Saturday, 14 January 2017

Dasin Retail Trust



Dasin Retail Trust ("DRT" or the "Trust") is offering 151,768,900 units at $0.80 per unit of which only 2m units will be available for the public tranche. There is an over-allotment option of 9,343,300 units in the event the IPO is oversubscribed. A separate cornerstone tranche of $25m of units have been offered to China Orient Asset Management and Haitong International Fund SPC.

Its principal investment mandate is to invest, develop income producing real estate in Greater China with initial focus on retail malls. The prospectus is here and the IPO will close on 18 Jan 2017 at 12pm. Investors need to know that this is registered under the Business Trust and is not a REIT.

Portfolio

The initial portfolio comprises 3 retail properties and DRT will acquire Shiqi Metro Mall by 30 June 2017. The properties are located in Zhongshan City, Guangdong. To help you visualize where the city is, Zhongshan city can forum a "triangle" with Macau and Hong Kong in the Pearl River Delta region. About 66% of the IPO proceeds will be used to acquire the portfolio with the balance repaying existing loans, transaction costs and for working capital.

According to the prospectus, there is higher economic activity, standard of living and strong consumer spending culture in Zhongshan city vis-a-vis rest of China.

Sponsor

The Sponsor is Zhongshan Daisin Real Estate Co.., Ltd, a leading developer in the city of Zhongshan. The sponsor is an award winning real estate development company in China and has concluded an extensive "Right of First Refusal" pipeline with DST.


Distribution "Waived"

Distribution waiver, in whatever terms you described it, is a form of financial engineering to me.

According to the prospectus, the Sponsor has selected mature assets as well as younger assets that have yet to reach its potential. The Sponsor waived a portion of its distributions entitlements to ensure investors receive a "market-level" rents immediately... whatever that means.

In layman terms, you can translate it as "The Sponsor has decided to "boost" the yield to comparable China REITs, otherwise, investors will not subscribe to its IPO". The distribution waiver will step down over time and end after 2021.


Based on the waivers, the projected yield will be 8.5% for FY2017 and 9% for FY2018.


Without the Wavier, the yield will drop to 3.8% and 4.7% respectively. 

NAV per unit (please correct me if i am wrong)

This is so difficult to find in the prospectus. Assuming the equity (page 152) is RMB 2,702,803,000 and the total number of units outstanding is 549,606,000 (page 137), the NAV per unit in RMB is 4.9 RMB per unit or $1.01 per unit. The IPO price of $0.80 is at a discount to its book value.


What i like about Daisin Retail Trust

  • In built rental escalation clauses in Ocean Metro Mall and Xiaolan Metrol Mall as well as expiry of rental free periods for Carrefour at Ocean Metro Mall
  • The infrastructure development such as the Shenzhen- Zhongshan bridge and the Hong Kong - Zhuhai - Macau bridge will spur economic development to these 3 regions and will benefit Zhongshan
  • Seemingly strong sponsor with long track record
  • The CFO of the Trustee-Manager, Mr. Ng Mun Fai, has previously worked at KPMG Singapore and likely to be one of our own. Lol. At least should trust our kaki lang on the financials? The only flip side is he just joined DRT in 2015, hoped he stays...
  • The sponsor continues to own ~60% of the malls, providing some alignment of interest
  • It is not highly levered, the leverage is around 30.7%
  • IPO is at a discount to its book value.
  • Ability to attract good tenants across all its malls

Some of my concerns
  • Overly concentrated in one city of Zhongshan
  • The land leases will expire between 2041 to 2046 compared to the freehold status of malls in Japan (Croesus Retail Trust). While this is "common" in China, I have no idea what will happen when the lease expires after 24 years
  • The use of distribution waiver as a form of financial engineering meaning it will offset any potential rental escalations.  
  • Malls are in pretty saturated market and the behavioral patterns of Chinese consumers are changing with the presence of online malls.  
Listed Comps

Dasin is definitely not the first China trust to list on SGX. Let's look at some of its peers. Listed comps include the list below:
  1. BHG Retail Reit. My write up is here.
  2. CapitaR China Trust
  3. Fortune REIT HKD
  4. Mapletree Greater China Trust
I think the two closest comps will be BHG Retail Trust and Capital R China Trust. BHG launched at the IPO price of $0.80 per unit at the yield of 6.3% (with financial engineering) and had given it a zero chilli rating back then.The price has since dropped to 65c, giving it a yield of 7.75% now and at 0.81x its book value.

Capital R China is currently yielding around 6.6% and at 0.92x book value

My Chilli Ratings

While i don't like the financial engineering, the issuance is priced at 20% discount to its book value and at an inflated yield of 8.5%. This compares favorably to BHG at 7.75% and CapitaR China Trust at 6.6%. I have not done an analysis on how the yield will change as the distribution waiver falls.

