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Deutsche Bank Markets Research

Industry

APAC Retail and Property

Date 13 December 2017

Asia Pacific

Retail Real Estate

F.I.T.T. for investors

Retail and retail real estate - winning the e-commerce game APAC is better positioned

The rise of e-commerce has redefined shopping and revolutionised both retailing and retail real estate development strategies. We have witnessed meaningful negative implications brought on by the age of online shopping in the U.S. (please refer to US FITT report “Cleaning out the closet: A Retail and Real Estate Makeover?”). In this report, we examine the implications for APAC region, identifying the winning traits and potential survivors of this structural change. We believe APAC, which hosts five of the top ten most attractive retail markets globally, is better positioned to weather this challenge.

________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong

Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 083/04/2017.

Real Estate Retail

Joy Wang Anne Ling

Research Analyst Research Analyst

(+65 ) 6423 5958 (+852 ) 2203 6177

[email protected] [email protected]

Emily Smith Michael Simotas


(+61) 2 8258-2297 (+61) 2 8258-1543


Jeffrey Gao, CFA Takahiro Kazahaya, CMA


(+852 ) 2203 6256 (+81) 3 5156-6983


Jason Ching, CFA Jihyun Song


(+852 ) 2203 6205 (+82) 2 316 8906


Yoji Otani, CMA Jeremy Kim


(+81) 3 5156-6756 (+82) 2 316 8902


Chien-Fie Man

Research Analyst

(+65 ) 6423 6897

[email protected]

Distributed on: 12/12/2017 21:00:00 GMT

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Distributed on: 12/12/2017 19:23:00 GMT

Deutsche Bank Markets Research

Asia Pacific Retail Real Estate

Industry


Date 13 December 2017

FITT Research

Retail and retail real estate - winning the e-commerce game

APAC is better positioned

________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong

Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 083/04/2017.

The rise of e-commerce has redefined shopping and revolutionised both retailing and retail real estate development strategies. We have witnessed meaningful negative implications brought on by the age of online shopping in the U.S. (please refer to US FITT report “Cleaning out the closet: A Retail and Real Estate Makeover?”). In this report, we examine the implications for APAC region, identifying the winning traits and potential survivors of this structural change. We believe APAC, which hosts five of the top ten most attractive retail markets globally, is better positioned to weather this challenge.

Real Estate Retail

Joy Wang Anne Ling


(+65 ) 6423 5958 (+852 ) 2203 6177




(+61) 2 8258-2297 (+61) 2 8258-1543


Jeffrey Gao, CFA Takahiro Kazahaya, CMA


(+852 ) 2203 6256 (+81) 3 5156-6983


Jason Ching, CFA Jihyun Song


(+852 ) 2203 6205 (+82) 2 316 8906


Yoji Otani, CMA Jeremy Kim


(+81) 3 5156-6756 (+82) 2 316 8902


Chien-Fie Man

Research Analyst

(+65 ) 6423 6897

[email protected]

Retail: converging trend, diverging pace Structural issues such as consumption upgrades, technological advancement and cyclical trends are pulling APAC’s offline brands/retailers in varying directions. Consumers in China and S Korea are fully embracing online, with those in Singapore and HK lagging, while Japan and Australia are moving at a tepid pace as preference for offline retail remains high. Consequently, retailers in China and Korea need to be proactive by adopting an integrated online/offline strategy in order to stay relevant, while their counterparts in other markets face less imminent pressure and are able to co-exist with rising online retail (in selected products) or to develop online on their own. Retail: who are the winners and losers? Department stores have felt most severely the rise of e-commerce, with its portion of total retail sales shrinking from 10-12% to 3-9% across countries between 2007 and 2016. Few brands/retailers in APAC have demonstrated successful online strategies and we note the following more successful names. Fast Retailing’s vertical model and self-run store format has allowed it to develop a seamless online module; Emart’s strong merchandising capability, particularly in fresh food, has powered its O2O model; YUM China’s online delivery has successfully brought virtual traffic to the stores; and Robam’s ability to manage offline distributors through a well-integrated inventory information system has sustained its sales growth. Real estate: performance increasingly polarised; subdued rental growth outlook Professional landlords have embraced the online challenge by engaging in a more active management of their retail assets through frequent redevelopment, tenant mix changes and asset recycling. Nevertheless, we forecast subdued market rental growth across the region, given the structural challenges despite a cyclical recovery in retail sales. Our rental outlook is most optimistic in China and least in HK. We see increasing polarisation in performance and expect well-managed quality portfolios to gain market share at the expense of street-level shops and boutique malls. Diversified groups are our preferred picks; opportunities exist in retail REITs We believe that developers and diversified REITs with substantial retail exposures are better positioned to overcome the challenges of online shopping and ride the cyclical recovery in consumption. Our top picks are Longfor, CapitaLand and Stockland. Notwithstanding near-term volatilities, we also see opportunities in some well-managed pure retail players, as we view the market as pricing in an overly pessimistic scenario that assumes an over-50bps cap rate expansion or almost 20% decline in rents. Scentre Group and CapitaLand Mall Trust are our preferred picks.

13 December 2017

Property


Page 2 Deutsche Bank AG/Hong Kong

Table Of Contents

All in charts ........................................................................ 3

The essentials .................................................................... 5

The evolution of retail and retail real estate ...................... 10

Survival traits ................................................................... 14

Valuations in a new world ................................................ 30

Australia .......................................................................... 39

China: pioneer in e-commerce ......................................... 46

Hong Kong ...................................................................... 64

Japan ............................................................................... 79

Korea e-commerce ........................................................... 99

Singapore ...................................................................... 110

Appendix A .................................................................... 118

The authors of this report wish to acknowledge the contributions made by Louise Li, Felix Gao, Leanne Truong, Daniel Wan, Foo Leung, Stephen Cheung, Myron Lau, Akiko Komine and Akane Wang.

13 December 2017

Property


Deutsche Bank AG/Hong Kong Page 3

All in charts

Retail

Figure 1: E-commerce retail sales have outperformed the

retail market in most countries over the past 10 years…

Figure 2: …with pace and penetration differing among

countries due to underlying reasons

11% 6%2%

0%4% 4% 6%

78%

17% 14% 13%24%

16% 16%

-10%

10%

30%

50%

70%

90%

China Hongkong UnitedStates

Japan Australia Singapore SouthKorea

10-year CAGR (2006-2016) for e-commerce/total retail sales for seven markets

Total retail E-commerce

0%

5%

10%

15%

20%

25%

30%

35%

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

e

2018

e

2019

e

2020

e

2021

e

Online penetration % comparison for six markets

China Hong Kong, China Japan

Singapore South Korea Australia

Source: Deutsche Bank, Euromonitor, Statista Source: Deutsche Bank, Euromonitor

Figure 3: E-commerce penetration from one category to

another, with countries at different stages

Figure 4: Department stores have been hurt the most

severely, particularly in Stages 2-3 in Figure 3

Stage 2‘Low risks’ categories• Looking for categories

which lack brand loyalty, e.g. apparel Stage 1

Standardized goods• Books and stationary

goods• Searching only for

lower price

Stage 3High ASP items • Online retailer

established credit • Luxury, cosmetics

taking off

Stage 4perishable or bulky items or consumer services• logistics and supply chain • consumption upgrade• Online delivery takes off

• Traditional book/stationary stores lost attraction

• Department stores and street level fashion stores lost traffic

• Traditional fashion brands lost market share

• Department stores further deteriorated

• Small/local cosmetics took off with hot SKU

• Hypermarket/supermarket moves online

• Online-offline integration• traditional restaurants

expand their O2O delivery business

Australia HK, Singapore, Japan

China, Korea

Where are the countries now ?

9% 10%

7%

10%

12%

4%

7%

11%

5%

9%10%

3%

0%2%4%6%8%

10%12%14%

China Hong Kong Japan Singapore South Korea Australia

Department store as % of total retail sales shrank from 2007 to 2016 for all six

countries

2007 2016

Source: Deutsche Bank Source: Deutsche Bank, Euromonitor

Figure 5: Most of the traditional retailers/brands have

experienced de-rating, reflecting the online disruption

Figure 6: More agile brands/retailers have rolled out

online strategies to stay relevant in a digital era

6

8

10

12

14

16

18

20

Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Nov-15 Nov-16 Nov-17

Weighted China Retailer PE -1x std Avg +1x std

1%3% 4% 5% 6%

9% 10% 10% 11% 11% 12% 13% 13%15%

17% 18%

23% 24%28%

30%

0%

5%

10%

15%

20%

25%

30%

35%

2017 Online sales contribution to overall sales in China

Source: Deutsche Bank, Bloomberg Finance LP Source: Deutsche Bank, company data

13 December 2017

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Real estate

Figure 7: Shopping centre space per capita as at 2016 −

figures in Asia Pacific were much lower than in the US

Figure 8: Tenant share of GLA in 2016 – Asia had highest

percentage of entertainment and F&B tenants 23.5

11.1 10.1

5.84.6 4.3

2.2 1.8

0.0

5.0

10.0

15.0

20.0

25.0

(sqf

t)

46%

13%

8%

29%

6%

27%

13%11%

47%

10%

23%

15%13%

36%

6%

17% 17%

11%

45%

15%15%

21%

16%

40%

8%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Dept Store Mini Major Entertainment Specialty F&B

USA UK Australia Asia Middle East Source: Deutsche Bank, CapitaLand Mall Trust, International Council of Shopping Centres, various statistics agencies and Cistri Source: Deutsche Bank, General Growth Properties, Cistri/Urbis

Figure 9: Annual tenant sales psf – the region is very

competitive globally

Figure 10: HK high street rents vs. shopping mall rents –

high street rents are converging downwards

738 753 684

949

1,381

326

666757

614 569

0

200

400

600

800

1,000

1,200

1,400

1,600

(US

$)

Total tenantsales psf

Specialty tenantsales psf

0

100

200

300

400

500

600

700

800

Overall prime Premium prime High street

Source: Deutsche Bank, company data *Note: Wharf (4.HK) has demerged its portfolio of Hong Kong investment properties (including Harbour City, Times Square, Plaza Hollywood) to form Wharf REIC (1997.HK) on November 14, 2017. The figures for Wharf’s retail portfolio in this report are historical numbers prior to the demerger. For illustration, “Wharf”/”Wharf Holdings” refers to this portfolio.

Source: Deutsche Bank, JLL

Figure 11: Retail office cap rate spread vs. LT average Figure 12: Retail cap rate over 10Y vs. LT average

111

2

-91-101

175

0

1278

46

-146-108

76

18

-46

-200

-150

-100

-50

0

50

100

150

200

1Q17 Average

247 295 121 71 282 353 255

261

353

13093

174

366

150

0

50

100

150

200

250

300

350

400

1Q17 Average

Source: Deutsche Bank, JLL, CBRE Source: Deutsche Bank, JLL, CBRE, Bloomberg Finance LP

13 December 2017

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The essentials

Retail: converging trend, diverging pace in Asia Pac

Converging trend; diverging pace Offline’s much slower growth than online is a structural issue because technological advancement has changed consumers’ use of time and broken down the characteristics of the offline business model (including the supply chain).

However, due to each market’s local characteristics, its pace of online/O2O development has been/will be different. We have evaluated each country based on a range of metrics, as shown in Figure 13, and divided them into three categories according to e-commerce adoption, operating environment, consumer behaviour, etc. These three categories are the Pioneers (China, South Korea), the laggards (Singapore and HK) and co-existence (Japan and Australia). In addition, there are similarities in the sequence of product category penetration. We believe brands/retailers in different countries have different ways to survive, which will be discussed in a later section, The evolution of retail and retail real estate.

Figure 13: Country metrics for developing e-commerce Country Classification Low labour

cost Access to

capital Access to suppliers

Market size Tech penetration

Favourable regulation

Metropolitans as % of total

regions

Population density

China Pioneer High High High High High High Moderate Moderate

South Korea Moderate High High High High High High High

Japan Co-existence Low Moderate High Moderate High Low High High

Australia Low Moderate High High Moderate High Low Low

Singapore laggard Low Low Low Low Low Low High High

HK Low Low Low Low Low Low High High Source: Deutsche Bank

How brands and retailers can stay relevant In our view, traditional brand/retailers can only survive this tech revolution through innovation and by embracing technology. Brands/retailers that are more agile and react quickly to the latest trends should stay relevant.

In our view, the following companies have the most nimble strategies We like Fast Retailing’s vertical model and self-run store format, which has allowed it to develop a seamless online platform; Emart’s strength in sourcing, which has empowered its O2O model; YUM China’s online delivery, which brings virtual traffic to stores; Robam’s ability to manage its offline distributors while growing its self-run online platform; and Anta’s push in its online share through digital marketing and differentiated products.

Meanwhile, we believe the valuations of offline brands/retailers (especially in emerging markets like China) experienced a de-rating from 2013 to 2015 (as shown in Figure 14 and Figure 15), reflecting the challenges ahead. This can also be seen in the number of privatisation applications in the market (Intime, Belle, NWDS, etc) or corporate restructuring (e.g. spin-off between Li & Fung and GBG, Lifestyle and Lifestyle China, etc). Share price performance has improved since 2017, however, thanks to a market recovery and positive

13 December 2017

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outcomes for the O2O initiatives implemented by certain companies (such as those we mention above).

We believe brands like Hengan and Jahwa might need to catch up and expand their online sales mix, as international brands/ local online brands are challenging them through either price disruption or new product offerings (launching new products offline is more costly). Nevertheless, we believe Hengan is making progress to increase its online sales mix in next five years. While Jahwa’s online market share lagged behind due to less competitive digital marketing strategies.

Retailers like Sun Art, which failed to restructure on its own, is teaming up with leading e-commerce player Alibaba. Yonghui, who has limited online initiatives given its less affected target market, also announced that it is in talk with Tencent, another Internet leader in China. In contrast, Gome, a CE retailer who recognized ~RMB1bn net loss from online, has yet to figure out a sustainable online strategy for now.

In South Korea, we find department stores are facing challenges of declining asset efficiency as a result of e-commerce expansion. Korea’s top three department stores’ per sqm sales have decreased to W5.4mn in 2016 from W7.2mn in 2012, leading to the department store channel’s annual growth slowing to -2.4%~-3.2% yoy since 2013 from 11.4% yoy in 2011/5.4% yoy in 2012. The format has not been able to successfully retain its customer base, while many customers migrate to new retail formats.

Figure 14: PE trend of traditional offline retailers/brands Figure 15: PE trend of global leading players

6

8

10

12

14

16

18

20


Weighted China Retailer PE -1x std Avg +1x std

0

10

20

30

40

50

60

70

80

90

100


Weighted E-commerce PE -1x std Avg +1x std

Source: Deutsche Bank, Bloomberg Finance LP; Note: we use 43 HK/China disc. consumer/retail companies with closing price as of 24 Nov 2017 Source: Deutsche Bank, Bloomberg Finance LP

Note: we use 7 leading Chinese e-commerce companies with closing price as of 24 Nov 2017

13 December 2017

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Real estate: it’s not all that bad

Asia Pacific region is better positioned for this transition period Looking at the real estate market structures across the various regions, we view Asia as better positioned to weather the structural challenge posed by the rise of e-commerce, especially when compared with its US counterparts.

Retail space per capita in Asia Pacific is much lower than in the US, with Australia the highest at 11.1sqft per capita and China the lowest at 1.8sqft per capita. This compares with 23.5sqft per capita in the US, more than double that of any of the countries in the region.

Mall managers in Asia Pac have been more active in seeking avenues to attract shopper traffic and improve shopping experience, in our view. This is evident in the change in tenant mix: the region now has the highest percentage of F&B and entertainment tenants. Tenant sales psf for the region also stand very competitive globally.

Asia’s higher population density, smaller average apartment size and better retail mall locations have made physical malls an important part of lifestyle and culture.

Space consolidation is necessary and better malls get stronger With online taking market share from offline retail, we expect competition to intensify in physical retail real estate. The desire for destination malls could force high street and neighbourhood /boutique malls to consolidate, in our view.

Rentals for high street locations in HK have converged towards those of shopping malls, while rentals for neighbourhood / boutique malls in Singapore have declined significantly more than the market. Nevertheless, rental rates for destination malls in both markets have remained strong despite intense competition.

We forecast subdued market rental growth across the region despite the cyclical upturn in retail sales, as a result of the structural challenges. We also see a shift in lease agreements, with a higher proportion of Gross Turnover (GTO) rents. As a result, rental revenues better reflect the retail market’s cyclicality and the malls’ ability to generate sales.

Figure 16: Forecast rental growth YoY% Country City/Region 2017 2018 2019 2020

Australia na na 0-2% 0-2% 1-3%

China Key cities 2-3% 2-3% 2-3% na

Hong Kong Hong Kong -3% -7% -7% -3%

Japan Tokyo 0% -5% 0% -10%

Singapore Singapore -3% 0% 2% 2% Source: Deutsche Bank estimates

We believe that space contraction is the ultimate outcome and solution, with street-level stores, boutiques and neighbourhood malls losing out in this process. The gravitation towards lifestyle and destination malls should channel shoppers to well-located regional shopping centres, and make the better malls even stronger.

We define destination mall as

a retail mall that is usually

large and has a large

collection of offerings.

Shoppers are willing to travel

a good distance to shop at

destination malls.

13 December 2017

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Valuation more than reflects the challenging environment Retail real estate, as an asset class, has underperformed over the last year, both in the public equity market and in the physical private market, pricing in a certain level of the challenging environment the sector faces.

Physical cap rates have compressed across all asset classes, but to a lesser extent in retail space. With the exceptions of Beijing and Tokyo, yield spreads between retail and office are above LT average levels across the various regional markets. Moreover, cap rate spreads over 10-year bonds are above the LT average in Hong Kong and Sydney, despite the extremely low 10-year yield.

Retail has underperformed the sector over the last year, implying a potential cap rate expansion of 52bps on average, or a rental decline of 19% on average from current levels. While we acknowledge the structural challenges, we believe that the market has priced in a pessimistic scenario, ignoring active mall managers’ ability to weather these issues.

Our stock calls

Retail - In an irresistible digital world, strong brands or retailers that integrate online/offline better can survive. Our top picks across the region are Yum China, Fast Retailing, Anta, Robam, Emart.

Yum China is the largest fast food chain in China with 30% market share. Online O2O delivery has been the key driver of the company SSSg with 40% yoy in 8M17. Although the O2O delivery market is dominated by aggregators (e.g. Ele.me, Meituan, etc.) who account for over 90% market share in GMV, the number of active daily users for KFC’s platform, an individual restaurant brand, reached 1.8m, just following Ele.me and Meituan. Thus we believe it is much easier for a strong brand to gain market share from online once the brand equity is well established. We have a buy recommendation on Yum China with TP of USD45.30.

Fast Retailing – We upgraded Fast Retailing at the end of Oct from Hold to a Buy as we believe the company aspires to become the next global brand leveraging its successful e-commerce strategy in both Japan/international markets. We forecast e-commerce's share of Uniqlo Japan's sales to expand from 5.3% in FY8/16 to 6.3% in FY8/17 and 12.2% in FY8/20. We believe Uniqlo's growing popularity among consumers stems from the favourable balance between the quality and price of its products thanks to its powerful supply chain, whereby the company manages every step from product planning to sales. The good quality/price balance is one of the key factors that Uniqlo secure its market share in across market/channel. In China, Uniqlo surpassed Inditex and H&M since 2014 and ranks No.1 in fast fashion industry since then. The latest TP is JPY47,100.

Emart − We expect Emart to be able to deliver solid growth of double-digit OP CAGR until 2019E, as a result of its investments in new business formats paying off well, and its focus on improving asset efficiency of its hypermarket businesses through restructuring efforts. Emart Mall and Traders should continue to pay off in top line growth, while its efforts to streamline the cost structure should enable margin expansions. We maintain Buy with a target price of W290,000.

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Anta − As a local sportswear brand in China, e-commerce becomes the key driver for its Anta’s core brand. We continue to believe Anta has shifted its e-commerce strategy toward a more scale-driven one to deliver its 2020 sellthrough growth. It is having good progress and made its sales ranking on Single Day in 2017 as No.3 after Nike and Adidas, consistent with its offline ranking. E-commerce to account for 20% of total sell-through by 2020 (vs. less than 10% in 2016). Within Anta brand, 70% of e-commerce SKUs will be exclusive for e-commerce by 2020. We also forecaste e-commerce EBIT contributed 34% of overall EBIT by 2020 vs 17% in 2016. We recommend Buy on Anta with TP of RMB37.0.

Robam – it started to develop the e-commerce distribution channel in 2009, when there were only 20 kitchen appliance brands sold online (vs. the current 100 brands). It added its online store in the C2C platform (Taobao and Paipai) and the B2C platform (Yihaodian, JD, and Tmall). Robam is a first mover to embrace e-commerce, which allowed it to gain experience to cater to online shopping demand and streamline it’s online/offline distribution system. For reference, the Midea and Haier officially started e-commerce distribution in 2013. We expect online sales mix to increase to 40% of total sales by 2019 vs 30% in 2016. We recommend Buy on Robam with TP of RMB50.0.

With a cyclical upturn in most of the retail markets across the region, we see diversified developers with significant quality retail exposure as better names to ride this uptrend. Our top picks across the region are Longfor, Stockland and CapitaLand.

Longfor – In addition to the strong growth of its development properties, Longfor also owns >2mn sqm GFA of its Paradise Walk shopping malls (as of end-2017), which has a good operating track record (4-6% yield to cost for malls in operation for less than three years, rising to 6-9% when reaching maturity after three years, vs. its average borrowing cost of 4.7% as of 1H17). Supported by its rich IP pipeline (11 new malls to be opened in the next few years to expand its IP portfolio to >5mn sqm), management targets a 33% CAGR in rental income to RMB6bn by 2020F (vs. our estimate of RMB5.3bn even on flat rental), well covering its gross interest expenses of RMB4-5bn.

CapitaLand – Cap rates compression, buoyant investment markets and abundant liquidity are an environment in which CapitaLand thrives. We argue for the strength of its business model in the current environment. With 90% of its investment properties completed and all its REITs cashed up with over S$3bn debt capacity, we believe CapitaLand could surprise on the upside. The significant retail portfolio could also benefit from the improving retail sentiment across the region.

Stockland – Stockland Group is our preferred diversified REIT, given 1) its exposure to single-family dwellings; 2) a strong dividend yield vs peers (5.7% vs 4.9%); and 3) it is currently trading at a 15% premium to NTA, below its historical average of 17% (we believe this has been driven by the market’s negative view on its retail portfolio).

We believe that a number of the well-managed quality retail portfolios are trading at levels that price in overly pessimistic scenarios and we would look to buy CapitaLand Mall Trust and Scentre Group.

13 December 2017

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The evolution of retail and retail real estate

Different phases, diversified outcomes

How has e-commerce disrupted the retail scene? To better understand the market, we look at how different retail markets have developed and believe that the diverse paths have resulted in very different retail scenes across countries today.

Retail markets in all countries go through an evolution from unorganised street retailing to organised multi-format retailing. That said, the US is probably one of the few markets that has gone through the full evolution process, which saw specialty shops before the creation of e-commerce / online retailing and today’s omni-channel retailing. The lengthy and full development process coupled with the availability of land means that the country has the highest retail space per capita, the greatest dependence on department stores, and today sees the biggest threat from the development of online retailing.

Meanwhile, APAC countries have diverged given their different development paths. Some of them, like China, have gone through the whole retail evolution process with less offline concentration, is leading the way in exploring the next trend, possibly omni-channel. Others have lagged a bit due to mature existing retail infrastructure.

Figure 17: Development of retail scene – more fragmentation as customization is less costly with technology

advancement

Street level store

Wet market

Department store

Supermarket

Shopping mall

Specialty chain

General merchandising store

Dollar store

Hypermarket

CVS store

Mega mall

Concept store

High-endsupermarket

Ecommerce

Omni-channel Mom & pop's stores

Source: Deutsche Bank. Note: in terms of the occurrence of different formats.

E-commerce, one of the most disruptive channels, has evolved over time from standard goods to FMCG and has thus disrupted retail scenes from department stores to hypermarkets. The expansion of product categories and e-commerce’s ability to gain share has been thanks to online channels’ infrastructure and changes in shopping behaviour. We break this disruption down into four stages (Figure 18).

What’s in this section?

1. The evolution of e-commerce and

its disruption to offline retail

2. We see diversified outcomes in the

region given different cultures and

development phases

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Figure 18: E-commerce evolution from one category to another and its impact

on offline channels

Stage 2‘Low risks’ categories• Looking for categories

which lack brand loyalty, e.g. apparel Stage 1

Standardized goods• Books and stationary

goods• Searching only for

lower price

Stage 3High ASP items • Online retailer

established credit • Luxury, cosmetics

taking off

Stage 4perishable or bulky items or consumer services• logistics and supply chain • consumption upgrade• Online delivery takes off

• Traditional book/stationary stores lost attraction

• Department stores and street level fashion stores lost traffic

• Traditional fashion brands lost market share

• Department stores further deteriorated

• Small/local cosmetics took off with hot SKU

• Hypermarket/supermarket moves online

• Online-offline integration• traditional restaurants

expand their O2O delivery business

Australia HK, Singapore, Japan

China, Korea

Where are the countries now ?

