Vickers
37%
39%
40%
39%
38%
36%36%37%37%38%38%39%39%40%40%41%
2015A 2016A 2017F 2018F 2019F
Gross Gearing Ratio
0.0
2.0
4.0
6.0
8.0
10.0
12.0
2015A 2016A 2017F 2018F 2019F
Capital Expenditure (-)
RMB
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
2015A 2016A 2017F 2018F 2019F
2
3
4
5
6
7
Jan-
10
Dec
-10
Nov
-11
Oct
-12
Sep-
13
Aug
-14
Jul-1
5
Jun-
16
May
-17
HK$
0.6x0.7x0.8x1.0x1.1x
2.0
3.0
4.0
5.0
6.0
7.0
Jan/
10
Oct
/10
Aug
/11
Jun/
12
Mar
/13
Jan/
14
Nov
/14
Aug
/15
Jun/
16
Apr
/17
%+1SD: 6.2%
Average: 5.3%
-1SD: 4.4%
Page 55
Company Guide
Yuexiu REIT
Key Assumptions (%)
FY Dec 2018F 2019F Office rental growth 0 0 Retail rental growth 3 5 Hotel rental growth 5 5 Service apartment rental growth 5 5
Source: Company, DBS Vickers
Segmental Breakdown (RMB m)
FY Dec 2015A 2016A 2017F 2018F 2019F Revenues (RMB m) White Housing Building 407 402 375 375 375 GZIFC 1,000 1,038 1,383 1,465 1,546 Yuexiu Tower 43 136 152 168 183 All other segment 1 1 1 1 1 Others 260 262 271 426 459 Total 1,710 1,838 2,181 2,435 2,564
Source: Company, DBS Vickers
Income Statement (RMB m)
FY Dec 2015A 2016A 2017F 2018F 2019F
Gross revenue 1,710 1,838 2,181 2,435 2,564 Property expenses (621) (569) (786) (804) (842) Net Property Income 1,088 1,268 1,395 1,631 1,722 Other expenses (359) (386) (373) (397) (403) Interest (Exp)/Inc (718) (912) (342) (311) (222) Exceptional 990 1,027 0 0 0 Pre-Tax Profit 1,001 997 680 923 1,097 Tax (260) (285) (170) (231) (275)
Non-Controlling Interests (5) (7) 19 (19) (24)
Net Profit 736 706 529 673 799 Distribution income 704 825 871 1,039 1,179
Revenue Gth (%) 9 7 19 12 5 NPI Gth (%) 10 17 10 17 6 Dist. Inc Growth (%) 6 17 6 19 13 DPU Growth (%) 5 15 4 15 10
Source: Company, DBS Vickers
Page 56
Company Guide
Yuexiu REIT
Balance Sheet (RMB m)
FY Dec 2015A 2016A 2017F 2018F 2019F
Fixed Assets 23,194 24,198 25,844 26,240 26,636 Other LT Assets 4,984 5,011 4,945 4,784 4,648 Cash & ST Invts 683 1,181 1,109 1,176 1,082 Other Current Assets 474 232 242 261 237 Total Assets 29,335 30,621 32,140 32,461 32,603 ST Debt
2,842 1,503 1,503 1,503 1,503 Creditors 857 757 813 824 835
Other Current Liab 207 188 222 246 259 LT Debt 8,136 10,422 11,444 11,258 10,858 Other LT Liabilities 3,800 4,117 4,250 4,373 4,481 Non-Controlling Interests 93 100 81 100 124 Unitholders’ funds 13,400 13,534 13,827 14,156 14,543 Total Capital 29,335 30,621 32,140 32,461 32,603 Share Capital (m) 2,829 2,922 3,021 3,127 3,241 Gross Debt 10,978 11,925 12,947 12,762 12,362 Working Capital (590) (713) (793) (809) (857) Book NAV (HK$) 5.63 5.50 5.43 5.38 5.34 Gross Gearing (%) 37 39 40 39 38
Source: Company, DBS Vickers
Cash Flow Statement (RMB m)
FY Dec 2015A 2016A 2017F 2018F 2019F
Pre-Tax Income 1,001 997 680 923 1,097 Tax Paid (13) (25) (2) (63) (106) Depr/Amort 152 157 155 155 155 Chg in Wkg.Cap. 108 144 232 176 155 Other Non-Cash (618) (406) (111) (11) 17
Operational CF 630 867 954 1,180 1,318
Net Capex (2) (11) (6) (6) (6) Assoc, MI, Invsmt (2,423) 10 (1,618) (367) (368)Investment CF (2,425) (1) (1,624) (373) (374)Net Chg in Debt 2,171 379 1,022 (185) (400)New issues/Unit Buyback 0 0 412 441 472 Distribution Paid (680) (747) (836) (996) (1,109) Other Financing CF 0 0 0 0 0 Financing CF 1,491 (368) 598 (740) (1,037)Chg in Cash (304) 498 (71) 67 (94)
Source: Company, DBS Vickers
Page 57
Company Guide
Yuexiu REIT
Target Price & Ratings History
Source: DBSVHK
Analyst: Trista QIN Carol WU Danielle WANG CFA Ken HE CFA Jason LAM
S.No.Date of Report
Closing Price
12-mthTargetPrice
Rat ing
1 10 Aug 17 5.00 5.98 BUY
Note : Share price and Target price are adjusted for corporate actions.
1
3.81
4.01
4.21
4.41
4.61
4.81
5.01
5.21
5.41
Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17
HK$
ed-TH / sa- CS / AH
BUYLast Traded Price ( 5 Jan 2018):HK$4.97 (HSI : 30,815) Price Target 12-mth: HK$5.10 (3% upside)
Analyst Ken HE CFA, +86 21 6888 3375 [email protected]
Carol WU +852 2863 8841 [email protected]
Danielle Wang +852 2820 4915 [email protected]
Jason LAM +852 2820 4915 [email protected]
What’s New • RevPAR recovery to continue, leading to even
higher recovery in EBITDA
• Office business remains decent with improvementin both rents and occupancy
• BUY with TP of HK$5.10
Price Relative
Forecasts and Valuation FY Dec (HK$ m) 2015A 2016A 2017F 2018F Gross Revenue 2,974 2,764 3,105 3,206 Net Property Inc 1,667 1,562 1,891 1,977 Net Profit 543 423 411 455 Dis tribution Inc 867 720 721 761 DPU (HK$) 0.43 0.36 0.36 0.38 DPU Gth (%) (10) (21) 0 6 Div Yie ld (%) 8.7 7.2 7.3 7.7 Gross Gearing (%) 38 37 38 39 Book Value (HK$) 4.16 4.05 3.90 3.74 P/Book Value (x) 1.2 1.2 1.3 1.3
DPU Rev (%): Nil Nil Consensus DPU (HK$): 0.27 0.29 Other Broker Recs: B: 3 S: 0 H: 1
Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX
Leveraged on hotel recovery
Buy for sustainable hotel recovery in top-tier c ities. Improving supply dynamics in the hotel sector and latest consumption upgrade will continue to drive up luxury hotels’ RevPAR in tier-1 cities and key tourist hotspots. J inmao Hotel is expected to fully leverage the recovery of the hotel sector. We also expect a stronger rebound in hotel EBITDA, given high operating leverage of its hotel business. It is now trading at 7.5% div idend y ield, with upside potential on div idends, given the continuous improving fundamentals.
Where we differ: More comfortable with EBITDA rebound. Its hotel occupancy in Beijing/Shanghai topped 75% in 9M17, which lays a solid foundation for raising ADR ahead. In 9M17, its RevPAR grew 9.1% y-o-y, and we also expect a stronger rebound in hotel EBITDA, given high operating leverage of its hotel business. We have run regressions on hotel EBITDA and hotel revenues for J inmao’s mature hotels (three in Beijing/Shanghai/Shenzhen) over the past eight years and observed that EBITDA growth is usually 2.6x of revenue growth.
Of f ice business remains decent. Office occupancy had fallen to 90.3% by end-2016, due to the relocation of a related company, but had returned to 96.0% by end-1H17. We expect occupancy to rise further, given limited supply and decent demand in Lujiazui area. Average rents increased by 4% y-o-y to Rmb12.5/sm/day.
Valuation: We base our valuation using a two-stage DDM methodology, assuming 9.8% cost of equity and 2% terminal growth, to derive a HK$5.10 TP. The stock is now trading at a y ield of 7.5% for FY17.
Key Risks to Our View: Interest rate risk. Any interest rate hike would adversely affect its valuation.
At A Glance Is sued Capita l (m shrs) 2,000
Mkt. Cap (HK$m/US$m) 9,940 / 1,272
Major Shareholders China Jinmao (%) 66.5 Tong JinQuan (%) 9.3 Lu Shiqing (%) 7.9
Free Float (%) 16.3
3m Avg. Daily Val. (US$m) 0.6 I CB Industry : Financials / REITs
DBS Group Research . Equity 8 Jan 2018
China / Hong Kong Company Guide
Jinmao Hotel and Jinmao (China) Version 5 | Bloomberg: 6139 HK Equity | Reuters: 6139.HK
Refer to important disclosures at the end of this report
Page 59
Company Guide
Jinmao Hotel and Jinmao (China)
CRITICAL FACTORS TO WATCH
Earnings Drivers: High occupancy likely to transform into higher ADR. Hotel investments from developers or local government have become more rational, which could be reflected by slow growth in hotel supply in key cities, according to management. On the other hand, consumption upgrade and tourism boom have driven up demand for high-end hotel rooms in key cities. As a result, we saw better-than-expected improvement in occupancy. Traditional business hotels in tier 1 cities saw over 80% occupancy, as rooms were filled by private/tourism demand on weekends. Apart from that, ADR in those tier 1 cities reversed its downward trend, which is a positive signal and we expect more recovery in hotel ADR ahead. For 9M17, blended occupancy improved by 9.4ppts to 75.9%, while ADR edged down to Rmb1,266/room/night, which results in an overall 9.1% y-o-y increase in RevPAR.
High operating leverage leads to larger rebound in EBITDA. In 1H17, the hotel business’s blended RevPAR grew 9.3% y-o-y, resulting in a 17% y-o-y increase in hotel EBITDA. We expect more RevPAR improvement, thanks to gradual recovery in ADR. This should support a larger increase in EBITDA.
F &B also regains growth with EBITDA margin stay ing at a high lev el. Hotel F&B grew 5% y-o-y in 1H17, due to a 9% rise in the number of customers but a 4% decline in consumption per person. EBITDA margin was maintained at 37% in 1H17.
Leasing business remains decent. Office occupancy had fallen to 90.3% by end-2016, due to the relocation of a related company, but had returned to 96.0% by end-1H17. We expect occupancy to rise further, given limited supply and decent demand in Lujiazui area. Average rents increased by 4% y-o-y to Rmb12.5/sm/day. EBITDA margin for leasing business remained high at 92% in 1H17.
Dist ributable income to regain growth. We expect distributable income (excluding support income from China J inmao in FY16) to grow 10% y-o-y to HK$721m in FY17. Payout ratio will stay at 100%.
KEY ASSUMPTION
Occupancy improvement
ADR growth for hotel
Rental growth for office
FY Dec (HK$ m) 2 0 17F 2 0 18F 2 0 19F EB ITDA 1 ,222 1 ,275 1 ,331 - hotel pre-opening expenses- actual interest paid (319) (307) (260) - actual income tax paid (164) (189) (217)
- FF&E spent (18) (18) (18) Subtotal 721 761 836 Shortfa ll supported by parent 0 0 0 D is tributable income 7 2 1 7 6 1 8 3 6
Cost of equity 9.8%
Terminal growth 2.0% PV of terminal value 8,289 Eq uity value 1 0 ,210 No. of shares 2,000 Value per share 5 .10
Source: Company, DBS Vickers
0
500
1,000
1,500
2,000
2,500
3,000
3,500
FY14 FY15 FY16 FY17E FY18E FY19E
HK$ m
0
200
400
600
800
1,000
1,200
1,400
FY14 FY15 FY16 FY17E FY18E FY19E
HK$ m
0%
20%
40%
60%
80%
100%
FY14 FY15 FY16 FY17E FY18E FY19E
Page 60
Company Guide
Jinmao Hotel and Jinmao (China)
Balance Sheet: Rebalancing its onshore-offshore debts. According to the management, the company will continue to lower its offshore debt exposure and increase its offshore assets to mitigate any impact from RMB depreciation. Loan-to-market value (LTV) had increased to 32% as of end-1H17.
