TESCO_LOTUS_RETAIL_GROWTH_FREEHOLD_&_LEASEHOLD_PROPERTY_FUND_(TLGF)-2013-01-14.ppt

,18.30,15.70,21.2,4.7,RIC TLGFu.BK,Company report,FIGReal EstateEquity Thailand,abcGlobal Research,Overweight(V)Target price THBShare price THBForecast dividend yield(%)Potential return(%)Note:Potential return equals the percentagedifference between the current share price andthe target price,plus the forecast dividend yield,Tesco Lotus Retail GrowthFreehold&Leasehold PropertyFund(TLGF),HSBC DPU,02/14e 02/15e0.73 0.74,02/16e0.77,Initiate OW(V):Retail footprint across Thailand,Dividend yieldPerformanceAbsolute(%)Relative(%),4.7%1M6.80.2,4.7%3M8.31.9,4.9%12MNANA,Thailands largest property fund;sponsored by Tesco Lotus Portfolio offers mix of income stability and growth;sponsor,Note:(V)=volatile(please see disclosure appendix)14 January 2013Pratik Burman Ray*,CFASenior Property AnalystThe Hongkong and Shanghai BankingCorporation Limited,Singapore Branch+65 6658.sgDavid Choo*,CFAProperty AnalystThe Hongkong and Shanghai BankingCorporation Limited,Singapore Branch+65 6658.sgShweta Arora*AssociateBangaloreView HSBC Global Research at:http:/*Employed by a non-US affiliate ofHSBC Securities(USA)Inc,and is notregistered/qualified pursuant to FINRAregulationsIssuer of The Hongkong and Shanghaireport:Banking Corporation Limited,Singapore BranchMICA(P)038/04/2012MICA(P)063/04/2012MICA(P)206/01/2012Disclaimer&DisclosuresThis report must be readwith the disclosures andthe analyst certifications inthe Disclosure appendix,and with the Disclaimer,which forms part of it,pipeline of ROFR assets is a key growth driver Initiate at OW(V)with TP of THB18.30;21%potential returnThailands largest property fund;sponsored by Tesco Lotus:TLGF is Thailandslargest property fund with 22 Tesco Lotus hypermarket anchored shopping malls acrossThailand.It is sponsored by Ek-Chai Distribution System Co.Ltd.(Tesco Lotus),aleading local hypermarket and shopping mall operator known for providing a wide rangeof value-for-money goods at competitive prices.As sponsor,Tesco Lotus holds a 25%stake in TLGF and has granted TLGF a Right of First Refusal(ROFR)over all of itsexisting and future shopping malls in Thailand with 3,000+sqm of hypermarket area.Portfolio offers mix of income stability and growth;sponsor pipeline of ROFR assetsis a key growth driver:TLGFs portfolio of 22 assets offers a mix of income stabilityand growth the properties are geographically diversified,occupancy is high and stableand assets are anchored by Tesco Lotus(10-year leases with periodic fixed rent uplifts),which provide income stability;at the same time,non-Tesco Lotus tenants offer highergrowth prospects through higher rent uplifts,rents linked to tenant sales and higher fixedrents.In addition,the ROFR granted by Tesco Lotus is a key growth driver for TLGF.Asat November 2012,Tesco Lotus had an additional 116 shopping malls across Thailand this large and definitive pipeline can grow TLGFs portfolio substantially.We initiate coverage on TLGF with an OW(V)rating and THB18.30 target price,implying 21.2%potential return.Our target price is derived using an equal weighting ofour RNAV and DDM valuations,on top of which we ascribe a 10%premium based onour qualitative premium/discount framework for ASEAN property stocks.The fund istrading at 4.7%FY13/14e DPU yield vs.4.4-7.4%DPU yield for regional retail-focusedREITs and 4.4-8.7%trailing DPU yield for retail-focused Thai property funds.Risks:Specific risks pertaining to TLGF include competition from other retail malls andhigher operating expenses,while generic risks include higher interest rates,economicslowdown and political uncertainty.Index THAI SET INDEX Free float(%)75Index level 1,423 Market cap(USDm)1,231Market cap(THBm)37,397Bloomberg