Source: Deutsche Bank

Stage 1: Online a convenient channel for consumers to buy standardised goods

In the initial stage, consumers tend to buy standardised commodities or products that are cheaper online, e.g. books, stationery, and consumer electronics (except in Japan, where CE’s retail prices were protected by regulations). At this stage, consumers shift to online to buy the same products only for the better price.

Offline retailers like bookstores and other small specialty stores are affected. Consumers seldom walk into traditional book/stationery stores to purchase only books/stationery.

Stage 2: Consumers get hooked on finding cheap and diverse brands online; department stores no longer enjoy a premium

Consumers start to buy products in categories where they are brand agnostic, e.g. apparel, footwear and accessories. In China, millions of online brands (Taobao brands) mushroomed with value-for-money products and gained market share from traditional apparel brands. Online penetration for apparel in China increased from 1% in 2010 to 26% in 2016. In Korea, leading commerce platforms (e.g. Gmarket, Auction and 11Street) have grown rapidly over the past decade by providing comprehensive product offerings for the brand agnostic categories such as trendy fashion goods, lower-end accessories and so on.

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During this stage, traditional apparel/footwear brands lose significant market share, with negative same store sales growth at traditional street-level stores and department stores. Department stores, as a channel, also see their traffic decline and market share shrink as footwear and apparel account for most of their selling space and are their main traffic drivers.

Stage 3. Online can be premium as well

Once the credibility of online operators is established, consumers’ digital baskets are enriched by more product categories with higher ASP, less standardised or brand-loyal items, such as cosmetics, gem-sets and luxury goods, for which consumers are more sensitive to product quality control. Aggressive investment in e-commerce also gives the online operators high tolerance on payback period, particularly some vertical players.

Department stores further deteriorate as brands start to proactively embrace online and restructure their channel strategy. From online operators’ angle, ticket prices need to be beefed up by the introduction of premium products, as traffic growth will finally peak out.

Stage 4: Well-developed logistics offer high-frequency shopping

Along with the gradual improvement in logistics infrastructure, an increase in the convenience of online shopping and delivery services enables consumers to buy perishable or bulky items or consumer services, e.g. fresh food, daily use FMCG, home furniture and online delivery services. For now, grocery’s online penetration remains lower in general at 12%/6% vs 18%/16% for overall retail in Korea/China, respectively.

By this stage, situations in different countries have diverged. In some countries, online groceries have been formed from offline traditional hypermarkets, e.g. Emart in Korea. In China, pure online players have expanded into grocery markets by beefing up grocery platforms and merchandising to further compete with offline. Thus, hypermarkets in China are still suffering from traffic declines, although they are trying to survive by also tapping into online or seeking new O2O business models.

How has this evolution played out in different countries? Having seen other countries go through part of or even the full evolution process, countries in the Asia Pac region went through a much compressed development process. We categorise the six countries we discuss here as follows, based on the adoption and impact of e-commerce.

The pioneers – China and Korea. Largely at Stages 3-4.

Co-existence – Japan and Australia, largely at Stages 1-3.

The laggards – Singapore and Hong Kong, largely staying at Stages 2-3.

Figure 19: Share of retail sales from

department stores has shrunk,

except in HK (2007 vs 2016)

9%10%

7%

10%

12%

4%

7%

11%

5%

9%

10%

3%

0%

2%

4%

6%

8%

10%

12%

14%


Department store as % of total retail shrank from 2007 to 2016 for most selected countries

2007 2016

Source: Deutsche Bank, Euromonitor

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Figure 20: E-commerce disruption converging and diverging

Group CountryOnline

penetration rate % (2016)

Online market CAGR % (2011-

2016)

Level of e-commerce disruption

Country characteristic Group characteristic

China 17.1% 61.2% High

• The key difference between China and many of the markets in other regions is the timing of the retail mall development. For most of the developed retail markets, e-commerce only evolved in the last two decades, when physical retail had already been dominating the retail market. China, on the contrary, experienced the development of online and physical retail development at the same pace. • With convenience of the online sales, it is not surprising for the country to have developed the most dynamic omni-channel retailing globally. • The leading players dominate the online market. The top two B2C players (Tmall and JD.com) own a market share of over 80%. They are also able to capture 85% of the online market growth for each year.• Brands/retailers are keen to implement the omni-channel strategy, while no uniform formats have been proved to the next mainstream.

South Korea

18.4% 16.0% High

• Grocery, the largest category in retail sales, may become the next growth driver for online shopping, given its lower e-commerce penetration ratio compared with the other categories. • We believe that Korea's e-commerce will remain fragmented with a number of pure online players and traditional retailers both participating in the online commerce market, in contrast to China. • Meanwhile, in our view, department stores and hypermarkets will continue to face the consequences of the e-commerce expansion with declining sales psm.

Japan 7.1% 13.3% Moderate

• Modern retail in Japan started from department stores, similar to the US. Over the years, we saw the rise of general merchandise stores, convenience stores, large retail chain stores on drugs and electronics, and suburban shopping centers grabbing a bite at the share of the department stores. • In recent years, many shopping malls have been transforming into one-stop destinations and cover more neighborhood areas to adapt to the aging population. • E-commerce development has been stalled in Japan due to its mature physical retail infrastructure (i.e., vast network of CVS and vending machines and daily needs can be fulfilled within 15 minutes with excellent services) and relatively conservative policies, including the Second Department Store Law, the Large-Scale Retail Store Law, and subsequent softening of the latter, etc.• While e-commerce has seen stronger inroads in the apparel segment, anti-monopolistic and trade rulings on distribution have limited growth in the electronics sector. • Rising labour costs made shipping costs increasingly prohibitive.

Australia 7.5% 22.4% Moderate

• Australia, one of the most advanced economies and with the most cultural similarities with the US, saw an early period of retail development resembling that in the US. • This diverged with the creation of the multi-format shopping mall in the 1960’s, which translated to a much lesser dependency on the department stores. • Meanwhile, the European and Asian influences over the last two decades, together with the significant development in real estate management capabilities, have shaped the retail real estate market into a more multi-cultural product. • That said, the country does have a relatively low online penetration rate as of today. This is due to its relatively low population density and higher costs, in particular, labor cost. • In addition, differences in online vs. offline pricing via negotiations and financing availability, as well as a preference for an in-store experience have also been an advantage for offline.

HK 3.1% 15.1% Low

• E-commerce development will mainly affect suburban malls. Malls located in CBD areas are more defensive, as they are mainly catering to tourist consumption. • Consumers are getting familiar with online shopping (84% of consumers have online shopping experience according Consumer Council). • Most of them shop from international websites for fashion, household (furniture and CE) categories and other long-tail products. FMCG and commodities are less affected due to the high availability in offline stores.

Singapore 4.6% 21.7% LowThe more advanced REIT market in Singapore has also cultivated a culture of professional mall management.

The pioneer

The Coexistence

The Laggard

China and Korea have the highest online penetration rates. We attribute the strong growth in e-commerce in these markets to the right environment and enabling elements, such as • advancement of technology including Wi-Fi and high-speed internet penetration, • aggressive investment from dominant incumbent traditional retailers or pure online players,• competitive pricing, and• relatively favorable government policy.

• The retail real estate markets in Hong Kong and Singapore have experienced a rather similar evolution process, especially in the early days. • Having the benefit of seeing how many of the developed market grow, and with limited land availability, malls in both cities were more compact and better located. The well-located malls and the high population density have made physical retail more convenient, and as a result, more e-commerce resistant. • In addition, with both cities representing major tourist destinations, tourist spending accounts for a significant proportion of the total retail sales, which is a key growth driver for retailers/brands. We highlight that in 2016, tourist spending in Singapore/HK was 21%/35%. • A lack of significant investment has limited the growth of e-commerce in Hong Kong and Singapore thus far, i.e., there is no local dominant e-commerce play; however, we have noted increased interest in these markets from Alibaba and Amazon. • We believe that an increasing influx of investment into e-commerce infrastructure could be a potential threat, especially for apparels and household products.

• More l inear e-commerce development rather than exponential over the past five years. • E-commerce co-exists and does not pose a big threat for the countries, with online shopping accounting for 7% share for each. • Online is gaining share at a much slower pace.

Source: Deutsche Bank, NBS, Euromonitor HK Consumer Council

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Survival traits

The rise of digital retail

Changing consumer behaviour in this digital world The rocketing growth of e-commerce has been at the expense of brick-and-mortar retailers, which have seen revenue/profit contraction due to declining footprints. The significant improvements in living standards and wealth creation over time, the availability of a huge number of brands, and the rapid adoption of and shifts in technology have changed consumer behaviour tremendously. Improved communication and connectivity have redefined borders, while more dynamic supply chains have brought economies of scale to smaller retailers. Meanwhile, product details and specifications can easily be found online now, and even better are the reviews of product users. Moreover, the internet has improved price transparency, all but eliminating price discrimination strategies.

As a result, the shopping experience has been revolutionised. In-store purchasing has shifted from physical to experiential offerings. Consumers’ behaviour has changed as they allocate more time to working, dining out, and, more importantly, entertainment. We note that clothing & accessories spending has seen the slowest growth over the last 24 months, with certain markets like HK and China showing declines. Experiential spending, including tourism spending, has seen the most growth, with mixed data on F&B.

Figure 21: YoY growth in clothing & accessories

spending per capita

Figure 22: Clothing & accessories spending as a % of

total retail sales

-20%-15%-10%-5%0%5%

10%15%20%25%30%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

China Hongkong Australia

United States Singapore

0%

2%

4%

6%

8%

10%

12%

14%

16%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

China Hongkong Australia United States Singapore

Source: Deutsche Bank, Census and Statistics Department, US Bureau of Labor Statistics, Ministry of internal affairs and communications, Singstat, Department of Statistics Malaysia, Australian Bureau of Statistics, World Bank, CEIC

Source: Deutsche Bank, Census and Statistics Department, US Bureau of Labor Statistics, Ministry of internal affairs and communications, Singstat, Department of Statistics Malaysia, Australian Bureau of Statistics, World Bank, CEIC

Shopping is no longer about finding and buying the merchandise: it is all about experience, personalised services and lifestyle. A brand is no longer about what the advertisement says, but what consumers tell each other. Rapidly and continuously changing consumer patterns and the loss of brand loyalty have made it difficult for retail real estate operators. Gone are the days of cookie-cutter malls. Even some of the long-standing brands might not attract the same number of shoppers today.

What’s in this section?

1. The rise of digital retail and

changing consumer behaviour

2. Survival traits for retail – the

importance of technology

3. Mall strategies – it is all about

attracting shoppers

13 December 2017

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Figure 23: YoY growth in outbound tourism expenditure

per capita

Figure 24: Outbound tourism expenditure as a % of total

retail sales

-50%

-30%

-10%

10%

30%

50%

70%

90%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

China Hongkong Australia Singapore Japan

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

China Hongkong Australia Singapore Japan

Source: Deutsche Bank, World Bank, CEIC Source: Deutsche Bank, World Bank, CEIC

Online is growing faster but penetration varies Despite different levels of penetration, online retail sales have continued to outpace offline retail sales in the past several years across the region. The Asia Pacific region now hosts the largest and most advanced e-commerce market, with the highest e-commerce penetration at 11% in 2016 vs a world average of 8.6% – thanks to China and the fast growing markets in ASEAN countries. Interestingly though, online penetration is actually fairly low for many of the mature economies in the region, including Australia, Japan, Hong Kong and Singapore, despite the advanced state of their infrastructure. With the entrance of Amazon into Singapore and Australia, and with government support for digital payments, we see an acceleration in e-commerce penetration in these mature markets. Forecasts suggest 14% e-commerce sales value growth in China and 9-20% in several other APAC countries in 2017-2021.

Figure 25: Five-year CAGR in online and total retail sales

(2011-2016)

Figure 26: Ten-year CAGR in online and total retail sales

(2006-2016)

10%2% 3% 1% 3% 3% 5%

61%

15% 15% 13%22% 22%

16%

0%10%20%30%40%50%60%70%


11% 6%2% 0%

4% 4% 6%

78%

17% 14% 13%24%

16% 16%

-10%0%

10%20%30%40%50%60%70%80%90%


Source: Deutsche Bank, Euromonitor Source: Deutsche Bank, Euromonitor

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Figure 27: E-commerce as % of total retail sales Figure 28: Forecast CAGR (2016-2021) of e-commerce

0%

5%

10%

15%

20%

25%

30%

35%

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

e

2018

e

2019

e

2020

e

2021

e

China Hong Kong, China Japan

Singapore South Korea Australia

14%16%

9% 9%

14% 15%

20%

0%

5%

10%

15%

20%

25%

Source: Deutsche Bank, Euromonitor Source: Deutsche Bank, Euromonitor, Statista

Overall, in major Asia Pacific countries, e-commerce retail sales have seen a 13%-61% CAGR over the past five years, accounting for 3-18% of total retail sales and driving 47%-235% of their respective markets’ incremental growth.

Figure 29: Offline retail sales by category – China Figure 30: Online retail sales by category – Korea

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

20.00%

50,000

150,000

250,000

350,000

450,000

550,000

650,000

750,000

850,000

950,000

(CN

Y m

illio

n)

China Incremental Retail Sales Growth

China OnlineIncrementalRetail SalesGrowth

ChinaIncrementalRetail SalesGrowth(ex.online)

China OnlinePenetration

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

20.00%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

2010 2011 2012 2013 2014 2015 2016

(KRW

bill

ion)

Korea Incremental Retail Sales Growth

Korea OnlineIncremental RetailSales Growth

Korea IncrementalRetail SalesGrowth(ex.online)

Korea OnlinePenetration


Figure 31: Offline retail sales by category – Hong Kong Figure 32: Online retail sales by category – Singapore

-1.20%

-0.70%

-0.20%

0.30%

0.80%

1.30%

1.80%

2.30%

2.80%

3.30%

3.80%

-2,800-2,000-1,200

-400400

1,2002,0002,8003,6004,4005,2006,0006,8007,6008,400

2010 2011 2012 2013 2014 2015 2016

(USD

mill

ion)

Hong Kong Incremental Retail Sales Growth

HK OnlineIncrementalRetail SalesGrowth

HKIncrementalRetail SalesGrowth(ex.online)

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

-250

-100

50

200

350

500

650

800

950

1,100

1,250

1,400

1,550

2010 2011 2012 2013 2014 2015 2016

(SGD

mill

ion)

Singapore Incremental Retail Sales Growth

Singapore OnlineIncremental RetailSales Growth

SingaporeIncremental RetailSales Growth(ex.online)

Singapore OnlinePenetration


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Figure 33: Offline retail sales by category – Japan Figure 34: Online retail sales by category – Australia

-8.00%

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

-2,400

-2,000

-1,600

-1,200

-800

-400

0

400

800

1,200

1,600

2,000

2,400

(JPY

billi

on)

Japan Incremental Retail Sales Growth

Japan OnlineIncrementalRetail SalesGrowth

JapanIncrementalRetail SalesGrowth(ex.online)Japan OnlinePenetration

-5.00%

-3.00%

-1.00%

1.00%

3.00%

5.00%

7.00%

9.00%

-3,000

-2,200

-1,400

-600

200

1,000

1,800

2,600

3,400

4,200

5,000

5,800

2010 2011 2012 2013 2014 2015 2016

(AU

D m

illio

n)

Australia Incremental Retail Sales Growth

Australia OnlineIncremental RetailSales Growth

AustraliaIncremental RetailSales Growth(ex.online)

Australia OnlinePenetration


Offline retail is still the culture in Asia The significantly higher urban density across the region and the much smaller size of homes mean that offline retail is part of the culture in Asia. Many go to a shopping mall not just to get the merchandise but also to meet up with friends, to socialise and to catch up with the latest trends. The increasing lifestyle, entertainment and service components have also reinforced this culture of going to shopping malls. That said, we see increasing focus on experience than shopping for merchandise and the rise of digital retail is forcing an integration of online and offline retail for a holistic experience.

Figure 35: Population density comparison Figure 36: Average unit home size in APAC cities

7,909

6,997

6,218

4,647

3,7953,295

1,301

454 374

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

Pers

on p

er s

q km

970 970 971

1,098

559 592

N.A.

1,625

1,441

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Aver

age

unit

size

(sqf

t)

Source: Deutsche Bank, World Bank, Bloomberg Finance LP, National Bureau of Statistics Source: Deutsche Bank, CBRE, ABS; Note: Number for Singapore does not include public unit types.

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Retail: be competitive by staying nimble

In order to combat the challenges brought on by the rapid rise of e-commerce, developers and brands must be ready to take bold steps in their strategies in order to avoid being tossed aside by the rising waves of e-commerce.

Brands embracing e-commerce as an additional revenue/profit driver As more consumers make online purchases, traditional brands have proactively/reactively expanded to online to fit new shopping behaviour, initially via online marketplaces due to lower investment costs and easier-to-acquire traffic. Taking China as an example, the online sales contribution is as high as 30% for some of the major consumer companies (Figure 37). When online’s share is meaningful enough (this differs among sectors and companies), profitability from online starts to improve. In China, many of the brands’ online businesses have reached breakeven, including at home appliance brands (Robam, Midea, Gree, Haier), Shanghai Jahwa, Giordano, Anta/Li Ning and Yum China.

Figure 37: Online sales contribution to overall sales in China (reflecting

various subsectors’ trends and brand strategies)

1%3% 4% 5% 6%

9% 10% 10% 11% 11% 12% 13% 13%15%

17% 18%

23% 24%28%

30%

0%

5%

10%

15%

20%

25%

30%

35%


Source: Deutsche Bank, company data

Not all retailers are successful when they go online, as they face broader competition from both online/offline and domestic/international. For example, when Belle and Hengan went online, Belle faced ASP pressure from local pure online brands while Hengan’s baby diapers faced ASP pressure from international brands like Merries, which have reset the retail price for products going through the CEBC channel.

Brands firstly use online as a destocking channel to sell off-season SKUs at cheaper prices (part of the Stage 1 we discussed above). When consumers upgrade and ask for a greater selection and more convenient shopping experience, they become less price sensitive but more quality sensitive. Currently, uniform pricing across online/offline, exclusive online products and convenient shopping experience are the major online focus for most brands.

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Brands with strong brand equity win. We believe brands with strong brand equity are more likely to survive, regardless of the channel disruption. Estee Lauder, Lancome, Nike, and Adidas are doing consistently well in all channels, partly because they are staying in segments that cater to consumers’ lifestyle and trading up demand, but partly because their brand equity is consistently good whether online or offline

Big brands are becoming relevant online. For instance, Uniqlo, one of the leading apparel chains in Asia, is doing very well in its offline stores. It recorded the best sales in both the 2015 and 2016 Singles Day shopping festivals (Figure 39). Similarly, Nike and Adidas achieved the best performances on Singles Day among all the sportswear brands, which indicates that consumers are now also looking for premium quality rather than just cheap products when they go online.

Figure 38: Top 10 sportswear brands on Singles’ Day

2012-2016 (global sportswear brands took the lead;

online top 3 players were same as offline top 3 in 2017)

Figure 39: Top 10 women’s apparel brands on Singles’

Day 2012-2016 (Uniqlo and other offline brands

becoming relevant) Sportswear 2012 2013 2014 2015 2016 20171 Camel Nike Nike Nike Nike Nike 2 Adidas Adidas Adidas NB Adidas Adidas3 Toread NB NB Li Ning NB Anta 4 NB Li Ning Li Ning Adidas Li Ning NB5 Li Ning Anta X-step X-step Anta Li Ning 6 Kappa X-step Anta Anta Skechers7 Decathlon Jordan Jordan ERKE Puma 8 X-Step Converse Converse Jordan X-Step 9 Hbr Vans ERKE 361 Degree UA10 Nike ERKE ASICS Skechers Camel

Women's apparel 2012 2013 2014 2015 2016 20171 Liebo Inman Handu Uniqlo Uniqlo Uniqlo2 Inman Handu Uniqlo Handu Only Vero Moda3 Bosideng Artka Artka Bosideng Bosideng Only 4 Handu Liebo Inman Only Handu EIFINI5 JEANSWESTOchirly Bosideng Liebo Lerting Handu6 Only Bosideng Ochirly Ochirly Ochirly Peacebird7 Yaloo Only Toyouth Vero Moda Vero ModaBosideng 8 OSA Goelia Elfsack Lerting Peacebird Lerting9 GOELIA Vero ModaOnly Inman EIFINI Ochirly10 Othermix Toyouth Liebo Artka Liebo TeenieWeenie

Source: Deutsche Bank, ebrun Note – International sportswear brands are highlighted in blue Source: Deutsche Bank, ebrun, Note – Offline brands are highlighted in blue

Yum China is the largest fast food chain in China, with a 30% market share. Online O2O delivery has been the key driver of the company’s SSSg, at 40% yoy in 8M17. Although the O2O delivery market is dominated by aggregators (e.g. Ele.me, Meituan, etc.) who account for over 90% of the market in GMV, the number of active daily users for the platform of KFC, an individual restaurant brand, reached 1.8m, just following Ele.me and Meituan. Thus, we believe it is much easier for a strong brand to gain market share online once the brand equity is well established.

Strong innovation power. In China/Korea, brands/retailers need to make use of online platforms to differentiate themselves. In China, plenty of local cosmetics, sportswear and household product brands have launched online-only products or new products. With the help of new digital media and social media platforms, they have successfully built brand awareness and become relevant in the minds of new customers. In China, for instance, local cosmetics are ranked at the top in terms of online sales via aggressive online strategies. Kans (online brand) and Pechoin (offline brand) both saw rocketing growth online by sponsoring popular online variety shows and successfully attracting youngsters’ attention. In Korea, leading brand/retail companies have been investing aggressively in establishing e-commerce platforms and focusing on digital marketing, seeing it as the best way to acquire a new/younger customer base.

Figure 40: Traffic comparison of

major O2O platforms

3.6

2.2

1.0

1.8

0.00.51.01.52.02.53.03.54.0

Ele.me Meituan Baidu KFC platform**

Platform DAU (M)

~100m ~50m ~90mNo. of registered users

No. of KFC delivery customer ~4.6m*

~100m

~13.8m*

Source: Deutsche Bank, Note: KFC DAU is based on KFC app and WeChat mini programme

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In contrast, weaker brands face tougher competition when they go online. Hengan’s baby diaper product is one such case. It holds the largest share in China’s household paper market mainly due to its strong channel power in traditional offline. However, without strong brand equity (which allows it to set a better price), its online market share is quite small as it faces more competition, particularly from international brands, e.g. Kao’s Merries.

Figure 41: Top 10 cosmetics on Singles’ Day 2012-2016 (high-end

international brands and leading local brands rank higher over time)

Cosmetics ranking

2013 2014 2015 2016 2017

1 AFU AFU Pechoin Pechoin Pechoin2 Magic Magic Kans L'Oreal Chando 3 Yunifang Kans Olay SK-II Lancome 4 L'Oreal Pechoin AFU One Leaf Estee Lauder 5 Naruko L'Oreal Yunifang Chando Skii6 Pechoin Yunifang L'Oreal Estee Lauder Olay 7 Olay Chando Estee Lauder KanS L'Oreal8 Mofashijia stee Laude Lancôme Herborist One Leaf 9 stee Laude Olay Mofashijia Olay Innisfree 10 Inoherb Naruko Chando Lancôme Shiseido

Source: Deutsche Bank, company data Note, International brands are highlighted in blue

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Figure 42: Different brands’ online initiatives

Ticker Retailer Online Strategy Online sales % Online profitability

Better performer

2020.HK Anta -Driver: More scale-driven online strategy to deliver its 2020 sell-through growth.

% of total sales<10% in 2016, 20% by 2020 by 2020% of total EBIT17% in 2016, 34% of EBIT by 2020

profitable

139480.KS Emart

-Leadership in grocery e-commerce: Emart to enhance leadership in grocery e-commerce, capitalizing on its capacity expansion and merchandising competitiveness.-Relatively weaker competition from other e-commerce players: Other e-commerce players are less capable of rapidly catching up with Emart, given their weakness in merchandise capability, and limited infrastructure capability for grocery retailing, and weaker consumer loyalty for this category.-Rare profitable e-commerce business in Korea: We believe Emart Mall has the potential to generate decent profits from e-commerce, thanks to high gross margin and less cost/price competition (unlike most e-commerce operations in Korea staying in the red).

% of consolidated sales: 6.6% in 2017E/7.3% in 2018E/7.8% in 2019EOnline profitability: Expect to break even in 2018

not profitable

6288.TT Fast Retailing-Balance between quality and price via vertical supply chain: Favourable balance between the quality and price of its products, thanks to its powerful supply chain, securing its market share across market/channel.

% of total sales 5.3% in FY16;6.3% in FY17; 12.2% in FY20

profitable

002508.SS Robam

-First-mover advantage: Developed the e-commerce distribution channel in 2009, when there were only 20 kitchen appliance brands sold online (vs. the current 100 brands).-Dual focus: Robam added its online store in both the C2C (Taobao and Paipai) and B2C platforms.

% of total sales 30% in 2016; 40% in the long run

profitable

YUMC.N Yum China

-Solid foundation: Started from self-owned 'Zhaijisong' (self-developed riders).-Collaboration: Partners with aggregators but invests into its own app and rider capacity to maintain a strong bargaining power vs. aggregators.-Acquisition: Acquired premium online delivery platform Daojia to beef up its high-end delivery market share.