Share Price Drivers: Bet ter-than-expected hotel performance will drive up its earnings and distributable income.
In addition, management has indicated that the company will ride the potential C-REITs to enjoy lower funding costs and unlock some value.
Key Risks: Slower-than-expected hotel recovery will drag its earnings/distributable incomes as well as share price performance.
Interest rate risk. Any interest rate hike would adversely affect its valuation.
Company Background J inmao Investments (J inmao) was established by China J inmao Group Holdings (prev iously known as Franshion, Sinochem’s property arm) and has a long history of operating luxury hotels and top grade office space in China. Its initial portfolio includes eight luxury hotels in top tourist cities and a landmark building - J in Mao Tower - in Shanghai Lujiazui. It offers investors exposure to the promising office market in Shanghai Pudong, and the recovering hotel market in China, driven by rising domestic tourism as a result of higher disposable incomes and changing lifesty les. The business trust structure generates high y ields for unitholders, with room for future growth.
Gearing
Net Capital Expenditure
ROE
Source: Company, DBS Vickers
Page 61
Company Guide
Jinmao Hotel and Jinmao (China)
Segmental Breakdown (HK$ m)FY Dec 2014A 2015A 2016A 2017F 2018F R e venues (HK$ m) Hotel operations 2,023 2,173 2,040 2,284 2,353 Gross rental income 568 637 559 667 698 Others 169 164 165 154 155
T otal 2 , 761 2, 974 2, 764 3, 105 3, 206
Source: Company, DBS Vickers
Income Statement (HK$ m)
FY Dec 2014A 2015A 2016A 2017F 2018F
Gross revenue 2,761 2,974 2,764 3,105 3,206 Property expenses (1,208) (1,307) (1,202) (1,214) (1,229) Ne t Property Income 1, 553 1, 667 1, 562 1, 891 1, 977 Other expenses (1,164) (981) (957) (1,021) (1,055) Interest (Exp)/Inc (351) (407) (352) (297) (281) Exceptionals 1,340 391 360 0 0 Pre -Tax Profit 1 , 401 818 667 575 644 Tax (494) (275) (244) (164) (189)
Non-Controlling Interests 0 0 0 0 0
Ne t Profit 907 543 423 411 455 Dis tribution income 960 867 720 721 761
Revenue Gth (%) 5 8 (7) 12 3 NPI Gth (%) 2 7 (6) 21 5 Dist. Inc Growth (%) 9 (10) (17) 0 6 DPU Growth (%) N/A (10) (21) 0 6
Source: Company, DBS Vickers
Balance Sheet (HK$ m)
FY Dec 2014A 2015A 2016A 2017F 2018F
Fixed Assets 9,210 8,904 8,195 7,843 7,491 Cash & ST Invts 1,129 803 1,005 1,176 1,408 Other Current Assets 234 385 208 250 253 T otal Assets 22, 640 21, 753 20, 145 20, 009 19, 894 ST Debt
2,183 2,304 1,942 2,087 1,807 Creditors 1,452 1,386 1,292 1,317 1,320
Other Current Liab 1,835 1,809 1,634 1,634 1,634 LT Debt 6,139 5,994 5,463 5,467 5,936 Other LT Liabilities 1,924 1,931 1,712 1,712 1,712 Non-Controlling Interests 0 0 0 0 0 Unitholders’ funds 9,107 8,328 8,103 7,792 7,486 T otal Capital 22, 640 21, 753 20, 145 20, 009 19, 894 Share Capital (m) 1,701 2,000 2,000 2,000 2,000 Working Capital (3,054) (2,811) (2,718) (2,701) (2,700) Book NAV (HK$) 5.35 4.16 4.05 3.90 3.74 Gross Gearing (%) 37 38 37 38 39
Source: Company, DBS Vickers
Page 62
Company Guide
Jinmao Hotel and Jinmao (China)
Cash Flow Statement (HK$ m)
FY Dec 2014A 2015A 2016A 2017F 2018F
Pre-Tax Income 1,401 818 667 575 644 Tax Paid (111) (103) (148) (164) (189) Depr/Amort 255 380 354 352 352 Chg in Wkg.Cap. 1,688 224 508 (17) (1)Other Non-Cash (1,303) (364) (293) (22) (26)
O pe rational CF 1, 928 950 1, 083 722 779
Net Capex (1,526) (670) (278) 0 0 Assoc, MI , Invsmt 381 7 5 22 26 I nvestment CF ( 1 ,152) ( 665) ( 275) 22 26 Net Chg in Debt 2,858 22 (372) 149 189 New issues/Unit Buyback 3,113 0 0 0 0 Distribution Paid (6,804) (566) (254) (721) (761)Other Financing CF (20) (73) 28 0 0 F inanc ing CF ( 853) ( 617) ( 598) ( 572) ( 572) Chg in Cash (78) (331) 210 171 232
Source: Company, DBS Vickers
Page 63
Company Guide
Jinmao Hotel and Jinmao (China)
Target Price & Ratings History
Source: DBS Vickers
Analyst: Ken HE CFA,
12
3.0
3.5
4.0
4.5
5.0
5.5
6.0
Feb-
17
Mar
-17
Apr
-17
May
-17
Jun-
17
Jul-1
7
Aug
-17
Sep-
17
Oct
-17
Nov
-17
HK$ S.No. Date Closing 12-mth Rat ingPrice Target
Price1: 28-Mar-17 HK$4.00 HK$4.22 Hold2: 8-Aug-17 HK$4.62 HK$5.10 Buy
DBSV's discussion of the issuer in this report will not be continuously followed. Accordingly, this report is being provided as a stand-alone analysis and recipients of this report should not expect additional reports relating to this issuer, unless so decided by DBSV
ed-TH / sa- AH /CS
NOT RATEDLast Traded Price ( 5 Jan 2018):RMB3.09 (HSI : 30,814) Analyst Ken HE CFA, +86 21 6888 3375 [email protected] Carol WU, +852 2863 8841 [email protected] Danielle WANG CFA, +852 2820 4915 [email protected] Jason LAM [email protected]
Price Relative
Forecasts and Valuation
FY N/A (RMB m) 2013A 2014A 2015A 2016A
Gross Revenue 2,946 3,067 3,312 3,119 Net Property Inc 1,765 1,868 1,534 1,509 Net Profit 972 1,505 168 114 Dis tribution Inc 997 983 1,303 1,355 DPU (RMB) 0.25 0.26 0.27 0.28 DPU (HK$) 0.29 0.30 0.32 0.33 DPU Gth (%) 3% 5% 5% 2% Div Yie ld (%) 6% 7% 8% 9% Gross Gearing (%) 24% 28% 31% 32% BV Per Share (HK$) 6.40 6.37 6.05 5.72
ICB Industry: Financials ICB Sector: Real Estate Holding & Development Principal Business: Leas ing of Beijing Oriental Plaza in Beijing and Shenyang Shenyang Lido Hotel in Shenyang Source of a ll data on this page: Company, DBSV, Thomson Reuters, HKEX
Negatives priced in • Key asset in Beijing continues to see positive rental
rev ersion and NPI improvement; yet its land use rightsremains a concern
• A ssets acquired over the past few years take time to seepositive results
• Negat ives largely in the price, yielding at 8.9% (consensus).Yet , for the stock to re-rate, management needs toimprove the performance of its assets in tier 2 cities
Investors are turning conservative given its poor acquisition history. It is the first RMB-denominated REIT, listed on HKEx on 10 April 2011, with its key asset being a mega commercial complex in Beijing. Yet, the company has made several acquisitions in tier-2 cities over the past years, some of which were not successful and had their NPIs and values drop after the acquisition. The poor acquisition history makes investor more conservative on this name, resulting in its share price underperformance. Currently , it owns/operates 1.1m sm of commercial properties in four cities. According to Bloomberg, it is now trading at 8.9% FY17 div idend y ield, we believe negatives are largely priced in.
Initial asset is prime, but has a flaw with land use rights. The key asset is a mega commercial complex in Beijing – Beijing Oriental Plaza, connecting Chang’an Avenue and Wangfujing. Operation of this asset remains decent with continuous rental rev ision and NPI improvements. Yet, Huixian REIT does not own the land use rights and the project has no economic value after the expiry of the land use rights in 2049.
Need time to rebuild track record. The REIT acquired Sofitel Shenyang Lido Hotel in 2011, whose profitability has subsequently deteriorated. It acquired Chongqing Metropolitan Oriental Plaza in 2014. Again, profitability of this retail/office complex had trended down in FY16 and 1H17. In 1Q17, it further acquired Metropolitan Oriental Plaza (office) in Chongqing and Sheraton Chengdu Lido Hotel. We think it takes time to rebuild its track record.
