Dasin Reit IPO: hoping to ride market momentum

Dasin Retail Trust has begun bookbuilding for Singapore's first reit IPO of 2017, hoping to become the fourth pure Chinese reit to list on the Singapore Stock Exchange. 

The Zhongshan-based retail group will have timed the deal well if it is able to take advantage of positive momentum towards the S-Reit sector, which has recently been rebounding from mid-November lows. 

The FTSE ST Reit Index is up 3.6% from a 703 level in mid-November, closing Friday at 728.96.

Investors were tempted back after the sector started trading through valuations it last hit at the end of the market’s taper tantrum in 2013. Since then the sector’s average forward price to book valuation has risen from 0.96 to 0.99 times.

At the end of 2016, the S-Reit sector closed the year up 3.8%. While this was a positive performance, it was below the 5% global average and the third worst of major markets behind the UK (down 8.5%) and Japan up 0.9%.

Key to the recent rally's sustainability will be investors' interest rate outlook for 2017. According to DBS, analysts have priced in about three rate hikes, which will take Singapore 10-year government bond yields to the 3% level. 

On Friday, they closed at 2.485%. Yields have been on a declining trend since the beginning of the year, but are still far above the 1.628% level they were trading at in early September 2016.  

In its investment outlook for 2017, UBS' wealth management division said it still had a positive outlook on Reits based on the assumption central banks would err on the loose side of monetary policy for longer even if it came at the cost of higher inflation.

"The current environment of lower-for-longer interest rates and muted economic growth should favour well-capitalised reits with sustainable dividend yield," the bank wrote.

Its analysts also pointed out that Asian companies had been reducing their dividend payments over the past year, a second consideration, which may play well with the private banking and high net worth investors who are likely to be Dasin's main buyers.

According to its term sheet, Dasin is offering a high dividend yield of 8.5% in 2017 and 9% in 2018 based on an offering price of S$0.80 per unit and 183 million units.

This compares well with both of its nearest comparables: CapitaLand Retail China Trust (CRCT) and BHG Retail Reit. 

The former is currently trading on a forward yield of 7.57% and the latter 7.938%. Both are among the highest in the sector.

The two stocks have also been on an improving trend. CRCT has generally been rising since it hit S$1.33 on December 23 and closed Friday at S$1.39. 

BHG closed Friday at S$0.65 compared to an S$0.57 low in early November. 

In terms of market capitalisation, CRCT will almost be three times larger than Dasin's S$440 million level ($306 million), which is in turn about 25% larger than BHG's S$322 million level. 

Like BHG, Dasin’s major unit-holders have waived their full dividend entitlement – ostensibly because two of the three assets in the listing vehicle are still in the ramp-up phase. However, this flatters the upfront dividend yield and is generally not popular with institutional investors.

The group’s prospectus states that their full entitlement will be waived 82.5% in 2017 declining to 72% in 2018, 67.5% in 2019, 52.5% in 2020 and 22.5% in 2021.

BHG listed on the Singapore Stock Exchange in December 2015 and while it traded at its IPO price for a number of months, it has traded down pretty much ever since.

Dasin will hope its yield pick-up over BHG will be enough to tempt investors.

It has also tweaked the yield upwards since it first unsuccessfully tried to market the deal in late March 2016 on an 8% 2017 yield and 8.2% 2018 yield. At that point 10-year Singapore government bond yields were trading around the 1.8% to 1.9% level.

Then Dasin offered a 6.15% pick-up. Now it is offering a 6.015% pick-up.

All three of Singapore-listed Chinese retail reits expose investors to the very likely risk that the renminbi will continue to depreciate in 2017 and the frothy mainland property market, which analysts consider one of the major macro risks to Chinese GDP growth.

Dasin’s assets are also concentrated in Zhongshan, Guangdong Province - the birthplace of China’s first president Sun Yat-sen. Fund managers told FinanceAsia this can be considered a plus or a minus.

Typically institutional investors prefer diversification. CRCT, for example, sold off around the time of its third quarter results after net income came in lower than expected because of the sudden imposition of new property taxes in Beijing, where 51% of its portfolio is located.

In its marketing materials Dasin points out that Zhongshan should be a huge beneficiary of the major infrastructure projects underway in the Pearl River Delta linking Hong Kong, Zhuhai and Macau. When the bridge linking the three is completed in 2018, it should cut the travelling distance from Zhongshan to Hong Kong International Airport to 91 kilometres.

Portfolio terms

The initial portfolio comprises three retail malls, with a fourth (Shiqi Metrol Mall) on schedule to be included by June 2017.

As of June 2016, the aggregate valuation of the four was Rmb7.4 billion. The IPO vehicle purchased them for Rmb3.1 billion, a 32% discount.

The four have a gross floor area (GFA) of 434,566.8 square metres and the IPO three have a GFA of 314,884.9 square metres.

The mature asset is Xiaolin Retail Mall, which has 100% occupancy and a weighted average lease expiry (Wale) of six years.

The two less mature assets are Ocean Metro Mall, which became operational in December 2014 and has a Wale of 11.7 years, plus Dasin E-Colour Mall, which opened in May 2015 and has a five-year Wale. Both enjoy high occupancy rates of 99.5% and 98% but are in their first lease cycle.

However, leverage at IPO will be 27.3%, giving the group room to expand its portfolio. According to its marketing materials, it has one purchase option and first right of refusal over 14 properties with a GFA of 1.1 million square metres.

IPO terms

The total IPO has been sized at S$146million ($99 million) of which S$119 million comprises the placement tranche and $2 million the public offering. There is also an S$25 million cornerstone tranche, which has been taken up by China Orient Asset Management and Haitong International Investment Fund. 

The institutional order book will close on January 11, with the public offering running from January 12 to 17, followed by listing on January 19.

Assuming the greenshoe is not exercised, the company will have a 33% freefloat.

Aqua Wealth holdings, a wholly owned subsidiary of the Zhang Family Trust will hold 61.4%, while Bounty Way Investments, a wholly-owned subsidiary of Sino-Ocean Group will hold 5.3%.

DBS is sole global co-ordinator with Bank of China and Haitong International on joint books.