China / Hong Kong Industry Focus China Real Estate (Warehouse) Sector Refer to important disclosures at the end of this report DBS Group Research . Equity 20 Nov 2017 Benefiting from rebound in online sales HSI :29,199 · Online sales rebounded on Single’s Day, likely to ANALYST drive up warehouse rentals in 4Q17 Danielle WANG CFA,+852 2820 4915 [email protected] · Tier 1 and satellite cities to lead rental growth, Trista QIN+852 2863 8820 while inland cities suffer from oversupply [email protected] Ken HE CFA,+86 21 6888 3375 · Rebound in e-commerce growth has triggered [email protected] industry-chain plays to compete for warehouses Carol WU+852 2863 8841 [email protected] · Our top picks are Vanke-H (2202.HK) and Shenzhen Chiwan (200053.CH) Alibaba’s online sales onSingle’s Day surged39% y-o-y to Recommendation & valuation Rmb168.2bn in 2017,vs. 32% y-o-y growth in 2016. E- commerce retail sales have sped up with 32% year-on-year (y- Disc/ o-y) growth registered in 10M17, outpacing the 26% in 2016 Target Mkt (Prem) and iResearch’s full-year projection of 25.4% for 2017. Major Currency Price Price Rec Cap to NAV e-retailers are actively expanding the categories of consumer Local$ Local$ US$m % goods, especially in fresh food and cross-border BJ Properties merchandises.Both export and import activities have picked up HKD 0.32 0.44 BUY 281 65.9 (925 HK) strongly year to date, mainly led by imports. Imports increased China Logistics by 17% in value terms in 10M17 while exports grew 7%. Property HKD 2.41 n.a. NR 900 n.a. (1589 HK)* Tier 1 cities to lead rental growth in 4Q17.Rentals at logistics Shenzhen Chiwan HKD 22.88 28.71 BUY 1,025 63.0 propertiesin key cities were relatively flattish quarter-on-quarter (200053 CH) (q-o-q) in second quarter 2017, while Chongqing/Chengdu Vanke-H HKD 28.1 25.00 BUY 47,682 -23.7 continued to suffer from oversupply. Looking ahead, Shanghai, (2202 HK) ^ Shenzhen and Beijing are expected to log 1-3% growth in Vanke-A CNY 28.9 22.20 HOLD 47,682 -41.2 rentals for 4Q17-1Q18. Industrial land supply in 14 key cities (000002 CH) ^ dropped by 19% y-o-y in 1H17, mainly due to substantial cut in Chengdu, Chongqing, and Wuhan. Growth of warehouse * Consensus investments also remained low at 5% in 10M17, vs. 5%/28% ^ TP under review in 2016/2015, which will likely slow down warehouse supply Source: Thomson Reuters, DBS Vickers from 2018 onwards and support rental growth. Upstream plays are also chasing warehouses, likely to push up capital values further. Alibaba (BABA.US, BUY) announced the Major players’ landbank move to raise its stake in Cainiao and expandits investments in warehouses. SF Express (002352.CH, not-rated) has signed GFA (m sm) 2014 1H17 various cooperation agreements with GLP, Vanke and GLP 10.7 29.2 Goodman to co-develop logistics properties. Suning Goodman 1.3 4.2 (002024.CH, not-rated) also announced its decision to set up a e-Shang/Redwood 0.6 4.1 logistics property fund, partnering with Shenzhen government- CNLP (Yupei) 0.7 4.0 backed firms. We are POSITIVE on the sector and prefer SOEs Mapletree 0.8 2.6 and large developers with strong access to warehouse land. Vanke 0.2 2.6 Our top picks are Vanke-H and Shenzhen Chiwan. The latter’s Shenzhen Chiwan (Blogis) 0.9 1.9 Beijing Properties 1.1 1.7 share price has risen by 25% month-to-date, as long-awaited Source: Company, DBS Vickers B-to-A conversion will likely resume. Valuation remains attractive at 45% discount to NAV. ASIAN INSIGHTS VICKERS SECURITIES ed- JS/ sa- AH Industry Focus China Real Estate (Warehouse) Sector Domestic demand to drive growth PMI: stayed at around 52% in October 2017 China’s shift to a consumption-driven economy is generating strong demand for modern high-quality logistics properties. E- % commerce retail sales have sped up with 32% year-on-year (y- 57 o-y) growth registered in 10M17, outpacing the 26% in 2016 and iResearch’s full-year projection of 25.4% for 2017. 55 Alibaba’s online sales onSingle’s Day grew 39% y-o-y to 53 Rmb168.2bn in 2017, vs. 32% y-o-y growth in 2016.Major e- retailers are actively expanding the categories of consumer 51 goods, especially in fresh food and cross-border merchandises. They have further penetrated into rural areas and are exploring 49 more opportunities there. In addition, major e-retailers are also expanding their consumer finance business, which could 47 facilitate and drive online consumption activities further. 