At A Glance Is sued Capita l (m shrs) 5,000 Mkt. Cap (RMBm/US$m) 15,450 / 2,379
Major Shareholders Cheung Kong (%) 60.0
Free Float (%) 40.0
3m Avg. Daily Val. (US$m) 1.4
China REITs Sector
Hui Xian Real Estate Investment Trust Bloomberg: 87001 HK | Reuters: 87001.HK Refer to important disclosures at the end of this report
China REITs Sector
Hui Xian Real Estate Investment Trust
Page 65
I ncome Statement (RMB m) B a lance Sheet (RMB m)
F Y Dec 2012A 2013A 2014A 2015A 2016A
Revenue 2,487 2,946 3,067 3,312 3,119Cost of Goods Sold - - - - -Gross Prof it - - - - -Other Opg (Exp)/Inc - - - - -Operat ing Prof it 1,270 1,463 1,587 1,247 1,223Other Non Opg (Exp)/Inc 2,800 (108) 665 (515) (470)Associates & JV IncNet Interest (Exp)/Inc (61) (88) (100) (207) (225)Exceptional Gain/(Loss) - - - - Pre- tax Prof it 4,009 1,267 2,152 525 528Tax (1,110) (427) (661) (372) (427)Minority Interest 2 132 14 15 13Preference Div idend - - - - - Net Prof it 2,901 972 1,505 168 114Net Profit before Except. 2,901 972 1,505 168 114EBITDA 1,574 1,765 1,868 1,534 1,509
GrowthRevenue Gth (%) - 18.5 4.1 8.0 (5.8)EBITDA Gth (%) - 12.1 5.8 (17.9) (2) Opg Profit Gth (%) - 15.2 8.5 (21.4) (1.9)Net Profit Gth (%) - (66.5) 54.8 (88.8) (32.1)
Margins & Rat ioGross Margin (%) #VALUE! #VALUE! #VALUE! #VALUE! #VALUE!Opg Profit Margin (%) 51.1 49.7 51.7 37.7 39.2Net Profit Margin (%) 116.6 33.0 49.1 5.1 3.7ROAE (%) 10.8 3.5 5.3 0.6 0.4ROA (%) 7.9 2.4 3.6 0.4 0.2ROCE (%) 2.6 2.5 2.8 0.9 0.5Div Payout Ratio (%) 41.5 129.3 89.2 857.1 1,305.2Net Internet Cover (x) 20.8 16.6 15.9 6.0 5.4
F Y Dec 2012A 2013A 2014A 2015A 2016A
Net F ixed Assets 29,660 30,080 30,760 34,060 33,534 Invts in Assocs & JVs - - - - - Other LT Assets 7,638 6,878 6,625 6,477 6,290 Cash & ST Invts 2,063 3,740 4,795 6,107 7,072 Inventory - - - - -Debtors 27 29 48 60 44 Other Current Assets - - - - -Total A sset s 39,388 40,727 42,228 46,704 46,940
ST Debt 1,005 157 1,104 1,443 893 Creditors 81 84 67 70 73 Other Current Liab 1,272 1,382 1,570 1,313 1,353 LT Debt 959 3,060 2,763 7,992 9,923 Other LT Liabilities 7,740 7,796 7,460 7,335 7,250 Shareholder's Equity 27,914 27,963 28,564 27,557 26,439 Minority Interests 417 285 271 256 243 Total Cap. & L iab. 39,388 40,727 41,799 45,966 46,174
Non-Cash Wkg. Cap - - - - -Net Cash/(Debt) 99 523 928 (3,328) (3,744) Debtors Turn (avg days) 4 3 5 6 6 Creditors Turn (avg days) n.a. n.a. n.a. n.a. n.a.Inventory Turn (avg days) n.a. n.a. n.a. n.a. n.a.Asset Turnover (x) 0.1 0.1 0.1 0.1 0.1 Current Ratio (x) 0.9 2.3 1.8 2.2 3.1 Quick Ratio (x) n.a. n.a. n.a. n.a. n.a.Net Debt/Equity (X) n.a. n.a. n.a. 0.1 0.1 Net Debt/Equity ex MI (X) n.a. n.a. n.a. 0.1 0.1 Capex to Debt (%) - 0.2 0.4 0.3 0.3
Ca s h F low Statement (RMB m) I ncome Statement (RMB m)
F Y Dec 1H15 2H15 1H16 2H16 1H17
Revenue 1,640 1,672 1,580 1,539 1,586Cost of Goods Sold - - - - -Gross Prof it - - - - -Other Oper. (Exp)/Inc - - - - -Operat ing Prof it 881 366 565 658 541Other Non Opg (Exp)/Inc (108) (407) (88) (382) 471Associates & JV IncNet Interest (Exp)/Inc (84) (123) (109) (116) (130)Exceptional Gain/(Loss) - - - - - Pre- tax Prof it 689 (164) 368 160 882Tax (237) (135) (205) (222) (242)Minority Interest 6 9 7 6 7Net Prof it 458 (290) 170 (56) 647Net profit bef Except. 458 (290) 170 (56) 647
GrowthRevenue Gth (%) 8.5 7.5 (3.7) (8.0) 0.4Opg Profit Gth (%) 8.0 (52.5) (35.9) 79.8 (4.2)Net Profit Gth (%) (51.5) (151.8) (62.9) - 280.6
Margins & Rat ioGross Margins (%) - - - - -Opg Profit Margins (%) 53.7 21.9 35.8 42.8 34.1Net Profit Margins (%) 27.9 (17.3) 10.8 (3.6) 40.8
(RMB m) 1H15 2H15 1H16 2H16 1H17Revenue (LHS) 1,640 1,672 1,580 1,539 1,586Revenue Gth (RHS) 9% 7% -4% -8% 0%
Source: Company, DBS Vickers
F Y Dec 2012A 2013A 2014A 2015A 2016A
Pre-Tax Profit 4,009 1,267 2,152 525 528 Dep. & Amort. 304 302 281 287 286 Tax Paid (435) (391) (493) (541) (515) Assoc. & JV Inc/(loss) - - - - -(Pft)/ Loss on disposal of FAs - - - - - Non-Cash Wkg. Cap. 142 118 35 (48) 83 Other Operating CF (2,690) 177 (534) 1,264 1,251 Net Operat ing CF 1,330 1,473 1,441 1,487 1,633 Capital Exp. (net) - (8) (15) (24) (33) Other Invts. (net) (1,083) (341) 129 (3,870) (11) Invts. in Assoc. & JV - - - - - Div from Assoc. & JV - - - - - Other Investing CF - - - 300 (2,184) Net Inv est ing CF (1,083) (349) 114 (3,594) (2,228) Div Paid (961) (997) (983) (1,303) (1,355) Chg in Gross Debt 1,694 - - - - Capital Issues - - - - - Other F inancing CF - - - - - Net F inancing CF 733 (997) (983) (1,303) (1,355) Chg in Cash 980 127 572 (3,410) (1,950) Opg CFPS (RMB) 0.26 0.29 0.28 0.28 0.30 Free CFPS (RMB) 0.07 0.09 0.08 0.03 0.05
BSV's discussion of the issuer in this report will not be continuously followed. Accordingly, this report is being provided as a stand-alone analysis and recipients of this report should not expect additional reports relating to this issuer, unless so decided by DBSV
ed-TH / sa- AH / CS
NOT RATEDLast Traded Price ( 5 Jan 2018):HK$3.43 (HSI : 30,814)
Analyst Ken HE CFA, +86 21 6888 3375
Carol WU, +852 2863 8841 [email protected] Danielle WANG CFA, +852 2820 4915 [email protected] Jason LAM
Price Relative
Forecasts and Valuation
F Y Dec (US$m) 2013A 2014A 2015A 2016A
Gross Revenue 71 81 81 75Net Property Inc n.a. n.a. n.a. n.a.Net Profit 70 73 40 91Distribution Inc 15 32 38 37DPU (RMB) 0.01 0.04 0.03 0.03DPU (HK$) 0.07 0.28 0.27 0.23DPU Gth (%) n.a. 301% -5% -14%Div Yield (%) 2% 8% 9% 7%Gross Gearing (%) 46% 40% 39% 36%BV Per Share (HK$) 6.14 6.30 6.03 5.99
ICB Industry: Financials
ICB Sector: Real Estate Holding & Development Principal Business: Leas ing of office in Beij ing and commercial
properties (for car service) in the UK
Source of a ll data on this page: Company, DBSV, Thomson Reuters, HKEX
Lacklustre outlook and yield
Beijing office likely to see headwind given potential
upcoming supply
Latest acquisition in UK raises concerns over its strategy
V aluation of 6.8% yield is not particularly attractivecompared to peers
Unattractive valuation and outlook. Spring REIT was listed on
the HKEx on 5 December 2013, with its initial portfolio being
two office towers which are part of a commercial complex -
China Central Place in Beijing’s CBD. Yet, we are cautious on the
Beijing office sector and are concerned over potential supply in
the city ’s CBD. In addition, it has just completed the acquisition
of commercial properties (for car serv ices) in the United Kingdom
from its ultimate shareholder. This has raised investors’ concerns
over its strategy. According to Bloomberg consensus, it is now
trading at 6.9% FY17 div idend y ield, which is not particularly
attractive compared to Yuexiu REIT and J inmao Hotel.
We are cautious on office supply in Beijing CBD. Grade A
offices in Beijing CBD will likely see a wave of new supply over
the next four years. According to J LL, total stock in the CBD was
1.8m sm as at end-3Q17 but will go up to 3.1m sm by 2021,
pushing up vacancy to >16% in 2021, which should pressure
rental rates in the area. We expect rental rates to decrease by 2-
3% per annum over the next four years.
Unclear strategy ahead. Its latest acquisition of commercial
properties (for car serv ices) in the UK was objected by its second
largest unitholder - PAG. We also fail to see any synergy between
its assets in China and the UK. Instead, this may increase
management expenses and foreign exchange risks.
At A Glance Is sued Capita l (m shrs) 1,258
Mkt. Cap (HK$m/US$m) 4,251 / 544
Major Shareholders RCA Fund 01, L.P. 27.65 PAG Investment Advisors Pte. Ltd. 11.09
Zeng Yuyu 9.20
SCREP VI Management, LLC 6.07
Asuka Asset Management Co., Ltd. 5.81
Free Float (%) 40.18
3m Avg. Daily Val. (US$m) 0.3
China REITs Sector
Spring Real Estate Investment Trust Bloomberg: 1426 HK Equity | Reuters: 1426.HK Refer to important disclosures at the end of this report
China REITs Sector
Spring Real Estate Investment Trust
Page 67
I ncome Statement (US$ m) B a lance Sheet (US$ m)
F Y Dec 2012A 2013A 2014A 2015A 2016A
Revenue 53 71 81 81 75Cost of Goods Sold - - - - -Gross Prof it - - - - -Other Opg (Exp)/Inc - - - - -Operat ing Prof it 10 20 28 52 47Other Non Opg (Exp)/Inc 213 79 69 11 64Associates & JV IncNet Interest (Exp)/Inc (29) (29) (24) (23) (20)Exceptional Gain/(Loss) - - - - Pre- tax Prof it 194 70 73 40 91TaxMinority InterestPreference Div idend - - - - - Net Prof it 194 70 73 40 91Net Profit before Except. 194 70 73 40 91EBITDA - - - - -
GrowthRevenue Gth (%) 13.8 33.1 15.4 (1.2) (6.3)EBITDA Gth (%) - - - - -Opg Profit Gth (%) 140.7 96.9 41.5 83.1 (8.7)Net Profit Gth (%) 5.9 (64.1) 5.1 (45.0) 126.2
Margins & Rat ioGross Margin (%) #VALUE! #VALUE! #VALUE! #VALUE! #VALUE!Opg Profit Margin (%) 19.2 28.4 34.8 64.5 62.9Net Profit Margin (%) 366.4 98.9 90.1 50.1 121.0ROAE (%) n.a. n.a. n.a. n.a. 10.5ROA (%) 16.7 5.2 5.2 2.9 6.6ROCE (%) n.a. n.a. n.a. n.a. 3.5Div Payout Ratio (%) n.a. 14.2 54.3 94.7 36.5Net Internet Cover (x) 0.4 0.7 1.2 2.3 2.4
F Y Dec 2012A 2013A 2014A 2015A 2016A
Net F ixed Assets 1,187 1,273 1,307 1,284 1,297 Invts in Assocs & JVs - - - - -Other LT Assets 68 64 62 63 56 Cash & ST Invts 12 67 24 31 29 Inventory - - - - -Debtors 0 - - 0 0 Other Current Assets - - - - -Total A sset s 1,267 1,404 1,392 1,377 1,381
ST Debt - - - - - Creditors - - - 12 13 Other Current Liab 24 37 38 23 21 LT Debt 477 505 461 477 480 Other LT Liabilities - - - - - Shareholder's Equity - - - 864 867 Minority Interests - - - - - Total Cap. & L iab. - - - 1,377 1,381
Non-Cash Wkg. Cap - - - - -Net Cash/(Debt) (465) (437) (436) (446) (452) Debtors Turn (avg days) 0 0 n.a. 0 1 Creditors Turn (avg days) n.a. n.a. n.a. n.a. n.a.Inventory Turn (avg days) n.a. n.a. n.a. n.a. n.a.Asset Turnover (x) 0.0 0.1 0.1 0.1 0.1 Current Ratio (x) 0.5 1.8 0.6 0.9 0.9 Quick Ratio (x) n.a. n.a. n.a. n.a. n.a.Net Debt/Equity (X) n.a. n.a. n.a. 0.5 0.5 Net Debt/Equity ex MI (X) n.a. n.a. n.a. 0.5 0.5 Capex to Debt (%) - - - - 0.2
Ca s h F low Statement (US$ m) I ncome Statement (US$ m)
F Y Dec 2012A 2013A 2014A 2015A 2016A
Pre-Tax Profit 194 70 73 40 91 Dep. & Amort. - - - - -Tax Paid - - - - -Assoc. & JV Inc/(loss) - - - - -(Pft)/ Loss on disposal of FAs - - - - - Non-Cash Wkg. Cap. 3 11 9 (1) (1) Other Operating CF - - - - -Net Operat ing CF 16 54 41 41 35 Capital Exp. (net) - - - - (1) Other Invts. (net) (6) (22) (2) - 0 Invts. in Assoc. & JV - - - - - Div from Assoc. & JV - - - - - Other Investing CF - (3) - - - Net Inv est ing CF (6) (25) (2) - (1) Div Paid - (15) (32) (38) (37) Chg in Gross Debt - 17 (50) - - Capital Issues - 48 - - - Other F inancing CF 0 (24) (1) (3) 1 Net F inancing CF 0 26 (83) (41) (36) Chg in Cash 10 55 (43) (0) (2) Opg CFPS (US$) n.a. 0.05 0.04 0.04 0.03 Free CFPS (US$) n.a. 0.04 0.01 0.00 (0.00)
F Y Dec 1H15 2H15 1H16 2H16 1H17
Revenue 41 40 39 36 36Cost of Goods Sold - - - - -Gross Prof it - - - - -Other Oper. (Exp)/Inc - - - - -Operat ing Prof it 27 25 26 21 25Other Non Opg (Exp)/Inc 8 4 86 (22) 4Associates & JV IncNet Interest (Exp)/Inc (11) (12) (11) (9) (10)Exceptional Gain/(Loss) - - - - - Pre- tax Prof it 23 18 101 (10) 19TaxMinority InterestNet Prof it 23 18 101 (10) 19Net profit bef Except. 23 18 101 (10) 19
GrowthRevenue Gth (%) 2.6 (4.8) (3.6) (9.1) (9.6)Opg Profit Gth (%) 87.5 78.8 (2.4) (15.4) (4.6)Net Profit Gth (%) (25.6) (58.9) 342.9 (155.6) (81.2)
Margins & Rat ioGross Margins (%) - - - - -Opg Profit Margins (%) 65.2 63.8 66.0 59.4 69.6Net Profit Margins (%) 55.9 44.2 256.6 (27.0) 53.4
ed: JS / sa:YM, PY
BUYLast Traded Price ( 23 Oct 2017): S$1.215 (STI : 3,349.80) Price Target 12-mth: S$1.30 (7% upside and 6% yield) (Prev S$1.25)
Analyst Regional Research Team [email protected]
What’s New
• 2Q18 DPU of 1.868 (+5.8% y-o-y) in line withexpectations
• Acceleration in tenant sales and rental reversions apositive sign for improved performance ahead
• Re-rating still has legs with MAGIC trading at elevatedyields despite the quality of its asset portfolio
Price Relative
Forecasts and Valuation FY Mar (S$m) 2016A 2017A 2018F 2019F Gross Revenue 337 351 363 375 Net Property Inc 277 286 297 307 Total Return 428 372 160 162 Distribution Inc 200 205 210 213 EPU (S cts) 6.87 5.53 5.68 5.72 EPU Gth (%) 51 (19) 3 1 DPU (S cts) 7.25 7.32 7.43 7.46 DPU Gth (%) 11 1 2 0 NAV per shr (S cts) 124 130 129 127 PE (X) 17.7 22.0 21.4 21.3 Distribution Yield (%) 6.0 6.0 6.1 6.1 P/NAV (x) 1.0 0.9 0.9 1.0 Aggregate Leverage (%) 39.4 39.2 39.1 39.1 ROAE (%) 5.6 4.4 4.4 4.5
Distn. Inc Chng (%): - - - Consensus DPU (S cts): 7.30 7.30 Other Broker Recs: B: 7 S: 0 H: 1
Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P
Join the magical ride Rally not over. We maintain our BUY call with a revised TP of S$1.30 for Mapletree Greater China Commercial Trust (MAGIC). MAGIC has rallied over 15% since our out of consensus call in late April that MAGIC’s yield should compress significantly given its strong track record and investors’ incorrect perception of the stock’s exposure to forex volatility despite the earnings resilience shown by MAGIC. However, we believe the share price rally can continue given improving macro conditions in HK and the discount it trades to its HK peers.