% of total sales 10% in 201625% in the long run

profitable

Progressive performer

1929.HK Chow Tai Fook

-China - still a small business in terms of sales: Its social media accounts have ~3.4m followers and its e-shops in Tmall and JD have ~0.35m unique daily visitors. -Management is making use of these big data to analyse its membership's preferences and offer more targeted products to consumers. As online clients are much younger, it has become its new client acquisition window. Thus, it has increase its ad share in digital marketing (~50% of ad budget). -In offline, it is offering different store formats to address the fragmentation. The use of smart trade also allows the company to understand consumers' preference. During Singles' day, some of its offline stores served as logistics hubs. Moving forward, as part of the O2O strategy, it hopes that clients can select products online any time and can review and buy these products at the stores afterwards.

5% of China sales value and 11% of sales volume profitable

1044.HK Hengan

-Online strategy making some progress: Management is increasing its online share, which is currently lower than that of the industry average. It has set up an e-commerce department in Xiamen. It hopes that operating margin will reach the high teens, which is a few ppts lower than its overall opm of 23-25%.

Online share of sanitary napkins, diapers and tissues stand at 6-7%, 20%+ and HSD+, respectively, targeting 10%, 40% and 30%, respectively, which are industry benchmarks

profitable

6808.HK Sun Art

-Sun Art announced to team up with Alibaba's Taobao Daojia, the O2O platform that offers two-hour delivery for fresh food, groceries and household services by collaborating with supermarkets and community stores. This platform will help -Sun Art acquire customers for its B2C/O2O business, technology and delivery. We believe this partnership will further speed up its online turnaround.

2% not profitable

601933.SS Yonghui

-Yonghui was not very proactive about its online strategy until this year, when it launched Super Species, an new retail format of " catering + fresh supermarket + O2O", and Yonghui Life, a community-based O2O format. Its Super Species stores are profitable on a store level.-In December, it announced that it is in talks with Tencent. We believe if the partnership is established, Yonghui's Super Species will expand faster with a larger online exposure, thanks to Tencent's huge customer base.

<1% not profitable

Lagging performer

0493.HK Gome

-Lagging the "going-online waves": It started to accelerate its online exposure and outlined an omni-channel strategy only when CE consumption was shifted to online in 2012. Its self-owned online sales declined in 3Q17.-New omni-channel initiatives: It completed its omni-channel strategy and acquired a social data platform Meixin, and launched a socialnomics ME shop, a C2C online shop to enable individuals sell 1m SKU nationwide with a rebate. This so-called shared GMV is a growth driver for its SSSg and an effective way to reduce traffic acquisition cost by at least 1ppt. Logistics is the key.

14% of total sales in 2016; 19% of total sales in 2019; 100% GAGR GMV growth during 2017-19

not profitable

600315.SS Shanghai Jahwa

-It faces tougher competition online as traditionally its forte lies in department stores and hypermarkets. Local mass market players, e.g., KanS, Chando and Pechoin are very aggressive on online expansion. More recently, international brands are also teaming up with online platforms to increase their market share in premium segments. -It aggressively invested into online infrastructure in 2016, while its sales growth failed to cover the A&P expense growth. This year it has changed the online business model from wholesale to self-owned business and became more profit-driven. However, we believe it does need a more consistent online strategy in terms of product and marketing to stand out.

10-15% Profitable


13 December 2017

Property



Retailers – struggling more than brands but some stand out

Grocery retailers –different models in embracing online business Grocery retailers face three challenges in most markets: 1) fragmentation offline, with convenience store growing; 2) weak CPI affecting SSSg; and 3) the growing popularity of online grocery chains as logistics networks improve. As a result, in-store traffic at brick-and-mortar hypermarkets/supermarkets has declined.

Some of the supermarkets/hypermarkets have tapped into the online market, but they hardly make a profit as the ticket price of FMCG is relatively low and economies of scale have yet to shape up. There are several business models in the grocery retailers, which we described in details below.

Outside of Asia, we have seen the UK, where online fresh business accounts for 7.3% of the total market (the highest in Europe), adopt a click-and-collect model. This has proved more effective than the delivery model given that the online grocery market is dominated by offline incumbent retailers, e.g. Tesco. Mature physical stores can be regarded as warehouses, from where consumers can pick up products in a very convenient manner. However, margins remain unattractive vs offline despite the fact that online grocery is dominated by incumbent retailers.

Similar to the UK, when incumbent offline retailers in Korea started to explore online they had advantages over pure online players, which were weak in terms of merchandise diversity for the grocery category, infrastructure (cold chain delivery, etc), and customer loyalty. Here, we see leading players such as Emart enjoying a leading position in the grocery e-commerce market, while maintaining its dominance in the offline hypermarket industry with over a 40% market share. Emart’s online business has yet to break even, similar to most pure e-commerce players in Korea, but we expect it to reach breakeven sometime in 2018 on a monthly basis and 2019 on an annual basis.

In China, the click-and-collect model does not work well as consumers do not generally pick up items given the cheap delivery cost. At the moment, operators in China are partnering with online retailers and exploring new retail formats. Various models have mushroomed but none of them has become mainstream yet. (Please refer to our report China Food Retailing - New retail shaping up, observed from store visits and channel checks, published on 10 Oct 2017.) Another model being followed by retailers such as Sun Art is an O2O model whereby online orders are delivered by stores. The incremental cost is smaller and it brings virtual traffic to stores, helping SSS.

Two initiatives are likely to help players improve their competitiveness and stay relevant, in our view:

1) Changes in the tenant/product mix to those which are more defensive vs. online. For instance, groceries in China offer more fresh food to attract in-store traffic. In their gallery areas, more lifestyle/restaurant tenants have been introduced to attract more families.

2) Innovation in new business formats, such as O2O fresh food delivery or fresh food dining in services, such as Super Species launched by Yonghui Superstores in China. We believe that more time is needed to conclude whether this is the right direction for groceries or mass market retailers.

13 December 2017

Property



CVS can secure robust growth sheltered from e-commerce expansion CVS is a rare offline channel that has outperformed overall retail sales in the majority of countries we discuss here (Figure 43 shows CVS growth in different countries). We believe this is mainly due to the following:

1) Closest-to-customer locations (community/office buildings, transportation hubs, etc.)

2) Selective but precise product offerings

3) Natural touch-points for O2O models. It is common to see CVS collaborate with online retailers as an O2O pick-up hub.

Figure 43: Retail sales of convenience stores vs total retail sales

10%

2%1%

3%5%

3%

11%

3% 3%

-1%

16%

2%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%


Five- year CAGR (2011-2016)

Total retail sales Retail sales from convenience stores


Department stores that offer more consumer experience apart from shopping remain relatively better off. We believe that to stay relevant in the digital era, department stores need a strong reason other than shopping for customers to visit.

1) More department stores are transforming themselves into shopping malls or lifestyle centres, offering more experiential consumption such as catering, cinema, book stores and DIY hand-made courses. The frequency of store revamps is higher than before to maintain relevance among consumers. Different offerings/layouts for each mall target different markets.

2) Product merchandising remains the key to monetisation. Differentiated product merchandising capabilities (for landlords) are still important, in our view. Products like cosmetics, sporting goods and kids’ products generally have a higher stay-and-buy ratio. For instance, the Sogo mall located in TST under Lifestyle (1212.HK) has seen teen SSSg, mainly driven by its large proportion of cosmetics (around 40% contribution to sales), which is a killer category.

3) Location is also key. We observe that e-commerce has less of an impact on malls located in tourist areas or CBDs

13 December 2017

Property



Real estate – active management to attract shoppers

Asia has less retail space Having looked at the history of retail real estate development, it is not a surprise to find that the US has the highest retail space per capita, more than 2x that of mature markets like Australia and Hong Kong, almost 4x that of Singapore, 6x that of Japan, and over 10x that of Korea and China.

Figure 44: Shopping centre space per capita across the region and US

23.5

11.110.1

5.84.6 4.3

2.2 1.8

0.0

5.0

10.0

15.0

20.0

25.0

(sqf

t)

Source: Deutsche Bank, CapitaLand Mall Trust, International Council of Shopping Centres, various statistics agencies and Cistri

Malls are different across different countries, but all focus on shoppers Given the shopping culture in Asia and the demanding Asian shoppers, mall managers have consistently focused on getting the right tenant mix for the locality. Based on data from General Growth Properties, Asia has the highest F&B component and second-highest specialty tenants, with a low level of concentration in department store. Australia has the second highest entertainment component but the lowest F&B content. In fact, given the diverse cultures and unique country drivers, tenant mix is vastly different across countries. We also note that Singapore has one of the highest F&B components in the region, while China has one of the highest lifestyle components and Australia has the highest contribution from supermarkets (see Figure 46).

13 December 2017

Property



Figure 45: Retail category’s share of total GLA in 2016 Figure 46: Tenant mix category comparison by area or

rent*

46%

13%

8%

29%

6%

27%

13%11%

47%

10%

23%

15%13%

36%

6%

17% 17%

11%

45%

15%15%

21%

16%

40%

8%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Department Store Mini Major Entertainment Specialty Food & Beverage

USA UK Australia Asia Middle East

30% 28%20%

21% 43%28%

4% 7%8%

21%

9% 9%

6% 6%7%

22%

11%

37%

29%27%

14%

6%18%

14%

6%25%

10%19%

41%

8% 18%

66%49% 47%

0%10%20%30%40%50%60%70%80%90%

100%

CT* FCT CRL Wharf LinkREIT*

VCX* SCG Joy

F&B SupermarketDepartment store Life, entertainment & serviceOthers

Source: Deutsche Bank, General Growth Properties, Cistri/Urbis Source: Deutsche Bank, company data; Note: Others for VCX and SCG include specialty and mini-majors, which may include F&B. Others for Joy City represent retail. *Note: Wharf (4.HK) has demerged its portfolio of Hong Kong investment properties (including Harbour City, Times Square, Plaza Hollywood) to form Wharf REIC (1997.HK) on November 14, 2017. The figures with regard to Wharf’s retail portfolio in this report are historical numbers of Wharf prior to the demerger. For illustration, “Wharf”/”Wharf Holdings” is used as the reference name to such portfolio.

Reflected in the numbers, we note that most of the professionally managed retail mall portfolios generate fairly strong sales psf as a result.

Figure 47: Annual tenant sales psf of regional retailers

738 753 684

949

1,381

326

666757

614 569

0

200

400

600

800

1,000

1,200

1,400

1,600

(US

$)

Total tenantsales psf

Specialty tenantsales psf

Source: Deutsche Bank, company data *Note: Wharf (4.HK) has demerged its portfolio of Hong Kong investment properties (including Harbour City, Times Square, Plaza Hollywood) to form Wharf REIC (1997.HK) on November 14, 2017. The figures with regard to Wharf’s retail portfolio in this report are historical numbers of Wharf prior to the demerger. For illustration, “Wharf”/”Wharf Holdings” is used as the reference name for this portfolio.

This is also reflected in the performance of some of the key brands in Asia. On balance, we still see more net openings for key brands in Asia than in North America. This is especially the case for a number of US fashion retailers like GAP and A&F.

13 December 2017

Property



Figure 48: Net openings of key brands in Asia Figure 49: Net openings of key brands in North America

-250-200-150-100-50

050

100150200250

Num

ber o

f sto

res

2014 2015 2016

-100-80-60-40-20

020406080

100

Num

ber o

f sto

res

2014 2015 2016

Source: Deutsche Bank, company data Source: Deutsche Bank, company data

Constantly evolving for a holistic experience Adapting to changing consumer behaviour and evolving to provide a holistic experience to attract shoppers has been and will likely continue to be the winning formula. Being a destination mall that offers a holistic experience is becoming a crucial differentiating factor in retailers’ physical real estate selection process, especially in an ‘omni-channel’ world. And finding the right concept/lifestyle flagship stores to anchor the mall on an ongoing basis becomes the key challenge for mall operators. A number of new concept stores that combines offline retails with technology and online platform have emerged over the last few years.

Figure 50: List of new concept store openings in the region Date Brand Product type Location City

Sep-15 Under Armour Sportswear Huaihai Road Shanghai

Dec-15 Muji Apparel, stationery, food & appliance

No. 755 Huaihai Road Shanghai

Dec-16 Alfred Dunhill Luxury menswear Paragon Square Singapore

Dec-16 Huawei Electronics SM City San Lazaro Manila

Feb -17 Victoria’s Secret Intimate apparel Lippo Plaza Huaihai Rd Shanghai

Feb-17 Moto (Lenovo) Electronics SM North EDSA Annex / SM Megamall

Manila

Mar-17 Uniqlo Move Activewear Shinjuku Takashimaya Tokyo

Apr-17 Alcantara Luxury materials Shanghai Village Shanghai

May-17 New Balance Apparel & footwear Roppongi Tokyo

Jun-17 Massimo Dutti Clothing VivoCity Singapore

Jul-17 Dover Street Market Clothing Tanglin Village Singapore

Jul-17 Muji Apparel, stationery, food & appliance

Plaza Singapura Singapore

Jul-17 I.T. Blue Block Clothing, homewear, outdoor

Hysan Place Hong Kong

Sep-17 Oppo Electronics Ayala Center Cebu Cebu

Oct-17 Dyson Appliance The Gardens Mall Kuala Lumpur Source: Deutsche Bank, InsideRetail, Retail News Asia, RLI, Retailinasia, The Straits Times

In addition, we note that some of the real estate landlords have also becoming more creative in combing the online / offline shopping experience.

13 December 2017

Property



CapitaLand announced in late August the launch of an exclusive online mall on Lazada Singapore. The shop-in-shop will aggregate the offerings of retailers in its Singapore malls on Lazada.SG by the end of this year. To facilitate an online and offline experience, shoppers who patronise the CapitaLand official store on Lazada.SG will have the option to collect their purchases in CapitaLand malls, and will be rewarded with CapitaStar. CapitaLand will also roll out two unmanned click-and-collect lounges at Plaza Singapura and Bugis plus feature fitting rooms and a product-testing bench.

Harvey Norman opened a two-story factory outlet at Viva Business Park in Singapore this July, which spans over 38,500 sqft. The store features a rich collection of products with up to 90% discounts. In Australia, the group opened a new superstore in Queensland in March, which has the largest 270 sqm cooking display in the area. It is also refurbishing its Auburn store in Sydney, where phase one has been completed. The 174,000 sqft store is the largest Harvey Norman store in the country, and the first within its Flagship Store strategy. Phase two is slated to be completed in June 2018.

Muji, the Japanese retail chain, opened its first flagship store in Southeast Asia at Plaza Singapura in July this year. According to its press release, the over 1,896 sqm store serves as its biggest outlet in Singapore. Muji has introduced new original concepts in the store and made it a community area, where products from series like Found MUJI and MUJI Labo add to a new merchandise line. Besides, the store also holds spaces for educational activities and the third Cafe & Meal MUJI, with a capacity of 70 diners.

Starbucks opened its first fully immersive coffee experience, Starbucks Reserve Roastery, in Shanghai in Dec. The Roastery occupies 30,000 sqft of space and integrates a real-time, in-store and online customer experience. Roastery customers are invited to immerse themselves in the first Starbucks AR experience – accessible through the custom-designed roaster digital web-app platform or on Alibaba’s Taobao app – by simply pointing their mobile devices at key features around the Roastery to bring to life information about the Starbucks bean-to-cup story.

This constant changing of the tenants are reflected in the shift in tenant mix of individual retail portfolio’s tenant mix as well. We saw noticeable but fairly different change across the region:

Increase in Apparel in Australia

Increase in Department Stores in Hong Kong high-end portfolio

Increase in F&B component in Singapore and Hong Kong suburban portfolios

Increase in Lifestyle and Entertainment component in China

13 December 2017

Property



Figure 51: CT tenant mix change Figure 52: Vicinity Centres tenant mix change

19%

21%

16%7%

15%

5%2%

4%

13%

30%

20%19%

6%

10%

4%3%

3% 3%1%F&B

Fashion / Jewellery & Watches /Shoes & BagsEducation & Services / Beauty &Health / Art GalleryDepartment Store

Gifts / Toys & Hobbies / Books /Sporting Goods / Leisure & MusicSupermarket

Office

Houseware & Furnishing

Electrical & Electronics / IT

Warehouse

14%13%

13%

7%16%

13%

10%

6%

2%

4%

2%

9%

12%

19%

10%13%

14%

5%

5%

4%4%

4% 2%

Supermarkets

Department stores

Apparel

Mini Majors

Food retail

Other Retail

General Retail

Retail services

Homewares

Jewellery

Leisure

Mobile phones

Source: Deutsche Bank, company data Source: Deutsche Bank, company data; Note: 2015 data from FDR, 2012 data from CRF

Figure 53: Link REIT tenant mix change Figure 54: Wharf tenant mix change

24%

24%11%

10%

8%

7%

28%

21%

15%

11%

6%

1%

1%

18%

Food & Beverage

Supermarkets and Foodstuff

Markets/Cooked food stalls

Services

Personal Care, Medicine,Optical, Books and StationeryEducation/Welfare, Office andAncillaryValuable goods (Jewellery,watches and clocks)Others

23%

5%

7%

18%

22%

7%

6%5%

8%

25%

7%

11%

22%

21%

3%3%

3%4%

1% Fashion

Leather Goods - Shoes Bags &Related TradesJewellery, Beauty andAccessoriesDepartment Stores,Confectionery ProductsRestaurant, Fast Food, F&B

Electrical & Audio-visualEquipmentsChildren’s Wear & Related Trades, ToysSports Wear

Others

Travels


*Note: Wharf (4.HK) has demerged its portfolio of Hong Kong investment properties (including Harbour City, Times Square, Plaza Hollywood) to form Wharf REIC (1997.HK) on November 14, 2017. The figures with regard to Wharf’s retail portfolio in this report are historical numbers of Wharf prior to the demerger. For illustration, “Wharf”/”Wharf Holdings” is used as the reference name to such portfolio.

Figure 55: China Resources Land tenant mix change Figure 56: Joy City tenant mix change

10%21%

10%

14%6%

39%

11%

20%

14%

7%8%

41%

Luxury

Food & Beverages

Lifestyle

Department stores

Supermarket

Others

68%

8%

24%

70%

7%

23%

Retail

Catering

Entertainment and services


13 December 2017

Property



We also note a moderate but seemingly structural decline in weighted average lease expiry (WALE) for many of the portfolios given the requirement for new concepts and differentiated experience. All these changes seem to point to the need for large-scale lifestyle / regional shopping centres instead of boutique or street level shops. Leveraging technology and online channels is becoming a further differentiating factor, in addition to the location of the mall, which is typically superior for those large-scale regional shopping centres anyway.

Figure 57: WALE of key regional players

0.01.02.03.04.05.06.07.08.09.0

10.0

CapitaLandMall Trust

FrasersCentrepoint

Trust

Vicinity Centres Scentre Group Japan RetailFund

2011 2012 2013 2014 2015 2016 2017

Source: Deutsche Bank, company data; Note: Vicinity Centres data from FDR and CRF for years before 2016, Scentre Group data from WRT for 2011-2013.

13 December 2017

Property



Valuations in a new world Real estate: pricing in the challenging environment; cyclical recovery could surprise

Subdued rental forecasts, tenant sales and occupancy cost the key drivers The rapid evolution of the retail and retail real estate landscape has raised many questions about valuing malls in this new world. While we do see the APAC region as being better positioned, we forecast subdued rental growth across all markets given the structural challenge raised by e-commerce. Amongst the various markets, China has one of the most optimistic rental growth outlooks given its more advanced stage in terms of e-commerce. Conversely, our rental forecast for HK is one of the most pessimistic in the region.

Figure 58: Forecast rental growth YoY% Country City/Region Rent growth YoY% Rationale

2017 2018 2019 2020

Australia Key cities na 0-2% 0-2% 1-3% Reflecting moderating retail sales growth, more store closure announcements, weaker specialty MAT sales and the arrival of Amazon

China Key cities 2-3% 2-3% 2-3% na reflecting stable retail sales growth from improving private consumption amid high single-digit disposal income growth in major T1/2 cities

Hong Kong Hong Kong -3% -7% -7% -3% Reflecting substantial increase in supply in 2018, bearish outlook on HK residential property market and historical high occupancy cost

Japan Tokyo 0% -5% 0% -10% Reflecting the macro condition, continuing weak private consumption in 2017 – 2018, rush demand before the projected consumption tax hike in 2019, and a negative reaction in 2020

Singapore Singapore -3% 0% 2% 2% Reflecting the challenges posed by e-commerce including the arrival of Amazon, yet a better retail sales outlook and declining supply post 2018


We attempt to address the potential rental outlook by following some real estate principles. We believe that tenant sales psf and occupancy cost are the two ultimate barometers that drive the performance of any retail real estate. This should be the guiding principle for any retail market. As such, we first look at each market as if it were a standalone shopping mall and build a framework around the two parameters, with the key variables being total retail sales growth, market share of online sales, total supply of retail real estate and retail rents psf.

With online market share continuing to increase, rents are likely to come under pressure and we estimate that every 5% market share gain could cause a rental decline of between 5.3% and 6.2%, as shown in Figure 59. While a rental decline might be the easiest way out, space reduction (closure of non-performing malls) and retail sales growth could help to cushion the pressure.

Figure 59: Changes required to maintain current occupancy cost after a 5%

online market share gain

Decline in rents Retail space reduction Retail sales growth

Singapore 5.4% 5.4% 5.7%

Hong Kong 5.3% 5.3% 5.6%

Beijing 6.2% 6.2% 6.6%

Shanghai 6.0% 6.2% 6.6%

Sydney 5.4% 5.4% 5.7% Source: Deutsche Bank, Singstat, URA, CEIC, Euromonitor, Hong Kong Census & Statistics Department, Rating and Valuation Department, JLL, Wind, National Australia Bank

13 December 2017

Property



Market can absorb significant space reduction before REITs and developers are affected As illustrated in Figure 59, closure of 5.3% - 6.2% of the total retail space could help maintain the occupancy cost of a market. Currently, street level shops and boutique malls represent about 68% of the market on average in the region. A closure of such retail space would help to relieve the pressure on the overall market and mitigate the need for rental competition. In an extreme scenario, we can afford to have at least 50% of the space reduced to weather close to 40% of market share gain in online before shopping malls are affected. Given that the retail space owned by listed developers and REITs is generally of a much higher quality and much larger size, we believe that rental pressure on these assets should be a lot lower than for the overall market.

Figure 60: Shopping mall space as a % of total retail

space

Figure 61: Average mall size comparison

50%

13%

29%

37%33%

0%

10%

20%

30%

40%

50%

60%

Singapore China Hong Kong Australia US

458275

1,394

28180

908

237456

2,061

990

372 302

0

500

1,000

1,500

2,000

2,500

CT FCT HangLung

(China)

HangLung(HongKong)

LinkREIT*

Wharf(HongKong)

Hysan(HongKong)

JoyCity

CRLand

SCG VCX JapanRetailFund

Thou

sand

s

Average mall size (sqft GFA)

Source: Deutsche Bank, URA, CapitaLand Mall Trust,Winshang.com, Census and Statistics Department, CEIC, Shopping Centre Council of Australia, Cushman & Wakefield Source: Deutsche Bank, company data. Note: data on Link REIT’s Hong Kong properties based on

internal floor area *Note: Wharf (4.HK) has demerged its portfolio of Hong Kong investment properties (including Harbour City, Times Square, Plaza Hollywood) to form Wharf REIC (1997.HK) on November 14, 2017. The figures with regard to Wharf’s retail portfolio in this report are historical numbers of Wharf prior to the demerger. For illustration, “Wharf”/”Wharf Holdings” is used as the reference name for this portfolio.

Mall cash flow has been resilient The shift in tenant mix towards lifestyle, entertainment and F&B raises concerns about the ability of tenants to pay rents. We highlight, however, that these tenants have in many cases replaced previous anchor tenants such as supermarkets and department stores, which are hardly rent payers. We also highlight that as the retail scene evolves, some of these tenants can actually be as profitable as specialty shops. While there is a lack of data, we managed to find some mall level data that illustrates a stable and growing rental stream while the tenant mix moves substantially towards experiential formats, as illustrated in Figure 62 to Figure 65.

