Company Update: 10 July 2023
We resume coverage of Sasseur with an Outperform recommendation
- Our S$0.95 target price is based on DDM valuation. While Sasseur’s 1Q23 DPU rose 1.5% YoY due to the reopening in China, the REIT’s long-term growth is underpinned by growing middle-income spend, and in fact, may continue to surpass 2019 figures going into 2H23 as government policies spur consumption.
China’s consumption has shown a remarkable recovery, driven by pent-up demand and the reopening of the economy in the first quarter of 2023. The easing of inter-city movement restrictions and improved supply chain conditions have played a significant role in fueling this recovery. Moreover, successful promotional events held at outlets during this period have effectively capitalised on the rebound in retail spending. These factors have contributed to the positive year-on-year growth, signaling a gradual comeback for China’s consumer market.
Staying intrend and onbrand.
The COVID-19 pandemic has caused Chinese shoppers to shift their preference toward domestic spending, resulting in a significant increase in luxury spending within China. In April 2023, 62% of luxury purchases were made domestically, compared to 41% in 2019. This change has had an impact on global brands and tourist destinations that previously relied on Chinese shoppers. However, it has also brought advantages to the domestic market, such as better communication with sales associates, no language barriers, and a more convenient shopping experience. This shift reflects the growing sophistication and appeal of domestic retail offerings in China, leading to a transformation in the global market dynamics. Sasseur plays a role in this by ensuring that all products sold in its outlet malls are authentic, with strict penalties imposed on merchants selling counterfeit goods.
DPU downside protection; upside potential.
The income generated by the company consists of fixed and variable income components. The fixed income component grows at a steady rate of 3% per year since 2018. On the other hand, the variable income component is derived from a percentage (ranging from 4.0% to 5.5%) of the total sales generated by its four outlets. In the first year after its initial public offering (IPO), the breakdown was 65% fixed income and 35% variable income. This combination of fixed and variable income provides stability and a potential for increased returns based on the performance of the outlets.
Valuation & Action
We initiate coverage on Sasseur REIT
with an OUTPERFORM rating and a target price of S$0.95. Our target price is based on DDM, with 9.0% cost of equity and 2.0% terminal growth rate.
Exchange rate pressures, asset value risks and income risks are the main risks facing the REIT.