Dasin Retail Trust: Securing regular income from Chinese consumers January 16, 2018

PSR Recommendation: BUYStatus: InitiationTarget Price: SGD0.98
  • 16% organic growth (CAGR) for next two years from higher rental revenue
  • Substantial inorganic ROFR pipeline that can quadruple Dasin’s assets
  • Initiate coverage with a BUY and a target price of S$0.98, 26.5% upside

Company Background

Dasin Retail Trust (Dasin) was listed on 20 January 2017 with three retail malls worth S$944.7mn. Just five months after listing, Dasin announced a yield accretive acquisition – Shiqi Metro Mall, for S$248.2mn. The current four malls in the portfolio span 243,632 sqm of net lettable area, all located in Zhongshan City, Guangdong Province, China. The Sponsor – Zhongshan Dasin Real Estate – has made available to Dasin a ROFR pipeline of 19 properties (10 completed properties and nine under development, across four cities – Zhongshan, Foshan, Zhuhai, Macau). Dasin’s distribution policy entitles unitholders to receive 100% of distributable income to unitholders for FY17 and FY18, followed by 90% of distributable income to unitholders in respect of FY19 and onwards.

Investment Merits

  1. Healthy organic growth. We are expecting organic rental growth of 16% CAGR for the next two years for Dasin. Growth will come from across almost all lease types, as almost 90% of leases are with built-in fixed escalation in rent and/or linked to tenant turnover.
  2. Available pool to quadruple assets. There is a ready ROFR pipeline of 19 properties across four cities that could see Dasin’s GFA potentially expanding by ~3.9x. In the near term, Dasin could exercise an option to acquire Doumen Metro Mall in Zhuhai. Based on net lettable area, this could become Dasin’s largest acquisition. Dasin’s gearing at 31.4% provides it with a debt headroom of S$209mn for acquisitions, assuming a gearing limit of 45%.
  3. Tapping on the vibrant Zhongshan economy. Retail sales in Zhongshan have been growing at a CAGR of almost 14% over the past ten years. This is on the back of robust GDP per capita gains of 9.0% (10-year CAGR).

Risk Factors

There are two relevant risk factors for Dasin:

  1. Income support: The Sponsor has waived their entitlement to dividends for five years from FY17 to FY21. This waiver begins in FY17, where 54.7% of total units will not be entitled to dividends. The final year of entitlements will be in FY21. FY21 will witness a material change in waived entitlements, from 34.6% in FY20 to 14.8% in FY21.
  2. Currency exposure to RMB: Rental collected is denominated in RMB. There is minimal hedging on the currency side and investors are essentially exposed to RMB fluctuations.

We initiate Dasin with a BUY. Our target price is S$0.98, implying 26.5% total upside together with a dividend yield of 10.2% (FY17e).

 

THE BUSINESS TRUST

Dasin Retail Trust (Dasin) is a business trust listed on the SGX Mainboard. It is primarily invested in retail assets in China. Dasin listed on 20 January 2017 with three malls and subsequently acquired a fourth mall just five months after listing. All the four malls are in Zhongshan.

THE SPONSOR

The Sponsor* of Dasin is Zhongshan Dasin Real Estate Co. Ltd, which is a leading developer of residential and retail properties in Zhongshan and presently owns a 60.1% stake in Dasin. The owners of Zhongshan Dasin Real Estate are Mr. Zhang Zhongming, Mr. Zhang Kaicheng and Mr. Zhang Jiucheng.

*Other businesses of the Sponsor include restaurants (Xin Xuan Tea House, Xin Xuan Restaurant, Dasin Seafood City), hotels (Dasin Convention Centre Hotel, Dasin Holiday Inn Hotel, Dasin Crowne Plaza), technology (Zhongshan Dasin Pass Intelligent Technology), education (Dasin Shiqi Central Primary School), finance (Zhongshan Dasin Microfinance).

THE ASSETS

Dasin currently holds four malls in its portfolio, valued at RMB7,469 (S$1,532m):

  1. Xiaolan Metro Mall – 2nd largest mall in the portfolio. Annual footfall of 22mn due to its situation within the main trade area which contains approximately 18.4% of Zhongshan’s total population and its close proximity to large-scale residential communities, Xiaolan Town Government and Zhongshan Xiaolan Middle School. Mall has enjoyed 100% occupancy for the past nine years.
  2. Ocean Metro Mall – The newest and fastest growing mall in the portfolio. Located at the heart of the new commercial city centre, with a “first mover” status in its primary trade area. In the portfolio, this mall has the lowest proportion of fixed rent leases (3% by GRI).
  3. Dasin E-Colour – Smallest mall in the portfolio. Caters to the younger crowd as it is located opposite the only University in Zhongshan – which has a student capacity of 20,000. Highest proportion of fixed rent leases (33% by GRI) within the portfolio.
  4. Shiqi Metro Mall – The largest mall in the portfolio. It is also Zhongshan’s first shopping mall. Dasin acquired the mall in June 2017 at S$248mn, a 57.8% discount to market value. This acquisition raised DPU by 32.2%.

Summary of the four malls

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LEASE STRUCTURE OF MALLS
a. Occupancy: All four malls registered 100% occupancy as at 30 September 2017.

Figure 6: Strong occupancy levels since IPO

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b. Lease types: Dasin’s portfolio of lease structure largely comprises of higher of base rent or turnover rent (28% by GRI) and fixed rent with built-in escalation (57% by GRI). This structure will provide predictability of the organic growth in the portfolio. In our models, we are estimating a 5-9% annual escalation rate for the leases with built-in escalation and a 5-40% renewal rate for the leases due to expire in each respective year.

Figure 7 (LHS): Dasin’s leases have a small fixed rent contribution

Figure 8 (RHS): Dasin E-Colour is the only mall without a “Higher of Base Rent or Turnover Rent” component

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Figure 9: Upside from ~23% leases expiring in FY2018

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The report is produced by Phillip Securities Research under the ‘SGX StockFacts Research Programme’ (administered by SGX) and has received monetary compensation for the production of the report from the entity mentioned in the report.

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