13 December 2017

Property



Figure 62: Tenant mix change vs. revenue – Tampines

Mall

Figure 63: Tenant mix change vs. revenue – CapitaMall

Wangjing

20%30%

27%23%

15%

20%9%

5%18%11%

6% 6%5%1% 5%

0%10%20%30%40%50%60%70%80%90%

100%

2002 2016Electrical & Electronics / IT Houseware & Furnishing

Supermarket Gifts / Toys & Hobbies / Books / Sporting / Leisure

Department Store Education & Services / Beauty & Health / Art

Fashion / Jewellery & Watches / Shoes & Bags F&B

US$23mUS$57m

32% 37%

21%24%

18%11%

1%13%9%

7%5% 3%1%

2%6% 1%5% 2%1%

1%0.1% 0.3%

0%10%20%30%40%50%60%70%80%90%

100%

2007 2016Fashion / Jewellery & Watches / Shoes & Bags Food & BeverageDepartment Store Education / Beauty & HealthcareSundry & Services SupermarketHouseware & Furnishings Sporting Goods & ApparelLeisure / Gifts / Toy & Hobbies / Books Electronics & ITWarehouse & Others

US$15m

US$32m

Source: Deutsche Bank, CapitaLand Mall Trust Source: Deutsche Bank, CapitaLand Mall Trust

Figure 64: Tenant mix change vs. revenue – Harbour City Figure 65: Tenant mix change vs. revenue – Festival

Walk

38% 39%

13%21%

12%

21%11%

7%9%

4%6%

3%

2%

2%11%

2%

0%10%20%30%40%50%60%70%80%90%

100%

2002 2016Fashion Leather Goods - Shoes, Bags & Related TradeJewellery, Beauty and Accessories Department Store, Confectionery ProductsRestaurant, Fast Food, F&B, Entertainment Children's Wear, Toy & Related TradesSports Wear Electrical & Audio-visual EquipmentOthers

US$130m

US$800m

34.7% 32.1%

14.7% 15.3%

7.9% 11.5%7.6% 8.6%6.4% 7.9%7.6% 7.0%8.2% 6.4%4.9% 4.1%8.0% 7.1%

0%10%20%30%40%50%60%70%80%90%

100%

FY14 FY17Apparel & Fashion accessories Food & BeveragesLeisure & Entertainment Personal CosmeticsDepartmental Store & Supermarket ServicesHouseware, Electronics & Furnishings Luxury Jewellery, Watches & AccessoriesOffice component

US$159mUS179m

Source: Deutsche Bank, Wharf Holdings *Note: Wharf (4.HK) has demerged its portfolio of Hong Kong investment properties (including Harbour City, Times Square, Plaza Hollywood) to form Wharf REIC (1997.HK) on November 14, 2017. The figures with regard to Wharf’s retail portfolio in this report are historical numbers of Wharf prior to the demerger. For illustration, “Wharf”/”Wharf Holdings” is used as the reference name for this portfolio.

Source: Deutsche Bank, Mapletree Greater China Commercial Trust

Cap rates reflect challenging outlook, external valuation a built in buffer The cap rate is defined as the rate of return on a real estate investment based on the income that the property is expected to generate. This ‘magic’ number should reflect the expected growth/decline trajectory of the cash flow, the risk to the cash flow and the market’s willingness to pay for the cash flow, in our view. Cap rates for many of the markets in the region have compressed significantly as a result of the movement in 10-year bond yields. As such, we see cap rates’ spread to 10-year bond yields as a better alternative in this analysis. We note that Singapore, Beijing, Shanghai, Guangzhou, and Tokyo are trading below the long-term average, while Hong Kong and Sydney are trading above the long-term average. We also look at spreads between retail and office cap rates and note that Beijing and Tokyo are trading below the long-term average and Singapore, Shanghai, Guangzhou, Hong Kong, and Sydney are trading above.

13 December 2017

Property



Figure 66: Retail cap rate spreads vs. LT average Figure 67: Cap rate spread vs. LT average – prime retail

over office CBD

247 295 121 71 282 353 255

261

353

13093

174

366

150

0

50

100

150

200

250

300

350

400

1Q17 Average

111

2

-91-101

175

0

1278

46

-146-108

76

18

-46

-200

-150

-100

-50

0

50

100

150

200

1Q17 Average Source: Deutsche Bank, JLL, CBRE, Bloomberg Finance LP Source: Deutsche Bank, JLL, CBRE, Bloomberg Finance LP

Figure 68: Retail cap rates of key regional markets Current Peak Trough Retail-office gap (bps)

Singapore 4.7% 5.7% 4.7% 111

Beijing 6.2% 13.2% 5.9% 2

Shanghai 4.5% 6.8% 4.0% -91

Guangzhou 4.0% 4.0% 4.0% -101

Hong Kong 4.5% 6.0% 3.6% 175

Tokyo 3.6% 5.0% 3.6% 0

Sydney 5.3% 7.5% 5.3% 12 Source: Deutsche Bank, JLL, CBRE

Valuation reflects a pessimistic outlook, especially by private market standards Pure retail and retail heavyweights have underperformed the sector over the last few years, trading at or below long-term averages, implying a potential cap rate expansion of 52bps on average or a rental decline of 19% on average from current levels. Market transactions, on the other hand, are still at cap rates 30 – 50bps narrower than the current level. With our forecast for the region still showing a moderate rental trajectory for most countries, and with most of the portfolios still demonstrating resilient earnings profiles, we believe that the market has priced in a pessimistic scenario, ignoring active mall managers’ ability to weather these issues.

13 December 2017

Property



Figure 69: Implied capital value and cap rates vs. market level Price Market Capital value Cap rate

7-Dec-17 Cap Implied Market Implied change Implied Market Implied change

(LC$) (US$m) (LC$ psf) (LC$ psf) (%) (%) (%) (%)

Australia

Scentre Group 4.23 16,945 875.1 1,189.3 -26.4% 5.70% 5.00% 0.7%

China

Joy City 1.16 2,114 7,940.0 9,770.0 -18.7% 6.50% 6.40% 0.1%

Hong Kong

Hysan 41.65 5,577 33,482.9 41,502.5 -19.3% 5.13% 4.84% 0.3%

Link REIT 69.10 19,463 15,663.7 20,751.3 -24.5% 4.52% 4.84% -0.3%

Wharf REIC 49.65 19,301 75,593.2 78,826.2 -4.1% 5.45% 4.45% 1.0%

Japan

Japan Retail Fund 205,200.00 4,853 92,950.6 na na 4.75% 3.50% 1.3%

Singapore

CapitaLand Mall Trust 2.06 5,424 2,179.4 3,294.0 -33.8% 5.18% 4.25% 0.9% Source: Deutsche Bank, JLL, company data, Bloomberg Finance LP, CBRE. Note: Market comparison for Joy City only include prime retail in Beijing, Shenzhen, Shanghai. Market value for Wharf REIC is for premium prime. China and HK implied value is based on gross rent. We adjust the market value for Link REIT by taking a 50% discount to prime market value. Development and management divisions of Scentre Group are valued at A$1.5b. Market value of Australia is for regional shopping centres.

Figure 70: Valuation table for real estate companies Rec YE Price TP % upside DB NAV Prem/disc % Retail YTD Mkt Mkt 20D P/E P/E DPU DPU ROE P/B Net

11-Dec to DB NAV NAV Cap Cap Avg Yield Yield gearingValue 17/18E 18/19E 17/18E 18/19E 17/18E ratio

LC$ LC$ % LC$ % % % LC$M US$M US$M x x % % % x %AustraliaGPT Group Hold 12 $5.38 $5.00 -7.1 5.04 6.7 46.0 6.1% 9,693 7,294 44.76 17.4 16.6 4.6% 5.0% 5.9% 1.10 0.36Mirvac Group Hold 6 $2.46 $2.34 -4.9 2.38 3.2 25.0 13.9% 9,129 6,869 43.57 15.9 16.9 4.5% 4.2% 6.8% 1.14 0.36Stockland Group Buy 6 $4.64 $4.95 6.7 5.16 -10.0 45.0 0.4% 11,296 8,500 45.19 13.1 13.1 5.7% 5.8% 8.1% 1.13 0.33Scentre Group Buy 12 $4.18 $4.25 1.7 4.13 1.3 100.0 -10.9% 22,256 16,747 62.50 17.2 16.4 5.2% 5.3% 6.1% 1.09 0.58Total/weighted average 0.0 0.2 -1.0% 39,411 16.1 15.8 5.1% 5.2% 6.6% 1.11ChinaChina Resources Land Buy 12 $21.85 $27.11 24.1 33.89 -35.5 28.5 24.1% 128,361 19,395 31.86 8.1 6.9 3.7% 4.3% 16.9% 1.22 0.33Joy City Property Hold 12 $1.23 $1.41 14.6 2.35 -47.7 82.4 23.0% 14,837 2,242 0.73 15.4 12.0 3.2% 4.2% 5.5% 0.56 0.28Longfor Buy 12 $18.52 $23.17 25.1 25.59 -27.6 30.3 83.7% 92,605 13,992 11.43 9.6 7.8 3.6% 4.5% 19.7% 1.44 0.54Total/weighted average 23.9 -33.2 47.5% 35,629 9.2 7.6 3.6% 4.4% 17.3% 1.26Hong KongHang Lung Properties Hold 12 $18.36 $16.50 -10.1 27.43 -33.1 69.0 8.6% 82,575 10,575 15.26 16.8 19.1 4.1% 4.1% 3.9% 0.64 0.02Hysan Development Sell 12 $41.75 $32.30 -22.6 58.65 -28.8 42.0 24.3% 43,660 5,592 5.73 19.2 20.4 3.2% 3.2% 3.4% 0.65 0.05Link REIT Hold 3 $69.90 $69.87 0.0 69.63 0.4 na 37.3% 153,771 19,693 37.31 28.1 25.9 3.6% 3.9% 14.8% 1.04 0.22SHK Properties Ltd Hold 6 $122.80 $122.30 -0.4 195.70 -37.2 46.5 21.9% 355,721 45,557 64.91 14.5 15.7 3.4% 3.4% 4.9% 0.71 0.07Wharf REIC Hold 12 $50.10 $46.20 -7.8 57.80 -13.3 75.4 0.2% 152,115 19,481 na 17.4 17.7 3.7% 3.6% 4.4% 0.76 0.15Total/weighted average -4.0 -24.4 19.5% 100,898 18.2 18.7 3.5% 3.6% 6.5% 0.78JapanJapan Retail Fund Inv. Hold 8 $204500.00 $210000.00 2.7 212364.41 -3.7 100.0 -14.3% 545,442 4,811 20.77 23.9 23.8 4.2% 4.2% 5.2% 1.23 0.78United Urban Investment Hold 5 $162400.00 $174000.00 7.1 149697.91 8.5 33.0 -9.0% 496,146 4,376 14.24 24.0 24.2 4.2% 4.2% 5.9% 1.41 0.73Total/weighted average 4.8 2.1 -11.7% 9,188 23.9 23.9 4.2% 4.2% 5.5% 1.32SingaporeCapitaLand Ltd Buy 12 $3.49 $4.60 31.8 5.05 -30.9 55.9 15.2% 14,823 10,971 25.33 19.2 18.6 3.2% 3.4% 8.6% 0.81 0.41CapitaLand Mall Trust Buy 12 $2.09 $2.15 2.9 2.10 -0.3 100.0 8.6% 7,412 5,486 17.70 18.5 18.5 5.3% 5.3% 6.0% 1.07 0.42Mapletree Commercial Trust Buy 3 $1.59 $1.60 0.6 1.51 5.4 44.7 13.2% 4,577 3,388 4.68 19.4 19.2 5.7% 5.7% 7.0% 1.16 0.58Total/weighted average 18.5 -16.3 13.0% 19,845 19.0 18.7 4.2% 4.3% 7.6% 0.94 Source: Deutsche Bank, Bloomberg Finance LP *Note: Wharf (4.HK) has demerged its portfolio of Hong Kong investment properties (including Harbour City, Times Square, Plaza Hollywood) to form Wharf REIC (1997.HK) on November 14, 2017. The figures with regard to Wharf’s retail portfolio in this report are historical numbers of Wharf prior to the demerger. For illustration, “Wharf”/”Wharf Holdings” is used as the reference name for this portfolio.

7 Sep 2017

Retail / Real Estate

Japan Retail / Real Estate Sector

Deutsche Securities Inc. Page 35

Retail: valuations already at trough in 2015/16; negative structural trends in the price

What drives the valuations of brands and retailers? The valuations of brands and retailers (normally based on PE multiples or DCF) are driven by earnings growth potential and the ability to generate free cash flow. As they enjoy operating leverage, a key share price driver is SSSg, which reflects the health of the operation. Thus, share prices tend to correlate with SSSg trends (Figure 71 and Figure 72). Stock re-ratings can be related to an acceleration in SSSg, which in most cases will reflect faster earnings growth momentum.

Figure 71: Sa Sa share price reflects SSSg trend Figure 72: Yum China share price also correlates with

SSSg

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Valuations depressed in 2015 by structural and cyclical downturn but have recovered since then The e-commerce boom since 2010 and economic slowdown since 2012 have been a double whammy for the consumer space, sending valuations to historical lows based on PE ratios. Early indicators like SSSg and traffic turned weak.

Depressed valuations and less interest in consumer stocks have led to more frequent corporate activities For example, Belle, the largest ladies’ footwear brand in China, experienced a ROE decline from 32% in 2007, a year after listing, to 14% in 2016 before privatisation, due to lower asset turn and operating profit deterioration. Its return deterioration was a result of three issues: 1) the economic slowdown; 2) online challengers with cheaper products; and 3) changes in consumer behaviour, with a shift to sports shoes and sneakers. It was privatised in July 2017.

Apart from Belle, several other companies decided to privatise during this period, namely Intime (announced in Jan 2017), NWDS (announced in 2014 but rejected by independent shareholders), and Peak (announced in May 2016). Other companies have restructured operations to force investors to put a value on their different business units via spin-offs (e.g. Hengan spun off Qin Qin, Lifestyle spun off its China operation, and Li & Fung spun off GBG, all in July 2016).

2017 Sep 7




Figure 73: Belle PE band – Belle was privatised at

HK$6.3/share

Figure 74: Intime PE band – Intime was privatised at

HK$10.0/share

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Source: Deutsche Bank, Bloomberg Finance LP Source: Deutsche Bank, Bloomberg Finance LP

Market has recovered since end 2016, with online retailers acquiring offline players The market has improved since then, however, along with an improvement in the overall economy and a property market boom. While the online challenge is still there, the impact is not as severe as it used to be as online players’ focus has shifted from gaining market share via promotions and volumes to collaboration with offline brands/retailers in most cases. As in the real estate space, we see a polarisation trend, with some finding the right online strategy and staying relevant to consumers, while others just shrink and become history.

Online/offline integration continues and this is just the beginning Alibaba’s acquisition of Sun Art is another major online/offline integration event in the new retail era. Compared with the previous deals/investments made by Alibaba, this one is more meaningful as it removes the competition between the largest online and offline food retailers. Yonghui announced it is in talk with Tencent on its partnership in Super Species on 8 Dec 2017. We believe market collaboration will continue but mainly between online/offline players rather than offline/offline players.

No mature format has emerged yet After Alibaba coined the term "new retail" at the end of 2016, various new retail formats have mushroomed over the past year. Consumers' new demand has not only created entrepreneurial retail formats but has also pushed traditional retailers to evolve. These new projects include O2O community CVS, unmanned stores or counters. Meanwhile, traditional online/offline giants have started to break down the boundaries to seek further growth in an omni-channel era (see Figure 75).

Not all offline players will hit the jackpot Online giants will only be interested in offline players that can offer complementary competencies or resources.

1) Product categories. For instance, Alibaba’s interest in Sun Art or Jingdong’s interest in Yonghui is largely due to the acquired companies’ FMCG product categories, which are the next growth drivers for online players. Amazon’s acquisition of Wholefood follows the same rationale.

7 Sep 2017



Deutsche Securities Inc. Page 37

2) Strong supply chain management capabilities. We believe online players are better at attracting consumers/traffic with a fancy/convenient front-end. Better offline players are normally good at back-end supply chain management and product merchandising, and players with these strengths are more attractive, such as Yonghui’s fresh food sourcing capability and Sun Art’s store network efficiency.

3) Location-based partner. In our view, Alibaba’s investment in Xin Hua Du in Sep is mainly to pave the way to expand Hema Fresh in Fujian province.

Figure 75: Major online/offline integration in China

Date of announcement Buyer Seller Stake Consideration Implied valuation RemarksAlibaba 28/03/2014 Alibaba Investment Ltd.

(wholly owned sub of Alibaba)

Intime (de-listed) 9.9% stake and HKD3.7bn CB

HKD5.37bn 14x 2015PE for the 9.9% stake; 20x FY17 PE for privitization

Alibaba initially acquired a 9.9% stake in Intime at HKD7.53 (17% lower than the last closing price before the announcement of the deal) and HKD3.7bn CB in Mar 2014. Alibaba converted all of its CBs at the conversion price of HK$7.13 into 535m conversion shares in Intime on 30 June 2016. The conversion price was a 16% premium to the closing price (HK$5.99) on 29 June. Post the conversion, Alibaba is the largest shareholder of Intime, with a 27.8% stake, up from 10.1% before the conversion. Subsequently, Ali privatized the company in Jan 17 at HK$10 share, a premium of 42% of closing price before the announcement (20x FY17PE or 1.7x PB).

10/08/2015 Taobao China, a subsidiary of Alibaba

Suning (002024.SZ, NR) 19.99% RMB28.3bn 127x 2014PE The acquisition price was RMB15.23/share, which was 10.44% higher than Suning's last closing price before the announcement. Suning also purchased 1.1% (27.8m shares )of Alibaba stake at RMB14bn. In Nov 2017, It announced that it planned to dispose of 5.5m shares at USD1bn.

21/11/2016 Hangzhou Alibaba ZETAI Information Technology (an indirect wholly-owned subsidiary of Alibaba)

Sanjiang (601116.SS, NR) 32% RMB2.15bn 69X 2015PE Acquisition price was RMB11.11/share, a 41% premium to the closing price as of last trading day before the deal was announced (issued new shares + share transfer)

23/12/2016 Shanghai Yiguo Ecommerce owned by Alibaba

Lianhua (0980.HK, NR) 18.00% RMB850m 3x 2015PB Yonghui acquired 21.17% of Lianhua at the price of HKD3.92/share in April 2015. In Dec 2016, Shanghai Yiguo Ecommerce bought 21.17% of the shares, at HKD4.01, 37% higher than the closing price of Lianhua. Alibaba bought 18% of the shares of Lianhua from Shanghai Yiguo Ecommerce (which is invested by Alibaba as well) in May 2017, but they did not disclose the price.

26/09/2017 Alibaba Chengdu and Hangzhou Hanyun

Xin hua du (002264.SZ, NR)

10% not disclosed not disclosed Consideration was RMB555m, based on the closing price of the last trading day before the announcement (RMB8.11/share).


Sun Art (6808.HK, Buy) 36% RMB22.4bn 18.4/17.2x 2017/2018 PE(Dbe)

The acquisition price was HKD6.5/share, 24.4% lower than Sun Art's last closing price.

JD.com12/08/2015 JD.com Yonghui Superstores

(601933.SS, Buy) 11% RMB4.31bn 35x 2014PERMB9.0/share, 11% lower than closing price on 30 July. After acquisation, JD will hold a 10% stake in Yonghui

20/06/2016 JD.com Yihaodian ( a subsidiary of Walmart) 100% RMB10bn P/GMV: 0.82 (2013)

Walmart will receive 145m newly issued JD.com Class A ordinary shares, amounting to 5% of total shares outstanding.

Tencent

11/12/2015 TencentYonghui Superstores (601933.SS, Buy)

5% RMB4.31bn na

Tencent is expected to own 15% stake in Yonghui Yunchuang. After the investment, we believe Yonghui Yunchuang will potentially become an associate of Yonghui listco (owning <50% stake). The company has assured to confirm the details and resume trading before 18 December 2017.

Source: Deutsche Bank, Company data, Bloomberg Finance LP

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Figure 76: Valuation table for consumer/retail companies

Ticker Company Recom Target Share Price Mkt Cap Rpt. Ccy Y/E(12 mth) Price Local (USD) FY1E FY2E FY1E FY2E FY1E FY2E FY1E FY2E FY1E FY2E FY1E FY2E FY1E FY2E

China/HK2020.HK Anta Buy 37.00 33.05 11,510 CNY Dec 26.53 22.17 5.91 5.48 2.60 3.16 14.98 12.39 25.94 25.65 3.51 4.16 -76.30 -76.120341.HK Cafe de Coral Hold 24.50 21.10 1,650 HKD Mar 27.59 24.30 4.28 4.15 3.51 3.51 11.69 10.41 16.13 17.94 4.30 4.39 -24.29 -27.171929.HK Chow Tai Fook Buy 10.40 8.24 11,265 HKD Mar 21.78 18.54 2.98 2.81 3.08 3.61 14.18 11.98 13.18 15.60 2.89 5.06 19.54 13.59000651.SZ Gree Buy 49.20 43.02 41,669 CNY Dec 13.17 12.16 4.44 3.87 4.56 4.93 6.27 5.17 36.16 34.02 15.20 11.72 -179.11 -182.150493.HK Gome Hold 0.82 0.89 1,976 CNY Dec 46.28 26.00 0.75 0.74 0.86 1.54 9.25 7.61 1.63 2.87 NM NM -0.47 0.531044.HK Hengan Hold 68.50 78.50 11,886 CNY Dec 21.42 20.49 4.92 4.54 3.09 3.23 13.20 12.67 23.98 23.09 5.69 4.27 -10.56 -14.581212.HK Lifestyle International Buy 13.90 10.56 2,319 HKD Dec 7.02 10.13 5.89 4.37 5.86 3.95 11.39 10.72 102.95 49.50 8.96 6.23 202.75 151.052331.HK Li Ning Co Ltd Buy 7.70 6.30 1,547 CNY Dec 25.54 15.25 2.75 2.42 0.00 2.43 8.38 5.03 12.15 18.21 5.82 7.60 -54.64 -63.780973.HK L'Occitane Buy 17.40 14.14 2,812 EUR Mar 20.83 18.60 2.65 2.44 1.70 1.91 8.92 7.85 12.13 12.53 2.72 5.40 -26.68 -32.57000333.SZ Midea Buy 63.00 53.30 34,512 CNY Dec 20.25 16.41 4.79 4.01 1.75 2.16 5.48 3.90 26.30 27.28 11.28 8.46 -95.14 -102.693813.HK Pou Sheng Hold 1.20 1.11 764 CNY Dec 11.77 8.94 0.77 0.72 0.00 1.04 5.08 4.39 6.07 7.70 NM 0.86 13.96 12.331913.HK Prada Hold 30.50 28.05 9,303 EUR Jan 27.32 31.72 3.20 2.59 4.04 3.27 11.63 13.02 8.96 8.08 4.81 3.48 -0.75 2.04600690.SS Qingdao Haier Buy 23.50 17.94 17,787 CNY Dec 17.17 13.99 3.77 3.17 1.76 2.16 8.13 6.54 23.97 24.81 NM 8.89 49.56 26.89002508.SZ Robam Buy 50.00 47.37 5,152 CNY Dec 28.53 22.07 9.14 7.08 1.04 1.35 16.89 12.58 36.07 36.14 2.85 3.81 -72.37 -75.631910.HK Samsonite Buy 39.80 34.40 6,119 USD Dec 26.12 21.28 3.84 3.50 1.63 2.02 14.04 12.04 15.30 17.28 0.33 4.87 93.04 74.580178.HK SA SA International Buy 3.84 2.92 1,051 HKD Mar 20.04 13.88 4.81 4.81 4.79 6.91 12.28 8.89 23.98 34.63 4.90 6.90 -39.75 -44.16600315.SS Shanghai Jahwa Hold 30.04 32.91 3,789 CNY Dec 60.59 47.65 4.53 4.25 0.51 0.65 32.47 25.53 7.70 9.24 NM 2.60 -6.86 -14.716808.HK Sun Art Retail Group Buy 8.70 8.28 10,502 CNY Dec 24.33 22.72 3.09 2.99 3.05 3.27 8.19 7.29 12.92 13.38 4.01 4.30 -43.12 -44.66YUMC.N Yum China Buy 45.30 40.80 16,292 USD Dec 29.74 25.77 6.24 5.75 0.88 1.22 13.34 12.10 23.07 24.23 2.98 4.06 -41.46 -45.24601933.SS Yonghui Superstores Buy 10.14 9.78 13,835 CNY Dec 50.23 34.79 4.56 4.28 1.00 1.44 26.78 19.32 9.30 12.70 2.82 3.44 -56.84 -62.16

0151.HK Want Want Hold 6.30 5.96 9,630 CNY Dec 20.09 18.12 4.72 4.00 0.00 0.00 12.19 10.70 25.68 23.89 5.62 6.50 -30.96 -46.57Average 26.02 21.19 4.19 3.71 2.18 2.56 12.61 10.48 22.08 20.89 5.22 5.35 -18.12 -26.25Korea035760.KQ CJOS Buy 230000.00 226,400.00 1,135 KRW Dec 10.49 9.43 1.22 1.09 1.31 1.31 3.27 2.39 12.23 12.22 20.86 24.25 22.13 8.41139480.KS Emart Buy 290000.00 260,500.00 6,326 KRW Dec 10.61 14.10 0.87 0.83 0.60 0.68 8.67 7.75 8.36 6.02 3.73 0.16 39.81 35.50007070.KS GS Retail Buy 47000.00 40,450.00 2,497 KRW Dec 19.92 15.17 1.34 1.26 1.97 2.82 8.26 6.75 6.75 8.59 5.39 9.65 22.94 16.25069960.KS HDS Hold 117000.00 101,000.00 1,886 KRW Dec 7.35 6.83 0.52 0.48 0.79 0.91 3.66 3.46 8.15 7.32 NM 4.37 13.81 11.50057050.KS Hyundai HS Hold 120000.00 122,000.00 1,359 KRW Dec 11.16 10.71 0.95 0.88 1.21 1.29 -8.19 -8.34 8.82 8.52 8.54 8.88 0.75 -4.28023530.KS Lotte Shopping Buy 260000.00 198,500.00 5,450 KRW Dec 48.91 13.93 0.42 0.41 0.95 1.43 6.43 5.71 -2.32 2.99 NM 6.77 41.10 40.25004170.KS Shinsegae Buy 290000.00 274,500.00 2,327 KRW Dec 12.40 11.32 0.74 0.70 0.50 0.58 9.08 8.50 6.17 6.37 0.84 4.04 54.38 52.29Average 17.26 11.64 0.87 0.81 1.05 1.29 4.45 3.75 6.88 7.43 7.87 8.30 27.85 22.85Japan 9983.T Fast Retailing Buy 47100.00 44,340.00 40,176 JPY Aug 31.10 33.59 4.21 5.19 0.96 0.97 15.32 16.04 17.54 16.46 2.93 2.17 -52.29 -47.673092.T Start Today Hold 2970.00 3,570.00 8,936 JPY Mar 35.23 44.37 26.88 22.92 1.22 0.90 21.25 28.63 71.68 61.68 2.75 2.02 -74.92 -70.194755.T Rakuten Hold 1230.00 1,132.50 13,538 JPY Dec 16.41 20.83 2.29 2.08 0.53 0.62 8.68 9.99 13.80 10.47 4.74 4.71 32.80 29.49Average 27.58 32.93 11.13 10.07 0.90 0.83 15.08 18.22 34.34 29.53 3.47 2.96 -31.47 -29.46

Headline PEx PBx Div Yield EV/EBITDA ROEFree cashflow

yield Net Debt/Equity

Source: Deutsche Bank estimates, Bloomberg Finance LP, closing price as of 11 Dec 2017

13 December 2017

Property



Australia

Key conclusions

Retail

Australian online retail is equivalent to c. 7% of bricks & mortar retail, and has plateaued at 6-7% over the past four years. This is mainly due to the country’s low population density and high costs.

