In the News
Global Logistic Properties Shops for Growth in China
Source: Barron's Asia
CEO Ming Mei has created China’s warehouse giant with an enviable position in the e-commerce boom.
By Isabella Zhong
It’s said there are only three rules to successful property investment: location, location, location. If that’s true, then Ming Mei appears to have nailed all three.
In his five years as chief executive of Global Logistic Properties (MC0.SG), the 43-year old Mei has transformed the company into the largest warehouse operator in China, an enviable position from which to profit from the e-commerce boom in the world’s most populous nation. China is a star attraction for a company that has amassed 48 million square meters of industrial real estate in East Asia and the Americas, with GLP now the second largest owner of industrial real estate in the U.S. after inking a $4.55 billion deal to buy more than 200 warehouses earlier this year.
GLP’s sprawling global presence in the unglamorous world of warehouses is testament to Mei’s aggressive growth strategy that has seen the former real estate greenhorn create an industrial property powerhouse. “Back then people were saying, ‘What does Ming know about real estate?’” he tellsBarron’s Asia, reflecting on his lack of experience in the industry. But what the Kellogg alumnus, who was appointed chief financial officer of U.S.-based building materials group Owens Corning (OC) when he was 25, did know was a simple formula: “Each business has a set of key success drivers; once you figure out what those drivers are, you then get the best people to meet them,” says Mei.
It was a philosophy that resonated with the late Jeffrey Schwartz, who as vice-chairman of U.S. logistics giant Prologis (PLD) had been scouting for someone to steer the company’s expansion into China and Asia’s developing economies in the early 2000s. Mei fondly remembers his interview with Schwartz over breakfast at Hong Kong’s Shangri-La hotel: “When I got back, I found three messages on my phone,” Mei says. “It was a meeting of minds.”
Mei, a Guangdong native raised in the U.S. Midwest, decided three ingredients were essential for success in the then nascent Chinese logistics industry: Access to capital, access to land and customers. With no shortage of capital, the focus for Mei was winning customers and securing land at a time when sales of industrial land in China were made behind closed doors and not through public auctions.
“So I put together a team of people who could help me to get access to land and who knew the direction of growth for a city better than the government itself,” says Mei. He poached his team from government development parks, which were filled with ambitious mid-level managers who were hungry for a piece of China’s turbocharged growth but had struck a glass ceiling because of a lack of family connections. “They’d go back to negotiate with their former colleagues and knew which buttons to push,” says Mei. The CEO also drafted into what he dubs his “atypical team,” logistics and retail professionals - people who spoke the lingo of clients and understood their needs. “We’ve always focused on demand from our customers’ perspective,” says Mei. “A lot of our competitors don’t think like that.”
It was a successful strategy for Prologis’ China business, which saw assets multiply 11-fold in just three years. However, trouble struck during the financial crisis as Prologis struggled under the weight of massive debts. But from that crisis an opportunity emerged for Mei. With backing from Singapore’s sovereign wealth fund GIC, Mei and Schwartz launched a $1.3 billion buyout bid for their employer’s China and Japan assets, giving rise to Global Logistic Properties.
Headquartered in Singapore, GLP is 36% owned by GIC, while around 60% of the company’s shares are floated for public trading. It was listed in Singapore in 2009. It has grown total assets more than ten-fold since 2008 while maintaining a conservative balance sheet. Besides rental income, the company makes money from property development by converting land into functioning warehouses.
In addition to developing and managing properties for its own balance sheet, GLP also has a fund management arm, which was created in 2012 to capitalize on rising interest in commercial real estate among institutional investors. Assets under management has ballooned from $2.6 billion back then to a current $32 billion. “We’re a good fund manager because we’re a good operator,” says Mei. The business not only brings in management fees of around $150 million a year, but also provides an alternative means to source capital. Mature assets could be sold into funds to buttress the company’s balance sheet and free up capital for new investments. For instance, GLP spun off five wholly owned properties in Japan into its J-REIT fund in August, which reduced its net debt to equity from 9.7% to 8.1%.
The combination of a strong performance from its assets and exposure to the then red-hot Chinese economy proved a lure to investors, with GLP’s stock rising to an all-time high of SGD3.14 a share in October 2013, up 60% on its IPO price. But as China’s growth slowed and the property market sputtered, so did GLP’s shares. GLP wasn’t immune from the savage selloff in Chinese stocks during the summer as investors punished the stock on concerns about its links to slower growth in the world’s second largest economy.
Currently at around SGD2 a share, GLP is down 30% from levels in late May. The stock’s discount to its net asset value has widened to 30%, which is steeper than a five year average of 18%. On price-to-book multiples, GLP trades at 0.9 times, which is below a five year average of 1.2 times, while on a forward price-to-earnings basis, it trades at 25 times, which is also below a five year average of 27 times. At current valuations, JPMorgan analyst Brandon Lee, who has an overweight rating on GLP with a SGD2.70 price target, spies “deep value for the patient,” although he notes a meaningful part of his valuation assumes the company successfully executes its China growth strategy, which is facing some near-term challenges.
