Dasin Retail Trust: A Portfolio Of Quality Retail Assets In Zhongshan

Dasin Retail Trust is a business trust that invests in and manages retail properties in Greater China, with its current portfolio of four shopping malls all located in Zhongshan city.

Zhongshan's fast-growing economy and future infrastructure improvements are expected to benefit the city's retail sector, as well as Dasin Retail Trust's portfolio of retail properties.

The trust's portfolio has also achieved full committed occupancy, with a high portfolio WALE of 6.7 years, providing a high degree of predictability in its cash flows.

Dasin Retail Trust has the backing of a strong sponsor with a healthy pipeline of ROFR assets.

It is trading at steep discount to NAV, with an estimated distribution yield of 8.67% in 2018.

Dasin Retail Trust (SGX.CEDU), which made its debut on the Singapore Exchange in January this year as the first mainboard listing in 2017, is a business trust that invests in and manages retail properties in the Greater China region. Its portfolio of four shopping malls, all of which are located in Zhongshan city, gives investors direct exposure to the fast-growing Pearl River Delta (PRD) region, which Zhongshan is part of. We recently attended a property tour hosted by Dasin Retail Trust (DRT), during which we caught up with the management and had a first-hand look into its four retail properties. Here are some of our takeaways.

Zhongshan: A City Located At The Heart Of The Pearl River Delta Region

Located within the Guangdong province of China, Zhongshan is a heavily-industrialised city and a leading global manufacturing hub, with each district widely-known for its respective area of industry focus. Its Tier-3 status belies its burgeoning economy, which has been growing at a faster clip relative to other parts of China, with the proximity of Zhongshan to Hong Kong and Macau also an advantage to its economic development. Its GDP growth of 7.8% in 2016 is significantly higher than China's overall GDP growth of 6.7%, while disposable income per capita and retail sales per capita for the same year are also above the national average. Amidst its fast-growing economy, Zhongshan's relatively higher standard of living and stronger consumer spending are expected to benefit the city's retail sector.

Figure 1: Retail Sales Per Capita In Zhongshan Consistently Above National Average

The PRD region is one of China's key economic zones and an important gateway along the One Belt One Road route that connects China to the rest of the world. Given its strategic location within the heart of the PRD region, Zhongshan economy is likely to benefit from the positive spill-over effects from the increased trade and investment in the region. Moreover, Zhongshan's connectivity with the rest of the PRD region is expected to improve with the construction of the Shenzhen – Zhongshan Bridge that will reduce travelling time between Shenzhen and Zhongshan to 30 minutes, down from about 90 minutes. We also understood from the management that a rail transit network, aimed at improving accessibility within Zhongshan, is under construction. These infrastructure improvements are expected to increase the inflow of residents and stimulate consumption in Zhongshan, a process that is likely to benefit the retail properties of DRT.

Figure 2: Zhongshan Lies At The Heart Of The PRD Region

Quality Portfolio Of Retail Assets

DRT's portfolio consists of four quality shopping malls in Zhongshan that are strategically located in areas with large population catchments, helping to draw large volumes of shoppers to its properties. The trust's portfolio has also achieved full committed occupancy (Table 1), an improvement from the occupancy rate of 99.2% at the time of its initial public offering, and is a testament to DRT's leasing and marketing capabilities. The weighted average lease to expiry (WALE) by net lettable area (NLA) of the portfolio is 6.7 years (3.7 years by total rental income), with 68.8% of leases committed till 2022 and beyond. A majority of the leases are also on a fixed rental structure with built-in escalation, providing a high degree of predictability in its cash flows and potential for income growth.

Table 1: Dasin Retail Trust's Asset Portfolio

1. Xiaolan Metro Mall

Xiaolan Metro Mall is positioned as a mid-end shopping mall that caters to the local residents staying in the vicinity. Having commenced operations since September 2005, it has built up an established consumer base overtime. The mall has approximately 136 tenants, with most of the non-anchor tenant leases containing a rental escalation clause that provides for an annual adjustment of between 6% and 10%, and is expected to bode well for the property's future cash flows.

Figure 3: Exterior Of Xiaolan Metro Mall

Figure 4: Crowd During Non-Peak Periods

We learnt from the management that anchor tenant RT-Mart, whose lease expires only in September 2025, is a strong crowd-puller, with its 40 check-out lanes (yes, 40 lanes!) filled with throngs of shoppers during peak periods. During holiday seasons, it is almost impossible to snag a trolley because there are just simply too many shoppers around. In addition, the recent acquisition of 118 Mall, a competing mall in the area, by Dasin (sponsor) effectively eliminates one competitor and provides the opportunity to create synergies between the two properties, in terms of scale and trade mix, to drive footfall.

Figure 5: RT-Mart Attracts Throngs Of Shoppers During Holiday Seasons

2. Ocean Metro Mall

Ocean Metro Mall is a relatively new upscale mall that mainly serves the residents and students (from the four schools nearby) in the area, although it also attracts employees working in the office buildings nearby. An 110,000 sqm convention centre is just a stone's throw away from Ocean Metro Mall, which benefits from the heavy footfall in the area whenever there are events. There are about 132 tenants in the mall, with Carrefour, Superior City Department Store and Jinyi Cinema amongst the anchor tenants. Beyond its retail and lifestyle offerings, the mall also seeks to promote family bonding, with a rooftop garden that offers community gardening spaces and animal exhibits.