Some retailers in categories such as fashion and office stationery have online sales of above 10%, but most are below the average of c. 7%. Unsurprisingly, food retail continues to see low online sales penetration, while others such as hardware retailer Bunnings do not have a transaction website. According to Bunnings management, customers prefer the in-store experience.

In FY17 online sales grew 13%, compared to bricks & mortar retail growth of 2.2% and overall retail growth of 2.9%. In a bull case scenario with online retail growth of 25% and bricks & mortar still at 2.2%, overall retail growth would have been 3.7%, 80bps higher than the actual FY17 growth rate. Due to online retail’s low base, its ability to shift the overall retail growth rate is limited.

Figure 77: Market-wide online sales % Figure 78: Online sales growth – FY17

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Total retail: $299 Total retail: $308 Total retail: gth: +2.9%

Source: Deutsche Bank, NAB Source: Deutsche Bank, company announcements, ABS, NAB

Real Estate

Highly productive retail REITs are in a solid position to defend against Amazon. We note that Scentre Group (SCG, Buy, PT $4.25/share) is the most highly productive retail REIT.

Australian retail REIT occupancy levels remain well above global peers at 99.5% (average), vs. USA Class A REIT malls at ~95%. Further, Australia’s supply (shopping centre space per capita) of 11.1sqft per capita is well below the US’s 23.5sqft per capita.

Retail REIT valuations have pre-empted Amazon’s entry. The FY18 distribution yield is 5.8%, compared with a sector average of 5.0%.

REITs such as SCG, MGR and GPT, which have proactively shifted their mix towards food and entertainment (the categories least affected by e-commerce), have experienced solid growth in comparable specialty MAT sales.



(+61) 2 8258-2297 (+61) 2 8258-1543


Leanne Truong Daniel Wan, CFA

Research Associate Research Analyst

(+61) 2 8258-3099 (+61) 2 8258-1791


13 December 2017

Property



Figure 79: Retail REIT valuations have pre-empted

Amazon’s entry (dividend yield)

Figure 80: Scentre Group the most productive REIT

($psm) 5.

8%

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Retail Diversified Office Industrial

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Source: Bloomberg Finance LP, Deutsche Bank estimates Source: Company results, Deutsche Bank

Australian online retail landscape Australian retail totalled some AU$308bn in FY17, and online retail accounted for c. 7% of this according to the NAB Online Retail index. This is low compared to other developed economies and in many sectors online retail remains underpenetrated. This is due to the country’s population density and costs, in particular labour cost. Over the past four years or so, market-wide estimates have put online sales at 6-7% of retail sales, indicating a plateau.

Figure 81: Market-wide online sales %

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However, wide variance exists across retailers and segments. This is shown in Figure 82, with some posting below-average online sales while others such as Oroton and Officeworks are well above.

13 December 2017

Property



Figure 82: Australian retail – online sales % Online sales % FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

JB Hi Fi 1.0% 1.6% 2.0% 2.2% 2.4% 3.0%

Myer 0.3% 0.6% 1.2% 2.1% 3.6%

Harvey Norman 1.0% 1.1% 1.3% 1.4% 1.5%

Officeworks 10.5% 11.0% 11.0% 12.0% 13.0% 13.8% 15.0% 17.0%

Woolworths Group 1.1% 1.4% 2.0% 2.6% 3.0%

Wesfarmers Group 1.3% 1.7% 2.0%

Oroton 6.0% 10.0% 10.0% 10.0% 10.0% 12.0%

Specialty Fashion 1.0% 2.6% 3.8% 4.6% 6.5% 8.8%

Kathmandu 1.0% 1.8% 3.0% 4.1% 5.1% 6.2% 6.9%

Market 4.9% 5.3% 6.2% 6.6% 7.1% 6.8% Source: Deutsche Bank, company announcements, NAB

Australian online retail by segment Below, we break down online sales for various Australian retailers. As shown in the chart, unsurprisingly, those in discretionary categories such as fashion have a higher online sales %; Oroton is a case in point, with 12% online sales in FY16. But, noticeably, there are more retailers below the average, which is boosted by a few retailers generating significant online sales. In comparison, department stores such as Myer still only make a small fraction of their sales online.

Figure 83: Online sales % breakdown by retailer Figure 84: Online sales % − dept stores & apparel

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16JB Hi Fi Myer Harvey NormanOfficeworks Woolworths Group Wesfarmers Group Oroton Specialty Fashion KathmanduMarket

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

FY10 FY11 FY12 FY13 FY14 FY15 FY16

Oroton Specialty Fashion Kathmandu Myer

Source: Deutsche Bank, company announcements, NAB Source: Deutsche Bank, company announcements

In electronics, homeware and stationery, there is significant variance. Wesfarmers-owned Officeworks has one of the highest online sales percentages amongst all omni-channel retailers at 17%. This is because of the homogeneity of stationery products, but also because it is one of the few to match all online prices. Channel checks suggest its pricing is very sharp. Harvey Norman and JB Hi Fi sell white goods as well as consumer electronics, so online sales are lower, but they also use their physical presence as an advantage against online pure-plays. JB Hi Fi actively encourages customers to come into store to negotiate a better price, while Harvey Norman offers up to 50 months interest-free financing in store.

13 December 2017

Property



Figure 85: Online sales % electronics, home, stationery

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

JB Hi Fi Harvey Norman Officeworks

Source: Deutsche Bank, company accounts

Unsurprisingly, conglomerates that mainly retail food have low online sales percentages. However, these conglomerates also contain a range of other businesses, from discount department stores such as Big W to hardware retailers such as Bunnings. These may affect the statistics, as disclosure is limited. Some, such as Bunnings, do not have transactional websites and management says that customers prefer the in-store experience. While this may be the case, online sales are still growing but at a level well below the market average.

Figure 86: Online sales % − food conglomerates

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

FY12 FY13 FY14 FY15 FY16

Woolworths Group Wesfarmers Group

Source: Deutsche Bank, company accounts

Aus retail – online growth bull case In FY17, online sales growth was 13% while bricks & mortar retail grew 2.2%. Overall, retail grew 2.9% to $308bn, with online accounting for 7.4% of the total. As discussed above, online is still growing but, given its low base, it has remained at around 6-7% of total retail for a few years. In FY16, online sales were 6.8% of the total.

13 December 2017

Property



Running an online bull case scenario analysis, if online retail had grown 25% and bricks & mortar growth had remained at 2.2%, then overall retail growth would have been 3.7%. This is 80bps higher than the FY17 actual growth rate. Due to online retail’s low base, its ability to shift the overall retail growth rate is limited.

Figure 87: Online sales growth − FY17 Figure 88: Online sales growth bull case – FY17

279 285

20 23

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

-

50

100

150

200

250

300

350

400

450

500

FY16 FY17


Online sales gth: +13%



$279 $285

$20 $25

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

FY16 FY17 online gth bull case Growth


Online gth bull case: +25%



Source: Deutsche Bank, company announcements, ABS, NAB Source: Deutsche Bank, company announcements, ABS, NAB

It’s all about the experience

Specialty sales slowing across Australia’s major retail landlords Australia’s major retail landlords have been reporting a moderation in specialty sales since December 2015 (see Figure 89). Most REITs have attributed the fall to administrations (such as Dick Smith) and competition (including e-commerce and new supply). As can be seen in Figure 90, the slowdown in specialty sales has been driven by Apparel and Homewares (the categories most affected by online sales, see Figure 82). This has been partially offset by strong growth in Retail Services (the category least affected by online). Specialty tenants typically account for 80%+ of a centre’s gross rents.

Figure 89: Comparable specialty MAT growth slowing Figure 90: Homeware and Apparel a drag on growth

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17

SCG MGR SGPGPT VCX Peer Average

SCG VCX GPT MGRApparel 0.2% -2.0% -2.4% 0.4%Food Catering 1.2% 2.2% 2.7% 17.5%Retail Services 2.7% 7.5% 8.6% 3.0%Food Retail 4.2% -1.1% 4.0% 2.5%General Retail 0.1% 0.6% 8.0% 8.0%Homewares -2.4% -3.6% 6.1% -4.1%Leisure -1.8% 3.0% -0.6% 1.0%Jewellery 1.9% -3.0% 12.1% 3.6%Mobile Phones 9.4% -9.9% -7.3% 12.2%

Source: Company results, Deutsche Bank Source: Company results, Deutsche Bank. Comp Spec MAT by category as at Sep 2017. GPT reported

as at June 2017. SCG categories weighted by sales

13 December 2017

Property



REITs undertaking large-scale development programmes to remain relevant As the threat of Amazon looms, REITs have been announcing large-scale development programmes to remain relevant. As can be seen in Figure 91, Australia’s largest retail landlords are looking to increase their portfolio by over 10% (current developments + future development pipeline) through developments. However, as can be seen in Figure 92, retail supply has outstripped population growth over the last four years and this does not look to be slowing given the major development programmes currently in place.

Figure 91: REITs undertaking large development

programmes

Figure 92: Retail space growing faster than population

12% 13%

20% 21%

35%

0%

10%

20%

30%

40%

0

1

2

3

4

5

SCG VCX SGP GPT MGR

Future Development Pipeline ($b)Projects currenlty under development ($b)% of BV

0%1%2%3%4%5%6%7%8%

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Retail Supply Growth (yoy) Population Growth (yoy)

Source: Company results, Deutsche Bank Source: JLL Research, ABS, Deutsche Bank.

Focus on delivering experiences to respond to changing consumer trends Significant product remixing has been taking place across Australia’s shopping centres, with a shift towards improving the customer experience through dining, entertainment, lifestyle and other services. Others are trying to differentiate themselves by offering electric vehicle charging stations, valet parking services or even handsfree shopping services.

As can be seen in the charts below, there has been a strong shift towards Food Catering, Retail Services and Cinemas and Entertainment.

Figure 93: SCG – growth in retail sales 2007-2017 Figure 94: SGP – Retailer mix 2010-2017

89.3%

63.1%54.5% 52.8%

0%10%20%30%40%50%60%70%80%90%100%

0.00.51.01.52.02.53.03.54.04.55.0

FoodCatering

Health andBeauty

Fashion,footwear

andJewellery

Technologyand

Appliances

0.0% 60.0% 120.0% 180.0%

Apparel and Jewellery

Mini Majors

Leisure, Cinemas &Entertainment

Food Catering

Services

Phones andcommunication

Growth in MAT Growth in Stores

Source: SCG company result, Deutsche Bank Source: SGP company result, Deutsche Bank.

13 December 2017

Property



Figure 95: MGR – retailer mix 2013-2016 Figure 96: GPT retail shift – % of GLA variance 2014-17 11

% 15%

16%

8%

19%

21%

10%19

%

18%

18%

8%

16%

16%

5%

0%5%

10%15%20%25%30%35%40%45%50%

Food

Cat

erin

g

Non

-ret

ail,

ente

rtain

men

tan

d ot

her

Appa

rel

Ret

ail S

ervi

ces

and

Mob

ileph

ones

Supe

rmar

ket a

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od re

tail

Hom

ewar

es,

leis

ure,

jew

elle

ryan

d ge

nera

l ret

ail

Dep

artm

ent S

tore

and

Dis

coun

tde

partm

ent s

tore

2013 2016

19.8%

7.1%4.4%

-1.8% -1.2%-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

FoodCatering

RetailServices

Leisure GeneralRetail

Apparel

Source: MGR company result, Deutsche Bank Source: GPT company result, ABS, Deutsche Bank.

Despite slowing sales, earnings growth remains above five-year averages While retail sales are slowing, the peer average comparable NOI growth remains above 3% and its five-year average. Moreover, comparable earnings growth has been recovering since the five-year lows recorded from June 2013 to June 2014. During the same period, peer average occupancy costs have reduced from 16.5% in June 2014 to 15.9% in June 2017.

While e-commerce has no doubt been capturing market share from brick and mortar retailers, as evidenced below, this is yet to affect the underlying earnings of REITs. Retail occupancy levels across Australia’s largest retail landlords remain at ~99.5%. Moreover, with an average WALE of 5+ years and fixed rental escalations of 4%+, there should be some stability in earnings going forward.

Figure 97: Comparable NOI still above 3% Figure 98: Occupancy costs remain relatively flat

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%



12.0%

13.5%

15.0%

16.5%

18.0%

19.5%

21.0%



Source: Company results, Deutsche Bank Source: Company results, ABS, Deutsche Bank.

13 December 2017

Property



China: pioneer in e-commerce

Key conclusions

As China is the leader in e-commerce (especially mobile commerce), offline players who are just in the midst of increasing its market share have been hit hard. That’s said, domestic/international brands have subsequently gaining online presence. Thus, some of the better players are benefiting from this additional channel. However, offline retailers remain the victim in the whole saga.

Changes are imminent despite painful. While we believe having the right products remain important, brands’ focus in less on networking but more on winning customers first, creating connection at the early stage of its shopping journey which normally involves online. The new retail concept is widely discussed but yet to materialize.

We see the future supply of retail space in China remaining ample even after fast growth over the past decade.

We believe the over-supply of retail space amid rapid growth of e-commerce will continue to put overall unit rent and rental yield under pressure.

However, we believe mall operators with strong execution will continue to grasp the strong demand from retailers (who seek quality retail environment) through proactive adapting to the new competitive landscape by adjusting their tenant mix (e.g. more F&B and experience shops that online shops cannot replicate).

Jeffrey Gao, CFA Anne Ling


(+852 ) 2203 6256 (+852 ) 2203 6177


Jason Ching, CFA Foo Leung

Research Analyst Research Associate

(+852 ) 2203 6205 (+852 ) 2203 6239


Stephen Cheung, CFA

Research Analyst

(+852 ) 2203 6182

[email protected]

Louise Li

Research Associate

(+852 ) 2203 6152

[email protected]

13 December 2017

Property



Attack on offline retailers/brands has been disastrous

The perfect womb for e-commerce development Low offline concentration by players, availability of manufacturing capacity, government’s support, pollution with traffic jam, popularity and high adoption in online payment and abundant low cost financing…all these has turned

China into the most advance e-commerce market in the world from one of the least developed retail market 10 year ago. e.g. mobile commerce is 80% of online sales vs 45% in the US. E-commerce has affected the whole retail ecosystem in China over the past 10 years.

According to CBRE, about 60% of Chinese internet shoppers do online shopping once a week or more, which is double the frequency of global users. The major items that they purchase are fashions, daily consumer products, and digital products.

1) Domestic brands – losing share to Tao brands

One of the Key Opinion Leaders (KOL), which operates her own apparel, brand on Taobao achieved sales of RMB1bn in 2016. From this example, we note that a) there is no doubt on cannibalization but consumers shifting more from price focus to trend focus; b) broadcasting and KOL are the new communication/sales tools for both on/offline sales.

Figure 101: Product mix % for online (2010) Figure 102: Product mix % for online (2016)

Apparel12%

Footwear 3%Sportwear

1%Alcoholic drinks

2%Soft drink

2%

Personal care and beauty

7%Luxury goods 0%

Packaged Food3% Personal

Accessories3%

Pet Care0%

Tissue and Hygiene

2%

CE products 65%

2010

Apparel30%

Footwear 6%

Sportwear3%

Alcoholic drinks7%

Soft drink 1%

Personal care and beauty

4%Luxury goods

3%

Packaged Food8%Personal

Accessories3%

Pet Care0%

Tissue and Hygiene

2%

CE products 33%

2016


2) International brands – losing the pricing power resulting in global price harmonization; local premium brands need to prove its value proposition

Online price transparency resulted in Chinese consumers looking for price arbitrage. The total Haitao market (including both the legitimated CBEC and the grey market - Daigou) is estimated to reach RMB392bn in 2016 and it is expected to reach RMB1trillion by 2018. International brands since 2 years ago have thus implement “global pricing harmonization” strategy with retail prices in different counties having not more than 5 -20% difference. Tag price in China has been reduced by ~10-30%.

Figure 99: Online’s contribution to

incremental retail sales growth in

China is increasing

11.1% 14.8%24.8% 30.9% 34.9% 28.1%

55.3%44.5%

88.9% 85.2%75.2% 69.1% 65.1% 71.9%

44.7%55.5%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

2011 2012 2013 2014 2015 2016 2017e 2018e

Online/offline contribution % to incremental retail sales in China

Online Offline Source: Deutsche Bank, iReserach

Figure 100: Frequency of Online

Shopping by Chinese Internet

Shoppers

4%

36%

18%

22%

6%

14%

3%12%

14%

32%

18%

21%Daily

Several times per week

Once per week

Once per month

3-4 times per year

Others

China

Global

Source: Deutsche Bank, iReserach

13 December 2017

Property



But China’s e-commerce development also provides opportunities to latecomers. Kao, for example, has made use of e-commerce in increasing its presence in the sanitary napkins and baby diaper markets in the past two years, while the CBEC model pushed down its pricing point given easier accessibility for imported products. Thus, international players these days seek a level playing field (in regulation and tax requirements) between on/offline markets.

Take Kao’s Merries as an example. Its made-in-China products sell at c.RMB1.50 per piece at Tmall’s Kao flagship store, whereas the same product made in Japan is selling at the same Tmall store at RMB2.75 per piece. However, some cross-border e-commerce shops are selling the imported Merries products at RMB1.45/pc – a price similar to the locally made Merries. This led to a price cut for the made-in-Japan Merries to RMB2.15/piece.

3) Domestic retailers – losing traffic and impulse buying habits to online

Gone are the days of price discrimination strategies (high price tag for gifting/gift cards and promotion/discount for mass public), which has resulted in lower returns for all players. Traffic decline is becoming a major issue for offline retailers. Ice-skating rinks, cinemas, restaurants and shops that offer experiences (e.g. adidas has hosted yoga classes at some of its stores) are ways to retain shoppers.

But the younger the age group, the more they prefer online entertainment and online chats. Impulse buying only happens online when KOL recommends a product/service or when one wants to buy a weapon in order to further advance in a game.

Figure 104: SSSg for major department stores has

deteriorated since 2011

Figure 105: SSSg for brands in China (2011-2016)

-20%

-10%

0%

10%

20%

30%

Mar

-11

Jun-

11Se

p-11

Dec-

11M

ar-1

2Ju

n-12

Sep-

12De

c-12

Mar

-13

Jun-

13Se

p-13

Dec-

13M

ar-1

4Ju

n-14

Sep-

14De

c-14

Mar

-15

Jun-

15Se

p-15

Dec-

15M

ar-1

6Ju

n-16

Sep-

16De

c-16

Mar

-17

Golden Eagle Intime NWDS* Parkson Maoye

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%Bauhaus Burberry L’Occitane C.Banner Trinity Daphne Etam

ChowSang Sang

Chow TaiFook

LukfookJewellery

2011 2012 2013 2014 2015 2016

Fashion & Apparel Jewellery

y-y

sale

s gro

wth

rate


Fast growth of retail space over the past decade

According to JLL, the total number of retail malls in the top 30 cities in China has increased significantly from 52 in 2001 to 998 in 2016, implying an average of 63 new shopping malls opened each year. JLL forecasts this strong

Figure 103: CBEC channel pushed

Kao to reduce official price in China

1.50 1.45

2.75

1.50 1.45

2.15

0.00

0.50

1.00

1.50

2.00

2.50

3.00

Made in China CBEC price Made in Japan

Retail price comps for Merries in China

Price before CBEC Price after CBEC

RMB

Source: Deutsche Bank, Tmall Kao flag ship store

13 December 2017

Property



growth trend to even accelerate in the next three years, and reach 1,445 shopping malls in 2019F (implying an average of 149 new malls opened each year).

In addition, we notice that the size of shopping malls has been growing over the years. For example, among malls built in 2009-2016, ones of over 100k sqm account for 39% (vs. 18% for those built pre-2000)

Figure 106: Total number of shopping malls of China's

top 30 cities

Figure 107: Mega-malls emerge and the share of smaller

malls drop

52 62 73 89 111 140 178 220 270 336

418 518

621 728

862 998

1,216 1,348

1,445

-

200

400

600

800

1,000

1,200

1,400

1,600

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

e

2018

e

2019

e

Num

ber o

f sho

ppin

g m

alls

60%

37%25%

23%

34%

36%

11%

16%

20%

6%6%

11%

6% 8%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Pre-2000 Pre-2000 2000-2008 2009-2016

0-50,000 50,000-100,000 100,000-150,000 150,000-200,000 200,000+

% o

f com

plet

ed sh

oppi

ng m

alls

Total GFA (sqm)

Source: JLL, Deutsche Bank Source: JLL, Deutsche Bank

Ample future retail space supply In addition to the existing large amount of retail space, there is ample supply of shopping malls in the pipeline. According to JLL, the shopping mall stocks in the top 25 cities in China will increase by 55% on average in the next three years. In particular, T2 cities (e.g. Chengdu, Wuhan, Ningbo, Changsha, Xi’an) have significant potential supply (>70% retail mall GFA increase).

Figure 108: Total shopping mall stocks by city

0

2

4

6

8

10

12

14

16

Shan

ghai

Beiji

ng

Shen

zhen

Guan

gzho

u

Chen

gdu

Wuh

an

Chon

gqin

g

Xi'a

n

Suzh

ou

Shen

yang

Nin

gbo

Hang

zhou

Tian

jin

Chan

gzho

u

Chan

gsha

Qin

gdao

Zhen

gzho

u

Hefe

i

Fosh

an

Fuzh

ou

Dalia

n

Nan

jing

Xiam

en

Jinan

Wux

i

T2 a

vera

ge

2016 2019E45%

54%

28% 66%

81%63%

70%70%

32%58%

105%63%

45%20% 77%

57%33%57%

48%47%

42% 60%

66% 41%

42%57%

Source: JLL, Deutsche Bank

13 December 2017

Property



Figure 109: Shopping mall stock per metropolitan consumer

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Shan

ghai

Shen

zhen

Beiji

ngG

uang

zhou

Chon

gqin

gCh

angz

hou

Chen

gdu

Zhen

gzho

uH

efei

Fuzh

ouSh

enya

ngQ

ingd

aoXi

'an

Wuh

anSu

zhou

Nin

gbo

Dalia

nCh

angs

haXi

amen

Tian

jinJin

anH

angz

hou

Wux

iFo

shan

Nan

jing

T2 A

vera

ge

Tier 1 Benchmarks Comparison Tier II Cities T2 Average

2016 2019

Shanghai saturation

levelSqm

per

per

son


Oversupply of retail space Given the large supply of retail space in T1/2 cites, the unit rent growth has been trending down over the past few years. In particular, the unit rent growth in Shanghai and Guangzhou has turned negative in 1Q17, according to JLL. Also, JLL forecasts that 30% of the mature malls (malls opened for over four years) will record rental decline in 2017F, and 50% will be flat.

As a result, many developers are delaying the opening of their shopping malls, with the major reason for delay being leasing difficulties (account for 24%).

Figure 110: Vacancy rate for malls in three T1 cities Figure 111: Net unit rent y-y change for malls in three T1

cities


13 December 2017

Property



Figure 112: Top reasons for delayed mall openings in

2016

Figure 113: Shopping mall rental growth performance by

year

Leasing difficulties, 24%

Construction delays, 19%

Located in a new or emerging area,

12%

Financial issues, 7%

Waiting for other sections of the

project, 7%

Fire safety issues, 5%

Recently transacted, 4%

Other reasons, 22%

6% 5% 6% 7% 9%21%

30%19% 18% 19% 25% 27%

42%

50%75% 76% 75% 69% 64%

37%20%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2011 2012 2013 2014 2015 2016 2017F

Falling Flat Rising

% o

f all

mal

ls ov

er 4

yea

rs o

ld


Figure 114: Retail rental yield of T1 cities in China

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

2012 2013 2014 2015 2016 3Q17

Beijing Shanghai Guangzhou


Implications for brands/retailers – adjusting to changes, with no more abnormal returns

Revisiting store return – less focus on network but more on key showrooms Expanding the store network used to be an effective way to reach out to consumers, especially in cosmetics and luxury, with good sales staff connecting with consumers and stimulating impulse spending on site. But with consumers spending more time on their mobile phones, some of the shopping journeys go online while consumers demand good service and experiences offline.