Where we differ – Yield to match HK peers. Consensus’ TPs imply that MAGIC should trade at a yield premium to its HK peers due to concerns over FX volatility, and a lack of familiarity with HK/China and history as a listed REIT. However, we believe this is unwarranted given its strong record as seen by FY17 DPU being 17% higher than its initial DPU in FY14, and MAGIC recording the fourth best total cumulative return for a SREIT since its listing (over 65% in capital and distribution returns) as well as having a portfolio with well-located assets. Thus, MAGIC should re-rate closer to mid 5% forward yield consistent with its HK peers, from its current 6.1% yield.
Improving HK consumer sentiment. In 2016, MAGIC’s share price performance was mixed, due to the higher property taxes in Beijing and weakness in HK retail sales resulting in concerns over the ability of Festival Walk to increase rents. We believe the positive news flow from improving retail sales and consumer sentiment should provide a tailwind to MAGIC’s share price. Festival Walk represents c.70% of MAGIC’s income.
Valuation: After rolling forward our valuation to FY19, we raised our DCF-based TP to S$1.30 from S$1.25.
Key Risks to Our View: The key risk to our view is a significant downturn in the HK and Chinese economies, causing a decline in rents at Festival Walk, Gateway Plaza and Sandhill Plaza.
At A Glance Issued Capital (m shrs) 2,812 Mkt. Cap (S$m/US$m) 3,417 / 2,510 Major Shareholders (%) Temasek Holdings Private Ltd 33.8 Schroders Plc 6.4 AIA Co Ltd 4.9
Free Float (%) 54.9 3m Avg. Daily Val (US$m) 3.1 ICB Industry : Real Estate / Real Estate Investment Trusts
DBS Group Research . Equity 24 Oct 2017
Singapore Company Guide Mapletree Greater China Commercial Trust Version 9 | Bloomberg: MAGIC SP | Reuters: MAPE.SI Refer to important disclosures at the end of this report
79
99
119
139
159
179
199
219
0.7
0.8
0.9
1.0
1.1
1.2
1.3
Oct-13 Oct-14 Oct-15 Oct-16 Oct-17
Relative IndexS$
Mapletree Greater China Commercial Trust (LHS)
Relative STI (RHS)
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Mapletree Greater China Commercial Trust
WHAT’S NEW
Growth resumes
3Q17 results in line
• After a few quarters of modest to flattish DPU, growthhas returned.
• 2Q18 DPU rose 5.8% y-o-y to 1.868 Scts. Thisrepresents 25% of our FY18F DPU and was in line withour expectations.
• The improved performance was largely attributed tohigher rental rates at Festival Walk. In addition,Gateway Plaza had a better quarter on the back ofhigher occupancies (95.8% versus 90.5% in 2Q17) andthe impact of higher accrued VAT in 2Q17. MAGIC hadconservatively assumed a higher VAT previously giventhe uncertainty over the applicable VAT rate a yearbefore.
• As a consequence of these drivers, overall 2Q18 NPIrose 5.7% y-o-y to S$70.9m. Underlying 2Q18 NPI forFestival Walk, Gateway Plaza and Sandhill Plaza rose2.7%, 17.4% and 1.8% y-o-y respectively
• Excluding the impact of currency movements, MAGICstill had a healthy quarter. NPI for Festival Walk rose2.9% y-o-y in HKD terms while Gateway Plaza andSandhill Plaza increased 16.7% and 1.3% y-o-yrespectively in RMB terms.
• Overall portfolio occupancy remains robust at 98.2%,up from 95.7% in 2Q17. However, there was a slightdecline q-o-q from 98.8% largely due to occupancy atGateway Plaza dropping to 95.8% from 98.8% in1Q18, partially offset by Sandhill Plaza now being fullyoccupied (97.5% in 1Q18). Festival Walk continues tobe fully leased.
Acceleration in positive rental reversions and tenant sales
• Rental reversions at Festival Walk (Retail) and SandhillPlaza (Office) accelerated over the quarter.
• For 1H18, Festival Walk (Retail) signing rents were 11%higher than expiring rents, up from 9% reported in1Q18. Meanwhile, Sandhill Plaza recorded 14% positiverental reversion for 1H18 versus 13% in 1Q18.Meanwhile Gateway Plaza, maintained the 10%increase in signing rents for 1H18.
• Thus far, MAGIC has renewed or re-let 54% of leasesthat were due to expire in FY18. In 2H18, there areanother 22.7% of leases that are due to expire, ofwhich 16% has already been renewed or re-let. BeyondFY18, another 22.9% and 25.7% of leases in FY19 aredue to expire.
• After tenant sales rose 2.1% y-o-y for the first time inseven quarters in 1Q18, the positive momentum hasflowed into 2Q18, with tenant sales jumping 2.9% y-o-y. The sectors that have done well over the priorquarters such as cosmetics and supermarkets sustainedtheir growth momentum. In 3Q17, Festival Walk alsosaw an uptick in the electronics.
• Nevertheless, foot traffic was subdued, flat y-o-y at10.4m partially due to the two typhoons that hit HKduring the quarter.
Capital structure
• MAGIC’s gearing fell marginally to 38.5% from 39.4%as at end 1Q18 with its effective interest rate droppingslightly to 2.71% from 2.74% in 1Q18.
• The proportion of fixed rate debt was stable at 76%.• MAGIC has also entered additional hedges with 69% of
FY18 distributable income now hedged versus 58% atend 1Q18.
• MAGIC’s net asset value per unit was relatively stable atS$1.244 compared its value at end 1Q18.
Moderate rental reversions ahead translating to steady growth ahead
• MAGIC guided that it should continue to achievepositive but moderate rental reversions going forward.
• In particular, with passing rents for Gateway Plaza atRMB338 per sqm per month that are between askingrents of RMB320-350, we can expect modest rentalreversions. In addition, with a slowdown in demand inBeijing, MAGIC guided that there may be somevolatility in Gateway Plaza’s occupancy. Thus, we expecta more stable performance for Gateway Plaza ahead
• For Festival Walk, with tenant sales recovering andoverall consumer sentiment in HK firming, we believesome investor concerns over the risk of negative rentalreversions should ease especially as occupancy costs hasnow dipped below the 20% level. Therefore, we expectFestival Walk to deliver high single digit to low teenrental reversions.
• Meanwhile, Sandhill Plaza should maintain its steadygrowth profile, as the property remains under rented.Passing rent stands at RMB5.32 per sqm per day versusasking rents of RMB5.30-6.00.
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Disciplined acquisition strategy
• MAGIC guided that cap rates for decentralised officeproperties, the key asset class it is targeting, remainslow at around 4% which makes it difficult for the REITto make DPU accretive acquisitions.
• We commend MAGIC for having a disciplinedacquisition strategy and willingness to even ride thisproperty cycle out.
• MAGIC guided that some of its sponsor’s assets are alsonot sufficiently stabilised for an acquisition to takeplace.
Maintain BUY with revised TP of S$1.30
• We maintain our BUY call with a revised TP of S$1.30.We have raised our DCF based TP to S$1.30 fromS$1.25 as we rolled forward our valuation base toFY19.
• We continue to like MAGIC for its attractive valuations.MAGIC’s 6.1% forward yield in our view remains toohigh considering its quality properties in the gatewaycities of HK, Beijing and Shanghai and it continues totrade at a yield premium to its HK peers which webelieve is unwarranted given its strong track record ofDPU delivery. Moreover, we believe the improvingmacro trends in HK (firming consumer sentiment andrecovery in retail sales) should act as catalysts to triggera further re-rating.
Strong track record with MAGIC now the fourth best performing SREIT by total cumulative return since its listing
Source: Bloomberg Finance L.P., DBS Bank
MAGIC yield versus HK peers
REIT FYE Price Mkt Cap Yield @ Current Price
(S$) S$'m FY17/18F FY18/19F
MAGIC Mar 1.215 3,417 6.1% 6.1%
HK REIT
Champion REIT Dec 5.77 5,868 4.2% 4.2%
Fortune REIT Dec 9.21 3,134 5.5% 5.6%
Link REIT Mar 66.50 25,548 3.7% 3.9%
Prosperity REIT Dec 3.35 857 5.5% 5.5%
Source: Bloomberg Finance L.P.,, DBS Bank
-40%
-20%
0%
20%
40%
60%
80%
100%
Mapletree Group of SREITsMAGIC
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Quarterly / Interim Income Statement (S$m)
FY Mar 2Q2017 1Q2018 2Q2018 % chg yoy % chg qoq
Gross revenue 83.1 88.9 88.1 6.1 (0.9)
Property expenses (15.8) (16.9) (17.2) 9.1 1.7
Net Property Income 67.3 72.0 70.9 5.4 (1.5)
Other Operating expenses (5.2) (5.7) (6.0) 15.4 5.1
Other Non Opg (Exp)/Inc 1.01 1.96 0.93 (8.1) (52.8)
Net Interest (Exp)/Inc (17.3) (17.5) (16.8) 2.7 3.9
Exceptional Gain/(Loss) 0.0 0.0 0.0 N/A N/A
Net Income 45.8 50.8 49.1 7.0 (3.4)
Tax (7.6) (8.4) (8.3) 10.3 (0.8)
Minority Interest 0.0 0.0 0.0 N/A N/A
Net Income after Tax 38.3 42.3 40.7 6.4 (3.9)
Total Return 38.3 42.3 40.7 6.4 (3.9)
Non-tax deductible Items 10.8 9.56 11.8 9.5 23.7
Net Inc available for Dist. 49.1 51.9 52.5 7.1 1.2
Ratio (%)
Net Prop Inc Margin 81.0 81.0 80.5
Dist. Payout Ratio 100.0 100.0 100.0
Source of all data: Company, DBS Bank
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CRITICAL DATA POINTS TO WATCH
Critical Factors Festival Walk still the star. Investors have raised concerns over the prior slowing retail market in Hong Kong impacting MAGIC’s core property Festival Walk. However, with retail sales turning a corner and consumer sentiment improving, we believe Festival Walk will continue to deliver, although achieving lower rental reversions (high single digit to low double digit) than the 20-21% delivered over the past two years. We believe overallrental income will remain on an uptrend due to the followingfactors: (1) the mall’s prime location in Kowloon Tong offeringtenants exposure to nearby established upscale residential areas,students and staff from the nearby City University of HongKong, and high transit crowd as the mall is located next toKowloon Tong Station which is an interchange between KwunTong Line (which serves Kowloon East) and East Rail Line (whichconnects to the Shenzhen border) and, (2) the mall’s strongtrack record and resiliency.
