EXECUTIVE SUMMARY

• The Smartkarma Corporate Webinar | Sasseur REIT: A Glimpse into China's Outlet Industry on Feb 29 explored the Oulet sector with Sasseur REIT, a Singapore REIT focused on China Outlets.

• Sasseur REIT is 57.85% owned by the Sasseur Group operating China outlets since 2008, with 4 outlets in 3 major Tier-2 cities currently in the REIT, with room for expansion.

• Sasseur REIT is a play on China consumption and outlet operations. 2023 EMA rental income +10.7% Y/Y. The 9.1% dividend yield stands out, at a relatively low aggregate leverage.

This Insight is part of the Smartkarma Corporate Webinar series, supported by SGX through the Investor Education Fund.

DETAIL

Sector Introduction: Unique Characteristics of the "China Outlets"

In China, the Outlets sector was fully born in the early 2000s and represents a distinct category of retail, next to Shopping Malls and Department Stores categories. In the US, the sector is often referred to as the Factory Outlet Center (FOC).

A Few Chinese Characteristics of the Sector:

• Chinese Outlets have a domestic focus - while this can vary by subsegment, in general the domestic brands dominate

• A larger number of brands - a typical China Outlet has a larger number of brands/tenants than the equivalent in the West

• Variable income component is high - the rental income comes mainly from the percentage of the tenant's sales, as opposed to the fixed rental

• Shorter leases - the lease duration is much shorter, for example 2 years As a result, the nature of the business is much more about the operations, the "software" part of this real estate sector.

Sector Size And Growth

The estimates of the China Outlets sector size vary, depending on the definitions and the major industry sources indicate that there were 226 operating outlet projects nationwide, with the sales of around 210 billion RMB in 2022. A different estimate/definition puts the sales figure at 160 billion RMB (2023).

For Jan-Sep 2023, the average year-on-year growth rate of the Outlet sales was 26.3%, a strong rebound from the low base in 2022 (Covid-related lockdowns), and the foot traffic growth was close to 35%. The available disclosure from two companies that operate in multiple retail categories highlights the relative strength of the Outlets in this rebound: Bailian Group Q3 2023 - Relevant Retail Sales:

• Outlets: +46%

• Shopping Centers: +30%

• Department Stores: +25% Wangfujing Q3 2023 - Relevant Retail Sales:

• Outlets: +33%

• Shopping Centers: +6%

• Department Stores: -0.3%

Data Sources: 2022-2023 China Outlet Industry White Paper published by China Commerce Association For General Merchandise ” (CCAGM), China Chain-Store & Franchise Association (CCFA), local news media, Outlet Excellence

China Outlets Sector Trends To Watch

Shift To Value-Oriented Consumption In China. The China Outlets sector has benefited from the consumption rebound in China, with a twist around the consumption downgrade pressures. Arguably, as the economic pressures lead to the downgrade in consumption, the Outlets sector's attractive discounts play well to the trend of consumers seeking value while preserving the quality.

Changing Nature Of Retail Globally. At the same time, the e-commerce globally has been altering the nature of retail real estate, emphasizing lifestyle and travel, family gathering, and entertainment needs. This gives the Outlets strong positioning vs other segments.

Higher-Tier vs Lower-Tier Cities In China. Industry-specific sources talk about some concerns about market saturation in China in the Tier-1/2 cities. In 2022, nearly half the new openings of Outlets were in the lower-tier cities.

The Rise Of The Domestic Brands. Not unique to Outlets, the Chinese domestic brands now take greater share of the market. Here are some examples of such names in fashion and sports: Li-ning (李宁), ANTA (安踏 ), Erke (鸿星尔克 ), Joeone (九牧王 ), Peacebird (太 平鸟 ), Feizi (菲姿 ), JNBY (江南布衣 ).

Macro Context - China Retail Sales Recovery, Urbanization Patterns

Among the China macro-factors for the sector, we would first highlight the continued, albeit gradual, recovery in the retail sales - it comes against the backdrop of low consumer confidence levels, unemployment problems, and the major downturn in the housing markets, yet with the policy supporting consumption growth. The chart below focus on the retail sales in the urban areas:

The second factor is more structural in nature and related to differences in the growth across major cities. The chart below depicts the absolute permanent urban population size at the city level in 2022 (latest available data) against the cumulative growth rate of that population in 2017-2022. It illustrates significant variation across major cities and emphasizes the importance of the relative city attractiveness in terms of the growth potential.

The Sasseur REIT Business Overview

Sasseur REIT is 57.85% owned by the Sasseur Group - an industry leader which has been operating China outlets since opening the first one in 2008. Currently, 4 outlets in 3 major Tier-2 cities (2 in Chongqing, 1 in Hefei, and 1 in Kunming) are under Sasseur REIT, while the Sasseur Group owns another 2 outlets (for which Sasseur REIT has the Right of First Refusal) and operates another 11 (owned by third parties).

The cities where Sasseur REIT's outlets are located stand out on large population size (Chongqing) and population growth (Hefei, Kunming), providing strong economic fundamentals. The pipeline assets from the sponsor are located in the fast-growing Xi'an and Guiyang.

Chongqing outlets comprised 63.1% of the total outlet sales for the 4 outlets, Hefei 22.2%, and Kunming 14.7%.