Figure 6: Exterior Of Ocean Metro Mall

While there are currently no major direct competitors in the area, a mixed-used development with about 50,000 sqm of retail space – located just 2km away from Ocean Metro Mall – is scheduled to be opened next year. That said, the mall's long WALE of 10.4 years helps mitigate the risks stemming from the increased competition. Moreover, most of the non-anchor tenant leases contain a rental escalation clause that provides for an annual adjustment of between 7% and 10%, and is expected to have a positive impact on future cash flows.

3. Dasin E-Colour

Dasin E-Colour is a one-stop shopping mall offering food and beverages, fashion, leisure and entertainment services. It targets the estimated 20,000 students from the university located just across the street. As such, the mall's trade mix is oriented towards offering affordable youth-focused products and services, including karaoke and escape rooms, with an internet café and cinema amongst its anchor tenants. Most of the non-anchor tenant leases contain a rental escalation clause that provides for an annual adjustment of between 5% and 8%.

Figure 7: Exterior Of Dasin E-Colour

Figure 8: Targets Students From The University Located Just Opposite The Mall

Interestingly, Dasin has struck up a partnership with the university, offering their students each a customised Dasin Pass smartcard that gives members attractive discounts and allows them to accumulate reward points when shopping at Dasin's shopping malls. The students can also use Dasin Pass to access school facilities and pay for meals at their school canteen – truly an all-in-one card that meets the daily shopping and living needs of the university students, and one that helps Dasin E-Colour to increase shopper stickiness.

4. Shiqi Metro Mall

With over ten years of operating experience in Zhongshan, Shiqi Metro Mall is a well-established mid-end mall that is located in Shiqi town, which is one of the core urban areas of Zhongshan, targeting the middle-income households that stay in the vicinity. It is located along one of the major arterial roads and is well-served by the road network. Besides being highly accessible, the mall is anchored by RT-Mart, a strong crowd-puller that drives footfall to the property and whose lease expires only in March 2024. Superior City Department Store, Jane Eyre Furniture Mall and Jinyi Cinema are also amongst the anchor tenants. There are about 163 tenants in the mall, with most of the non-anchor tenant leases containing a rental escalation clause which provides for an annual adjustment, typically between 5% and 7%.

Figure 9: Exterior Of Shiqi Metro Mall

Figure 10: Frequent Events To Attract Shoppers

Figure 11: Entrance Of Anchor Tenant RT-Mart

Strong Sponsor Pipeline To Boost Growth Ahead

DRT's sponsor, Zhongshan Dasin Real Estate, is one of the leading real estate developers in Zhongshan City, and holds a majority 59.9% stake in DRT. It is also the largest mall operator, with an approximate 40% market share, and operates across other industries such as residential building development, education, hospitality and payment systems. Its strategy is to essentially build an eco-system around its retail business i.e. shopping malls are supported by demand from the residential buildings, hotels and schools that are built by Dasin.

The right of first refusal (ROFR) option provided by Dasin also allows DRT to leverage on group synergies to obtain new assets. There are currently ten completed properties in the sponsor pipeline that could potentially be acquisition targets for DRT. With a healthy gearing ratio of 31.5%, DRT has the flexibility to make further yield-accretive acquisitions. Shiqi Metro Mall Phase II, an upscale mall that houses brands such as H&M, Uniqlo, and Haidilao Hotpot, and is part of the ROFR pipeline, was opened in October this year.

Figure 12: Opening Ceremony Of ROFR Property Shiqi Metro Mall Phase II

Attractive Return Potential – But Not Without Risks!

While DRT's estimated distribution yield for 2018 is at a mouth-watering 8.67% (based on an estimated DPU of SGD 0.072), it is due to the major unitholders opting to waive a portion of their distribution entitlement, for a period of about five years. As Ocean Metro Mall and Dasin E-Colour have only commenced operations not too long ago, the waiver is to ensure that minority unitholders receive a distribution yield that is more commensurate with market-level rents immediately when they invest in DRT. We see this as a strong alignment of interest with the minority unitholders. Without the waiver, DRT's distribution yield comes down to about 4.55%. The risk to investors, therefore, is a potential reduction in distribution yield after the waiver period if distributable income does not increase.

At its closing price of SGD 0.83 (as of 30 November 2017), DRT traded at a steep -45.0% discount to its NAV of approximately SGD 1.51 (as of 30 September 2017) perhaps as investors are not particularly familiar with the retail environment in Zhongshan. The discount also reflects the over-concentration of DRT's properties in Zhongshan, another risk that investors should take note of. While Zhongshan's economy has been booming in recent years, it remains largely dependent on low-end manufacturing, which has been facing increasing competition from other countries with lower wages. Hence, moving up the value chain to high-end manufacturing is critical for Zhongshan's future economic growth, failing which its economy may stagnant, and that could have a negative impact on DRT.

While its peers are trading at about to 0.9X book value, we believe a price-to-book ratio of 0.7X would be more appropriate for DRT, considering the over-concentration of its properties in Zhongshan – that gives us an intrinsic value of about SGD 1.06. For investors who can look beyond the over-concentration risks, DRT represents an exciting investment option that leverages on the economic growth of Zhongshan city, strong sponsor support, and a high distribution yield (at least for the next five years) that will certainly pique the interest of income investors.

Declaration:

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.

The Research Team is part of iFAST Financial Pte Ltd.