Sandhill Plaza remains under rented. Since its acquisition in June 2015, Sandhill Plaza in Shanghai has boosted MAGIC’s earnings. However, we believe the benefits from this acquisition have not been fully realised as passing rents at the property remain below market.
Rising interest rates a potential headwind but concerns overblown. While higher interest rates will likely dampen MAGIC’s DPU and provide a headwind to its share price performance given investors perception that interest rates and share prices are negatively correlated, we believe these concerns will be proven to be largely unfounded. This is because positive rental reversions will offset the higher borrowing costs (which are 76% hedged) and result in MAGIC delivering DPU growth which we believe is a more critical factor to share price performance.
Acquisition pipeline from sponsor. MAGIC’s sponsor has several malls, office buildings and business parks in China and HK which have yet to be stabilised or are in the process of being constructed. Subject to the price paid, these properties could potentially provide MAGIC with a pipeline of DPU-enhancing acquisitions.
More stable contribution from Gateway Plaza. With Gateway Plaza’s passing range now in the middle of asking rents of between RMB320-350 per sqm per month, we believe rental reversions will now be more modest. In addition, with slowing demand in Beijing, we expect Gateway Plaza to deliver a more stable contribution going forward. This compares to the high growth period several years back when the property was significantly under rented.
Net Property Income and Margins (%)
Net Property Income and Margins (%)
Distribution Paid / Net Operating CF
Interest Cover (x)
Source: Company, DBS Bank
77.4%
79.4%
81.4%
83.4%
85.4%
87.4%
89.4%
0
50
100
150
200
250
300
350
400
2015A 2016A 2017A 2018F 2019F
S$ m
Net Property Income Net Property Income Margin %
79%
80%
80%
81%
81%
82%
82%
83%
83%
84%
59
64
69
74
79
1Q20
16
2Q20
16
3Q20
16
4Q20
16
1Q20
17
2Q20
17
3Q20
17
4Q20
17
1Q20
18
2Q20
18
Net Property Income Net Property Income Margin %
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
2015A 2016A 2017A 2018F 2019F
(x)
0.00
1.00
2.00
3.00
4.00
5.00
6.00
2015A 2016A 2017A 2018F 2019F
(x)
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Balance Sheet: Optimal gearing levels. As at end-September 2017, MAGIC’s gearing stood at c.39% which is at an optimal level. Nevertheless, given the new 45% gearing limit for S-REITs in January 2016, MAGIC’s ability to pursue further acquisitions without further equity raisings is constrained.
Moderate exposure to rising interest rates. Currently, 76% of MAGIC’s borrowings are on fixed rates which partially insulates the REIT against rising interest rates in the near term.
Share Price Drivers: Festival Walk to drive growth ahead deliver. Investors have been concerned over the outlook for retail rents in Hong Kong and risk of negative rental reversions at Festival Walk. With retail sales recovering, these fears should be allayed now. Combined Festival Walk’s strong market position, we expected continued delivery from the property to drive MAGIC earnings and share price higher.
Yields to compress to HK peers. Over the last four years since listing, MAGIC has demonstrated strong performance in terms of DPU growth, tenant sales and rental reversions. Thus, we believe MAGIC’s yield premium to its HK listed peers is unwarranted. Consequently, in our view, MAGIC should re-rate closer to mid 5% forward yield consistent with its HK peers, from its current low 6% yield.
Key Risks: Foreign exchange risks. While FX over the past two years has been a tailwind, the depreciation of the HKD and CNY would negatively impact MAGIC’s DPU and NAV per share on a lagged basis. MAGIC hedges its income to smooth out the volatility from movements in FX rates.
Economic risks. A significant economic downturn in Hong Kong and China would cause a decline in rents for retail and office properties. This in turn would negatively impact MAGIC’s earnings and DPU.
Company Background MAGIC is a Singapore real estate investment trust (S-REIT) established with the investment strategy of principally investing, directly or indirectly, in a diversified portfolio of income-producing commercial real estate in the Greater China region.
Aggregate Leverage (%)
ROE (%)
Distribution Yield (%)
PB Band (x)
Source: Company, DBS Bank
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
2015A 2016A 2017A 2018F 2019F
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
2015A 2016A 2017A 2018F 2019F
Avg: 7%
+1sd: 7.6%
+2sd: 8.1%
-1sd: 6.4%
-2sd: 5.8%
4.5
5.5
6.5
7.5
8.5
9.5
2013 2014 2015 2016 2017
(%)
Avg: 0.81x+1sd: 0.86x+2sd: 0.91x
-1sd: 0.76x-2sd: 0.71x
0.5
0.6
0.7
0.8
0.9
1.0
1.1
Oct-13 Oct-14 Oct-15 Oct-16 Oct-17
(x)
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MAGIC share price versus HK retail rents Remarks
Source: Bloomberg Finance L.P., DBS Bank
Historically, there has been
a close correlation between
MAGIC’s share price and
HK retail rents.
With retail rents recovering,
we believe there remains
prospects for MAGIC’s
share price to continue its
uptrend. 320
322
324
326
328
330
332
334
336
0.60
0.70
0.80
0.90
1.00
1.10
1.20
Mar
-13
Jun-
13
Sep
-13
Dec
-13
Mar
-14
Jun-
14
Sep
-14
Dec
-14
Mar
-15
Jun-
15
Sep
-15
Dec
-15
Mar
-16
Jun-
16
Sep
-16
Dec
-16
Mar
-17
Jun-
17
Sep
-17
MAGIC (LHS)
Colliers HK retail effective rent psf per month (RHS)
S$ HK$
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Income Statement (S$m)
FY Mar 2015A 2016A 2017A 2018F 2019F
Gross revenue 281 337 351 363 375 Property expenses (51.8) (59.2) (65.0) (65.6) (67.4) Net Property Income 229 277 286 297 307 Other Operating expenses (25.1) (27.7) (23.0) (24.2) (24.1) Other Non Opg (Exp)/Inc (7.0) 40.7 4.14 0.0 0.0 Net Interest (Exp)/Inc (40.4) (64.5) (73.0) (75.3) (81.6) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Net Income 157 226 194 197 202 Tax (33.8) (37.8) (40.1) (37.8) (39.1) Minority Interest 0.0 0.0 0.0 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Income After Tax 123 188 154 160 162 Total Return 319 428 372 160 162 Non-tax deductible Items 55.0 11.7 51.0 50.5 50.7 Net Inc available for Dist. 178 200 205 210 213 Growth & Ratio Revenue Gth (%) 5.1 19.7 4.2 3.4 3.3 N Property Inc Gth (%) 6.1 21.0 2.9 4.0 3.5 Net Inc Gth (%) 4.9 53.0 (18.4) 3.9 1.8 Dist. Payout Ratio (%) 100.0 100.0 100.0 100.0 100.0 Net Prop Inc Margins (%) 81.6 82.4 81.4 81.9 82.0 Net Income Margins (%) 43.8 55.9 43.8 44.0 43.4 Dist to revenue (%) 63.3 59.4 58.4 57.9 56.9 Managers & Trustee’s fees
8.9 8.2 6.6 6.7 6.4
ROAE (%) 4.0 5.6 4.4 4.4 4.5 ROA (%) 2.4 3.2 2.4 2.4 2.5 ROCE (%) 3.3 3.9 3.6 3.7 3.9 Int. Cover (x) 5.1 3.9 3.6 3.6 3.5
Source: Company, DBS Bank
Drag on earnings in FY17 due to impact of higher property taxes in Beijing and implementation of VAT. However, we expect recovery in earnings from FY18 as the impact of positive rental reversions at Festival Walk shines through
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Quarterly / Interim Income Statement (S$m)
FY Mar 2Q2017 3Q2017 4Q2017 1Q2018 2Q2018
Gross revenue 83.1 87.8 94.8 88.9 88.1 Property expenses (15.8) (16.4) (17.3) (16.9) (17.2) Net Property Income 67.3 71.4 77.5 72.0 70.9 Other Operating expenses (5.2) (5.4) (6.4) (5.7) (6.0) Other Non Opg (Exp)/Inc 1.01 0.18 1.79 1.96 0.93 Net Interest (Exp)/Inc (17.3) (19.0) (19.3) (17.5) (16.8) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Net Income 45.8 47.2 53.5 50.8 49.1 Tax (7.6) (8.0) (16.9) (8.4) (8.3) Minority Interest 0.0 0.0 0.0 0.0 0.0 Net Income after Tax 38.3 39.2 36.7 42.3 40.7 Total Return 38.3 39.2 256 42.3 40.7 Non-tax deductible Items 10.8 10.3 18.1 9.56 11.8 Net Inc available for Dist. 49.1 49.5 54.8 51.9 52.5 Growth & Ratio Revenue Gth (%) (2) 6 8 (6) (1) N Property Inc Gth (%) (3) 6 9 (7) (1) Net Inc Gth (%) (3) 3 (7) 15 (4) Net Prop Inc Margin (%) 81.0 81.3 81.7 81.0 80.5 Dist. Payout Ratio (%) 100.0 100.0 100.0 100.0 100.0
Balance Sheet (S$m) FY Mar 2015A 2016A 2017A 2018F 2019F
Investment Properties 5,349 5,922 6,226 6,231 6,242 Other LT Assets 1.00 9.30 10.0 10.0 10.0 Cash & ST Invts 125 207 236 279 268 Inventory 0.77 0.85 0.81 0.81 0.81 Debtors 11.1 10.7 55.2 11.6 12.0 Other Current Assets 0.80 4.05 1.67 1.67 1.67 Total Assets 5,488 6,154 6,529 6,533 6,533
ST Debt 274 462 163 163 163 Creditor 76.3 147 149 153 153 Other Current Liab 45.2 37.9 44.3 44.3 44.3 LT Debt 1,710 1,960 2,393 2,393 2,393 Other LT Liabilities 122 130 144 144 144 Unit holders’ funds 3,260 3,416 3,636 3,636 3,636 Minority Interests 0.0 0.0 0.0 0.0 0.0 Total Funds & Liabilities 5,488 6,154 6,529 6,533 6,533
Non-Cash Wkg. Capital (109) (169) (135) (183) (183) Net Cash/(Debt) (1,859) (2,215) (2,320) (2,277) (2,288) Ratio Current Ratio (x) 0.3 0.3 0.8 0.8 0.8 Quick Ratio (x) 0.3 0.3 0.8 0.8 0.8 Aggregate Leverage (%) 36.2 39.4 39.2 39.1 39.1 Z-Score (X) 0.9 0.8 0.8 0.8 0.8
Source: Company, DBS Bank
Increase in gearing on the back of the debt-funded acquisition of Sandhill Plaza
Page 77
Company Guide
Mapletree Greater China Commercial Trust
Cash Flow Statement (S$m)
FY Mar 2015A 2016A 2017A 2018F 2019F
Pre-Tax Income 157 226 194 197 202 Dep. & Amort. 2.49 3.49 3.49 3.49 3.49 Tax Paid (26.6) (21.3) (14.9) (37.8) (39.1) Associates &JV Inc/(Loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. 18.6 2.72 (55.9) 48.2 (0.5) Other Operating CF 71.7 53.9 100 47.5 47.7 Net Operating CF 223 265 227 259 213 Net Invt in Properties (5.0) (335) (6.9) (5.4) (11.2) Other Invts (net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc. & JVs 0.0 0.0 0.0 0.0 0.0 Other Investing CF (0.2) (0.1) (0.1) 0.0 0.0 Net Investing CF (5.2) (335) (7.0) (5.4) (11.2) Distribution Paid (169) (188) (204) (210) (213) Chg in Gross Debt (26.5) 353 76.8 0.0 0.0 New units issued 0.0 0.0 0.0 0.0 0.0 Other Financing CF (34.0) (56.7) (71.4) 0.0 0.0 Net Financing CF (229) 108 (199) (210) (213) Currency Adjustments 3.37 43.4 53.1 0.0 0.0 Chg in Cash (8.1) 81.0 74.0 43.2 (11.2)
Operating CFPS (S cts) 7.56 9.57 10.2 7.49 7.52 Free CFPS (S cts) 8.07 (2.6) 7.92 9.01 7.11
Source: Company, DBS Bank
Target Price & Ratings History
Source: DBS Bank Analyst: Regional Research Team
S.No.Date of Report
Closing Price
12-mthTargetPrice
Rat ing
1: 28 Oct 16 1.06 1.11 BUY
2: 31 Jan 17 0.96 1.11 BUY
3: 30 Mar 17 1.02 1.11 BUY
4: 28 Apr 17 1.07 1.25 BUY
5: 03 Jul 17 1.08 1.25 BUY
6: 01 Aug 17 1.11 1.25 BUY
Note : Share price and Target price are adjusted for corporate actions.
