• GLP posted FY14 PATMI at US$685mn (31% y-y), and Revenue at US$598mn (20% y-y) after adjustment of divestment of assets to J-REIT in 4Q13 and FX
• Record high new and expansion leases of 3mn sqm, up 74% y-y in FY14
• Target FY15 development starts at US$2.7bn, up 38% y-y
• Propose FY14 dividend at 4.5 cents
• Upgrade to Accumulate with new FY15 TP 3.13

What is the news?

GLP FY14 PATMI and Revenue were US$685mn (0% y-y), and US$598mn (-7% y-y) due to divestment of assets to J-REIT in 4Q13 and FX movements. After adjustments of J-REIT and FX, FY14 PATMI and Revenue increased 31% y-y and 20% y-y respectively driven by lease-up of development projects and continued rental growth in China. The positive operational performance is underpinned by buoyant leasing momentum with record high new and expansion leases of 3mn sqm, up 74% y-y in FY14. Fund management platform business also posted strong growth with management income doubled to US$25mn in this quarter. GLP intends to accelerate the portfolio growth and target to commerce US$2.7bn development starts in FY15. A dividend of 4.5 cents was proposed.

How we view this

We are seeing healthy leasing activities in all 3 markets in 4Q14. In China, the new and expansion leases leaped by more than 100% to 1mn sqm y-y this quarter (up 61% y-y for the whole FY14), with 71% leased to existing customers. Out of the new leases, e-commerce and 3PLs companies represented about 45% and 23% of the demand respectively, demonstrating the strong exigency from these industries. For Japan side, leasing activities for FY14 increased by 57% y-y, driven by a recovery in consumer spending. Overall Japan portfolio remained well-leased at 99%. The development starts were 2.5mn sqm GFA in China (in-line with target) and 453K sqm GFA in Japan (exceeding the development target) for FY14. The above operating metrics signified the continued robust logistics demand in China and Japan.

CHINA - GLP had announced a landmark agreement with a group of Chinese State Owned Enterprises (SOEs) and institutions (Bank of China, China Life and Hopu Fund etc) to reorganize the China operations under a new holding company China Holdco in last quarter. GLP will hold about 66% while the Strategic Partners (Chinese SOEs and Employee Team) will hold the balance 34%. This US$2.5bn deal is spilt into two tranches and we estimate that the deal will be completed by this year with the first tranche of US$1.6bn to take place in 1Q15. The strategic partnerships with the SOEs will improve the GLP’s network of customer base, provide better access to secure strategic land, increase business opportunities and improve stickiness of tenants by providing value-added services (for example, better supply chain financing alternatives from Bank of China, one of their strategic investor) to their customers. Furthermore, the partnerships will also solidify GLP’s reputation as the top logistics solution provider in China, opening doors to future new customers. China’s business remains upbeat with rents on renewal up 7.1% y-y in FY14. With the capital unlocked from the divestment of China operations, GLP will accelerate the expansion with 40% increase to US1.7bn in development starts for China in FY15. We believe that the recent investment from Chinese consortium will be beneficial to GLP growth in China in long term though the transaction may dilute the earnings in near term.

Brazil - Another major development for GLP is the acquisition of 34 logistic properties in Brazil from BR Properties S.A for US$1.36bn. Per our understanding, these properties will be wholly owned by GLP. With the acquisition completed by 2Q15, Brazil portfolio will increase to 2.6mn sqm, strengthening GLP’s market position in Brazil. The loan-to-value (LTV) is about 35% and is immediate accretive, raising both top and bottom line, partially offsetting the near term earnings dilution from the divestment of the China business.

Japan – Rents for modern logistics facilities in Japan have bottomed out and are in the upward trend on the back of high demand from 3PLs servicing manufacturers and consumer goods companies. Demand is especially intense in Tokyo and Osaka due to the tight new supply. The vacancy rate is virtually zero in Osaka and stays low at 4.0% in Tokyo despite 5 new completions in last quarter. 85% of GLP’s Japan portfolio is located in Tokyo and Osaka. Management has revealed that GLP Ayase is now 100% pre-leased, way ahead of the completion in 1Q16. GLP, coupled with the new developments starts in Greater Tokyo (GLP Yachiyo and GLP Sayama Hidako I and II) and Greater Osaka (GLP Naruohama and GLP Kobe-Nishi) with expected completion date from 4Q15 onwards, is in a prime position to ride the skyward rental wave for higher earnings.

Investment Action

GLP intends to step up the portfolio growth with FY15 target development starts expenditure at US$2.7bn (US$1.7bn for China, US$675mn for Japan and US$252mn for Brazil), an increase of 38% y-y. We favor GLP for (1) its dominant market position, (2) landlord-favored market dynamics for modern logistics facilities and (3) solid investors with strong financial capability. We upgrade our rating to Accumulate as we roll over to new FY15 TP of $3.13 and introduce FY16 estimates. Potential risk: Depreciation of JPY / RMB, mitigating GLP’s profits.

Source: Phillip Securities Research - 26 May 2014