Sasseur REIT’s 4QFY2022 results 'darkest before the dawn', analysts maintain 'buy' on China consumption recovery

Sasseur REIT’s experiential giant malls with a value proposition bench well on China's improving consumer sentiment.

Analysts at DBS Group Research and UOB Kay Hian have maintained ‘buy’ on Sasseur REIT CRPU following the revival of consumption from the middle-income households triggered by China’s reopening.

“Sasseur REIT’s experiential giant malls with a value proposition bench well on improving consumer sentiment as China bids farewell to Covid-19,” DBS analysts Geraldine Wong and Derek Tan note.

The REIT’s 4QFY2022 DPU of 1.302 cents is below the analysts’ expectations. During the period, rental income declined 11% y-o-y. The widespread outbreaks of Covid-19 in China during the period caused temporary closures and shortened operating hours at Sasseur REIT’s four outlets.

“Shopper traffic was affected by sporadic lockdowns and intercity travel restrictions. The outbreaks disrupted tenant sales during its anniversary sales and the week-long national day holidays in early October,” says UOB analyst Jonathan Koh.

Specifically, across Chongqing’s lockdown in 4QFY2022, Sasseur REIT’s Liangjiang mall and Bishan mall were mandated to close for a period of approximately three weeks. Correspondingly, total outlet sales in 2HFY2022 dipped 23% y-o-y, with most of the decline back loaded in 4QFY2022. As such, the variable component of entrusted management agreement rental income in 4QFY2022 dipped 39% y-o-y.

That said, portfolio occupancy reached an all-time high of 97.2% in 4QFY2022. Koh says that this is a testament of tenants’ faith despite the prevailing dire operating environment.

At present, the REIT’s sponsor Sasseur Holding has 14 operational outlet malls in China and is developing two more outlet malls at Shijiazhuang and Wulumuqi. Sasseur Holding has granted first right of refusal for the REIT to acquire two operational outlet malls in Xi’an and Guiyang. The two large scale outlet malls have good long-term growth potential, Koh points out.

Meanwhile, Sasseur REIT has refinanced its bank borrowings due March 2023, renewed as three separate loan tranches. The three separate facilities will help diversify the REIT’s loan profile in terms of both lease tenure and interest rates for greater financial flexibility, Wong and Tan say.

Post refinancing, the REIT’s weighted average debt maturity will extend from 0.2 years to a staggered 3.6 years while its proportion of onshore loans on cheaper financing rates will increase from 51% to 55%. Average cost of debt, on the other hand, is expected to increase from 5.5% to 6% in FY2023.

The completion of Sasseur REIT’s refinancing exercise before the conclusion of FY2022 will set the REIT up to start the year on a strong footing, giving comfort to investors as the markets increased its scrutiny of refinancing for China-focused REITs, DBS says.

“Revenge consumer spending may see China’s retail sales normalising above pre-Covid-19 levels, with brick-and-mortar sales potentially encroaching into online sales as domestic travel returns,” Wong and Tan note.

In 2023, the analysts foresee three drivers of DPU growth for Sasseur REIT. First is the pent-up consumption demand by the Chinese, where industry data has shown that Chinese New Year spending has increased 12% above 2019 levels.

This is followed by the normalisation of payout ratio to DBS’s estimation of 95%, with refinancing completion and no major asset enhancement initiative projects expected this year. The last driver is tax savings, as Sasseur REIT’s biggest mall will transit to preferential tax rates.

DBS and UOB have lowered their target prices to $1.05 and 96 cents respectively. This is on the back of the increase in average interest costs as well as stronger Singapore dollar against the renminbi.

As at 10.07am, units in Sasseur REIT are trading 0.5 cents lower or 0.64% down at 78 cents.

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