China’s slower growth has led GLP to lower its growth target for new warehouse starts to a more “cautious” 5% this year, down from the 32% pace posted last year. While that may seem like a sharp deceleration, the reality is the company is still looking to break ground on $1.7 billion, or a little over three million square meters, of new projects this year, which is on par with last year. “That’s twice the size of our largest competitor’s entire portfolio,” Mei points out. JPMorgan’s Lee expects the pace of new starts growth to return to 15% in 2017.
The stock has also been dogged by heftier rent concessions aimed at helping customers deal with China’s economic headwinds. Customers are being offered a longer rent free period of one and a half months, compared to one month previously. “Our customers are coming to us and saying, ‘can you share some of the pain?’” Mei says. He was unable to give a timeframe for how long the higher concessions will linger, but said “the concessions are not coming from our bottom line.” GLP is benefiting from gains on development projects as looser monetary policy reinvigorates China’s property market. While GLP’s initial yield on development projects has fallen to between 8% and 8.5% from between 8.5% and 9%, investors are also assigning higher values to industrial properties in major Chinese cities. “We’re passing some of that gain to our customers,” Mei says.
A long term challenge for any property company, GLP included, is procuring land. Beijing has tightened its land quota system amid concerns farmland was being converted into commercial plots at an unsustainable rate. Anticipating the policy shift, GLP forged an alliance with a consortium of state-owned enterprises, including China Life Insurance (2628.HK) and China Development Bank, in a deal that saw the logistics company carve out a 34% share of its China business to the group. The transaction baffled many. Not only did it dilute existing shareholders, but also GLP didn’t need to raise capital at the time. However, the deal provided access to the SOEs’ idle land banks. GLP’s land acquisitions totaled 860,000 square meters last quarter, a third of which came from non-primary sources. “I’m very happy – the tighter the land supply is, the happier I am,” Mei beams.
It’s GLP’s exposure to China’s e-commerce boom that holds most exciting promise for investors, especially given how close its warehouses are to mouse-clicking customers. The company is well positioned at a time when growing enthusiasm for online shopping is forcing a dramatic evolution of new models of retail distribution. Mei expects organized retail, which includes e-commerce and chain stores, to account for 60% to 65% of total retail space by 2020 versus a current 10%. This will boost demand for large logistics facilities as organized retail displaces smaller mom and pop stores.
Mei sounds a little evangelical when talking about the growth of e-commerce. “In five years’ time, you’ll not hear of e-commerce, it will just be commerce,” asserts Mei, who sees freight costs becoming a more important consideration for the retail industry than rent. Unlike with the traditional big box retailers such as Wal-Mart, where large quantities of goods are distributed to stores in large trucks, e-commerce involves a tremendous number of small-batch home deliveries made throughout the day. This makes warehouse location critical for e-tailers as freight costs would balloon as delivery distance increases. The reshaping of the retail landscape has prompted GLP to build new warehouses closer to neighborhoods.
While GLP isn’t all about China, it’s the market that Mei reckons will continue to offer the best returns. “We’ll continue to allocate the majority of our balance sheet assets to China,” he says. GLP expanded its presence after taking a 15.5% stake in CMSTD (600787.CN), China’s biggest state-owned warehouse operator. China accounts for around 59% of net assets, while Japan makes up 24%. The remainder is split between Brazil, the U.S. and cash holdings. Of its smaller markets, Japan continues to enjoy strong growth underpinned by the consolidation of older warehouses into larger new facilities. Although analysts see some signs of weakness in Brazil due to its weak economy, Mei is upbeat about the market’s long term prospects given its similarities to China.
While China features prominently in Mei’s ambitions for GLP, the company’s total assets – which include those in the fund management arm – are roughly split one-third each across the U.S., China and Japan. For the fund management unit, the focus is on the U.S. market, which is attracting strong interest from investors seeking mature investments and stable returns. Roughly 90% of capital for the $4.55 billion U.S. warehouse acquisition GLP made in July came from the fund management arm. Fund management fees currently account for less than a fifth of revenue, but Mei says “ideally we’ll someday have one third each from fees, development profits and rental income.” Analysts surveyed by FactSet expect GLP’s total revenues to reach around SGD1.6 billion in 2018, implying a 31% annual growth rate.
Despite its aggressive growth strategy, GLP maintains a very conservative balance sheet. Net debt is equal to just 11% of equity. While GLP has been criticized for holding too much cash, having a well-stocked coffer allows it to move quickly on new opportunities.
“Our company was born through the crisis, so we know that lesson very well,” says Mei.