1
2 3
4
5
6
0.87
0.92
0.97
1.02
1.07
1.12
1.17
1.22
1.27
Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17
S$
ed: JS / sa:PY
BUYLast Traded Price ( 23 Oct 2017): S$1.69 (STI : 3,349.80) Price Target 12-mth: S$1.80 (7% upside) (Prev S$1.70)
Analyst Regional Research Team [email protected]
What’s New • 3Q17 DPU was 2.37 Scts, flat y-o-y as stronger
operations offset by one-off higher taxes
• CRCT deserves to trade at premium to NAV given itshigh-quality assets, and good earnings delivery
• Raised TP to S$1.80 after assuming S$250m acquisitionin 4Q17
• Maintain BUY
Price Relative
Forecasts and Valuation FY Dec (S$m) 2016A 2017F 2018F 2019F Gross Revenue 214 235 255 266 Net Property Inc 140 151 163 172 Total Return 107 114 85.6 88.9 Distribution Inc 86.7 90.0 93.2 96.8 EPU (S cts) 7.62 12.9 9.46 9.58 EPU Gth (%) (8) 69 (26) 1 DPU (S cts) 9.97 10.1 10.2 10.3 DPU Gth (%) (6) 1 1 1 NAV per shr (S cts) 164 173 169 165 PE (X) 22.1 13.1 17.8 17.6 Distribution Yield (%) 5.9 6.0 6.0 6.1 P/NAV (x) 1.0 1.0 1.0 1.0 Aggregate Leverage (%) 35.1 37.3 37.6 37.9 ROAE (%) 4.5 7.6 5.5 5.7
Distn. Inc Chng (%): (5) 12 13 Consensus DPU (S cts): 11.0 11.0 11.4 Other Broker Recs: B: 4 S: 1 H: 2
Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P
On the verge of a new acquisition
Deserves to trade at a premium to NAV due to its high-quality assets with growth upside as well as acquisition potential. The recent divestment of CapitaMall Anzhen at a 13% premium to its latest valuation demonstrates that CapitaLand Retail China Trust (CRCT) deserves to trade above its NAV (historical P/NAV is 1.16x). Organic growth will be led by positive rental reversions at its key high-quality assets, namely CapitaMall Xizhimen and CapitaMall Wangjing, together with revamps at several malls such as Grand Canyon, Minzhongleyuan and Xinnan. Moreover, we believe acquisition is on the radar after the divestment of Anzhen which will bring inorganic growth.
Where we differ: priced in acquisition with growth potential. We have priced in an acquisition of S$250m in 4Q17 with 6% initial NPI yield and 3% p.a. growth potential. As such, our revised TP of S$1.80 is 7% higher than consensus mean.
Potential Catalyst: acquisitions in the near term. CRCT’s gearing is around 35%, and could be further reduced to 31% if proceeds from the divestment of CapitaMall Anzhen is used to repay debt. This translates to a debt headroom of over S$450m which provides flexibility for debt-funded acquisitions. We believe the divestment of Anzhen is a signal of a shift in Manager’s focus from stability to growth generated from more actively managed assets and acquisition of such assets could be on the radar.
Valuation: Raised DCF-based TP by 5.9% from S$1.70 to S$1.80 after assuming an acquisition of S$250m by end-2017. No immediate DPU accretion to pre-Anzhen levels but future earnings may be lifted due to greater growth potential of its portfolio and acquisitions. Maintain BUY.
Key Risks to Our View: A significant depreciation of the RMB versus SGD, and downturn in Chinese consumption.
At A Glance Issued Capital (m shrs) 902 Mkt. Cap (S$m/US$m) 1,520 / 1,116 Major Shareholders (%) Capitaland Ltd 25.3 CapitaMall Trust 13.8 Matthews International Capital 6.1
Free Float (%) 49.9 3m Avg. Daily Val (US$m) 1.3 ICB Industry : Real Estate / Real Estate Investment Trust
DBS Group Research . Equity 24 Oct 2017
Singapore Company Guide
CapitaLand Retail China Trust Version | Bloomberg: CRCT SP | Reuters: CRCT.SI Refer to important disclosures at the end of this report
85
105
125
145
165
185
205
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
Oct-13 Oct-14 Oct-15 Oct-16 Oct-17
Relative IndexS$
CapitaLand Retail China Trust (LHS) Relative STI (RHS)
Page 79
Company Guide
CapitaLand Retail China Trust
WHAT’S NEW
3Q17 Results: strong operational improvement; Raised TP after assuming acquisition
Strong operational improvement lifted earnings. 3Q17 gross revenue was RMB 275.0m, 10.5% higher y-o-y, mainly due to the contribution from the acquisition of CapitaMall Xinnan (Sep 2016) and rental growth from the multi-tenanted malls. This was partially offset by lower revenue from CapitaMall Qibao due to competition faced in the vicinity and no contribution from CapitaMall Anzhen since its divestment with effect from July 2017. Net property income (NPI) was RMB 176.6m, up 9.5% y-o-y. In SGD terms, gross revenue increased by 10.6% y-o-y to S$56.0m and NPI increased by 9.7% y-o-y to S$36.0m. The increases were similar to those in RMB terms, thanks to a stable RMB against SGD given that CRCT does not hedge its currency exposure.
Flat y-o-y DPU mainly due to higher taxation. Distributable income increased by 4.2% y-o-y. The magnitude of this increase was less than that of NPI as the acquisition of CapitaLand Xinnan resulted in higher management fees, finance costs, and taxation. Taxation was further increased due to related tax expense on the gain on disposal of Anzhen SPV. With a bigger unit base, DPU was 2.37 Scts, up a marginal 0.4% y-o-y. The annualised DPU for FY17 is about 10.10 Scts, which is very close to our revised full-year forecast of 10.06 Scts, after the removal of Anzhen from 3Q17, in line with our expectations.
Healthy portfolio performance will support future earnings. Portfolio occupancy remains high at 95.6%. Rental reversion was 7.5% at the portfolio level, led by 10.3% reversion at CapitaMall Xinnan and 9.0% reversion at CapitaMall Xizhimen. What is more, 28% of NLA at CapitaMall Wangjing was renewed at 5.9% higher rents, including the renegotiated lease with its anchor tenant BHG.
Current price is unjustified, as it has traded at a premium to NAV. Since the net asset value (NAV) of CRCT is translated from valuation in RMB terms to SGD at the spot rate at the
end of each quarter, the reported NAV fluctuates and does not represent CRCT’s asset value on a sustainable basis, but we note that the exchange rate of SGD/CNY has stabilised in the last 18 months. After applying the historical mean P/NAV multiple of 1.16x to its mean NAV over the last two years (to mitigate the effect of FX fluctuations), we believe CRCT’s price should trade above S$1.80 (please see chart below). Bear in mind that this is before any revaluation gains which we believe is likely to be recorded next quarter.
Increase TP to S$1.80 after assuming acquisition. From a fundamental perspective, we think it is highly probable that CRCT is on the verge of acquiring a new asset, as soon as 4Q17. The Management indicated last quarter that it is keen to purchase assets with growth potential in tier-1 or tier-2 cities, and is comfortable to push gearing up to 40%. As CRCT has received net proceeds of S$181m from the divestment of Anzhen, we have assumed an acquisition of S$250m to be funded by both debt and equity, which would raise the REIT’s gearing slightly from 35.4% to 37-38%. We have made conservative estimates of an NPI yield of around 6% for the new acquisition (similar as the exit yield of Anzhen). The upside will be generated from future growth potential of the new asset as opposed to Anzhen’s rather flat outlook due to its master lease structure. As such, we have assumed no immediate DPU accretion to pre-Anzhen levels but a higher growth rate of 3% from the new asset to lift future earnings. As such, our TP is raised to S$1.80.
Maintain BUY. The new TP of S$1.80 represents 1.07x P/NAV (latest NAV was S$1.60). With a price upside of 6.8% (based on latest close of S$1.69) and a forward yield of 6.0%, CRCT provides investors a potential total return over 12%. Maintain BUY.
Chart: CRCT’s Price should trade above S$1.80 after applying the historical P/NAV to its 2Y mean NAV of S$1.60
Source: Thomas Reuters, REIT Manager, DBS Bank
Page 80
Company Guide
CapitaLand Retail China Trust
Quarterly / Interim Income Statement (S$m)
FY Dec 3Q2016 2Q2017 3Q2017 % chg yoy % chg qoq
Gross revenue 50.6 59.0 56.0 10. (5.1
Property expenses (17.8) (19.0) (20.0) 12. 5.
Net Property Income 32.8 40.0 36.0 9. (10.1
Other Operating expenses (3.4) (3.2) (3.2) (5.8 (1.5
Other Non Opg (Exp)/Inc 0.51 0.0 1.24 145. nm
Net Interest (Exp)/Inc (4.7) (5.4) (5.2) (10.1 4.
Exceptional Gain/(Loss) 0.0 0.0 52.2 N/A N/A
Net Income 25.2 31.3 81.1 221. 158.
Tax (7.1) (14.0) (24.9) 250. 77.
Minority Interest 0.13 0.98 0.0 N/A (101.5
Net Income after Tax 18.2 18.3 56.2 208.4 207.
Total Return 18.2 31.3 56.2 208.4 79.
Non-tax deductible Items 2.34 (8.0) (34.8) nm 334.
Net Inc available for Dist. 20.6 23.3 21.4 4. (8.3
Ratio (%)
Net Prop Inc Margin 64.7 67.8 64.2
Dist. Payout Ratio 100.0 100.0 100.0
Source of all data: Company, DBS Bank
Page 81
Company Guide
CapitaLand Retail China Trust
CRITICAL DATA POINTS TO WATCH
Price driven by both Singapore and China markets. CRCT’s share price movements are reflected in both S-REIT Index and Shanghai Composite. In 2H2011 (Chart 1), CRCT was sold off together with S-REIT Index and Shanghai Composite amid the Eurozone crisis (event 1). Its share price soon recovered with the S-REIT despite Shanghai Composite recovering at a much laterstage. A similar pattern was seen during the taper tantrum(event 2) and fears over China slowing down (event 3); duringthe latter event, the degree of sell-off for CRCT was betweenthat of S-REIT Index and Shanghai Composite. In short, CRCT’sshare price has been impacted by macro events andperformance in both markets and these should be monitoredsimultaneously.