This means that a brand/retail company can no longer review a store’s performance or a region’s performance on a standalone basis. In the past, it would focus on sales/profit per square meter as the key benchmark. These days, this needs to be reviewed together with its online performance, or its impact as a showroom in stimulating online sales. Management’s KPIs need to be aligned, although we believe this is still very difficult at this stage, with the border getting blurred.

13 December 2017

Property



Figure 115: Store return simulation for an apparel brand – by including online

sales

before after change % as of sales % before after change %Sales 100 90 -10% Sales 100% 100% 0%- Offline 100 85 -15% - Offline 100% 94% -6%+ Online 0 5 + Online 0% 6% 6%COGS 20 18 -10% COGS 20% 20% 0%GP 80 72 -10% GP 80% 80% 0%- Offline 80 68 -15% - Offline 80% 80% 0%+ Online 0 4 + Online 80% 80% 0%Opex 60 59 -3% Opex 60% 65% 5%- Offline 60 56 -8% - Offline 60% 65% 5%+ Online 0 3 + Online 60%Variable cost 30 27 -12% Variable cost 30% 29% -1%- Offline 30 26 -15% - Offline 30% 30% 0%+ Online 0 1 0% + Online 20%Fixed cost 30 32 7% Fixed cost 30% 36% 6%- Offline 30 30 0% - Offline 30% 35% 5%+ Online 0 2 + Online 40%EBIT 20 14 -33% EBIT 20% 15% -5%- Offline 20 13 -38% - Offline 20% 14% -6%+ Online 0 1 + Online 20%


Increase in digital marketing – investing in consumers Chinese consumers are extremely connected via digital technology: they spend more time on smartphones, laptops and tablets than global averages. Quest Mobile researchers estimate that China has 927m active mobile internet users, along with 707m users of WeChat, 272m users of Alipay and 231m users of KuGou. By 2021, more than 90% of purchases will involve at least one digital touch point (up from 70% in 2016), according to BCG/Aliresearch in June 2017. Highly fragmented consumer purchase pathways require companies to engage consumers at every one of the possible steps – with an integrated, digital experience – or risk losing them (Figure 117/Figure 118).

Figure 116: Chinese consumers rely heavily on digital technology % of Chinese consumers

% of global consumers

31% 16% Click on an advertisement that is relevant to them

41% 34% Consumers use social platforms as a way to receive promotional offers

79% 46% Positive interactions with brands on social media have driven them to endorse the brands more

71% 44% Consumers have spent more due to interaction with brands through social media

29% 13% Consumers use social media to see what brands or products KOLs and celebrities are endorsing

Source: Deutsche Bank,PwC Total Retail 2017 Note: Base=877 (China), 13,675 (Global)

13 December 2017

Property



Figure 117: Chinese consumer shopping pathway No.1 –

starting from a recommendation from social network

Figure 118: Chinese consumer shopping pathway No.2 –

starting from an online search for a target product

Starting from receive a

recommendation from a friend on

Wechat

conduct some online researches

on different websites

make a purchase

recommend the product to

another friends

Starting from A consumer goes online to check

price/channel for a specific product

make a purchase

make a purchase

impact the next consumer

Source: Deutsche Bank, BCG Source: Deutsche Bank, BCG

Consumers want companies to justify their price (offer value and service). PWC’s survey shows that the personalisation of digital marketing is particularly effective in China, where consumers are almost twice as likely (31%) to click on an advertisement that is relevant to them than the global average (16%).

KOLs are particularly popular as communication/sales tools in China. PWC’s survey showed that 29% of Chinese consumers use social media to see what brands or products KOLs and celebrities are endorsing. Instead of movie stars, KOLs in China are in some cases internet celebrities. They monetise their personal brand and follower base by selling products, mostly fashion and cosmetics, over online platforms such as WeChat and Taobao.

Figure 119: Brands better understand/serve consumers by leveraging the big

data captured by online retailers Companies Collaboration details

Nestle partnered with Alibaba

To personalize the products/recommendations displayed on their Tmall store based on consumer profiles, consumer behaviour and social graphs.

Quaker collaborated with JD.com

To identify an underpenetrated market via developing a high-fibre oats drink specifically for the China market.

Nivia teamed up with JD.com

Nivea evaluates consumer skin care products sales trends in JD.com and enables JD.com consumers to access its newly launched products in other

countries.

Haier used Alibaba data

Haier reverse-engineers its product development and manufacturing process by analysing data from Alibaba, including customer support,

product ratings and comments. Source: Deutsche Bank

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Figure 120: Social networks are the battlefield in China

7%

9%

11%

21%

24%

36%

48%

70%

9%

11%

20%

37%

13%

35%

32%

59%

-80% -60% -40% -20% 0% 20% 40% 60% 80%

Digital press and magazines

Blogs

Emails from brands/retailers

Individual retailer websites

Mobile apps

Price comparison websites

Multibrand websites

Social networks

China Global

Note: Respondents were asked to select up to three options; for brands to stand out they first need to be where their consumers are, and in China that means social.Base = 905 (China), 24,471 (Global)


Brands are relocating their stores from department stores to shopping malls With the threat from online shopping, we observe that department stores have been particularly suffering from the competition, with the number of department stores dropping 20% in 2012-2016 (Figure 121). That said, the decline in department stores has stabilised somewhat recently.

Nationwide brands such as CTF and Belle are busy closing stores in department stores and relocating to shopping malls. Taking CTF as an example, its net openings in the China market slowed from 234 stores in FY14 to 26 in FY16 and started to stabilize in FY17 (67 net openings), mainly due to massive closures in department stores. In FY16/17, it shut down 5/39 stores in department stores and opened 45/76 in shopping malls. The POS mix of department stores for its self-operated stores shrank from 82% in FY10 to 41% in FY17.

Figure 121: Decline in number of

department stores in China

8,152

6,552

2012 2016

Total no. of department stores dropped 20% from 2012 to 2016

Source: Fung Group, Deutsche Bank

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Figure 122: CTF’s store openings since FY14-FY17 Figure 123: CTF self-owned POS by operating model in

China

234159

2667

-200

-100

0

100

200

300

400

FY14 FY15 FY16 FY17

Gross opening store closure

net opening

82%

41%

5%

17%

13%

41%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY10 FY17

Department stores Shopping malls Others

Source: Deutsche Bank Source: Deutsche Bank

Online sales mix is growing for brands in China, while retailers are struggling International brands have increasingly started to team up with Tmall given its online initiatives in China since 2015. For domestic brands, this became more obvious in 2016 when Alibaba joined up with 160 brands (Tao brands/international brands/local traditional brands account for 15%/30%/55%, respectively) on its Tmall platforms. One of the key agreements was that Alibaba agreed to deal with fake products and unauthorized dealers on its Tmall websites. Since then, online sales have increased to 10-30% of its China sales (from close to zero). Thus, brands started to get some benefits from online development.

Offline retailers, on the other hand, are still suffering (although SSS has picked up over the past six months due to a cyclical recovery). Alibaba has acquired Intime, but there is no clear breakthrough in how some of these offline stores will be revamped and operated. Meanwhile, Alibaba is busy preparing its staff-less store.

Figure 124: Online as % of total sales for selected traditional brands/retailers

in China

1%3% 4% 5% 6%

9% 10% 10% 11% 11% 12% 13% 13%15%

17% 18%

23% 24%28%

30%

0%

5%

10%

15%

20%

25%

30%

35%



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Figure 125: Online/offline integration accelerating

Date of announcement Buyer Seller Stake Consideration Implied valuation RemarksAlibaba 28/03/2014 Alibaba Investment Ltd.

(wholly owned sub of Alibaba)

Intime (de-listed) 9.9% stake and HKD3.7bn CB

HKD5.37bn 14x 2015PE for the 9.9% stake; 20x FY17 PE for privitization

Alibaba initially acquired a 9.9% stake in Intime at HKD7.53 (17% lower than the last closing price before the announcement of the deal) and HKD3.7bn CB in Mar 2014. Alibaba converted all of its CBs at the conversion price of HK$7.13 into 535m conversion shares in Intime on 30 June 2016. The conversion price was a 16% premium to the closing price (HK$5.99) on 29 June. Post the conversion, Alibaba is the largest shareholder of Intime, with a 27.8% stake, up from 10.1% before the conversion. Subsequently, Ali privatized the company in Jan 17 at HK$10 share, a premium of 42% of closing price before the announcement (20x FY17PE or 1.7x PB).


Suning (002024.SZ, NR) 19.99% RMB28.3bn 127x 2014PE The acquisition price was RMB15.23/share, which was 10.44% higher than Suning's last closing price before the announcement. Suning also purchased 1.1% (27.8m shares )of Alibaba stake at RMB14bn. In Nov 2017, It announced that it planned to dispose of 5.5m shares at USD1bn.

21/11/2016 Hangzhou Alibaba ZETAI Information Technology (an indirect wholly-owned subsidiary of Alibaba)

Sanjiang (601116.SS, NR) 32% RMB2.15bn 69X 2015PE Acquisition price was RMB11.11/share, a 41% premium to the closing price as of last trading day before the deal was announced (issued new shares + share transfer)

23/12/2016 Shanghai Yiguo Ecommerce owned by Alibaba

Lianhua (0980.HK, NR) 18.00% RMB850m 3x 2015PB Yonghui acquired 21.17% of Lianhua at the price of HKD3.92/share in April 2015. In Dec 2016, Shanghai Yiguo Ecommerce bought 21.17% of the shares, at HKD4.01, 37% higher than the closing price of Lianhua. Alibaba bought 18% of the shares of Lianhua from Shanghai Yiguo Ecommerce (which is invested by Alibaba as well) in May 2017, but they did not disclose the price.

26/09/2017 Alibaba Chengdu and Hangzhou Hanyun

Xin hua du (002264.SZ, NR)

10% not disclosed not disclosed Consideration was RMB555m, based on the closing price of the last trading day before the announcement (RMB8.11/share).


Sun Art (6808.HK, Buy) 36% RMB22.4bn 18.4/17.2x 2017/2018 PE(Dbe)

The acquisition price was HKD6.5/share, 24.4% lower than Sun Art's last closing price.

JD.com12/08/2015 JD.com Yonghui Superstores

(601933.SS, Buy) 11% RMB4.31bn 35x 2014PERMB9.0/share, 11% lower than closing price on 30 July. After acquisation, JD will hold a 10% stake in Yonghui

20/06/2016 JD.com Yihaodian ( a subsidiary of Walmart) 100% RMB10bn P/GMV: 0.82 (2013)

Walmart will receive 145m newly issued JD.com Class A ordinary shares, amounting to 5% of total shares outstanding.

Tencent

11/12/2015 TencentYonghui Superstores (601933.SS, Buy)

5% RMB4.31bn na

Tencent is expected to own 15% stake in Yonghui Yunchuang. After the investment, we believe Yonghui Yunchuang will potentially become an associate of Yonghui listco (owning <50% stake). The company has assured to confirm the details and resume trading before 18 December 2017.

Source: Deutsche Bank, Company announcement

Implication on real estate - Malls’ adaptation to new competitive landscape

Tenant mix adjustment Given the threat from online shopping, we observe that department stores have been negatively affected by the competition, with the number of department stores dropping 20% from 2012-2016. On the other hand, we notice that mall operators have introduced more F&B shops (especially light/fast food stores) to replace traditional retail. For example, on average 31% of café/tea/ice cream shops, 20% of fast food shops, and 19% of bakery shops plan for expansion in 2016.

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Figure 126: Decline in no. of department stores in China Figure 127: Rapid expansion of light/fast-food stores in

2016

8,152

6,552

2012 2016

Total no. of department stores dropped 20% from 2012 to 2016

31%

20% 19%17%

7%

12%

7%

11%

Café/Tea/Ice cream Fast Food Bakery Fast casual

Average expansion rate Average Closure Rate

Source: Fung Group, Deutsche Bank Source: JLL, Deutsche Bank

Figure 128: Change in tenant mix – Hang Lung Properties

97% 95% 88% 88% 88% 87% 90% 85% 81% 85% 88% 84% 87% 88% 91%76%

3% 5% 12% 12% 12% 13% 10% 15% 19% 15% 12% 16% 13% 12% 9%24%

0%10%20%30%40%50%60%70%80%90%

100%

2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016

Shanghai Plaza 66 Shanghai GrandGateway 66

Shenyang Palace 66 Shenyang Forum 66 Jinan PARC 66 Wuxi Center 66 Tianjin Riverside 66 Dalian Olympia 66

Others Lifestyle


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Figure 129: Change in tenant mix – CR Land

71% 70% 69%60%

89% 89% 86% 90% 85% 85% 80% 82%65% 61% 67%

14% 14% 15%

8%

10% 11%9% 7% 14% 12% 16% 18%

9% 15% 9%

16% 16% 16%31%

1% 0% 5% 3% 1% 3% 4% 0%

27% 24% 24%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2014 2015 2016 2014 2015 2016 2014 2015 2016 2014 2015 2016 2014 2015 2016

Shenzhen MixC Chengdu MixC Shenyang MixC Hangzhou MIXc Nanning MIXc

Others Lifestyle Department Stores


Taking Joy City, one of the leading mall operators in China with precise market position, as an example, its key features are:

1) Unique positioning: targets the emerging middle class aged 18 to 35. To maximise its market position, “themed streets” that attract its target groups are found in most of its malls. Tenancy is also actively managed to keep a mall trendy and refreshing.

2) Strong ability in mall alterations: Its well-known brand name offers Joy City stronger bargaining power and flexibility in mall/usage alterations (Figure 117). With such flexibility, it could renovate the mall to accommodate higher exposure to lifestyle tenants. It is an early bird to survive the impact of e-commerce. It has completed adjustments in its tenant mix before 2014 (it removed all department stores and increased F&B and lifestyle stores in the tenant mix).

Figure 130: Examples of alteration/change of purpose in property use at various Joy City malls Mall Area / Features of alternation Benefits

Shanghai Jing'an Joy City

Adding a Ferris wheel on the rooftop Making the mall an iconic destination; diverting footfall to the top of the building

Adding freight containers on the rooftop as part of the shops in "themed streets"

Utilizing mall spaces; increasing rental income

Tianjin Joy City Converting one of its car parks to a themed street Utilizing mall spaces; attracting footfall; increasing rent

Taking over public areas to themed streets with F&Bs Increasing leasable area; attracting footfall; increasing rent

Beijing Xidan Joy City Converting part of its hotel space to retail space for F&B outlets

Utilizing leasable area; improving tenant mix; increasing rent

Source: Company, Deutsche Bank

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Figure 131: Tenant mix – Joy City overall Figure 132: Tenant mix – Shanghai Plaza 66

2014, 77%

2014, 23%

2015, 73%

2015, 27%

2016, 75%

2016, 25%

Joy City - overallOthers Entertainment and services

2015, 97%

2015, 3%

2016, 95%

2016, 5%

Shanghai Plaza 66 (Hang Lung)Others Lifestyle & Entertainment

Source: Company, Deutsche Bank Source: Company, Deutsche Bank

Figure 133: Tenant mix – Shanghai Grand Gateway 66 Figure 134: Tenant mix – Shenyang Palace 66

2015, 88%

2015, 12%

2016, 88%

2016, 12%

Shanghai Grand Gateway 66 (Hang Lung)

Others Lifestyle & Entertainment

2015, 88%

2015, 12%

2016, 87%

2016, 13%

Shenyang Palace 66 (Hang Lung)Others Lifestyle & Entertainment


Figure 135: Tenant mix – Shenyang Forum 66 Figure 136: Tenant mix – Jinan Parc 66

2015, 90%

2015, 10%

2016, 85%

2016, 15%

Shenyang Forum 66 (Hang Lung)Others Lifestyle & Entertainment

2015, 81%

2015, 19%

2016, 85%

2016, 15%

Jinan PARC 66 (Hang Lung)Others Lifestyle & Entertainment


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Figure 137: Tenant mix – Wuxi Center 66 Figure 138: Tenant mix – Tianjin Riverside 66

2015, 88%

2015, 12%

2016, 84%

2016, 16%

Wuxi Center 66 (Hang Lung)Others Lifestyle & Entertainment

2015, 87%

2015, 13%

2016, 88%

2016, 12%

Tianjin Riverside 66 (Hang Lung)Others Lifestyle & Entertainment


Figure 139: Tenant mix – Dalian Olympia 66 Figure 140: Tenant mix – Shenzhen MixC

2015, 91%

2015, 9%

2016, 76%

2016, 24%

Dalian Olympia 66 (Hang Lung)Others Lifestyle & Entertainment

2014, 70%

2014, 14%

2014, 16%

2015, 70%

2015, 14%

2015, 16%

2016, 69%

2016, 15%

2016, 16%

Shenzhen MixC (CR Land)Others Lifestyle Department Stores


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Figure 141: Tenant mix – Chengdu MixC Figure 142: Tenant mix – Shenyang MixC

2014, 61%

2014, 8%

2014, 31%

2015, 89%

2015, 10%

2015, 1%

2016, 89%

2016, 11%

2016, 0%

Chengdu MixC (CR Land)Others Lifestyle Department Stores

2014, 86%

2014, 9%2014, 5%

2015, 90%

2015, 7%

2015, 3%

2016, 85%

2016, 14%

2016, 1%

Shenyang MixC (CR Land)Others Lifestyle Department Stores


Figure 143: Tenant mix – Hangzhou MixC Figure 144: Tenant mix – Nanning MixC

2014, 85%

2014, 12%

2014, 3%

2015, 80%

2015, 16%

2015, 4%

2016, 82%

2016, 18%

2016, 0%

Hangzhou MIXc (CR Land)Others Lifestyle Department Stores

2014, 65%2014, 8%

2014, 27%

2015, 61%

2015, 15%

2015, 24%

2016, 67%

2016, 9%

2016, 24%

Nanning MIXc (CR Land)Others Lifestyle Department Stores


Leading malls are resilient to e-commerce with strong demand from retailers Based on the above, we can see that leading mall operators have been actively taking the challenges from e-commerce and have adjusted its tenant mix to maintain a balance between footfall and sales. As mentioned earlier, although there are about 4,500-5,000 malls in China, most of these are not well-operated.

However, many brands are seeking to increase exposure in China. According to the JLL report (Destination Retail 2016), among the 140 cities covered globally by JLL, eight cities in Mainland China are ranked in the Top 50 cities regarding their attractiveness to global cross-border retailers, not to mention some of the emerging local brands in China.

According to JLL, among the total stocks of shopping malls in the 60 cities studied by the consultant, only 10-15% of these stocks are estimated to be of international standards (in terms of standard of construction, design, layout,

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and other features that attract tenants). This indicates that the supply of quality malls is very limited.

Figure 145: Top 50 cities that are most attractive to international brands


As a result, there is strong demand from retailers for quality malls with strong operation, which is relatively in limited supply. Thus, these malls have stronger bargaining power on tenant mix adjustment and rents adjustment.

Many of the branded malls in China, Paradise Walk operated by Longfor and MixC by CR Land, are the benchmarking malls in the market. The tenant sales below show how resilient the malls have been. The sales declines in the malls were more related to some tenant adjustment/renovation of spaces and also the downcycle of the market.

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Figure 146: Retail sales growth of mature malls of Longfor and CR Land 2012 2013 2014 2015 2016 1H17

CR Land

Shenzhen MixC Low-single digit Mid-single digit flat Mid-single digit decline

High-single digit Over 20%

Hangzhou MixC Mid-teens Mid-single digit flat Low-teens High-single digit Over 20%

Shenyang MixC flat Low-single digit Over 20% Over 30%

Nanning MixC Mid-single digit Over 20% Over 30%

Longfor

Chongqing North Paradise Walk High-single digit Mid-single digit High-single digit Mid-single digit decline

Mid-single digit decline

Note: Shenzhen MixC’s decline in 2015 was mainly due to the poor sales performance of a luxury car dealer. Chongqing North Paradise Walk’s declines in 2015 and 2016 were due to the tenant mix adjustment on the department store and supermarket. Source: Company, Deutsche Bank

Malls exist to satisfy consumers’ needs and demand In conclusion, from the perspective from mall operators, e-commerce could and had satisfied some basic consumption demand online. Hence changes in the physical retail has been taking place. However, as proven by mall’s operational data, the brick and mortar shopping spaces cannot be eliminated. There are still ample needs and demands from consumers to be satisfied by the shopping malls. Hence, we are positive on the mall operators with strong execution, including Longfor (Paradise Walk series) and CR Land (MixC Series).

Figure 147: Summary of major mall operators in China

CR Land Longfor Joy City Hang Lung# of opened malls by 1H17 23 22 9 8GFA in operation (mn sqm) 2.8 2.0 1.1 1.0

# of malls to be opened in the next two years 17 14 2 2GFA of new malls to be opened (mn sqm) 2.1 1.6 0.5 0.3

GAV of China retail IP (exisitng and in the pipeline) - as % of IP GAV 71% 100% 72% 38% - as % of total GAV 24% 36% 60% 35%

Source: Company data, Deutsche Bank

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Hong Kong

Key conclusions

• As the infrastructure supporting e-commerce improves, e-commerce is expected to grow at 16% CAGR in the next five years to reach HK$28.7bn by 2021, markedly higher than the 1.9% CAGR for Hong Kong retail sales over the period. E-commerce expects to explain 39%~46% of retail sales growth in 2017-2021e, according to Euromonitor’s forecast.

• However, as visitor spending made up a much higher portion of retail sales in Hong Kong at 35% (e-commerce is expected to account for just 6% of Hong Kong retail sales by 2021 despite the higher CAGR and 9% of local consumption), tourists have much bigger influence over retail sales and help to cushion any adverse impact to rents (especially in shopping malls) associated with the shift in spending pattern towards e-commerce.

• Local consumers started online shopping more recently; however, this is at a very early stage and mostly comprise purchase of limited product categories from overseas websites. There is no dominant local e-commerce play and local retailers have limited online exposure.

• We thus anticipate differential impact on shopping malls. Specifically, tourist-centric shopping malls are likely to be resilient against growing e-commerce due to higher tourist spending. In contrast, domestic-centric shopping malls are expected to be relatively more affected in light of competition from e-commerce.

• Owing to historical high occupancy cost (currently at 22-26% versus long-term average at 16-19%) and slowing growth in Hong Kong retail sales (1.9% CAGR in 2017-2021 versus 10% CAGR in 2011-2016), we expect the rental gap between high-street shops and shopping malls to narrow to 20% in the next 12 months (from 30% currently).

• As turnover rents as a percentage of total retail revenue have markedly fallen to low single-digit for most retail mall operators (from the peak of double digit) under our coverage (i.e. turnover rents serving as a variable rent buffer is diminishing), the further decline in high-street shop rental is likely to start putting downward pressure on shopping mall rents.

• Current valuation for retail landlords are relatively rich compared with the historical average, trading at a 29% discount to NAV versus the historical average at 39%. On the other hand, we expect cap rates to expand by 25bps in the next 12 months in anticipation of the upcoming rate hike cycle.

Jason Ching, CFA Anne Ling


(+852 ) 2203 6205 (+852 ) 2203 6177


Jeffrey Gao, CFA Louise Li

Research Analyst Research Associate

(+852 ) 2203 6256 (+852 ) 2203 6152


13 December 2017

Property



Threat from e-commerce overstated as tourists have a much bigger influence on overall retail sales

E-commerce remains underpenetrated statistically due to a high mix of tourist spending among overall retail sales At first glance, Hong Kong has markedly lower penetration in e-commerce as compared with other major cities. According to the statistics compiled by the Census and Statistics department, there are a total of 1.7mn online shoppers in 2016, which represented a 9.1% CAGR from 2000. Online shopping penetration in Hong Kong merely stood at 28% in 2016, versus China (67%), Japan (69%), the UK (81%) and the US (78%).

Meanwhile, according to Euromonitor data, total e-commerce sales accounted for just 3% of total retail sales in Hong Kong in 2016, which is also markedly lower than China (17%), Japan (7%), the UK (15%) and the US (10%).

Figure 148: Number of online shoppers in Hong Kong Year Persons ('000) Penetration rate %

2004 410.6 7.1%

2005 498.2 8.6%

2006 508.3 8.8%

2007 576.8 10.1%

2008 597.7 10.3%

2009 923.9 15.9%

2012 1,460.1 24.4%

2014 1,415.6 23.4%

2016 1,701.2 27.8% Source: Census and Statistics Department; Deutsche Bank

Figure 149: E-commerce penetration rate in HK vs other regions

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0 5,000 10,000 15,000 20,000 25,000

Population Density in 2015 (person per sq. km)

Onlin

e sh

oppi

ng p

enet

ratio

n ra

te

Hong Kong

Singapore

Macau

UKUSAGermanyJapan

China

Source: World Bank; government data; Deutsche Bank

Different from other peers, tourist spending has been the key growth driver of HK retail sales One of the reasons why the impact from e-commerce is not very strong is due to the fact that tourist spending accounted for 35% of HK retail sales (2016), of which 90% is from tourists from the mainland. Each year, around 50m

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travellers come to HK. Spending has been focusing on daily necessaries, luxury and gold jewellery. Tourist sales accounted for 40-70% of some of the HK retailers’ business in HK. While tourist arrivals from China have softened in the past two years from its peak, Hong Kong remains one of the preferred travel locations and shopping destinations despite the vast e-commerce market at home.

Figure 150: PRC tourists like to travel to HK

REASONS TO SHOP IN HK YES NO

GENUINE PRODUCTS 50% 50%

CONVENIENCE & RANGE 49% 51%

PROMOTIONS FOR MAINLANDERS 28% 72%

WELCOMING STAFF 27% 73%

NOT TOO CROWDED 26% 74%

Source: Deutsche Bank, Nielsen

Figure 151: Why tourists prefer to shop in HK Figure 152: HK remains No.1 shopping destination

globally

27%

WELCOMING STAFF

50%

GENUINE

28%

PROMOTIONS FOR

26%

NOT TOO

49%

CONVENIENCE &

29%

33%

31%

31%

29%

29%

33%

30%

28%

31%

27%

31%

31%

31%

32%

33%

32%

33%

32%

32%

44%

36%

38%

38%

39%

38%

35%

37%

40%

37%

0 50 100 150 200 250

Tokyo

Kuwait City

Beijing

Singapore

Shanghai

New York

Dubai

Paris

Hong Kong

London

Mainstream Premium Luxury

Cross-border retailer attractiveness Note: The coloured bars and percentage values illustrate the share of international retailers by

Rank City

1

2

3

4

5

6

7

8

9

10

Source: Deutsche Bank, Nielsen Source: Deutsche Bank, Consumer Council

Of the HK$52bn total tourist receipts spent in HK from mainland tourists, around 70% is for shopping. The share is higher than the total spend mix globally by mainland tourists (around 50%). Therefore, there seems to be some attraction to shopping at physical stores in HK. According to Nielson, this is due to proximity, similar language, choices, product authenticity, etc. In addition, HK remains the number two top destination for luxury products, according to Jones Lang LaSalle.

When we exclude the tourist spending, e-commerce effectively accounted for 5% of total retail sales as of 2016, making Hong Kong’s e-commerce penetration higher than expected, but still remains the lowest. Euromonitor currently expects retail sales in Hong Kong to grow at CAGR of 1.9% in 2017-

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2021. Meanwhile, we expect the split between domestic spending and visitor spending to remain 65/35 over the period.

Figure 153: Retail sales trend in Hong Kong Figure 154: HK retail sales breakdown by consumer type

0

100,000

200,000

300,000

400,000

500,000

600,000

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

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2009

2010

2011

2012

2013

2014

2015

2016

2017

F20

18F

2019

F20

20F

2021

F

HKD million

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F20

18F

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F20

20F

2021

F

Domestic spending Visitor spending Source: Census and Statistics Department; Deutsche Bank estimates Source: Hong Kong Tourism Board; Deutsche Bank estimates

What affected e-commerce development in HK? In our view, the low e-commerce penetration in HK can be mainly attributed to:

Super mature and convenient physical retail. As one of the most popular “shopping paradises”, HK has been bearing the fruit of well-established retail infrastructure and favourable commercial policies as a 100% free port with zero import tax. High variety of products and relatively concentrated shopping areas have made HK brick-and-mortar retailing highly developed.

Being conventional about virtual shopping and digital payment, local consumers in HK take longer to build trust in online shopping.

High logistics cost due to increased labour costs made online shopping less attractive in terms of price. At the initial stage, consumers normally opt for online shopping for the lower prices as we mentioned in “The evolution of retail and retail real estate” section. However, the extremely high logistics costs and low efficiency made online shopping not necessarily attractive vs offline.

A lack of significant investment has limited the growth of e-commerce thus far i.e. there is no dominant local e-commerce play. Local retailers are reluctant to expand to online given its mature network from offline.

E-commerce to contribute more to HK retail sales growth in the next five years Although e-commerce development in HK lagged behind vs most of the other countries in APEC, the trend is set and expected to grow at 16% CAGR in the next five years to reach HK$28.7bn by 2021 according to Euromonitor. This is markedly higher than the 1.9% CAGR for Hong Kong retail sales over the period. Euromonitor expects e-commerce to comprise 39%~46% of retail sales growth in 2017-2021e. By 2021, e-commerce is expected to account for 6% of total retail sales (9% of adjusted total retail sales excluding visitor spending) in Hong Kong.

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Figure 155: E-commerce to explain 39%~46% of retail

sales growth in 2017-2021F

Figure 156: E-commerce revenue as a percentage of

total/domestic retail sales expected to reach 6%/9% by

2021 (3%/5% in 2016)

65%

22%27%

35%28%

17%

5%

26% 26%32%

18%12%

7% 8% 10% 12% 15%19%

24%

-2%

8% 5%9% 10% 8%

2%

14%21% 10% 11%

0% -3% -4%1% 1% 2% 2% 3%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

Total retail sales vs online retail sales yoy% in HK

Online retail sales yoy% Total retail sales yoy%

Source: Deutsche Bank, Census and Statistics Department Source: Deutsche Bank, Consumer Council

E-commerce finally taking off, but gradually

HK consumers ready for online as mainstream shopping behaviour With Internet coverage and smartphone penetration climbing to 85% and 71%, respectively, in 2016, Hong Kong consumer’s behaviour has been affected by technology change and is certainly ready for online shopping. Hong Kong consumers spend 24 hours a week on the internet, according to a Nielsen report published in March 2016.

In our view, online entertainment (games, video and music), long working hours (especially for white-collar workers these days) and frequent traveling (either for work or leisure) means that Hong Kong consumers have much less time for shopping. Cheaper/special discounts, convenience and wider product variety are the common reasons based on several surveys made by the Consumer Council (April 2015), Nielsen (April 2017) and KPMG (Nov 2016).

Figure 158: Domestic profile of online and non-online

shoppers by age, gender, education and economic status

Figure 159: Consumer Council survey on consumer

preference on e-commerce category breadth and

frequency of online shoppers in Hong Kong

37.8%52.7%

43.5%26.8%

11.4%2.2%

26.0%29.4%

1.4%22.8%

55.5%

36.4%14.9%

62.2%47.3%

56.5%73.2%

88.6%97.8%

74.0%70.6%

98.6%77.2%

44.5%

63.6%85.1%

0% 20% 40% 60% 80% 100%

Age15-24 years old25-34 years old35-44 years old45-54 years old55-64 years old

65 years old or aboveGender

MaleFemale

EducationPrimary and below

SecondaryPost-secondary

Economic statusEconomically active

Economically inactive

Online shoppers Non-online shoppers

Source: Deutsche Bank, Census and Statistics Department Source: Deutsche Bank, Consumer Council

Figure 157: Major reasons for

shopping online

62%

59%

43%

41%

35%

0% 10% 20% 30% 40% 50% 60% 70%

Flexible shopping hours

Lower price/more discounts

Can compare prices

Wider range on products available

Delivery service options

Source: Deutsche Bank, Nielsen 2017

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Property



Figure 160: Profile of HK online consumer

Online penetration remains low•28% of the Hong Kong population aged 15 and above had used online purchasing services for personal items during a 12-month period (“online shoppers”), while 72%

had not (“non-online shoppers”).

People born after the 80s are the biggest fans of online shopping •The percentage of people having used online purchasing services is much higher for online shoppers aged between 25 and 34 years old (53%), post-secondary educated

(56%), and economically active (36%) than the corresponding counterparts.

Per capita spending has been increasing•The average amount spent in purchasing products/services online witnessed a surge. Specifically, the median amount spent (for the six months prior to the survey) was

HK$2,100, markedly higher than figure gathered from the same survey conducted in 2014 at HK$1,500.

Consumers mostly buy standardized products and apparel from online channels•Among those who shop online in Hong Kong, they shop at least once a month and “non-branded clothes” is the most popular category of purchase (89% of the online

shoppers have previously bought), followed by “books/toys” at 53%, “air-ticket/travel” at 35%, “food/beverages” at 34% and “event/concerts” at 33%.

Consumers become more addicted and love sharing their experiences •Another key finding is that the most frequent online shoppers tend to make purchases across a wide range of sectors. Also, once consumers adopt the habit of online

shopping, they tend to expand their scope of purchases towards a wider range of sectors, as well as share their good experiences with friends and family.

Source: Deutsche Bank, Neilsen, Consumer Council

E-commerce penetrates selective product categories in near term We believe online shopping is still new for most HK consumers and the development stays at Stage 1/2 referring to the section “The evolution of retail and real restate”. Online shopping can offer better choices only within a certain product category, such as apparel and personal accessories, which are more standardized and price sensitive rather than quality sensitive products.

Figure 161: Online products mix by category in HK in

2016

Figure 162: Offline products mix by category in HK in

2016

Alcoholic Drinks, 8%

Apparel and Footwear, 25%

Beauty and Personal Care, 1%

Consumer Appliances , 1%

Consumer Health, 5%

Home and Garden, 6%

Home Care, 1% Hot drinks, 1%

Luxury Goods,

11%Packaged Food,

9%

Personal accessorie, 29%

Pet Care, 1%Soft Drinks, 1%

Tissue and Hygiene, 2%

Online

Alcoholic

Drinks, 6%

Apparel and Footwear, 20%

Beauty and Personal Care,

4%Consumer Appliance

s , 3%Consumer Health, 2%

Home and Garden, 4%Home Care, 0.4%Hot drinks, 1%

Luxury Goods,

16%

Packaged Food, 13%

Personal accessories, 24%

Pet Care, 0.2%

Soft Drinks, 4%

Tissue and Hygiene, 1%

Offline


Indeed, more Hong Kong shoppers have indicated higher adoption of e-commerce in most of the sectors, according to KPMG. Specifically, shoppers for “home appliances” and “beauty & wellness” saw the biggest improvement in intention to switch to e-commerce in the next two years. On the other hand, “Food & beverage”, “Lifestyle” and “Books” sectors registered a net decline in shoppers expressing the desire to shop in physical stores in the next two years.

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Figure 163: Shopping habits in Hong Kong Past 12 months Next 2 years

Physical stores E-commerce Physical stores E-commerce

Fashion 74% 25% 75% 31%

Lifestyle 80% 18% 79% 26%

Food & beverage 81% 18% 78% 25%

Travel 27% 42% 36% 43%

Home appliances 75% 17% 79% 27%

Entertainment 50% 27% 53% 32%

Beauty & wellness 77% 20% 78% 30%

Books 77% 21% 74% 26% Source: KPMG; Deutsche Bank

Limited local platforms result in local offline retailers/brands having less online share We note that most of the popular websites that Hong Kong consumers visited and shopped at are overseas websites. The top three most popular e-commerce websites among online shoppers in Hong Kong are Taobao, Yahoo! and Groupon. For Taobao, 86% of the respondents in the survey conducted by the Consumer Council have shopped from the website, while 4%/9% have searched of/heard of the website. We believe that it might also be a chicken or egg situation. As the HK market is small, there is less investment in e-commerce. Therefore, the overseas websites provide a better customer experience.

The most popular one is Taobao, where similar products can be 5 to 10x cheaper (e.g. a gym bike at Aeon store costs ~ HK$2,000 at its stores in Hong Kong and a similar one costs HK$300, including shipping to Hong Kong). According to Nielsen 2016, when asked about which websites they purchased from, 43% of online shoppers cited Taobao, the largest e-commerce platform in China.

Group buying sites and grocery retailers such as Yahoo!, GROUPON, HKTV mall, Wellcome and Park’N Shop are also popular with Hong Kong consumers. In fact, 57% of online shoppers said they have made a group buy purchase in the past 12 months, indicating the strength and popularity of these platforms. Group buy targets popular products/services with a discount. The recently launched Tmall Supermarket has also attracted some attention. Should Hong Kong consumers become more comfortable with PRC websites’ food safety issue, this could pose a threat to local websites like Wellcome Delivers and PARKnSHOP.com operated by the two supermarkets mentioned above as well as HKTV mall.

Most of the HK retailers that we spoke to commented that while they have websites and offer online alternatives, online sales is a very low percentage (<1% to low single digit) of its total Hong Kong sales vs 5% for the industry. Most want to increase its online presence in Hong Kong. However, the reception is still not very strong.

Figure 164: The most popular online

platforms for online retailers

Source: Deutsche Bank, Consumer Council

Figure 165: Overseas websites have

wider selections

Where do they shop?

>40% Online shoppers have shopped at an overseas website in the past 12 months.

71%Have shopped from Asia Pacific websites including Mainland China, Japan, South Korea and Taiwan

44% Shopped on US websites20% Shopping on European websites

Source: Deutsche Bank, Nielsen

13 December 2017

Property



Impact on retailers’ operations

1) Marketing formats have changed

Retailers in Hong Kong, e.g. Sa and Chow Tai Fook, now team up not only with Union-pay (credit card company) but also online payment companies like WeChat and Alipay so as to attract consumers to shop when they come to Hong Kong. In addition, most consumers these days (even for tourists) will come to its stores with the picture of the product on its smart phone. Thus, digital marketing has increased to attract customers before they step into stores.

2) HK retailers tapping into CBEC to encourage sales from mainland tourists when they are not travelling

Tourist sales sometimes can be more volatile than domestic consumption as tourist arrivals can be affected by various factors which is out of the brand or retailers’ control. Thus, while brands can set up its own retail presence in China, retailers can also set up CBEC operation such that they can also buy from the retailer even when they are within China. e.g. Sa Sa has set up an operation in Zhengzhou in 2016.

3) Enhance offline store experience

With consumer behaviour changing, the company is also seeking ways to enhance store experience. For example for CTF, it has developed different store formats. e.g. some stores targeting at youngsters has products with trendier design and easy access without sales’ assistant. There is a store recently opened that house a coffee shop within the store. Luxury companies are hosting special events for VIPs.

Figure 166: CTF new store at APM mall (Kwun Tong) Figure 167: CTF x Sensory Zero coffee shop at Kwai

Fong Metro Plaza

Source: Company; Deutsche Bank Source: Company; Deutsche Bank

4) By category, apparel companies were hit hard

13 December 2017

Property



While the share of e-commerce as % of domestic retail sales is lower than others, apparel retailers has been hit hard by online shopping. For Jan-Oct 2017, although overall retail sales growth was 1.2%, apparel still lag behind with a decline of 0.4%.

Figure 168: Apparel segment lagged behind total retail sales yoy%

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

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Oct

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Apr-

17O

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7

HK retail sales value yoy% - total vs apparel

HK total retail sales value yoy% HK apparel retail sales value yoy%

Source: Deutsche Bank, HK census

Valuation Current valuation for HK focused retailers, e.g. Lifestyle, Chow Tai Fook and Sa Sa, are trading at 20-22x one-year forward PE with good dividend yield (3-5% at current prices). This is not very expensive in our view, given the market recovery in tourist arrivals (6.6% rise in tourist arrivals and 8.3% rise for Chinese tourist arrivals in Oct) and domestic recovery as witnessed in performance of Lifestyle, Sa Sa and Chow Tai Fook.

We believe this is because while market is factoring a cyclical recovery, it is also assuming that there is no structural growth story on a mid to long term basis. In our view, 2018 and 2019 market recovery will come from return in domestic consumptions (which has only started since 3Q17) and subsequently more infrastructure (like the launch of high speed chain and HK, Zhuhai Macau) will facilitate same day travellers. We like CTF due to its liquidity, its change in strategy to balance domestic/tourist spending and its operating leverage for its HK operation. This is followed by Lifestyle and Sa Sa.

Impact on real estate

Tourist-centric shopping malls are resilient to e-commerce

In theory, the change in spending behaviour towards e-commerce in selected sectors such as apparel and toys should bring a corresponding impact on tenant mix changes. However, actual tenant mix changes have been relatively resilient in the past five years, where tenant mix changes are more apparent only for malls catering to domestic spending.

In particular, in Harbour City (more dependent on tourist spending), total retail space occupied by department stores actually increased slightly to 23.8% in

13 December 2017

Property



2016 versus 22.1% in 2012. Fashion/accessories was little changed in the past five years (47.3% in 2016 versus 47.8% in 2012) while total space occupied by restaurants only slightly increased to 15.5% in 2016 versus 13.8% five years ago.

Figure 169: Trade mix changes in Harbour City (Tourist

centric)

Figure 170: Tenant mix changes in Swire’s portfolio

(Domestic spending centric)

47.3%50.0%49.8%52.2%47.8%

23.8%19.6%19.7%19.6%22.1%

15.5%15.4%14.7%14.8%13.8%

7.9%7.3%7.4%8.4%9.0%1.6%1.9%2.0%1.9%2.1%3.9%5.8%6.4%3.1%5.2%

0%

20%

40%

60%

80%

100%

20162015201420132012Fashion and accessories Department storesRestaurants Children's wear, toys & sports wearElectronics Others

28.5%30.0%30.5%30.2%24.9%24.9%

17.7%17.3%15.6%15.5%14.4%14.6%

4.8%4.8%7.9%7.9%6.1%6.1%

18.1%18.0%16.9%16.9%23.0%23.1%

5.3%5.3%5.1%5.1%3.5%3.4%

25.6%24.6%24.0%24.4%28.1%27.9%

0%

20%

40%

60%

80%

100%

1H1720162015201420132012Fashion and accessories Restaurants Cinema and entertainment

Department stores Supermarkets Others Source: Company; Deutsche Bank *Note: Wharf (4.HK) has demerged its portfolio of Hong Kong investment properties (including Harbour City, Times Square, Plaza Hollywood) to form Wharf REIC (1997.HK) on November 14, 2017. The figures with regard to Wharf’s retail portfolio in this report are historical numbers of Wharf prior to the demerger. For illustration, “Wharf”/”Wharf Holdings” is used as the reference name for this portfolio.

Source: Company; Deutsche Bank

On the other hand, in Swire’s portfolio (caters more to domestic spending), total retail space occupied by department stores fell to 18.1% in 1H17 (from 23.1% in 2012) and restaurants rose to 17.7% in 1H17 from 14.6% five years ago. However, the total space occupied by fashion/accessories rose by 3.6 percentage points in the past five years to 28.5% (24.9% in 2012, but down from 30.5% in 2015).

In conclusion, the rise of e-commerce poses a threat to conventional retail, but the impact is expected to be reasonably biased towards a sub-segment of the overall market. While we believe the popularity of e-commerce is likely to eventually expand towards the higher-end retail segment, we see bigger near-term impact on the mid-to-low end domestic spending, based on the current online shopping habits in Hong Kong. Hence, we believe domestic spending-centric shopping malls and street-front shops are likely to be more adversely affected. Among the top 10 shopping malls in Hong Kong by size, five of them are tourist-centric, two are a mixture of tourist/domestic spending-centric and only three are domestic spending-centric.

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Property



Figure 171: Top 10 shopping malls in Hong Kong by size Rank Name District GFA ('000 sqft) Mall type Positioning

1 Harbour City Tsim Sha Tsui 2,049 Tourist centric High-end

2 New Town Plaza Shopping Mall Sha Tin 1,650 Tourist centric Mid-tier

3 Festival Walk Kowloon Tong 1,209 Mix of tourist/domestic Mid-to-high-end

4 MegaBox Kowloon Bay 1,146 Domestic Mid-tier

5 Cityplaza Tai Koo 1,109 Domestic Mid-tier

6 Times Square Causeway Bay 936 Tourist centric High-end

7 Elements Western Kowloon 890 Tourist centric High-end

8 MOKO Mong Kok 725 Mix of tourist/domestic Mid-tier

9 The Mall, Pacific Place Admiralty 711 Tourist centric High-end

10 YOHO Mall I/ I Extension Yuen Long 695 Domestic Mid-tier Source: Company data, Deutsche Bank

Rents are under pressure on high-occupancy cost/lowing retail sales growth While we generally expect tourists to have a much bigger influence over retail sales than the shift in spending pattern towards e-commerce, we anticipate retail rents to be under pressure ahead due to historical high occupancy costs. In particular, occupancy cost at Harbour City rose to a new historical high of 22% in 2016, markedly higher than the historical average of 16%. Consequently, rental growth slowed to just 4% (versus average 10-year growth at 15% per annum). On the other hand, occupancy cost at Times Square is also at a historical high of 26% in 2016 (historical average at 19%) and rental growth slowed to just 6% (versus average 5-year growth at 12% per annum).

Figure 172: Occupancy cost vs rental growth for Harbour

City

Figure 173: Occupancy cost vs rental growth for Times

Square

0%

5%

10%

15%

20%

25%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Occupancy Cost Rental income growth rate

0%

5%

10%

15%

20%

25%

30%

2012 2013 2014 2015 2016

Occupancy Cost Rental income growth rate

Source: Company; Deutsche Bank Source: Company; Deutsche Bank

Shopping mall rents resilient so far but unsustainable at current levels Meanwhile, as retailers opt for higher variable costs in operating expenses in shopping malls as opposed to fixed costs with high-street shops, high-street shop rents have fallen by 41% since its peak in 2014. In contrast, shopping mall rents have remained resilient so far, with average rents still hovering at historical highs.

13 December 2017

Property



Figure 174: High-street rents versus shopping mall rents

-

100

200

300

400

500

600

700

800

Premium mall street level floor High street


However, we believe the rental discrepancy between high-street shops and shopping malls will eventually narrow as turnover rents as a percentage of total retail revenue have generally fallen to low single-digit for most retail mall operators under our coverage (i.e. turnover rents serving as a variable rent buffer is diminishing), and further decline in high-street shop rental is likely to start putting downward pressure on shopping mall rents. Specifically, for Hysan, turnover rents made up just 2% of total retail revenue, markedly down from the peak of 11% in 2011.

Figure 175: Turnover rents as % of total retail revenue for Hysan portfolio

2%

4%

5%

6%

8%

11%

8%

0%

2%

4%

6%

8%

10%

12%

2016201520142013201220112010

Turnover rent as % of total rental revenue

Source: Company, Deutsche Bank

Indeed, we estimate that the net effective rents between high-street shops and shopping malls have narrowed to just HK$137/sf (~30% gap). If the current pace of decline in high-street shop rents continues, high-street shop rents will match the shopping mall counterpart in two years, assuming shopping mall rents remain flat. Meanwhile, we expect the rental gap between high-street shops and shopping malls to narrow to 20% in the next 12 months.

13 December 2017

Property



Figure 176: Effective rents between high-street shops and shopping malls

0

100

200

300

400

500

600

700

800

2014 2015 2016 2017Q2Premium mall street front floor High street Difference

Effective rent HK$psf


According to the Ratings and Valuation Department, total stock of retail properties in Hong Kong stood at 6.1mn sqm GFA as of 2016, of which it is expected to grow moderately by 1.1-1.5% per annum in the next three years. Among these stocks, about 56% of 3.4mn sqm fell into the prime retail category according to JLL classification. JLL currently expects prime retail space to increase at CAGR of 2.7% in the next five years to reach 3.9mn sqm GFA by 2021, of which the next supply peak is 2018, where 253k sqm GFA (7% of inventory) is expected to be completed. Meanwhile, we anticipate retail sales per floor area to remain mostly flat over the period.

Figure 177: Hong Kong retail trade floor area Figure 178: Hong Kong overall prime retail space

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

1996

1997

1998

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2000

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2002

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F

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F20

18F

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F20

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2021

F

sqm

Source: Census & Statistics Dept, Deutsche Bank estimates Source: JLL, Deutsche Bank

13 December 2017

Property



Figure 179: Retail sales per floor area in Hong Kong

0

10,000

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F

Retail sales per floor area (HKD/sqm) yoy change

Source: Census and Statistics Department; Ratings and Valuation Department; Deutsche Bank

Moreover, Hong Kong has a much higher population density than nearby cities. Specifically, the shopping centre space per capita in Hong Kong stood at 10.1 sf/person, higher than the 5.8 sf/person in Singapore, 4.3 sf/person in Japan and 2.2 sf/person in South Korea.

Current valuation on retail landlords is relatively rich We adopt target discount on Net Asset Value (NAV) as our primary valuation metric for Hong Kong retail landlords. We calculate our NAV using a sum-of-the-parts valuation. For the development properties (if any), we apply Discounted Cash Flow (DCF) to estimate the value of the development projects of the company by taking the estimated cash inflows from property sales minus the outstanding costs, including any outstanding land costs, construction costs, and related income. For the investment properties, we use an income capitalisation approach, taking the estimated rental revenues of the investment properties and dividing this figure by the estimated cap rates. Our estimated rents and cap rates differ between the various types of properties and locations. When arriving at the NAV, we take the aggregate estimated value for the above business segments and add the company’s net cash position or subtract its net debt position.

13 December 2017

Property



Figure 180: Historical discount to NAV for Hysan

-80%

-70%

-60%

-50%

-40%

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Aug-

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ct-1

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n-17

Discount to NAV -1SD Average +1SD

Source: Bloomberg Finance LP, Deutsche Bank

Hong Kong retail landlords have been historically trading at an average NAV discount of 42% (ranging from a 10% premium to an 80% discount). Currently, retail landlords are trading at a 26% discount to NAV (i.e. close to +1 standard deviation) or a relatively rich valuation, in our view. Meanwhile, we expect cap rates to expand by 25bps in the coming 12 months in anticipation of the coming rate hike cycle, alongside potential softening in retail rents; we expect NAVs to be under pressure correspondingly.

Note: Wharf (4.HK) demerged its portfolio of Hong Kong investment properties (including Harbour City, Times Square, Plaza Hollywood) to form Wharf REIC (1997.HK) on November 14, 2017. The figures with regard to Wharf’s retail portfolio in this report are historical numbers of Wharf prior to the demerger. For illustration, “Wharf”/”Wharf Holdings” is used as the reference name for this portfolio.

13 December 2017

Property



Japan

Key conclusions

Retail Core retail sales: ¥111.8trn in FY3/17, e-commerce market share at

7.2% in FY3/17 and expected to be the top retail format by FY3/22.