I will give it a one chilli rating given its fairness in pricing the IPO. My gut feel is don't expect much fireworks but I don't expect it to drop drastically given its relatively small issuance and fair pricing.  

Samurai 2K Aerosol Limited

For information only. Not spending too much time as the placement is already closed with no public tranche.



Samurai 2K Aerosol Limited ("Samurai 2K" or the "Company") is placing out 20m shares at $0.20 each for a listing on Catalist. There is no public tranche and trading will commence on 16 Jan 2017 at 9 am with a market cap of $20m. The link to the prospectus is here.

Principal Activities

The Company is headquartered in Malaysia and is a high performance aerosol coating specialist for automotive refinishing and refurbishing industry.  Samurai 2K manufactures, distributes and markets products under its own brand.

According to the prospectus, the Company has a 27% market share in Malaysia and 5% market share in Indonesia in 2015.


Products segments and brands


The picture above shows what the aerosol is used for and the Company is probably alluding that its products are mainly used on motorcycles (Trains are not included). The brands include Samurai, Ninjusu, Bushido, CanArt etc. Seems like the owner is a fan of Japan. The products are manufactured in Johor and distributed to more than 4 countries.

Market Share

With a focus in this region, the addressable market share for two wheelers seemed large enough for the Company to continue its growth trajectory here.



Financial Highlights


The Company generated RM 30.6m revenue and a net profit of RM 5.4m for FY2016. Net profit increased by 3x from FY2014. What i like about the trend is that it is increasingly gaining revenues and inroads into Indonesia in FY2016. 

However, while 1Q 2017 showed the revenue trend to be increasing, what is worrying is the net profit and margin dropped quite significantly to RM291k and 3.6% (shown by the red box above). The cause of the drop is due to huge increase in admin expenses The increase in admin expenses in Q1 FY 17 was attributed to increase in staff cost and legal and professional fees for the listing, which i assume is one-off.


Future Plans

The Company intends to upgrade its production facilities, focus on R&D and increase spending on marketing and branding as well as expand through acquisition.

Valuation

According to the prospectus, assuming the service agreement is in place, the Company is listing at a historical PER of 13.5x. The NAV per share is around 19.2 sen (or S$0.06) at today's exchange rate versus the IPO price of $0.20.

The gross profit grew by 65% in Q1 but the profit dropped due to increase in admin expenses which some like staff cost are recurring while others like listing expenses is probably one-off. The listing status will also attract higher compliance and directors fees. 

I am not privy to the financial forecasts. Assuming EPS hovers plus or minus 20% for FY17, the EPS in Malaysian sen will be between 4.32 (1.32 Singapore cents) to 6.5 (2.08 S cents).  A PER multiple of 11x will imply a price of around 14 to 23 cents.

What I like about the Company
  • I like companies that have its own brands and products and some patents. At the end of the day, the brand will help the Company differentiates itself from competitors
  • The addressable market for motorcycles is large in this part of the world (SEA) and if Samurai is able to gain market share, it will bode well for the Company.
  • Strong growth trajectory in both revenue and profitability over the last 3 years if the Company can execute well in Indonesia and potentially Vietnam.
  • Well diversified customer base
Some of my concerns
  • Currency translation risk. While the Company cost base is in ringgit, it obtains some of its materials in US$. In addition, it derives most of its revenue from Malaysia and Indonesia as well. The movements of MYR and IDR against the SGD will have implications on the reported numbers given its listing status here.
  • It is a small cap stock with market cap of $20m and investors will "forget" about this Company over time. I looked at the stock performance of  the last 10 Malaysian companies listed on SGX and frankly, the results is not encouraging. They suffer from lack of trading liquidity and low share price post listing.
  • It operates Indonesia with a susidiary that is only 67% due to regulations. The 23% not held directly may cause issues if things do not work out between the parties 
  • It didn't "promise" to pay any dividends as part of the listing
  • Given its small cap status, it is not surprising that the ownership is held by a few individuals. While it creates alignment of interest, the flip side is also true where investors can't really do much to "change" the Company and management is critical.
  • It is a competitive market with strong competitors such as Nippon Paint.
My Chilli Ratings

The small cap status allows the Company to be able to place out the shares to close circle. If well executed, it will debut ok given the current positive market sentiments. Over the long run, as we see in many small cap Malaysian companies, the liquidity dries up and the share price crashed.

My ratings is meaningless since there is no public tranche. If there is a public tranche, i will probably give it a miss for reasons mentioned above.

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