TLGF TBSource:HSBCSource:HSBC,0,1.3,Tesco Lotus Retail Growth Freehold&Leasehold Property Fund(TLGF)Real Estate14 January 2013Financials&valuation:Tesco Lotus Retail Growth Freehold andLeasehold Property Fund,abcOverweight(V),Financial statementsYear to FebruaryProfit&loss summary(THBm),02/2013e 02/2014e 02/2015e 02/2016e,RNAV computation(THBm)Gross Asset ValuationGreater Bangkok,FY13/14e29,56413,086,Per unit(THB)12.655.60,%of totalGAV97%43%,Gross RevenueProperty ExpensesNet Property IncomeAsset Management and Trust ExpensesEBITNet Interest ExpenseIncome Before TaxesIncome Tax ExpenseIncome After TaxNet Investment Income,1,802(339)1,463(302)1,16101,162-1,1621,296,2,372(440)1,932(396)1,53611,537-1,5371,716,2,471(515)1,956(399)1,55711,558-1,5581,734,2,566(531)2,036(224)1,81111,812-1,8121,811,ProvincialTourist DestinationOther AssetsTotal GAVDebtOther LiabilitiesTotal Liabilities,8,8857,59391030,47500,3.803.250.3913.040.000.000.00,29%25%3%100%,(For Distribution)Cash flow summary(THBm)Cash flow from operations,02/2013e 02/2014e 02/2015e 02/2016e1,296 1,715 1,733 1,810,RNAVNo.of unitsRNAV per unit,30,4752,33713.04,Cash flow from investing activities,(24,908),1,1,1,Cash flow from financingChange in Cash,23,892280,(1,716)0,(1,734)0,(1,811)0,TLGF:PBV Chart,Cash at beginningCash at end,0280,280280,280280,280280,1.51.4,+1SD:1.41,Balance sheet summary(THBm),02/2013e 02/2014e 02/2015e 02/2016e,Cash&cash equivalentsTotal current assetsTotal non current assetsTotal assets,28028025,53925,819,28028025,36025,640,28028025,18425,464,28028025,18525,465,1.21.11.0,A v g:1.27-1S D:1.14,Total debtTotal Liabilities,-25,819,-25,640,-25,464,-25,465,M ar-1 2,M ay-12,J ul-1 2,Sep-12,No v-1 2,Jan-13,Total EquityShareholders funds,25,81925,819,25,64025,640,25,46425,464,25,46525,465,T LGF PB V,Av g,Ratio,growth and per share analysis,+1 SD,-1 S D,Year to February,02/2013e,02/2014e,02/2015e,02/2016e,y-o-y%change,Priced at close of 09 Jan 2013Source:Bloomberg,HSBC,RevenueEBITDAPBTPATMI-coreEPS Core,NANANANANA,32%32%32%32%32%,4%1%1%1%4%,4%4%16%4%4%,Performance of TLGF relative to SET&SETPROP indices160,Ratios(%),140,EBIT MarginNet Debt/EquityPer share data(THB)DPUFully Diluted DPU,64%NM0.690.69,65%NM0.730.73,63%NM0.740.74,71%NM0.770.77,12010080M ar-12,M ay-12,Aug-12,Oct-12,Jan-13,2,Priced at close of 09 Jan 2013Source:Bloomberg,HSBC,S ET,SET PR OP,TLG F,(THB),tenants,and,Variable,tenants,33%,Food Court,Tesco Lotus Retail Growth Freehold&Leasehold Property Fund(TLGF)Real Estate14 January 2013Key charts,abc,TLGF:Market cap of retail-focused Thai property funds,TLGF:Portfolio NLA split(Total NLA:311,534 sqm),40,37.4,32.7,Tourist,302010,8.5,4.9,3.3,Destination22%,GreaterBangkok42%,0,T LGF,CPNRF F UTU REPF MJLF,TRIF,M ark et cap(T HB bn)Source:Bloomberg,HSBCTLGF:FY13/14e revenue split by geography,Prov incial36%Source:TLGF,HSBCTLGF:FY13/14e revenue split by tenant type,TouristDestination23%,Greater,Temporarytenants14%14%,HypermarketandFood Court,Prov incial32%,Bangkok45%,PermanentPermanentVariabletenants19%19%,PermanentFixedtenants34%,tenantstenants33%PermanentFixedtenants34%,Source:HSBC estimatesTLGF:Portfolio split by FY13/14e HSBC valuation,Source:HSBC estimatesTLGF:DPU and DPU growth,TouristDestination26%,GreaterBangk ok,0.800.76,FY12/13-FY15/16CAGR:4%0.73,0.74,0.77,44%,0.72,0.690.68Prov incial,30%,0.64,Source:HSBC estimates,FY12/13eSource:HSBC estimates,FY13/14e,FY14/15e,FY15/16e,3,Tesco Lotus Retail Growth Freehold&Leasehold Property Fund(TLGF)Real Estate,abc,14 January 2013Investment summary Sponsored by Tesco Lotus,TLGF is Thailands largest property fundwith a diversified portfolio of 22 hypermarket anchored shopping malls Portfolio offers income stability as well as organic growth;acquisition-led growth potential from ROFR granted by Tesco Lotus Initiate at OW(V)with TP of THB18.30,OverviewTLGF is sponsored by Tesco LotusTesco Lotus Retail Growth Freehold andLeasehold Property Fund(TLGF)is a propertyfund sponsored by Ek-Chai Distribution SystemCo.Ltd.(Tesco Lotus),which is a leading localhypermarket and shopping mall operator inThailand known for providing a wide range ofvalue-for-money goods at competitive pricesunder the Tesco Lotus brand.Tesco Lotus holds a25%stake in TLGF,with the remaining 75%heldby local and foreign unitholders.which is one of Thailands mostwell recognised retail brandsTesco Lotus is one of the most well recognisedretail brands in Thailand,with the companyoperating more than 900 stores of various formatscatering to over 35m customers each month,including over 8m“ClubCard”members.Itsshopping malls provide its customers with adestination shopping experience combining theofferings of a Tesco Lotus hypermarket with otherpopular food retail and entertainmentestablishments.In Thailand,Tesco Lotus has thebroadest range of retail store formats,includingshopping malls,community malls,hypermarkets,4,supermarkets and top-up convenience storeswhich appeal to a wide range of customers ofall demographics.TLGF is the largest property fundin Thailand with a portfolio of22 shopping mallsTLGF,with a diversified portfolio of 22 TescoLotus hypermarket anchored shopping malls,isthe largest property fund in Thailand.The existingportfolio is cTHB23.6bn by appraisal value defined as the aggregate of“lower of twovaluations for each asset”and the fund has amarket capitalisation of THB37.4bn.The assets are located across Thailand,includingGreater Bangkok,tourist destinations like Phuket,Samui and Krabi,and provincial areas such asPetchboon,Chiangrai,Ranong,Pitsanulok andNakorn Sri Thammarat.Investment positivesExposure to Thailands retail sector,asegment we are positive onTLGFs portfolio is exposed to retail,a sector weare positive on with regard to consumer trends inThailand.The assets are anchored by Tesco Lotus,a leading local hypermarket and shopping mall,Tesco Lotus Retail Growth Freehold&Leasehold Property Fund(TLGF)Real Estate14 January 2013,abc,operator in Thailand,known for providing a largerange of value-for-money goods at competitiveprices under the Tesco Lotus brand.Tesco Lotushas the broadest range of retail store formats inThailand,including shopping malls,communitymalls,hypermarkets,supermarkets and top-upconvenience stores,and is oriented to customersacross all demographics.This is reflected in TescoLotuss sales,which have increased fromTHB17bn(in 1998)to THB137bn(in FY10/11).Diversified portfolio with stable andhigh occupancy ratesTLGFs portfolio comprises 22 shopping mallsanchored by Tesco Lotus hypermarkets togetherwith other diversified tenants including retail,entertainment and food&beverageestablishments,which cater to a wide range ofcustomers of all demographics.The portfolio isgeographically diversified with assets locatedacross Thailand,including Greater Bangkok,tourist destinations like Phuket,Samui and Krabi,and provincial areas such as Petchboon,Chiangrai,Ranong,Pitsanulok and Nakorn SriThammarat.Occupancy rates for the portfoliohave generally remained high,at c99%,despite aglobal economic downturn and local politicaltensions during the last three years.Large proportion of TLGFs assets ison freehold landc75%of TLGFs assets is on freehold land,whichmakes TLGFs portfolio unique when comparedwith most other property funds in Thailand.Asland prices in Thailand appreciate and make up alarger proportion of total development costs,weexpect premiums for freehold land to increase.Long-term lease with Tesco Lotusprovides income stabilityThe hypermarket and the food court areas withinthe shopping malls are leased to Tesco Lotus on a10-year lease term with rent increases of 10%,every three years and rent review and renewalevery 10 years(lease is renewable for twoadditional 10-year terms).This long-term leasestructure with a high quality tenant with in-placerental increases provides TLGF with incomestability.Based on our projections,revenues fromhypermarket and food courts are expected to makeup 33%of total revenues for FY13/14e.Fixed and variable rent payingpermanent tenants and temporarytenants provide income growthThe properties in the portfolio have a mix ofpermanent tenants across a variety of trade sectorssuch as food&beverage,entertainment,financialservices,fashion,health&beauty and furniture&decorations,with leases that are typically 1-3 yearsas well as temporary tenants that lease spacetypically for 6 months.These permanent tenants either pay fixed rentswith built-in increments(annual or every threeyears,depending on the lease agreement)or rentswhich are based on a percentage of theirunderlying sales(based on the lease agreement),while the temporary tenants pay relatively highfixed rents on a per sqm basis.Given the higher rental growth from permanenttenants as well as the higher per sqm rent fromtemporary tenants,these tenants provide unitholders with income growth.Based on ourprojections,revenues from permanent tenants andtemporary tenants are expected to make up 54%and 13%of total revenues for FY13/14e.Acquisition-led growth potential fromROFR granted by Tesco LotusAs the sponsor,Tesco Lotus has granted TLGF aRight of First Refusal(ROFR)over all of itsexisting and future shopping mall properties inThailand with more than 3,000 sqm ofhypermarket area that Tesco Lotus wants to sell.Given that as at Nov 2012,Tesco Lotus had a,5,Tesco Lotus Retail Growth Freehold&Leasehold Property Fund(TLGF)Real Estate14 January 2013,abc,portfolio of 116 hypermarket-anchored shoppingmalls across Thailand excluding the 22 assets inTLGF this large and definitive pipeline of assetscan grow TLGFs portfolio substantially in themedium to long term.If TLGF were to convertinto a REIT under the Thai REIT regulations,itcould likely fast track its growth given higherleverage allowed under the REIT regime.Investment risksDownside risks for TLGF include competitionfrom other retail malls and increases in operatingexpenses.Generic risks include,amongst others,negative macroeconomic developments,politicalrisks and higher interest rates.ValuationBlended valuation methodology withequal weighting on DDM and RNAVWe have used a blended valuation approach forTLGF,with an equal weighting given to ourDDM-based valuation and RNAV-based valuation.We ascribe a 10%premium to the blended valuationas part of our qualitative premium-discountframework to arrive at our target price.Low dividend yield reflects stability ofcash flows,acquisition-led growthprospects and size of property fundTLGF,with a FY13/14e dividend yield of 4.7%has one of the lowest dividend yields amongproperty funds in Thailand.In our view,this isattributable to the stability of TLGFs cash flowsand its acquisition-led growth prospects given theROFR from Tesco Lotus.Also,TLGF is thelargest property fund in Thailand and thusinvestors are willing to pay a premium for its sizein our view.In our view,TLGFs size,togetherwith its identifiable pipeline of assets from thesponsor,makes it a top candidate for conversioninto a REIT under the Thai REIT regulations.6,Initiate at OW(V)with a target price ofTHB18.30Our target price for TLGF is THB18.30,whichimplies a potential return of 21.2%over the next12 months.Potential return equals the percentagedifference between the current share price and thetarget price,plus forecast distributions.Weinitiate coverage at Overweight(V).,Tesco Lotus Retail Grow