Spending wariness promising for outlet malls
- EMA income at RMB658.5m (+11% y-o-y); FY23 DPU at 6.25scts (-6% y-o-y), slightly behind our estimates
- Tenant sales rose 32% y-o-y; spending wariness amongst Chinese saw outlet format sales outperforming
- Valuation flat y-o-y in RMB terms; acquisition interest turning to Guiyang Mall, a more digestible deal
- Maintain BUY with lower TP of S$1.00
FY23 Results
Sasseur REIT reported topline EMA rental income of RMB658.5m (+10.7% y-o-y), boosted by higher variable component rents, which rose 31.7% y-o-y in tandem with underlying portfolio sales.
- Distributable income reversed into a 5.8% y-o-y decline of S$83.4m on both higher cost of financing and forex translation losses, which saw a 7% y-o-y depreciation of the RMB against the SGD in FY23.
- Full year DPU of 6.25Scts (-4.6% y-o-y) came in slightly behind our estimates of 6.4scts on a 93% pay-out ratio.
- Portfolio occupancy remains stable at 97.6% as of end-FY23 (vs. FY22 occupancy of 92.3%)
- With improving cash flow from underlying sales, portfolio valuation was flat y-o-y at RMB 8,497m (+0.02% y-o-y) on local currency terms.
- Capital management remains stable with low gearing of 25.3% and a cost of debt of 5.6%. There remain no substantial loan expiries until FY26, as c.47% of debt will be due for refinancing.
Interest cost should have peaked at the current 5.6%. Cost of borrowing rose 80 bps y-o-y to 5.6% as of 31 December 2023, reflecting refinancings completed in 1Q23. Financing cost is the biggest woe faced by Sasseur REIT given both improving operations and a comfortably low gearing of 25%. We believe that current cost of borrowing would likely have peaked at current rates, given both a decline in offshore cost of debt and onshore 5-year PBoC rates, which declined 65 bps y-o-y to 3.95% (Feb ‘24). Sasseur REIT will consider the early refinancing of upcoming FY24 expiries (sponsor loan) to take advantage of dovish onshore rates. Based on its sensitivity analysis, every 50 bps decrease in Sasseur REIT’s onshore RMB loans will see a 0.07scts uplift to underlying DPUs.
Outlet sales continue to hold many promises in FY24. Outlet performance continued to perform well in 2023, with nationwide outlet sales for 9M23 increasing 26% y-o-y and footfall rising 35% y-o-y. Outlet malls will continue to improve from a normalisation of inbound travel amongst the Chinese consumers, as Sasseur REIT has also mentioned their historical capture in ‘tourist’ footfall at their malls, alongside the continuation of a trade-down mentality amongst Chinese consumers. Within our short update released yesterday on Spring Festival data released by the government, spend per pax reduced further from c.97% across holidays in FY22 to c.91% this Spring Festival break (SG / HK hotels: China CNY travel data – Experiences please.. but at a lower price point). We continue to see both of these trends uplifting Sasseur REIT’s tenant sales come FY24 to meet a double-digit y-o-y sales level on a higher base.
ROFR asset Guiyang Mall added to the acquisition radar. Management shared that they are adding ROFR asset Guiyang Mall into their acquisition radar. Guiyang Mall is a smaller-sized outlet mall compared to Xi’an Mall and at a valuation price point more digestible to the REIT. We understand that the asset has attained unencumbered status. We believe Sasseur REIT may look at a full injection of Guiyang Mall or a stake purchase of Xi’an Mall as the REIT’s first acquisition. In our site visit to Xi’an Mall (report), the mall’s direct metro connectivity alongside a more substantial F&B offering makes for a quality asset that is on par or superior to Sasseur REIT’s existing portfolio titan – the Chongqing Liangjiang Mall.