REIT-specific factor: sensitive to policy, pay attention to Beijing. CRCT’s share price is sensitive to changes in property-related policies in China. These policies could differ from city to city – close attention should be paid to Beijing as c.75% of the portfolio’s NPI is derived from properties in Beijing. For example, during 2H2016, the sell-off in CRCT was caused by the change in property tax in Beijing (event 4, Chart 1).
Deserves to trade at premium to NAV. The historical mean multiple for CRCT’s P/NAV was 1.16x. We believe the premium is justified as several malls in the portfolio are yet to be maximised, including Grand Canyon, Minzhongleyuan and Xinnan. Also, as observed in the four incidents when CRCT was sold off (Chart 1), a sharp recovery usually followed when the P/NAV fell to around 0.80x. The recent divestment of CapitaMall Anzhen at 13% premium over its latest valuation again demonstrated that CRCT deserves to trade at a premium to its NAV. Based on the two-year average NAV of S$1.60, the stock is currently trading at P/NAV of 1.06x.
DPU growth in tandem with China Retail Sales and has a long-term correlation coefficient of 0.69 (Chart 2). The short-term relationship, however, has been disrupted by forex fluctuations as China retail data is reported in CNY whereas CRCT’s DPU is distributed in SGD. We believe China Retail Sales data is a good leading indicator of DPU growth.
Net Property Income and Margins (%)
Net Property Income and Margins (%)
Distribution Paid / Net Operating CF
Interest Cover (x)
Source: Company, DBS Bank
60.8%
62.8%
64.8%
66.8%
68.8%
70.8%
0
20
40
60
80
100
120
140
160
180
200
2015A 2016A 2017F 2018F 2019F
S$ m
Net Property Income Net Property Income Margin %
56%
58%
60%
62%
64%
66%
68%
70%
31
33
35
37
39
41
2Q20
15
3Q20
15
4Q20
15
1Q20
16
2Q20
16
3Q20
16
4Q20
16
1Q20
17
2Q20
17
3Q20
17
Net Property Income Net Property Income Margin %
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
2015A 2016A 2017F 2018F 2019F
(x)
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
2015A 2016A 2017F 2018F 2019F
(x)
Page 82
Company Guide
CapitaLand Retail China Trust
Appendix: Critical Factor Analysis
Chart 1: CRCT’s P/NAV is correlated to both Singapore and China markets
Chart 2: CRCT’s DPU vs China Retail Sales Remarks • Generally, DPU growth is in tandem with China Retail Sales
data• Short-term relationship could be disrupted due to forex
fluctuations as China retail sales data is reported in CNYwhereas CRCT’s DPU is distributed in SGD
• Long-term correlation coefficient is 0.69
Chart 3: CRCT’s P/NAV vs Rental Reversion Rates Remarks • CRCT’s P/NAV is somewhat correlated to rental reversion
rate• This was especially so during periods of sharp correction or
recovery• Short-term NAV could be volatile due to forex fluctuations• Long-term correlation coefficient is 0.47
Source: REIT Manager, SGX, Thomson Reuters, Bloomberg Finance L.P., DBS Bank
Page 83
Company Guide
CapitaLand Retail China Trust
Balance Sheet: Aggregate leverage is low. Current aggregate leverage is around 35%, and if the proceeds from divestment of CapitaLand Anzhen is used to repay debt, the ratio will decline to 31% - a very comfortable level below MAS' 45% gearing limit. This provides CRCT with debt headroom for acquisitions.
Temporary dip in proportion of fixed rate debt. As at the end of March 2017, the proportion of fixed rate debt has fallen to c.53% from c.75% as CRCT drew down on a bridge loan tofund the acquisition of Galleria mall. As at 30 September 2017,67.6% of borrowings are at fixed rates. Nevertheless, weunderstand this is temporary as CRCT will look to increase theproportion of fixed loans when it refinances its bridging loan.Finance costs should then edge back up to around 2.9%, allelse constant, from the current level of 2.5%. We have alreadyincorporated this in our model.
Share Price Drivers: Acquisitions. With adequate debt headroom and the signal of a shift in focus to more actively managed assets from the divestment of CapitaLand Anzhen, we believe acquisitions are on the Manager’s radar in the near term.
Positive rental revisions. Despite the concerns over the economic outlook for China weighing on CRCT, we believe delivery of positive rental reversions and DPU growth should allay such concerns. Furthermore, continued DPU growth over the medium term should also be boosted by increased contributions from CapitaMall Grand Canyon as full benefits from tenant remixing have yet to be realised.
Key Risks: Currency risk. As 100% of CRCT's income is derived in RMB and it does not hedge its income, depreciation of the RMB against the SGD would result in a lower DPU to unitholders.
Threat from e-commerce. This threat is partially mitigated by the fact that c.42% of CRCT’s Gross Rental Income (GRI) is sourced from tenants in F&B (23% of GRI), supermarket (10%), leisure & entertainment (3%), education (3%) and beauty & healthcare (3%) sectors which are more immune to the e-commerce threat.
New mall supply in Beijing. This risk is partially mitigated by the fact that c.80% of the new supply is located out of the core retail areas where CRCT’s malls are situated.
Company Background CapitaLand Retail China Trust (CRCT) is a real estate investment trust which invests in income-producing retail properties located mainly in China, Hong Kong and Macau.
Aggregate Leverage (%)
ROE (%)
Distribution Yield (%)
PB Band (x)
Source: Company, DBS Bank
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
2015A 2016A 2017F 2018F 2019F
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
2015A 2016A 2017F 2018F 2019F
Avg: 6.6%
+1sd: 7.1%
+2sd: 7.6%
-1sd: 6.1%
-2sd: 5.5%
4.9
5.4
5.9
6.4
6.9
7.4
7.9
8.4
2013 2014 2015 2016 2017
(%)
Avg: 0.92x
+1sd: 0.99x
+2sd: 1.06x
-1sd: 0.85x
-2sd: 0.78x
0.6
0.7
0.8
0.9
1.0
1.1
1.2
Oct-13 Oct-14 Oct-15 Oct-16 Oct-17
(x)
Page 84
Company Guide
CapitaLand Retail China Trust
Income Statement (S$m)
FY Dec 2015A 2016A 2017F 2018F 2019F
Gross revenue 220 214 235 255 266 Property expenses (79.3) (74.5) (83.3) (91.8) (94.4) Net Property Income 141 140 151 163 172 Other Operating expenses (14.6) (13.8) (17.0) (17.4) (17.8) Other Non Opg (Exp)/Inc 0.55 (2.0) 0.0 0.0 0.0 Net Interest (Exp)/Inc (19.2) (19.4) (27.7) (33.3) (33.7) Exceptional Gain/(Loss) 0.0 0.0 29.8 0.0 0.0 Net Income 108 105 137 112 121 Tax (43.4) (41.6) (21.4) (25.3) (30.1) Minority Interest 4.70 2.61 (1.5) (1.4) (1.5) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Income After Tax 69.2 65.5 114 85.6 88.9 Total Return 114 107 114 85.6 88.9 Non-tax deductible Items 20.1 (19.9) 6.06 7.52 7.88 Net Inc available for Dist. 89.2 86.7 90.0 93.2 96.8 Growth & Ratio Revenue Gth (%) 8.4 (2.8) 9.6 8.5 4.6 N Property Inc Gth (%) 6.6 (1.0) 8.4 7.6 5.5 Net Inc Gth (%) 73.9 (5.4) 73.7 (24.7) 3.8 Dist. Payout Ratio (%) 100.0 100.0 100.0 100.0 100.0 Net Prop Inc Margins (%) 64.0 65.2 64.5 64.0 64.6 Net Income Margins (%) 31.4 30.6 48.4 33.6 33.4 Dist to revenue (%) 40.5 40.5 38.3 36.6 36.3 Managers & Trustee’s fees
6.6 6.5 7.2 6.8 6.7
ROAE (%) 4.9 4.5 7.6 5.5 5.7 ROA (%) 2.8 2.4 3.9 2.8 2.9 ROCE (%) 3.7 3.5 5.0 5.0 5.1 Int. Cover (x) 6.6 6.5 4.8 4.4 4.6
Source: Company, DBS Bank
Assumed acquisition to replace loss of earnings from the divestment of Anzhen in 3Q17.
Page 85
Company Guide
CapitaLand Retail China Trust
Quarterly / Interim Income Statement (S$m)
FY Dec 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017
Gross revenue 50.6 56.7 60.1 59.0 56.0 Property expenses (17.8) (21.9) (19.8) (19.0) (20.0) Net Property Income 32.8 34.8 40.3 40.0 36.0 Other Operating expenses (3.4) (4.0) (4.1) (3.2) (3.2) Other Non Opg (Exp)/Inc 0.51 (0.4) (0.1) 0.0 1.24 Net Interest (Exp)/Inc (4.7) (5.2) (6.0) (5.4) (5.2) Exceptional Gain/(Loss) 0.0 0.0 0.13 0.0 52.2 Net Income 25.2 25.2 30.3 31.3 81.1 Tax (7.1) (15.6) (9.5) (14.0) (24.9) Minority Interest 0.13 1.52 0.21 0.98 0.0 Net Income after Tax 18.2 11.1 21.1 18.3 56.2 Total Return 18.2 34.0 21.1 31.3 56.2 Non-tax deductible Items 2.34 (13.3) 3.28 (8.0) (34.8) Net Inc available for Dist. 20.6 20.6 24.4 23.3 21.4 Growth & Ratio Revenue Gth (%) (2) 12 6 (2) (5) N Property Inc Gth (%) (8) 6 16 (1) (10) Net Inc Gth (%) 15 (39) 90 (13) 207 Net Prop Inc Margin (%) 64.7 61.3 67.1 67.8 64.2 Dist. Payout Ratio (%) 100.0 100.0 100.0 100.0 100.0
Balance Sheet (S$m) FY Dec 2015A 2016A 2017F 2018F 2019F
Investment Properties 2,413 2,628 2,605 2,612 2,620 Other LT Assets 5.91 4.03 4.03 4.03 4.03 Cash & ST Invts 126 136 443 458 472 Inventory 0.0 0.0 0.0 0.0 0.0 Debtors 12.8 12.8 13.1 14.2 14.9 Other Current Assets 12.6 2.11 2.11 2.11 2.11 Total Assets 2,570 2,783 3,066 3,090 3,113
ST Debt 0.0 0.0 0.0 0.0 0.0 Creditor 59.5 64.5 59.1 64.1 67.0 Other Current Liab 246 241 241 241 241 LT Debt 706 978 1,145 1,162 1,180 Other LT Liabilities 43.4 48.8 48.8 48.8 48.8 Unit holders’ funds 1,491 1,432 1,552 1,552 1,552 Minority Interests 24.3 19.9 21.4 22.8 24.2 Total Funds & Liabilities 2,570 2,783 3,066 3,090 3,113
Non-Cash Wkg. Capital (280) (290) (285) (288) (291) Net Cash/(Debt) (580) (842) (702) (705) (709) Ratio Current Ratio (x) 0.5 0.5 1.5 1.6 1.6 Quick Ratio (x) 0.5 0.5 1.5 1.6 1.6 Aggregate Leverage (%) 27.5 35.1 37.3 37.6 37.9 Z-Score (X) 1.1 1.0 1.1 1.1 1.1
Source: Company, DBS Bank
Assumed an acquisition of S$250m after the divestment of Anzhen with net proceeds of S$180m.
Earnings’ dip due to the divestment of Anzhen.
Assumed the new acquisition to be funded by both debt and equity and pushing gearing up from 36% to 37-38%.
