Global Logistic Properties Limited: Softening demand in China August 15, 2016

PSR Recommendation: ACCUMULATEStatus: DowngradedTarget Price: 2.28
  • 1Q17 revenue/profit after taxation and minority interests (PATMI) met 24.8%/37% of our full-year FY17 forecasts for Global Logistic Properties Limited (GLP)
  • China and Japan assets formed 85% of the Group’s total net asset value as at 30 June 2016

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Operating performance in China portfolio stayed resilient but expect performance to decline due to near term oversupply in certain parts of China

Rental and related income in China was up 3.3% YoY to US$74.2 million in 1Q17 from US$71.8 million in 1Q16. In addition, customer retention was up 5 ppts QoQ to 71%, and effective rent growth on renewal grew 6.2% in 1Q17 compared to 2.9% in 4Q16 respectively. However, near term oversupply of logistic facilities in certain markets in China as mentioned in the previous report dated May-16 may lead performance in China to decline, especially lease ratio continued to dip where it is currently standing at 86%. Rental and related income in 1Q17 formed 45.5% of total rental and related income collected in the same period.

Strong development profits in 1Q17 driven by GLP Atsugi II; GLP has met 32.2% of full year development profit target and will continue to focus on development starts in strong markets

GLP booked in a total development profit of US$65 million in 1Q17, led by higher development margin of 30% for GLP Atsugi II, a logistic facility located in Greater Tokyo, Japan, where GLP typically targets a development margin of 25%. GLP has met 32.2% out of US$200 million of development profit for FY17. The Group has begun developing 20% of its targeted development starts in FY17 where development start plans are focused on markets with strong demand. In particular, GLP has started US$282 million (out of US$1.4 billion) of new developments in China which commanded an average lease ratio of 87% and facing limited supply.

China Value-added Tax (VAT) reform has impacted certain key operating statistics on China portfolio; no impact on net operating income (NOI) of property

The Chinese Government has implemented VAT to replace the existing Business Tax which has been effective since May 2016. Before the reform, taxes are included in both rental income and property expenses. After the reform, taxes are excluded in both rental revenue and property expenses. All in all, there is no impact on NOI on a property. Gross and effective rent would have remained the same at RMB1.09/sqm/day and RMB1.10/sqm/day respectively in both periods of 4Q16 and 1Q17 if the effects on VAT reforms were to be disregarded.

Low gearing provides ammunition to pursue growth opportunities through acquisition

Total debt-to-assets (gearing) ratio and net gearing ratio came in at 21.8% and 16.6% respectively. However, pro-forma net gearing ratio is expected to drop to 14.4% if proceeds from the syndication of GLP US Income Partners II fund were to be included on the Group’s balance sheet. With its internal gearing target of 40%, GLP’s low gearing provides plenty of ammunition to pursue acquisitions for growth. A possibility would be further expansions in the US market considering the strong growth in performance in the Group’s US portfolio (effective rent growth on renewal leases up 20.7%), driven by the region’s positive demand and supply dynamics for modern logistic facilities underpinned by a strong growth in e-commerce.

Investment Actions

We continue to favour GLP for its resilient performance bolstered by its strong position in the key markets which the Group has presence in. Although there are near term headwinds in the China markets, however, as domestic consumption remains the key driver of demand for modern logistic facilities which is aligned with the nation’s strategy of moving towards a domestic consumption driven economy, we are of the view that GLP will continue to benefit from the transition. We maintain our “Accumulate” rating with an unchanged TP of S$2.28.

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