In the News
GLP's Prospects Brighter than What Analysts Think
Source: The Business Times
Group CEO Ming Z Mei allays fears that a slowdown in the company's key China market will hurt its financial performance.
By Lynette Khoo
GLOBAL Logistic Properties Limited (GLP) may well be a misunderstood stock, as far as its risk profile and accounting treatment are concerned.
Amid worries over a slowdown in its key market China, group CEO Ming Z Mei said the group is still slated to achieve strong profits from development completions in China this year.
Net operating income (NOI) from its US assets is also expected to be "very strong" on the back of high rental growth on renewal leases, Mr Mei told The Business Times.
On the whole, GLP is still expecting positive same-property NOI growth for its key markets of the US, Brazil, China and Japan, similar to the 6.9 per cent growth seen in fiscal 2016 ended March 31.
Such upbeat tone from the group CEO flies in the face of concerns flagged in recent analyst reports following the group's release of fourth-quarter results.
GLP, whose single largest shareholder is GIC, has a US$36 billion property portfolio spanning 52 million square metres of logistics facilities across China, Japan, the US and Brazil. Of this, 57 per cent of its net asset value resides in China.
And clearly, investors have been applying a discount on the counter due to a lack of clarity over macro-economic risks in China.
But Mr Mei told BT: "Even though we are slowing down investments in some markets where we see oversupply because a lot of capital has been flowing into those cities and into the sector, we continue to expect earnings growth in our China business this year despite the slowdown.
"Earnings this year is going to be buoyed by actions done the prior year, development completions and rental growth," he added. "Development completions in China are going to be just the same if not higher than last year, because the projects started a year ago are completing this year, so earnings (from China) are not going to be impacted this year," he added.
He opined that some analysts probably strayed on at least two counts - first, domestic consumption in China is "way underestimated" and second, GLP's mark-to-market treatment for development completions which it terms as value creation is not fully appreciated.
For the first time, the consumption and service sector has surpassed 50 per cent of China's GDP. "Why that is important is because more than 90 per cent of our business is driven by domestic consumption. Going forward, we will see domestic consumption and service industry make up a larger percentage of the economy," he added.
Noting that retail sales in China are still growing at 10 per cent from a year ago, Mr Mei pointed out that organised retail - as opposed to mom-and-pop stores - still makes up only 14 per cent of total retail in China, well below other countries. The growing trend of chain stores and e-commerce is driving demand for modern logistics facilities in China.
"About 20 per cent of the markets we are operating in China face some over-supply because in the last two years a lot of pension funds have been drawn to the sector, so we slow down development in those markets but we continue to grow in other core markets," he said.
Value creation from development projects on completion in China is still expected to be similar to last year due to the work done in prior years. For the year ended March 31, GLP registered a 30 per cent jump in profit after tax and minority interests (Patmi) in China to US$395 million, underpinned by higher fair value gains from development completions and cap rate compression as well as rental growth.
Group Patmi (profit after tax and minority interest) was up 48 per cent to US$719 million for fiscal 2016 on the back of higher asset values in China, development completion gains in Japan and GLP's entry into the US market. GLP has raised its dividend payout every year from three Singapore cents per share in fiscal 2012 to six cents in fiscal 2016.
Its three-pronged growth strategy hinges on rental growth from operating assets, value creation from development completions as well as expansion through the fund management platform. Earnings is hence underpinned by rental income from logistics properties, management fee income as well as fair value gains from investment properties.
The latter includes revaluation gains from operating assets as well as mark-to-market gains from development projects upon completion.
"Analysts, in their reports, talk about the concept of core income and non-core income - the reason being that we develop and recognise the value of capital appreciation of our assets, and so create accounting income. But we don't sell those assets in the same financial quarter or year.
"In a year or two later, we sell these assets into GLP J-Reit and recognise cash profit but there is no accounting profit because the accounting gain was already recognised in the prior year," Mr Mei said.
Put simply, "we didn't get credit the first time, and we didn't get credit the second time", he quipped.
Another area of concern flagged by analysts has been GLP's lower target for development starts in fiscal 2017, which can affect earnings growth further down the road when these assets are marked to market upon development completions.
Mr Mei agreed that GLP's fiscal 2017 development targets reflect a more cautious outlook in the markets it is operating in. The group is targeting to start US$2.1 billion of new developments and complete US$1.5 billion of developments; in fiscal 2016, it started US$2.8 billion of new developments and completed US$2.1 billion of developments.
While the group remains focused on logistics projects, it has two industrial sites in Beijing and Shanghai that could potentially be converted into mixed-use, pending approval from the Chinese authorities. GLP is looking to bring in international partners, from Singapore, Hong Kong or even the US, to co-develop the sites.
Same-property NOI growth in China may normalise to about 7-10 per cent after a 10.7 per cent growth in fiscal 2016, but the group expects the Chinese economy to pick up in a year or two from now.
There is also room for cap rate compression in China because the yields for logistics facilities are higher than other real estate sectors like office and retail, Mr Mei said.
"We see potential cap rate compression in Japan because we see transactions occurring at lower cap rates than what we have on our books," he said, adding that there is a continued healthy supply-demand dynamics for logistics space in Japan.
Any further compression of cap rates in markets that GLP operates in bodes well for future revaluation gains.
In the US, where supply is still below historical demand, GLP's logistics assets have many leases inked after the global financial crisis. Hence lease renewals are expected to mark strong rental growth, as seen in the 19 per cent effective rent growth that GLP achieved for renewal leases in fiscal 2016.
As for Brazil, Mr Mei posited: "I think we have seen the worst in Brazil, so things will pick up."
Source: The Business Times © Singapore Press Holdings Limited. Permission required for reproduction