Given the different characteristics of China outlets, it's not straightforward to find the equivalent of Sasseur REIT in e.g. the US, but Tanger REIT (38 outlets in the US/Canada) and Simon Property Group's Premium Outlets business (69 outlets US and International) could serve as useful points of comparison of the business operations as well as the difference in the scale.

Within China, compared to the overall sector sales estimates of RMB 160-210 billion , Sasseur REIT is still relatively small, with its 4 outlets' sales of RMB 4.66 billion in 2023, and high concentration of sales from Chongqing.

Sasseur REIT model is based on Entrusted Management Agreement (EMA) structure, explained by the Company in the following chart:

Emphasis On Operations, VIP Membership

The management emphasizes the operations and active tenant management, marketing efforts as key success factors, consistent with the variable rent as the main income component, and relatively short lease durations.

On the consumer side, such efforts include, for example, the VIP Membership scheme. Outlet sales to VIP Members comprised over 60% of the total of the company's outlet sales. VIP membership increased by over 20% in 2023 to over 3.5 million members, a 22% CAGR for 2019-2023.

Diversified Tenant Profiles, Short Lease Duration

Domestic Fashion and Sports, Followed by the International Brands

comprise the main tenant groups in terms of the Gross Revenue, in a diversified portfolio of 1,170 tenancies across the 4 outlets (the sum of outlet-specific disclosed figures, not adjusted for the same brands in multiple locations), where no tenant makes up more than 5% of the total Gross Revenue, and the top 10 tenants add up to just over 14% of Gross Revenue.

A 2022/2023 McKinsey study "The State Of Fashion 2023" highlighted the growth prospects for China fashion and luxury fashion segments.

Diversified and attractive tenant mix comes with the relatively short lease durations of 1.2 years in terms of Gross Revenue (61.6% expiring in 2024) and 2.1 years in Net Lettable Area (52.3% expiring in 2024). This provides a lot of flexibility for changing the tenant mix, while the risk of vacancy appears to be low, considering the occupancy rates of over 97% across the 4 outlets (see the chart above).

The names of disclosed largest tenants by gross revenue by outlet include NIKE, Adidas, FILA, and +39 space at Chongqing Liangjiang; NIKE, New Balance, POLO SPORT, and ANTA at Chongqing Bishan; NIKE, Coach, Bosideng, and HAZZYS in Hefeil; +39 space, NIKE, FILA, and ANTA in Kunming.

Strong 2023 Performance, Returning To Pre-Pandemic Levels, FX Impact

Sasseur REIT delivered strong performance for 2023 overall, though with a drop in the DPU attributed to exchange rate impact of the weaker RMB vs SGD and the higher financing cost.

2022 was a low base given the Covid related lockdowns, hence it's hard to delineate to what extent we are seeing real growth vs return to the prepandemic levels. The overall outlet sales for Sasseur REIT reached in 2023 96.6% of the 2019 levels. In the case of the Chongqing Liangjiang outlet, the outlet sales exceeded the 2019 levels by 8.5%, for the Hefei outlet, sales "nearing pre-COVID-19 level".

Growth metrics were not dramatically different across the 4 outlets but Chongqing Liangjiang outperformed the other 3, which the management attributed to strong local market fundamentals and operations.

Sasseur REIT's Dividend Yield Stood at 9.1% (31 Dec 2023), High Compared to the Peers.

Completed 2023 Refinancing And Debt Profile

Sasseur REIT's aggregate leverage came down to 25.3% for 2023 vs 26.7% for 2022, staying among the lowest of Singapore REITs, according to the SGX Research, with the interest coverage at 4.3x vs 4.4x in 2023, with the gross borrowings at SGD 442 million.

The average debt maturity stood at 2.9 years as of 31 Dec 2023, compared to 0.2 years a year earlier, after the successful refinancing in 2023, and with no debt due in 2024, and only 13% due in 2025 to the Sponsor.

The debt carries a weighted average cost of financing of 5.6%, higher than 4.8% a year earlier, but with diversification across funding sources (53.4% onshore, 46.6% offshore) and debt currency (53.4% RMB, 30.5% SGD, and 16.1% USD), with potential benefits from the Chinese interest rates trending down.

Such Debt Position Leaves Room for Expansion.

Near-Term Expansion Potential - Xi'an, Guiyang

Two assets from the Sponsor, that Sasseur REIT says are in the pipeline, are located in Xi'an and Guiyang. The former is one of the largest outlet malls in the north-west region, carrying around 500 brands, and the latter is a 10-minute drive from the city centre, with around 390 brands, hence both with a well established presence and in fundamentally attractive cities/ locations.

An Operations-Focused Play On China Consumption

Sasseur REIT should be in a good position to take advantage of the consumption growth as well as the changing consumption patterns in China, with a highly focused, 'pure play' in the Outlet sector, with the support of the market-leading Sponsor in that sector.

The business shows strong performance metrics and attractive dividend yield. It is still relatively small, though, with concentrated exposure but with room for expansion. The nature of the business is highly operationally focused, with its pros and cons, reflecting the nature of the sector in China.

With all the income in RMB, currency risk plays a role in the current environment, countered by the benefits of the policy support measures in China and lower interest rates outlook.

By the Smartkarma Smart Score measures, Sasseur REIT stands out on its dividend yield and a positive sentiment: