Download Riding Asia Structural Growth - Eastspring Investments Berhad

MARKET INSIGHTS
BUILDING A HOUSE OF VALUE RIDING ASIA’S STRUCTURAL GROWTH
JANUARY 2016
Rapid growth in population and the changes in demographics in the last 50 years paint a consistent picture
that there has been significant global and Asian urban population growth (United Nations Population Fund).
This provides structural demand for various property assets, not just for urbanites to live and work in, but
also for businesses to flourish.
WHY INVEST IN ASIAN PROPERTY
We believe investing in Asian property assets can be a successful long term strategy and we outline some
key reasons below:
1. Urbanisation
Strong urbanisation trends have been observed in Asia and this growth has been higher than the overall population
growth. Modern housing and commercial property form a major infrastructure of new urban areas.
Fig.1. Urban areas continue to see significant population growth
1,600
%
90
1,400
80
1,200
70
60
1,000
50
800
40
600
30
400
20
200
10
0
0
1960
China
1970
Indonesia
India
1980
Malaysia
Source: World Bank Databank, as at August 2015.
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1990
Philippines
2000
Korea
Thailand
2010
Rural %
Riding the structural growth in Asia | Page 2
Ph
ilip
pin
es
AS
EA
N
As
ia
Ind
on
esi
a
De
vel
op
Wo ed
rld
Ch
ina
Th
aila
nd
%
2.5
2.0%
2.0
1.4%
1.5
1.2%
1.0
0.8%
0.5
0.0
-0.5 -0.3% -0.2% -0.1%
Workforce growth CAGR (2014-2021)
Source: United nations & Haver, as at January 2015.
Fig.3. Workforce growth CAGR (2014-2021)
60.0%
Increasing
dependency
ratio (negative)
Declining
dependency
ratio (positive)
50.0%
40.0%
30.0%
20.0%
10.0%
2014
AS
EA
N
Ind
ia
Bra
zil
Ch
ina
US
Eu
rop
e
Ru
ssi
a
0.0%
2021
Source: United nations & Haver, as at January 2015.
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3. Developing Asia households have room to
spend more on property
Financing supports the ability to purchase large ticket
residential properties. As banks develop mortgage
products and extend their customer reach – their
penetration will increase and help support residential
purchases and prices. Mortgage to GDP (Fig. 4) is much
lower in Asia vs rest of developed world.
Fig.4. Developing Asia expenditure on property
has not reached the level of developed markets
%
80
70
60
50
40
30
20
10
0
Developed Asia
Developing Asia
US
Sp
ain
Fig.2. More working adults allow economies
to grow by increasing output
To accommodate a population which is growing
in size and has longer life expectancies, there will
also be demand from pension funds to seek stable
and sustainable returns from long-term investing
opportunities – a profile which typically matches that
of property assets.
UK
An important ingredient of economic growth is human
capital. A rise in the working population translates to a
larger base of labour capital input, which the country
can tap on for raising its output. Asia currently shows
the potential for more room for expansion in the
absolute number of working adults, as compared to
countries in developed markets.
Together with an increase in the absolute size of
workforce, more workers will also move into the middleaged bracket, with relatively higher disposable income.
Over time, the shift in demography will also lead to a
need for countries to develop more value-added sectors
and infrastructure to tap on the skills of its mature
workforce. This is expected to unfold over the long-term
in Developing Asia.
Sin
ga
Ho pore
ng
Ko
Ma ng
lay
sia
Ch
i
Th na
aila
Ind nd
on
Ph esia
ilip
pin
es
Ind
ia
2. Supportive demographics and a large
population pool
Developed West
Source: Haver UBS estimates, as at February 2015.
Riding the structural growth in Asia | Page 3
4. Property has become an established asset
class with supportive funding access
Fig.6. Corporates able to raise both debt and
equity in Asian markets - Equity raising
Property as an asset class has attracted the interests of
longer-term investors such as pension funds, sovereign
wealth funds and large institutions. The long duration of
these assets and their higher yields make them attractive
relative to government bonds. Debt markets continue
to develop in the Asia Pacific – providing long duration
funding and diversification of funding channels for
property asset owners.
USDmn
120,000
100,000
80,000
60,000
With more investment grade properties coming in
the supply pool with a steady rental stream, plus
transactional evidence, price transparency has improved.
This is supportive of property investments including
REITS (Fig. 5 & 6) – improving the size of the debt and
equity markets.
40,000
20,000
20
0
20 0
01
20
0
20 2
03
20
0
20 4
05
20
0
20 6
07
20
0
20 8
09
20
1
20 0
11
20
1
20 2
13
20
14
0
Fig.5. Corporates able to raise both debt and
equity in Asian markets - Debt raising
US
USDmn
240,000
Asia Pacific
EMEA
Source: UBS estimates, as at July 2015.
220,000
200,000
ATTRIBUTES OF PROPERTY FUND
INVESTMENTS
180,000
160,000
1. Enjoy both growth and income
140,000
120,000
A diverse property portfolio of developers and Real
Estate Investment Trusts (REITs) offer higher earnings
growth at the right time in the cycle, but steady
dividend income through cycles. An example of select
developer and REIT names in Fig. 7 show the drivers of
performance over a 10-year period between growth and
income.
100,000
80,000
60,000
40,000
20,000
20
0
20 0
01
20
0
20 2
03
20
0
20 4
05
20
0
20 6
07
20
0
20 8
09
20
1
20 0
11
20
1
20 2
13
20
14
0
US
Asia Pacific
EMEA
Source: UBS estimates, as at July 2015.
insights
Riding the structural growth in Asia | Page 4
Fig.7. Attractive dividends and price appreciation
(November 2005 - November 2015, local currency)
REITS
Total
annualised
return
% of return
due to dividend
reinvestments
(income)
Capitaland
Mall Trust
5.6
94.8
Link REIT
19.6
41.3
Developers
Total
annualised
return
% of return
due to capital
appreciation
(growth)
China Vanke
27.0
82.3
Summarecon
Agung
30.3
87.7
3. Asian REITs currently offer both absolute
and relative yield opportunities in comparison
with a natural peer of long maturity
government bonds
Fig.9. Regional REIT yields continue to offer a
premium over government bonds
7%
6%
5%
4%
Source: Bloomberg data, as at 30 November 2005 - 30 November 2015.
3%
2%
2. Asia property developers’ valuations are
attractive
1%
0%
S-REITs
Fig.8. Asia Pacific all countries developers,
historical discount-to-NAV
0.1
US-REITs
Current DY spread
Average DY spread
Attractive yields in Asia’s REIT markets are supported by
the strong cash flow nature of the underlying property
assets such as retail malls, offices, industrial or logistics
properties. In addition, select Asia REITs’ continue to
offer dividend premiums relative to government bonds.
(0.1)
(0.2)
(0.3)
(0.4)
APAC developers
+1 standard deviation
5
b-1
4
b-1
-1 standard deviation
Source: UBS, as at 30 November 2015.
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Fe
3
Average
Fe
b-1
Fe
Fe
b-1
2
b-1
1
Fe
Fe
b-1
0
(0.5)
b-0
9
J-REITs
REIT dividend yield
Source: UBS estimates, Thomson Reuters Datastream, as at
November 2015. DY = Dividend yield.
0.0
Fe
HK-REITs
10 year bond yield
REIT yields have already priced in moderate US rate hikes
and although there has been volatility in the market,
we believe that REIT valuations should hold up even if
the U.S. Federal Reserve continues to move rates up.
Duration lengthening and interest rate hedging has been
employed by REITs to reduce the short term impact of
rate and currency changes.
