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UOB Kay Hian retains ‘buy’ call on MLT as upgrading of domestic consumption drives recovery for China portfolio

Chloe Lim
Chloe Lim9/7/2022 11:44 AM GMT+08  • 5 min read
UOB Kay Hian retains ‘buy’ call on MLT as upgrading of domestic consumption drives recovery for China portfolio
Mapletree Yuyao Logistics Park II China
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UOB Kay Hian Research analyst Jonathan Koh has kept his “buy” rating on Mapletree Logistics Trust (MLT) with an unchanged target price of $2.08. He has also retained his distribution per unit (DPU) forecasts.

In recent times, Koh observes that MLT’s China portfolio has recovered from localised lockdowns, where leasing activities have resumed and demand for logistics space is expected to pick up rapidly in 3QFY2022.

Leases accounting for 24.2% of portfolio net lettable area (NLA) would expire in FY2023 ended March, of which about half comes from MLT’s China portfolio.

This comes with China easing lockdowns imposed to control the spread of Covid-19 since early-June. In addition, Tier 1 cities enjoy stable take-up for logistics space, supported by continued growth in domestic consumption. Tier 2 cities, on the other hand, have experienced slower take-up.

Koh observes that tenants are cautious and some have signed shorter leases of one to two years. Key tenants, such as JD.com and Cainiao however, are keen to renew their leases.

Occupancy for MLT’s China portfolio eased 0.2 percentage points q-o-q to 92.9% in 1QFY2023. Management expects continued weakness in 2QFY2023 but recovery is in sight from 3QFY2023.

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Based on China’s 14th five-year plan, online retail sales is projected to increase 44% from 2020 to 2025, driven by live broadcasting, online grocers, and cross-border e-commerce platforms. The projected growth must be supported by an additional 70m sqm of logistics space.

Online retail sales grew 5.6% y-o-y in 1HFY2022, in addition to online share of physical goods sales reaching 25.9%, up 1.0 percentage points y-o-y.

At present, e-commerce platforms Alibaba, JD.com and Pinduoduo are competing head-on to reduce delivery time to within 24 hours. To achieve this feat, they must secure prime logistics space close to consumers, especially in Tier 1 and 1.5 cities.

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Rent for logistics space increased 4.8% in 1HFY2022 and is projected to increase 0%-5% in 2HFY2022, says the analyst. Meanwhile, MLT’s FY2023 distribution yield has improved to 5.4%.

Unlike office and retail properties, Koh observes that the logistics sector is resilient and was able to weather through short-term disruptions such as sporadic and localised lockdowns, and relatively unaffected by Covid-19-related restrictions. Although there were localised outbreaks in Yangtze River Delta, Pearl River Delta and Northeast China, these regions resumed growth in May and June. Exports from Shanghai, which was the most affected, returned to growth in June, says the analyst.

Net absorption of logistics space increased 57% to 6.6 million sq m in 2021, driven by e-commerce platforms and third-party logistics providers, which accounted for 80% of total annual leasing volume. “Net absorption is expected to exceed 6m sqm for the second consecutive year in 2022,” says Koh.

According to Coldwell Banker Richard Ellis (CBRE) Group, supply of logistics space is projected to reach a record of 7m sqm in 2022, with the bulk coming from Tier 1 and satellite cities.

Beijing, Shanghai, Guangzhou-Foshan and Shenzhen-Dongguan continue to register relatively low vacancies. Guangzhou and Shenzhen, in particular, are short on logistics space. On a nationwide basis, rents have increased 1.3% y-o-y in 2QFY2022. CBRE expects demand for logistics space to pick up rapidly in 3QFY2022.

Meanwhile, the Chinese government has also introduced measures to support growth of the e-commerce sector, such as anti-monopoly rules to lower barriers to entry and laws to prevent industry consolidation via mergers and acquisitions (M&A). The government plans to develop the logistics sector with incentives, including lower value-added tax and cutting road tolls across provincial borders. The authorities also plan to establish 120 national transportation hubs and scale up development of cold chain logistics.

Additionally, the analyst notes how leasing demand remains resilient despite uncertainties created by the Russia-Ukraine war.

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This is coupled with how MLT’s logistics properties in Singapore benefit from growth from e-commerce and inventory stockpiling. “In Hong Kong, it enjoys firm rental rates and high occupancies due to favourable demand-supply dynamics, while Japan, South Korea and Australia provide stable income streams due to increased e-commerce penetration,” Koh adds.

Koh observes that MLT achieved strong positive rent reversion of 3.4% in 1QFY2023, with rent reversion picking up sequentially compared to 2.9% in 4QFY2022 with continued growth post Covid-19 pandemic.

“We also see MLT placing more emphasis on redevelopment projects in the near term, such as 51 Benoi Road to be redeveloped into a six-storey ramp-up logistics property with modern specifications,” says Koh.

The redevelopment provides an uplift to gross floor area (GFA) by 2.3x to 80,360 sq m (865,000 sq ft). Management estimated yield on cost at 6.2% based on total development cost at $232 million. The redevelopment is scheduled to be completed by 4QFY2025.

In addition, MLT plans to amalgamate two newly-acquired industrial land parcels with its existing Subang 3 and 4 logistics properties into a huge 492,000 sq ft site to be redeveloped into a six-storey ramp-up mega hub with 1.4m sq ft of logistics space, five times their current size. Management estimated yield on cost at 7% based on total investment cost of RM500 million ($157 million). The redevelopment will not contribute to income in the initial years and is expected to complete by 2027.

As at 11.05am, units in MLT are trading at 3 cents down or 1.75% lower at $1.68 with a FY2023 P/B ratio of 1.2x and distribution per unit (DPU) yield of 5.4%.

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