China is slowly emerging from its lockdown due to the Covid-19 pandemic and businesses are more than eager to get things up and running. However, it is not just bosses who are looking forward to the economy opening up again. Consumers who were cooped up at home are also eager to release their pent-up demand to shop.
Earlier in May, it was reported that luxury leather goods brand Hermès recorded sales of some US$2.7 million ($3.8 million) on a single day after its Guangzhou store reopened its doors to shoppers once the lockdown was lifted. And as more cities in China emerged from the lockdown, shoppers reportedly embarked on “revenge spending” during the first few weeks of stores opening. The term refers to an overindulgence in retail therapy by shoppers who had built up a strong desire to go out and shop during the lockdown.
This was also the case for outlet malls belonging to Sasseur Real Estate Investment Trust (Sasseur REIT) which reported “strong” first-day sales of RMB47.2 million ($9.5 million) for its annual Spring Sales in April. This was 411% higher compared to its first-day sales after their reopening in March.
Sasseur REIT’s annual Spring Sales are usually held for between two and three weeks in April across its four outlet malls in Chongqing, Bishan, Hefei and Kunming. In fact, the four malls reported a 129% increase in sales this year compared to last year, thanks to the lockdown.
In late January, Sasseur REIT had to shut its malls for between 44 and 49 days to prevent the spread of Covid-19 in China. They were reopened progressively from March 11.
“We are in a counter-cyclical sort of industry that is very resilient compared to the traditional retail malls because we have the bargaining power. As the inventory of the brands we carry started to pile up, our team worked closely with them to bring down the price,“ says Vito Xu, chairman of Sasseur REIT’s manager. These included discounts of up to 90% for selected brands and products.
Although shopping for fashion items and discounted luxury goods is considered discretionary spending, Xu does not think Covid-19 will particularly have a huge negative effect on shoppers visiting Sasseur REIT’s outlet malls. On the contrary, he expects more to shop at the outlet malls due to the attractive discounts offered.
“China has a huge population with many citizens harbouring some sort of brand aspiration, especially those in the middle class. Although [Covid-19] has pushed them to be tighter and more calculative with their budgets, they will still set aside some budget for discretionary spending. And they will likely go shop at an outlet mall [for discounted items] instead of a flagship store in a mall where they will have to pay the full price,” explains Xu.
Recovery underway
For all of Xu’s upbeat assessment of his outlet business, retail sales in China continue to languish. Retail sales contracted by 2.8% and 1.8% y-o-y in May and June respectively, taking the contraction in 2QFY2020 to 3.0% y-o-y. This despite online sales rebounding to +7.3% y-o-y. The Chinese economy also rebounded, with GDP growing at a stronger than expected 3.2% y-o-y in 2QFY2020 from an unprecedented contraction of 6.8% y-o-y in 1QFY2020.
So, what does this mean for Sasseur REIT if current trends persist till the end of the year? For one, Sasseur REIT’s valuations could be impacted. Its DPU could also fall.
In 1QFY2020, outlets sales at Sasseur REIT’s portfolio of malls fell by 55.7% y-o-y to RMB534.5 million. The REIT’s rental income comprises a fixed component and a variable component. In 1QFY2020, the fixed component contributed 80% to total rental income (which the REIT manager refers to as “entrusted management agreements income” or EMA income) of RMB127.2 million (–17.1% y-o-y) compared with just 64% in 1QFY2019. This was because the variable component fell by 54% y-o-y in 1QFY2020 to RMB24.8 million from RMB54.8 million in 1QFY2019.
DPU in 1QFY2020 fell by 19.4% y-o-y to 1.334 cents. This represented 100% of the total distributable income of $16.0 million, which fell 18.7% y-o-y.
Anthony Ang, CEO of Sasseur REIT’s manager, explained that the variable component of the EMA allows unitholders to also enjoy the fast growth of outlet malls. “This EMA model income is interesting as it gives you downside protection with the fixed component, and the variable part that grows with the mall’s sales,” he says.