Page 86
Company Guide
CapitaLand Retail China Trust
Cash Flow Statement (S$m)
FY Dec 2015A 2016A 2017F 2018F 2019F
Pre-Tax Income 108 105 137 112 121 Dep. & Amort. 2.64 2.40 2.40 2.40 2.40 Tax Paid (20.2) (41.6) (21.4) (25.3) (30.1) Associates &JV Inc/(Loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. 2.50 12.7 (5.7) 3.91 2.27 Other Operating CF 22.3 42.0 3.66 5.12 5.48 Net Operating CF 115 120 116 98.5 101 Net Invt in Properties (16.1) (313) 23.9 (7.6) (8.0) Other Invts (net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc. & JVs 0.0 0.0 0.0 0.0 0.0 Other Investing CF 0.14 0.0 0.0 0.0 0.0 Net Investing CF (16.0) (313) 23.9 (7.6) (8.0) Distribution Paid (66.1) (52.5) (90.0) (93.2) (96.8) Chg in Gross Debt 30.0 277 (13.9) 17.6 18.0 New units issued 0.0 0.0 90.0 0.0 0.0 Other Financing CF (25.9) (13.5) 0.0 0.0 0.0 Net Financing CF (62.0) 211 (13.8) (75.5) (78.8) Currency Adjustments (3.8) (8.1) 0.0 0.0 0.0 Chg in Cash 33.3 9.78 126 15.3 13.8
Operating CFPS (S cts) 13.5 12.5 13.7 10.4 10.6 Free CFPS (S cts) 11.8 (22.5) 15.8 10.0 9.97
Source: Company, DBS Bank
Target Price & Ratings History
Source: DBS Bank Analyst: Regional Research Team
S.No.Date of Report
Closing Price
12-mthTargetPrice
Rat ing
1: 26 Oct 16 1.55 1.60 HOLD
2: 01 Dec 16 1.39 1.60 BUY
3: 27 Jan 17 1.41 1.60 BUY
4: 24 Apr 17 1.50 1.68 BUY
5: 03 May 17 1.56 1.68 BUY
6: 28 Jul 17 1.65 1.70 BUY
7: 16 Aug 17 1.59 1.70 BUY
Note : Share price and Target price are adjusted for corporate actions.
1
2
3
4 5
6
7
1.26
1.36
1.46
1.56
1.66
1.76
Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17
S$
Divestment of Anzhen and new acquisition
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DBSVHK recommendations are based an Absolute Total Return* Rating system, defined as follows:
S TRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
B UY (>15% total return over the next 12 months for small caps, >10% for large caps)
HO LD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
S ELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
Completed Date: 8 Jan 2018 07:58:21 (HKT) Dissemination Date: 8 Jan 2018 18:24:23 (HKT)
Sources for a ll charts and tables are DBS Vickers unless otherwise specified.
GENERAL DISCLOSURE/DISCLAIMER
Th is report is prepared by DBS Vickers (Hong Kong) Limited (“DBSV HK”). This report is solely intended for the clients of DBS Bank Ltd., DBS Bank
(Hong Kong) Limited (DBS HK), DBSV HK, and DBS Vickers Securities (S ingapore) Pte Ltd. (“DBSVS”), its respective connected and associated
corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (i i) redistributed without the prior written consent of DBSV HK.
The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS
Bank Ltd., DBS HK, DBSV HK, DBSVS, its respective connected and associated corporations, affi liates and their respective directors, officers, employees and agents (collectively, the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research . Accordingly, we
do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document
does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain
separate independent legal or financial advice. The DBS Group accepts no liabil ity whatsoever for any direct, indirect and/or consequential loss
(including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securitie s. The DBS Group, a long with its affi l iates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform
broking, investment banking and other banking services for these companies.
Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can
be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or ris k assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be inco mplete or condensed, it may
not contain a ll material information concerning the company (or companies) referred to in this report and the DBS Group is un der no obligation to update the information in this report.
This publication has not been reviewed or authorized by any regulatory authority in S ingapore, Hong Kong or e lsewhere. There is no planned
schedule or frequency for updating research publication relating to any issuer.
The valuations, opinions, estimates, forecasts , ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to s ignificant uncertainties and contingencies. It can be expected that one or more of the estimates on
which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary s ignificantly from actual
results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described he rein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts , ratings or risk assessments or their underlying assumptions will be achieved, and(b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk
assessments stated therein.
Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies)
mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract re lating to the
commodity referred to in this report.
DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated i n any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage
in market-making.
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ANALYST CERTIFICATION
The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) a lso certif ies that no part of his /her
compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate
1 does not serve as an officer of
the is suer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the
management of the is suer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or his associate does not have financial interests
2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has
procedures in place to e liminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment
banking function of the DBS Group and procedures are in place to ensure that confidential information held by e ither the re search or investment
banking function is handled appropriately. There is no direct l ink of DBS Group's compensation to any specific investment ba nking function of the DBS Group.
CO MPANY-SPECIFIC / REGULATORY DISCLOSURES
1. DBS Bank Ltd, DBS HK, DBSVS, DBSV HK or their subsidiaries and/or other affi liates have proprietary positions in Fortune Real Es tateInvestment Trust (778 HK), Jinmao Investments & Jinmao (China) (6139 HK), Langham Hospita lity Investment Limited (1270 HK), LinkReal Estate Investment Trust (823 HK), Prosperity Real Estate Investment Trust (808 HK) and Yuexiu Real Es tate Investment Trust (405
HK) recommended in this report as of 04 Jan 2018.
DBS Bank Ltd, DBS HK, DBSVS, DBSV HK or their subsidiaries and/or other affi liates have proprietary positions in Capitaretail China
Trust (CRCT SP), Mapletree Greater China Commercial Trust (MAGIC SP) and Ascendas Real Estate Investment Trust (AREIT SP) recommended in this report as of 30 Nov 2017.
2. Neither DBS Bank Ltd, DBS HK nor DBSV HK market makes in equity securities of the issuer(s) or company(ies) mentioned in thisResearch Report.
3. DBS Bank Ltd, DBS HK, DBSVS, DBSV HK, their subsidiaries and/or other affi liates have a net long position exceeding 0.5% of the total
is sued share capital in Fortune Real Es tate Investment Trust (778 HK), Jinmao Investments & Jinmao (China) (6139 HK), Langham
Hospitality Investment Limited (1270 HK) and Prosperity Real Estate Investment Trust (808 HK) recommended in this report as o f 04Jan 2018.
DBS Bank Ltd, DBS HK, DBSVS, DBSV HK, their subsidiaries and/or other affi liates have a net long position exceeding 0.5% of the total
is sued share capital in Capitaretail China Trust (CRCT SP) recommended in this report as of 30 Nov 2017.
4. DBS Bank Ltd, DBS HK, DBSVS, DBS Vickers Securities (USA) Inc ("DBSVUSA"), DBSV HK or their subsidiaries and/or other affi liates
beneficially own a total of 1% of the is suer's market capita lization of Langham Hospitality Investment Limited (1270 HK) and Jinmao Investments & Jinmao (China) (6139 HK) as of 04 Jan 2018.
DBS Bank Ltd, DBS HK, DBSVS, DBS Vickers Securities (USA) Inc ("DBSVUSA"), DBSV HK or their subsidiaries and/or other affi lia tes beneficially own a total of 1% of any class of common equity securities of Ascott Residence Trust (ART SP) as of 30 Nov 2017.
DBS Bank Ltd, DBS HK, DBSVS, DBSV HK, their subsidiaries and/or other affi liates of DBSVUSA, within the next 3 months, will r eceive
or intend to seek compensation for investment banking services from Yuexiu Real Es tate Investment Trust (405 HK) and Capitaretail
China Trust (CRCT SP) as of 30 Nov 2017.
5. Co mpensation for investment banking services:
DBS Bank Ltd, DBS HK, DBSVS, DBSV HK, their subsidiaries and/or other affi liates of DBSVUSA have received compensation, within thepast 12 months for investment banking services from Dasin Retail Trust (DASIN SP), S ino -Ocean Group Holding Limited (3377 HK),
China Overseas Grand Oceans Group (81 HK), China Jinmao Holdings (817 HK), and Ascott Residence Trust (ART SP) as of 30 Nov2017.
1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor s tep-child, of the analys t; (ii) the trustee of a trust of
which the analys t, his spouse, minor child (natural or adopted) or minor s tep -child, is a beneficiary or discretionary object; or (iii ) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst.
2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities i n respect of an issuer or
a new lis ting applicant, or financial accommodation arrangement between the issuer or the new lis ting applicant and the firm or analys is. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or
new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.
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China REITs Sector
Page 89
6. DBS Bank Ltd, DBS HK, DBSVS, DBSV HK, their subsidiaries and/or other affi liates of DBSVUSA have managed or co -managed a public
offering of securities for Yuexiu Real Es tate Investment Trust (405 HK), S ino-Ocean Group Holding Limited (3377 HK), China JinmaoHoldings (817 HK) and Ascott Residence Trust (ART SP) in the past 12 months, as of 30 Nov 2017.
DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to
obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security
discussed in this document should contact DBSVUSA exclusively.
7. Disclosure of previous investment recommendation produced:DBS Bank Ltd, DBSVS, DBSVHK, their subsidiaries and/or other affi liates of DBSVUSA may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12
months . Please contact the primary analyst l isted in the first page of this report to view previous investment recommendationspublished by DBS Bank Ltd, DBSVHK, their subsidiaries and/or other affi liates of DBSVUSA in the preceding 12 months.
An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor s tep-child, of the analys t; (ii) the trustee of a trust of
which the analys t, his spouse, minor child (natural or adopted) or minor s tep -child, is a beneficiary or discretionary object; or (iii ) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst.
Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities i n respect of an issuer or
a new lis ting applicant, or financial accommodation arrangement between the issuer or the new lis ting applicant and the firm or analys is. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or
new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.
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R ESTRICTIONS ON DISTRIBUTION
Ge neral This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, s tate, country or other jurisdiction where such distribution, publication, availabil ity or use would be contrary to law or regulation.
Australia This report is being distributed in Australia by DBS Bank Ltd. (“DBS”) or DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”). DBS holds Australian Financial Services Licence no. 475946.
DBSVS is exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients . Both DBS and DBSVS are regulated by the Monetary Authority of S ingapore under the laws of S ingapore, and DBSVHK is regulated by the Securities and Futures Commission of
Hong Kong under the laws of Hong Kong, which differ from Australian laws.
Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.
Ho ng Kong This report is being distributed in Hong Kong by DBS Bank Ltd, DBS Bank (Hong Kong) Limited and DBS Vickers (Hong Kong) Limited, a ll of which are registered with or l icensed by the Hong Kong Securities and Futures Commission to carry out the
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I ndonesia This report is being distributed in Indonesia by PT DBS Vickers Sekuritas Indonesia.
Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this
report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected
and associated corporations, affi l iates, their directors, officers, employees, agents and parties related or associated with any
of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also
have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.
Wong Ming Tek, Executive Director, ADBSR
S ingapore This report is distr ibuted in S ingapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No.
198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of S ingapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affi liates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in S ingapore to a person who is not an Accredited Investor, Expert
Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. S ingapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report.
Th ailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd.
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This report is disseminated in the United Kingdom by DBS Vickers Securities (UK) Ltd (“DBSVUK”). DBSVUK is authorised and regulated by the Financial Conduct Authority in the United Kingdom.
In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and
associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (i i) redistributed without the prior written consent of DBSVUK. This communication is directed at persons having professional experience in matters relating to investments . Any investment activity following from this communication will only be engaged in with such persons. Persons who do not have professional experience in matters
re lating to investments should not re ly on this communication.
Du bai
I n ternational Fi nancial
Centre
This research report is being distributed by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3rd Floor,
Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for
professional clients (as defined in the DFSA rulebook) and no other person may act upon it.
Asian Insights SparX
China REITs Sector
Page 91
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Em irates
This report is provided by DBS Bank Ltd (Company Regn. No. 196800306E) which is an Exempt Financial Adviser as defined
in the Financial Advisers Act and regulated by the Monetary Authority of S ingapore. This report is for information purposes only and should not be relied upon or acted on by the recipient or considered as a solicitation or inducement to buy or sell
any financial product. It does not constitute a personal recommendation or take into account the particular investment
objectives, financial situation, or needs of individual clients. You should contact your relationship manager or investment adviser if you need advice on the merits of buying, selling or holding a particular investment. You should note that the information in this report may be out of date and it is not represented or warranted to be accurate, timely or complete. This
report or any portion thereof may not be reprinted, sold or redistributed without our written consent.
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this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research
analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by
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