45 Therefore, demand for warehouses remains decent. Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Sep-10 Sep-14 Sep-15 Sep-16 Sep-17 Sep-11 Sep-12 Sep-13 SF Express (002352.CH, not-rated) is expanding its cold-chain May-10 May-11 May-12 May-13 May-14 May-15 May-16 May-17 logistics business.China’s manufacturing Purchasing Managers' Source: CEIC, DBS Vickers Index (PMI) has been recovering since hitting 49.0 in Feb 2016, the lowest level since 2010. PMI had gradually climbed to 51.6 Import and export growth in October2017,indicating an expansion of manufacturing · Export growth has remained positive y-o-y over the past eight activities.Both export and import activities have picked up months; +7% y-o-y growth in 10M17 strongly year to date, mainly led by imports. Imports increased · Imports have achieved double-digit y-o-y growth year to date; by 17% in value terms in 10M17 while exports grew 7%. +17% y-o-y growth in 10M17 Consumption upgrade continues to drive up demand for fresh foods and cross-border goods, and hence, demand for cold 30% storage warehouses and bonded warehouses. SF Express is teaming up with GLP and Vanke to build cold storage facilities. 20% 10% 0% - 10% - 20% - 30% Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Feb- 12 Feb- 13 Feb- 14 Feb- 15 Feb- 16 Feb- 17 Source: CEIC, DBS Vickers Page 2 Industry Focus China Real Estate (Warehouse) Sector Logistics Prosperity Index China warehouse index · Logistics Prosperity Index (LPI) has remained above 50 for · China warehouse index was low at 49.6 in July following the past 16 months themid-year online sales promotions in June · Index recovered to 55.1 in October % % 57 61 59 55 57 53 55 51 53 51 49 49 47 47 45 45 J ul -16 J ul -17 Jan-16 Jan-17 Jun-16 Jun-17 Oct-16 Oct-17 Feb- 16 Feb- 17 Sep-16 Sep-17 Apr-16 Apr-17 Dec-15 Dec-16 Nov-15 Nov-16 Mar-16 Mar-17 Aug-16 Aug-17 May-16 May-17 Feb- 16 Nov-13 Nov-16 Mar-13 Aug- 14 Aug- 17 May-15 Source: China Federation of Logistics & Purchasing (CFLP), DBS Source: China Federation of Logistics & Purchasing (CFLP), DBS Vickers Vickers China E-retailer logistics index Online retail sales · China E-retailer logistics index edged down to 122.3 in · Online retails sales growth slowed down from 33% in October 2017, from123.6 in September 2017 2015 to 26% in 2016 · But, y-o-y growth picked up to 32% in 10M17 J an2015=100 RMB trn 125 8 70% 124 7 123 60% 6 122 50% 5 121 40% 4 120 30% 119 3 20% 118 2 10% 117 1 116 0 0% 115 2011 2012 2013 2014 2015 2016 2017E 2018E J ul -17 Jan-17 Jun-17 Oct-17 Oct-16 Feb- 17 GMV of China Online Retail Sales (LHS) Sep-16 Sep-17 Apr-17 Dec-16 Nov-16 Mar-17 Aug-17 May-17 Growth rate (RHS) Source: China Federation of Logistics & Purchasing (CFLP), DBS Source: iResearch, CEIC, DBS Vickers Vickers Page 3 Industry Focus China Real Estate (Warehouse) Sector Key Industry Trends Management, on 14 November 2017. Intensifying competition should continue to drive up capital value of warehouses. Land supply – Industrial land supply has been on a declining trend since 2012, with aggregate industrial land supply in 14 Land supply in 14 major cities major cities contracting by 19% y-o-y during Jan-Jun 2017, · Guangzhou, Tianjin and Hangzhou raised industrial land largely from Chengdu, Chongqing and Wuhan. Shenzhen has supply in 1H17 joined Nanjing to suspend supply of any industrial land in · Chengdu, Chongqing and Wuhan had cut industrial land during the same period. Apart from these two cities, Beijing’s supply substantially in 1H17 industrial land supply was the lowest among other cities. The · Nanjing and Shenzhen suspended industrial land supply in land supply for warehouses could be much lower as big cities 1H17 have significantly cut supply for warehouse use. Beijing has ceased to offer land for warehouse use for the last two years. mn sm The falling supply of industrial land will likely lead to 120 undersupply of warehouses in 2-3 years' time. 100 Investments picking up, foreign investors are coming back. The e-commerce boom had led warehouse construction to grow 80 rapidly from 2012-2015. Major investors such as Blackstone, 60 Warburg Pincus, APG, Brookfield, Temasek, and PGGM had poured money into China’s logistics real estate sector during 40 that period. However, foreign investors have slowed down their investments during the past two years given concerns 20 over the RMB depreciation.