“When we came up with the EMA model, we did not anticipate Covid-19 happening. But it happened and caused sales to fall by over 50% in the first quarter. Yet, our total income, because of this formula, fell only by about 17%, as part of the income is already fixed. So, EMA helped to protect our investors,” adds Ang.
Meanwhile, portfolio occupancy was slightly lower q-o-q at 94.8%, dragged down by a six-percentage point drop in occupancy at Bishan Outlet Mall to 86.5% as some of its leases expired during the mall closure period, says management. Having said that, a significant proportion of leases expiring in FY2020 have since been recontracted.
Xu is not concerned about occupancy as he claims tenant demand is higher than supply with 2,000 brands interested in leasing space in Sasseur’s outlet malls which can only take 400 to 500 brands each.
Moreover, most brands sign short leasing contracts of one to two years on average. Hence, Sasseur REIT is able to ask for higher contribution from the brand when they renew their lease, or replace the brand if it is not willing to pay more.
Another interesting point to note is that all of Sasseur REIT’s malls have a point of sale arrangement with its tenants, where the mall collects all sales revenue upfront electronically. Sasseur REIT subsequently deducts the rent portion from the sales revenue and gives the remainder back to the store owner at the end of the month. The way Ang sees it, this arrangement also provides another form of downside protection for REIT investors, as rent is collected upfront and there is no risk of rental payments falling behind.
Looking ahead, Sasseur REIT is planning some asset enhancement initiatives (AEIs) to bolster sales. It intends to reposition Chongqing Outlet Mall as a lifestyle and shopping destination for both locals and tourists. AEIs began in May, and should be completed by 1QFY2021. It also intends to create synergy between the two buildings at Hefei Outlet Mall by repositioning Block B into a sports-themed complex as well as maximising space by converting the pedestrian walkway to enhance shoppers’ flow between Block A and B. The works are likely to start in June 2020 and be completed by end 4QFY2020.
E-commerce not a threat yet
Although China is home to Alibaba Group Holdings and Tencent, e-commerce is not yet a threat to Sasseur REIT’s outlet malls, Xu claims. “We have analysed the e-commerce market, but we realised that the online platforms did not gather much interest from our customers, as the majority of our customers like to come down to the physical stores to see, feel and try on the clothes before making the purchase,” he explains.
Instead, Sasseur REIT is promoting an online-to-offline strategy, whereby it uses social platforms like WeChat and TikTok to promote its products. But this is not a major stream of revenue.
According to Xu, the profile of the majority of shoppers who go to the outlet malls are middle-class women with families. Hence, he uses attractive retail deals to woo these shoppers to the outlet malls, as well as exciting lifestyle options and shopping experiences for visitors who want to spend more time at the mall.
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Analysts are keeping a rather bullish stance on Sasseur REIT. KGI Securities initiated its coverage on Sasseur REIT with an “outperform” and a target price of 89 cents.
In its June 11 report, analyst Joel Ng believes that despite a rough 1QFY2020, Sasseur REIT’s long-term growth is underpinned by growing middle-income spend, which may surprise on the upside going into 2H2020 as government policies spur spending. Furthermore, the yuan’s decline against the US dollar and yen may also incentivise shoppers to spend on domestic activities.
Meanwhile, CGS-CIMB Research has dropped its target price to 80 cents from 85.7 cents previously but kept its “add” rating on the REIT to reflect lower tenant sales at Sasseur’s outlet malls. “We reiterate our ‘add’ rating as we believe the long-term uptrend for outlet malls is still intact in China,” says analyst Lock Mun Yee.
Maybank-Kim Eng is similarly upbeat retaining a “buy” call and a target of 95 cents. “We see a recovery in 2QFY2020 following its March reopening and a lift from Spring sales events, and for sales growth to pick-up momentum in the seasonally-stronger 2HFY2020,” says analyst Chua Su Tye. A visible pipeline from the sponsor including two right-of-firstrefusal assets could boost gross floor area by four times, he adds. Chua is forecasting DPU of 6 cents for FY2020, translating into a yield of 7.8% based on Sasseur REIT’s July 22 closing price of 77 cents. The REIT listed in March 2018 at 80 cents per unit.
