• GLP reported 2Q15 Revenue at US$193mn (32% y-y), driven by leasing and rental growth in China and recent Brazil portfolio acquisition. 1H15 Revenue up 25% to US$362mn
• 1H15 PATMI ex-revaluation however came in at US$269mn (-23% y-y) attributed to one-time FX losses in Japan and Brazil from the sales of assets to the fund management platform
• Started development of US$846mn in China, on track with the whole year targeted development starts of US$1.7bn
• Maintain at Accumulate with lower TP of $3.03

What is the news?

GLP reported 1H15 revenue at US$362mn (25% y-y), attributed to the strong leasing and rental growth in China and the inclusion of Brazil portfolio acquired in previous quarter. 1H14 PATMI was down 23% y -y to US$269mn which included one-time FX losses from the sale of Japan and Brazil assets to the fund management platform and higher NCI contribution, partially offset by weakening of JPY against USD. Adjusting for these, the 1H15 pro-forma earnings was up 12% y-y.

Development starts for 1H15 for the 3 countries was US$1.45bn (US$846mn in China, US$368mn in Japan and US$239mn in Brazil), up 160% y-y. GLP has also completed its US$2.5bn landmark agreement with the consortium of Chinese domestic institutions, owning 66% of GLP China.

How do we view this?

Fund management income increased 87% y-y to US$49mn in 1H15 contributed by development and acquisition fees and management fees. GLP has recently expanded the fund management platform by US$2.5bn from (1) the formation of US$1.1bn GLP Brazil Income Partners II, (2) US$0.4bn expansion of GLP Brazil Development Partners I, (3) US$0.5bn expansion of Japan Development Venture and (4) US$0.5bn asset monetization to GLP J-REIT.

The management has revealed their intention for a possible second China development fund with the strong demand from their capital partners. Even with the slowdown of the Chinese economy, GLP remains positive on the China business environment as supply remains constrained, with 67% of demand coming from their existing customers.

However, the rental growth is likely to slow to 4-5% for the next 5 years. GLP aims to grow its pipeline of developments to earn revaluation gains on completed projects and recycle stabilised properties to the fund management platform. Moving forward, we rationalise that the fund management revenue will be a significant earnings contributor to GLP.

With Bank of Japan easing monetary policy, possible further Yen depreciation could impact GLP’s net profit and weigh on GLP’s valuation in the near term since the Japan portfolio contributes about 37% of the top-line. GLP intends to create a natural hedge by increasing leverage in Yen and capitalise on the low interest environment for more development projects considering the low vacancy rates in Tokyo and Osaka.

Source: Phillip Securities Research - 5 Nov 2014