Riding the structural growth in Asia | Page 5
ASIA PROPERTY OUTLOOK
Australia, Hong Kong and Singapore make up over
80% of the Asia Pacific ex. Japan Property market
by market capitalisation.
buy land at lower prices or collect rental income from
their existing investment portfolios. The Portfolio Manager
prefers developers with deep discount to their book
values and a good historical track record in execution.
3. Hong Kong
1. Australia
Strong corporate governance, deep management
resources and capabilities, and a transparent physical
market dominated by private players are conducive to
investment. Valuations of Australian property stocks
and REITs have eased considerably in the past three
months, but outperformed the MSCI Australian market
YTD (0.7% vs -7.0% on a total return basis1, in USD).
Attractive dividend yields, lower interest rates, rational
supply and foreign investments in direct physical
properties after the weakness in the AUD, currency fall
have lent support to the market. The Portfolio Manager
sees value in both retail and residential REITs.
2. Singapore
High-dividend names have seen prices broadly corrected
by nearly 10% in the past six months and dividend yields
relative to 10 yr government bonds are a high of more
than c.3%. Most REITs are conservative in their balance
sheet (gearing levels <35%) and funding cost although
rising – is more diversified across channels (bonds,
banks, preference shares etc) and higher duration. This
provides more stability to net yields of the properties and
the dividend yield of the REITs.
Developers have suffered share price declines from the
easing residential property cycle; supply is rising whilst
interest rates are easing. Against this backdrop, there
exist robust listed developers with healthy cash levels on their balance sheets and hold low inventory levels (in land and finished goods).
While the outlook for earnings may be weaker due
to lower sales, select developers with healthy balance
sheets have the option to diversify into new markets,
1
Source: Bloomberg, as at 1 December 2015.
insights
The Hong Kong residential space is still in undersupply
since the household formation growth has been rising
faster than land supply. The population household
gearing levels remain low as well. In addition,
developers’ balance sheets are strong enough to take
advantage of purchasing undeveloped land as an
investment strategy and also executing within healthy
timelines for turnover of assets. Market prices already
reflect declines in average selling prices, and discounts
to NAV are wide.
Due to limited land supply and an already high density
in Hong Kong, new commercial property supply has
been scarce. Office vacancies at 1+% are the lowest in
the developed world. Retail rents tend to peg to shorter
term retail sales – due to landlord’s incentive to capture
rental upside on the strong Chinese tourist expenditure
but this has been suffering headwinds in the last 1-1.5
years on the back of an anti-corruption drive in China,
strong HKD which is pegged to USD, and Chinese
tourists travelling further afield.
The overriding fear is the depreciation of the HKD and
the risks to asset prices. HK capitalisation rates are
amongst the lowest in the world especially in retail
properties. The HK government has limited room to
manage monetary policy as it takes interest rates form
the Fed as its currency is pegged to the USD. The
RMB easing may reduce demand for its goods and
services, including property assets - and reduce the
HK companies’ overall competitiveness. The Portfolio
Manager is of the view that this remains a tail risks and
is watchful of asset price valuations. The developers that
we prefer trade well below book value and are mostly in
a strong cashed-up position, reducing this risk.
Riding the structural growth in Asia | Page 6
4. China
China macroeconomic and liquidity conditions have
been easing dramatically. The housing market will be a
key lever of the Chinese government in stimulating the
GDP of the country. The market has become mature in
residential housing with many players, and competition
for land. The market is significantly oversupplied in the
commercial space. Being cognizant of this, the portfolio
manager avoids companies with a large number of
development properties in the commercial space.
However, we are constructive on developers with strong
balance sheets, and higher asset turnovers – that will
be able to sustain or improve growth prospects from
supportive government policies. The Chinese property
developers segment is a standout in the country relative
to other old world industries that are going through
declines in profitability.
to its balance sheet. In general, listed Chinese developers
have been highly reliant on offshore capital markets
funding – often issuing USD-denominated debt. Issuing
debt offshore leads to ill-matched currency exposures. A
prudent strategy is to have diversified funding and a fully
hedged book – and in this regard Vanke stands out. As
a result, we believe the company can utilize its healthy
balance sheet to quickly respond to market conditions if
they improve by accelerating construction activity.
Fig.10. China Vanke – offering growth from capital appreciation
Price (rebased), SGD
Dividend yield, %
6
350
300
5
250
CASE STUDY – DEVELOPERS OFFER GREAT
GROWTH OPPORTUNITIES
The market’s gyration and attention paid to the
macroeconomic outcomes of the new RMB (Renminbi)
regime has not changed our strategy. The Portfolio
Manager remains focused on investing in a diversified
portfolio of high-yielding, attractively-valued companies
with strong cash-generative business models, and
undervalued sustainable earnings.
China Vanke Co. is an example of such a company.
China Vanke develops residential properties in some of
China’s larger cities, such as Beijing and Shanghai. The
stock has enjoyed appreciation in its price as well as
moderate growth in dividend yield.
The Chinese property developer is a fundamental blue
chip name in the sector. We observe management to be disciplined, operating an efficient “manufacturing model”
that generates high asset turnover which reduces
inventory risk and improves cash flow generation.
Management has taken a conscious, prudent approach
insights
4
200
3
150
2
100
1
50
0
0
Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Nov-15
China Vanke
Dividend yield
Source: Bloomberg, Eastspring Investments as at 31
December 2015.
Vanke started in 1988 and has since concentrated its
focus on residential development. The company grew
quickly (Fig. 11) as it rode the wave of the housing
market boom in China in the early 2000s, an example
of how investing in property assets allows one to benefit
from exposure to the larger trend of population growth
(Fig. 12) and urbanisation.
Riding the structural growth in Asia | Page 7
Fig.11. Growth of China Vanke since 1990s
RMB bn
160
%
140
140
120
100
120
80
100
60
80
At December 2015, the company’s share price has
outperformed its peers in the country and is beginning
to look fully valued.
As of late, recent corporate actions have occupied
investors’ attention; the stock was temporarily
suspended in December 2015 due to potential
announcements concerning an asset restructuring by the
company’s management to address the recent significant
increase in stake by a financial services/ insurance firm.
40
60
20
40
0
-20
0
-40
19
1994
9
19 5
9
19 6
9
19 7
1998
9
20 9
0
20 0
0
20 1
2002
0
20 3
0
20 4
0
20 5
0
20 6
2007
0
20 8
0
20 9
2010
1
20 1
1
20 2
1
20 3
14
20
Vanke revenue (LHS)
We remain positive on China Vanke; it is one of the
most well-run property developers in China and its high
quality management has a strong focus on shareholder
returns, asset turnover and ROE. The Portfolio Manager
is of the view that fundamentals that underpin growth
of the company and China’s property market have not
changed.
Vanke revenue growth (RHS) Vanke net profit growth (RHS)
Source: Goldman Sachs Research, as at August 2015.
Fig.12. Population growth of China
Population mn
800
The company’s stock is now trading at relatively
attractive metrics of 4% fwd yield; 1.6x P/B with 19%
ROE. And we expect the payout ratio / dividend will
increase over the year as they find it more challenging
to find high ROE investment opportunities.
Fig.13. Historical price-to-book chart for China Vanke
700
v-1
Source: Goldman Sachs Research, as at August 2015.
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5
No
-1 standard deviation
No
+1 standard deviation
No
Average
No
Relative to benchmark
No
100
19
6
19 0
64
19
68
19
72
19
76
19
80
19
84
19
88
19
92
19
96
20
00
20
04
20
08
20
12
200
No
v-1
0.8
v-1
4
300
3
1.0
v-1
400
v-1
1.2
0
500
2
1.4
v-1
1
600
Source: Bloomberg, as at 2 December 2015. Benchmark Shanghai Stock Exchange Property Index.
Riding the structural growth in Asia | Page 8
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Branch, 125 Old Broad Street, London EC2N 1AR.
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insights
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