Japan has lower e-commerce share but growth is faster than the United States.

Mass electronics retailers unaffected by e-commerce.

Likely winners in e-commerce to be Amazon Japan and Rakuten.

Top picks: Fast Retailing (9983.T: BUY: ¥44,140): We forecast that FY8/18 core OP will rise 15% YoY to ¥216.7bn Our forecast core OP growth of ¥32.7bn YoY reflects an increase of ¥6.5bn for Uniqlo Japan, growth of ¥5.0bn for global brands, and a ¥21.2bn gain for Uniqlo International. We expect domestic Uniqlo Japan’s Same-Store-Sales to rise 3.2% while Uniqlo International’s Same-Store Sales is expected to rise by 14% to ¥808bn and core OP by 28% to ¥97.4bn.

Real estate The impact of e-commerce on Japan real estate is most evident in the

logistic facilities segment that caters to the increased demand from online retailers.

Supply of large-scale multi-tenant type logistics facilities will increase 67% YoY for 2018.

Stock of large-scale multi-tenant type logistics facilities will be about 1.8x for 2018 compared to the stock in 2014.

Logistics facilities’ price DI and rent DI are on a downward trend.

Top Pick: Currently we do not have any Buy recommendations. We are concerned about the large investment of Daiwa House (1925.T). The company targets an investment of ¥700bn for the current medium-term plan (already invested ¥280.6bn as of FY3/17). The breakdown: ¥100bn for residential; ¥140bn for retail; ¥360bn for logistics; and ¥100bn for overseas businesses. This means the logistics property will become a major factor in determining the company’s earnings. Of course, the investment will affect the demand/supply balance of the entire logistics property market.

Summary – retail – just beginning a phase of big change

Core retail sales: ¥111.8trn in FY3/17 Japan’s core retail sales (retail sales minus fuel and automobiles) came to ¥111.8trn in FY3/17. The figure has not changed significantly over the past decade – ¥106.9trn in FY3/07 and ¥108.3trn in FY3/12. By retail format, department stores have seen a decline of share from 8.1% in FY3/07 to 5.9% in FY3/17, while supermarkets have remained flat at 11.8% and 11.6% in the same period. In contrast, both CVS and e-commerce have increased their share from 6.9% to 10.3% and from 1.9% to 7.2%, respectively. The growth of

Takahiro Kazahaya, CMA Yoji Otani, CMA


(+81) 3 5156-6983 (+81) 3 5156-6756


Akane Wang Akiko Komine

Research Associate Research Analyst

(+81) 3 5156-6720 (+81) 3 5156-6765


13 December 2017

Property



CVS is attributable to the changes of social structures including the aging of society, the rise of single-person households and working women, while the industry itself has reached a phase where further growth is difficult. In the meantime, e-commerce has expanded significantly and we believe that it will continue its growth and become the nation’s top retail format by FY3/22.

Comparison with US: lower share but faster growth We estimate that e-commerce’s share of core retail sales is 7.2% in Japan (FY3/17) compared to 11.8% in the US (FY12/16), which indicates that Japan’s e-commerce growth is lagging behind the US. Still, e-commerce in Japan has actually grown at a faster annual speed of 7.4pt than the 5.5pt of the US in the past 15 years, which makes it a crucial factor to consider for equity investment from a medium-term perspective.

Impact of e-commerce growth: rational business behaviour New store openings have slowed down due to the rise of construction and labour costs as well as the rebalancing of offline/online store portfolios by current players. Department stores and GMS have been particularly affected on both sales and earnings by the growth of e-commerce, while their fall has already begun since the beginning of the deregulation of location controls on large commercial facilities since 1990. The threat of e-commerce has also reached areas such as shopping centres and train-station fashion buildings, which used to be considered relatively secure. As an example of responding to this structural change, large fashion retailers United Arrows and Adastria have managed to expand their e-commerce activity successfully, while they are yet to drive profits due to their scale of online sales limitations.

Surprisingly small impact of e-commerce: uniqueness of mass electronics retailers Mass electronics retailers in Japan have remained strong in the face of e-commerce. Due to the prohibition of unduly low pricing of consumer electronics under the Anti-Monopoly Act, electronics chains have maintained their competitiveness by leveraging their bargaining power in sourcing products, which even players like Amazon could not match. We believe the major mass electronics retailers will remain a force to reckon with in Japan over the medium term.

Likely winners in e-commerce: Amazon Japan and Rakuten Ichiba Starting out focusing on separate target markets, Amazon Japan and Rakuten Ichiba have both expanded sales and product lineup and own 20.4% and 21.4% market share of e-commerce in FY12/16. With rising delivery fees, the strategy that Amazon Japan takes and its implications on Rakuten Ichiba’s market share and profitability are to be closely monitored.

Summary: real estate – watching the risk of oversupply

2Q 2017: Tokyo metropolitan area’s large-scale multi-tenant vacancy rate improves to 5.1% According to CBRE’s report, Logistics market view 2Q 2017, the 2Q (April-June) vacancy rate of large-scale multi-tenant logistics facilities (i.e., those with a total floor area of at least 10,000 tsubo, or about 33,000m2) in the Tokyo metropolitan area improved to 5.1% from 6.5% in the previous quarter. Demand in 2Q was particularly healthy at approximately 96,000 tsubo driven by e-commerce and apparel firms, making it the third-highest ever demand since the start of CBRE’s survey. While the vacancy rate has improved, rents have remained broadly stable in main Tokyo metropolitan areas.

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Vacancy rate including medium-sized facilities is almost flat According to Ichigo Real Estate Service, an independent real estate research company specializing in logistics facilities and other industrial-use real estate, the vacancy rate of logistics facilities (with a total floor area of 10,000m2 or more) in the Tokyo area in April 2017 was 4.8%, down 0.1ppt from 4.9% in January 2017. The survey for the quarter (February-April 2017) has also shown supply/demand was well balanced.

Heading for record supply in 2018 According to CBRE reports, new supply of large-scale multi-tenant logistics facilities reached a record high of 360,000 tsubo in 2016. Meanwhile, new supply of large facilities is expected to bring supply to 240,000 tsubo in 2017 and 400,000 tsubo in 2018, which would then set another new record high. In sync with a new record of supply also set in Kinki region, we believe this would gradually cause a supply/demand disparity in both regions.

4.75% expected NOI yield in Tokyo metropolitan bay area logistics facilities According to CBRE’s real estate investor survey (April 2017), the expected NOI yield on multi-tenant logistics facilities in the Tokyo metropolitan bay area is 4.75%, marking a 181bp drop over the past seven years but no change from the previous survey in January 2017; therefore, we believe the decline of NOI is likely near an end.

Deteriorating sentiment in six-month outlook The Ichigo Real Estate Service survey also indicates that expected yield in logistics facilities is not likely to fall further. Also, according to another survey of real estate practitioners and specialists, carried out by Ichigo Real Estate Service from late January through early February, there has been an increasing number of market players who gave negative views indicating a worsening of sentiment for the next six months.

Risk of slower revamp of logistics strategies With industrial production index momentum (defined as YoY production growth minus YoY inventory growth) being below the 1997 pattern of the previous consumption tax hike, we believe a pick-up in investment in logistics facilities is not likely to occur despite a temporary improvement in recent period.

Japan: e-commerce

Core retail sales: ¥111.8trn in FY3/17 Japan’s core retail sales (retail sales minus fuel and automobiles) came to ¥111.8trn in FY3/17. The figure has not changed significantly over the past decade – ¥106.9trn in FY3/07 and ¥108.3trn in FY3/12 – due partly to the aging and shrinking of the population.

Japan’s core retail sales

totalled ¥111.8trn in FY3/17

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Figure 181: Core retail sales (FY3/07) Figure 182: Core retail sales (FY3/12) Figure 183: Core retail sales (FY3/17)

Others, 76.2 , 71%

Super market, 12.6 , 12%

Department stores, 8.6 , 8%

CVS, 7.4 , 7%

E-Commerce, 2.0 , 2%

Others, 75.3 , 70%


CVS, 9.0 , 8%


E-Commerce, 4.3 , 4%

Others, 66.9 , 60%

E commerce, 8.0 , 7%


CVS, 11.5 , 10%


Drug stores, 5.8 , 5%

Source: METI, Deutsche Securities Source: METI, Deutsche Securities Source: METI, Deutsche Securities

Meanwhile, convenience stores (CVS) and e-commerce have taken a growing market share in Japan’s retail sector. By format, department stores have seen their share recede from 8.1% (¥8.6trn) in FY3/07 to 6.2% (¥6.7trn) in FY3/12 and 5.9% (¥6.6trn) in FY3/17, while superstores have remained flat at 11.8% (¥12.6trn), 12.0% (¥13.0trn) and 11.6% (¥13.0trn) in the same period. In contrast, CVS have boosted their share from 6.9% (¥7.4trn) to 8.3% (¥9.0trn) and 10.3% (¥11.5trn). Similarly, e-commerce has climbed from 1.9% (¥2.0trn) to 4.0% (¥4.3trn) and further to 7.2% (¥8.0trn), moving beyond department stores as the third biggest retail format.

Among the growth formats, CVS has benefited from the changes in Japan’s social structure, such as the aging of society and the rise of single-person households and working women. CVS now account for 18.4% of household spending on food (FY3/17). At the same time, the format’s momentum appears to be slowing. Its share of household spending on food appears to have peaked for now; outlets nationwide have grown to 56,160 at end-FY3/17, or one for every 2,260 persons, and market share has become increasingly concentrated in the Big Three (Seven-Eleven Japan, FamilyMart, Lawson). That is, the industry has reached a difficult phase in terms of further growth prospects.

On the other hand, e-commerce is becoming an ever-greater presence in the nation’s retail sector. Its market size in FY3/17 is nearly as large as CVS had achieved in FY3/12. We believe the e-commerce market will expand to ¥14.1trn in FY3/22, overtaking the ¥13.7trn at CVS to become the nation’s top retail format. This would be 2.6x the estimated ¥5.5trn at department stores, giving it a 14% share of core retail sales.

Convenience stores and e-

commerce take growing

market share

CVS growth slows, but bright

outlook for e-commerce

E-commerce market to hit

¥14.1trn in FY3/22

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Figure 184: Market size and YoY growth by retail format

FY07/3 FY12/3

FY17/3

FY22/3e

FY07/3FY12/3

FY17/3

FY22/3e

FY07/3

FY12/3

FY17/3 FY22/3e

FY07/3

FY12/3 FY17/3 FY22/3e

FY17/3FY22/3e

FY17/3 FY22/3e

FY17/3 FY22/3e

(10.0)

(5.0)

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0

（YoY％）

（Sales/trillions）

Source: METI, Deutsche Securities

Comparison with US: lower share but faster growth It is well known that the US, China and the UK are ahead of Japan in the expansion of e-commerce. We estimate that e-commerce’s share of core retail sales, which was 7.2% in Japan (FY3/17), totalled 11.8% in the US (FY12/16). That is, Japan’s e-commerce growth lags the US, which had already reached 7.2% in FY12/06.

Compared to the US, where the giant book retailer Borders went bankrupt in 2011, we believe that e-commerce in Japan has had a modest impact on the retail sector thus far at a similar 7.2% share. Still, the share growth over the past 15 years (Japan FY3/02-FY3/17, US FY12/01-FY12/16) has been 5.5pt in the US against 7.4pt in Japan. That is, e-commerce has progressed faster in the latter. As such, we believe that forecasting structural changes in the sector will be crucial for equity investment from a medium-term perspective.

Figure 185: E-commerce market share in Japan Figure 186: E-commerce market share in US

0.3 0.4 0.7 1.01.4

1.9 2.3 2.7 3.2 3.6

4.0 4.5

5.3 5.9

6.5 7.2

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0（％）

6.3 6.4 6.7 7.0 7.4

7.8 8.2 8.3 8.5 9.1

9.6 10.0 10.3

10.7 11.1 11.8

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0（％）

Note: Ratio of core retail sales Source: METI, Deutsche Securities Note: Ratio of core retail sales. Source: US census, Deutsche Securities

E-commerce’s share of core

retail sales: US 11.8% vs.

Japan 7.2%

Japan’s e-commerce is US

2005 level

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Impact of e-commerce growth: rational business behaviour Appetite for new brick-and-mortar store openings has generally been in retreat in Japan. METI statistics reveal that the total store area in applications for new large-store openings (sales floor area of over 1,000m2) dropped 13% YoY to 1.82m m2 in FY3/17, sliding below the 2.06m m2 of FY3/10 to a new post-financial-crisis low. The figure is 42% below the ten-year high of 4.26m m2 in FY3/08. This corporate behaviour stems from (1) the rise in store opening expenses due to soaring construction and labour costs and (2) a rebalancing of offline/online store portfolios with the spread of e-commerce.

Figure 187: Store area in new applications for large stores nationwide

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2016 2016

(m²)

Source: METI, Deutsche Securities

Department stores and General Merchandise Stores (GMS) have been particularly affected on the sales and earnings sides. These formats were already structurally in a slump even before the emergence of e-commerce. We attribute this to the deregulation of location controls on large commercial facilities in Japan. Big commercial complexes faced restrictions in opening new locations under the Large-Scale Retail Store Act of 1974 as a means of protecting small retailers. The wave of major commercial facility openings with the gradual relaxation of this law from 1990 coincided with an economic downturn. This cut badly into the profitability of department stores and GMS, the dominant retail formats in the 1990s. A further easing with the implementation of the Large-Scale Retail Stores Location Law in 2000 led to the emergence of new sales channels such as shopping centres and train-station fashion buildings. This worsened the struggles at department stores and GMS.

Cuts in new outlet openings

spur rational business

behaviour

Changing rule of game (1):

Land deregulation, from

department stores and GMS

to SC and station/fashion

buildings

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Figure 188: Business CFM at major GMS and new large-scale applications

-

1

2

3

4

5

6

7

8

0

1000

2000

3000

4000

70 75 80 85 90 95 `00 `05 `10 `15

(1)Tight opening regulations(regulated order)

(3) Renewed order(rationalization/weeding out)

(2)Deregulation(war of attrition)

Large-scale retail store Operating CF margin

Large-scale retail storeapplications (lhs)

Operating CFmargin (rhs)

Margins decline sharply as competition intensify

74:Large-scale Store

79:tightening of LSA

90:LSA eased

92:second easing

94:third easing

97:fourth easing

00:Large-scale Retail Store Location Act

（CY） Note: (1) Average operating cash flow margin at the 5 major GMS ( Ito-Yokado, Aeon, Daiei, Seiyu, and Uny), (2) The operating cash flow margin is defined as (OP + depreciation) / parent sales Source: NPF, Deutsche Securities

Figure 189: Ito-Yokado sales and OP

-20

0

20

40

60

80

100

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800 Operating Revenue (left scale) OP (right scale)

（bn yen）

Source: Company materials, Deutsche Securities forecasts

The slide in profitability at department stores and GMS accelerated with the appearance of e-commerce, which offered a new sales channel to consumers. For instance, Start Today, the largest fashion e-commerce retailer, saw its merchandise transaction volume rise from ¥11.2bn in FY3/07 to ¥212.1bn in FY3/17, higher than the clothing sales of department store major Hankyu Hanshin. We expect this to hit ¥311.1bn in FY3/19, surpassing the clothing sales at Takashimaya, Isetan Mitsukoshi and Daimaru Matsuzakaya.

Changing rule of game (2):

Spread in e-commerce –

offline to online

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Figure 190: Start Today’s merchandise transaction volume and department

store clothing sales

Mitsukoshi IsetanTakashimaya J Front Retailing

Hankyu Hanshin Dept

17/3 Start today

18/3E Start today

19/3E Start today

-10

-5

0

5

10

15

20

25

30

35

0 50 100 150 200 250 300 350

YoY（％）

Retail sales (¥1bn) Source: Company data, Deutsche Securities

E-commerce has become a serious competitive threat to sales channels that had been considered secure. Shopping centres had been expanding in sale even as department stores and GMS struggled, but Mitsui Fudosan reports that eight of its 11 regional shopping centres (RSC) suffered a decline YoY in sales in FY3/17. In train-station fashion buildings, JR East saw same-store sales fall YoY in both Lumine and Atre in FY3/17.

Figure 191: Mitsui Fudosan’s RSC sales (FY3/17)

Mitusi Outlet Mitsubish i Estate

Facilities Sales Revenue % YoY Store number (year end) Facilities Sales Revenue % YoY

Osaka Tsurumi 0.0 About 60 Gotemba (Shizuoka) 853 (4.3)

Yokohama Bayside (1.0) About 80 Rinku (Osaka) 400 (3.9)

Marinpia Kobe (3.0) About 140 Sano (Tochigi ) 400 2.0

Tama Minami Osawa 3.0 About 120 Tosu (Saga) 294 2.0

Makuhari 5.0 About 140 Toki (Gifu ) 312 1.2

Jazz Dream Nagashima (3.0) About 240 Kobe Sanda (Hyogo) 507 2.2

Iruma 1.0 About 210 Sendai Izumi (Miyagi ) 72 (2.8)

Sendai harbor 0.0 About 120 Ami (Ibaraki) 169 (1.2)

Sapporo Kitahiroshima (4.0) About 180 Shisui (Chiba) 257 (6.6)

Shiga Ryuo (1.0) About 230

Kurashiki (1.0) About 120

Kisarazu 2.0 About 250

Hokuriku Oyabe 1.0 About 170

total About 2060 3,262 -1.5

144

3,073

(Million Yen )

431

344

130

263

355

131

454

75

141

184

190

231

Source: Senken Shimbun, Deutsche Securities

Retail shops serving as tenants in commercial facilities are also feeling the effects on the profit side. For example, large fashion retailers United Arrows and Adastria have successfully expanded their e-commerce activity (which represented 13.9% of sales at United Arrows in FY3/17 and 15.0% at Adastria in FY2/17), but poor sales in their many brick-and-mortar stores have dragged down overall earnings.

Mitsui Fudosan sees profits

down in eight of 11 RSC

Greater e-commerce does not

always boost profitability

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For retailers that have developed as offline businesses, e-commerce may fail to attract new customers once it is above a certain size and could fall into competition with the offline business. This phenomenon has been observed in the US and UK. We believe that it will require further study to determine whether the so-called omnibus channel strategy will generate higher corporate value over the long term.

Figure 192: Adastria’s online sales ratio and profitability Figure 193: United Arrows’ online sales ratio and

profitability

Operating margin（left axis）

EC ratio（right axis）

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

FY2/11 FY2/12 FY2/13 FY2/14 FY2/15 FY2/16 FY2/17 FY2/18E FY2/19E

Operating margin（left axis）

EC ratio（right axis）

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/16 FY3/17 FY3/18E FY3/19E

Source: Company materials, Deutsche Securities forecasts Source: Company materials, Deutsche Securities forecasts

Impact from Amazon fashion expansion: business model is envy of Amazon E-commerce is a growing force in the fashion business in Japan as elsewhere, as seen in the growth in Start Today and Amazon's renewed push into the fashion world. The possibilities of mass customization have also been widely discussed in light of advances in IT. We believe e-commerce could prompt a revitalization of the fashion industry, as when the shift in Japan from department stores to train station complexes and shopping centres transformed the main channels for fashion retailing.

In particular, the entry of online-based fashion retailers targeting less brand-conscious buyers via easy-to-copy supply chains could become a threat in both sales and profitability. Also, it is essential to have shared targets and invest over the entire supply chain in order to harness IT innovations to bolster the company's competitiveness. We believe that companies like Uniqlo that build their business from a long-term standpoint with factories and raw material makers can raise their competitive positions through appropriate investment, including staff.

Uniqlo's sales in Japan have risen from ¥83.1bn in FY8/98 (0.5% market share) to ¥799.8bn in FY8/16 (7.2%). We believe Uniqlo's growing popularity among consumers stems from the favourable balance between the quality and price of its products due to its powerful supply chain, whereby the company manages every step from product planning to sales.

For instance, its quality and production management teams (manufacturing and technical teams) work with factories as business partners to raise the level of its production sites (146 key partner facilities as of February 2017) from a long-term perspective. In material development and procurement, it obtains large stable supplies of high-quality materials from makers at a low price and works on development of new materials to achieve ever-higher quality. We

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believe this approach will distinguish the firm from more trend-conscious brands like Inditex, H&M and Forever21 in its global expansion and possible fashion expansion of Amazon.

Surprisingly small impact of e-commerce: Uiqueness of mass electronics retailers The spread of e-commerce has affected the retail sector worldwide, but there are segments in Japan’s unique market where the experience of the US, China and the UK do not apply and the threat is less pronounced. One of those is mass electronics retailers.

Japan’s Fair Trade Commission prohibits unduly low pricing of consumer electronics under the Anti-Monopoly Act. With the promulgation of the Large-Scale Retail Stores Location Law in 2000, before e-commerce took hold, four electronics chains – Yamada Denki, K’s Holdings, Yodobashi Camera and Bic Camera – have secured effective oligarchic control of the markets and powerful competitiveness in sourcing products. As a result, e-commerce players like Amazon Japan have found it difficult to sustain low-priced sales via 1P as a means of securing market share. The number of warnings over unfair electronics sales has fallen steeply since the publication of the Guidelines Concerning Unjust Low Price Sales in December 2009 and a revised version in June 2011.

Figure 194: Warnings over unduly low pricing

1,028 1,138 1,123 847

635 490 420

714 444 426

452

326 341

732

856

142 121

29

3 3

1

0

500

1,000

1,500

2,000

2,500

3,000

FY11/3 FY12/3 FY13/3 FY14/3 FY15/3 FY16/3 FY17/3

Alcoholic Beverages Petroleum Products Home Electronic Appliances Other

Source: FTC, Deutsche Securities

In addition, the FTC’s revised Guidelines Concerning Distribution Systems and Business Practices in March 2015 allows makers to select their distributors, enhancing the advantageous position of the established mass electronics retailers. This has led some major manufacturers to set separate transaction prices for offline and online product sales even for the same retailer.

Consequently, Amazon Japan has turned away from 1P in its electronics sales, where it will bear inventory risk, to 3P (marketplace), where it utilizes existing mass electronics retail stores, in order to maintain its advantage in price and product lineup. In this way, makers and existing offline mass electronics retailers retain the initiative in consumer electronics even in e-commerce,

Japanese mass electronics

retailers distinctive from US

Direct electronics sales even

stump Amazon Japan

Selective distribution okayed

in 2015, retailers begin

exclusive contracts

Japanese electronics sales

driven by offline retailers

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steeling the industry against the threat of e-commerce growth as experienced at Yamada Denki.

We expect this situation to remain in place over the medium term, and believe the major mass electronics retailers will remain a force as a format with a stable free cash flow outlook. One risk is a shift by Amazon Japan from 3P to 1P, but we consider that possibility low given Japan’s distinctive market, where distributors can be specified.

Likely winners in e-commerce: Amazon Japan and Rakuten Ichiba The main comprehensive e-commerce sites in Japan are Rakuten Ichiba, Amazon Japan and Yahoo Japan. Their market share in FY12/16 was Rakuten Ichiba at 21.4%, Amazon Japan at 20.4%, and Yahoo Japan at 7.4%. They represent a combined 49.2% share of Japan’s e-commerce market.

We forecast that Japan’s e-commerce market, which grew from ¥2.0trn in FY3/07 to ¥8.6trn in FY3/17, will reach ¥15.2trn in FY3/22. We believe Amazon Japan will surpass Rakuten Ichiba to become the nation’s top e-commerce purveyor in FY12/18.

Figure 195: Japan’s e-commerce market and transaction volume of three

main firms

bn yen 2013 2014 2015 2016 2017e 2018e 2019eTotal EC market 5,993 6,804 7,689 8,612 9,559 10,610 11,777Rakuten Ichiba 1,477 1,629 1,715 1,846 2,020 2,223 2,436Amazon Japan 975 1,218 1,462 1,754 2,017 2,320 2,667Yahoo Shopping 308 365 457 640 832 998 1,198Others 3,233 3,592 4,055 4,372 4,690 5,070 5,476

Market Share 2013 2014 2015 2016 2017e 2018e 2019eTotal EC market 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%Rakuten Ichiba 23.9% 22.3% 21.4% 21.1% 20.9% 20.7%Amazon Japan 17.9% 19.0% 20.4% 21.1% 21.9% 22.6%Yahoo Shopping 5.4% 5.9% 7.4% 8.7% 9.4% 10.2%Others 52.8% 52.7% 50.8% 49.1% 47.8% 46.5%

Growth (Y-Y, %) 2013 2014 2015 2016 2017e 2018e 2019eTotal EC market 14% 13% 12% 11% 11% 11%Rakuten Ichiba 10% 5% 8% 9% 10% 10%Amazon Japan 25% 20% 20% 15% 15% 15%Yahoo Shopping 19% 25% 40% 30% 20% 20%Others 11% 13% 8% 7% 8% 8%

Note: January-December, Source: Deutsche Securities

Amazon established Amazon Japan in 2000 as its fifth worldwide site. Rakuten Ichiba started life in 1997, followed by Yahoo Japan in 1999. Amazon Japan initially concentrated on books and CD/DVD sales through 1P, while Rakuten Ichiba mainly solid food products and clothing via 3P. That is, they were focused on separate markets.

However, Amazon Japan moved to bolster its transaction volume by expanding its 3P sales and product lineup, raising logistics quality through an expansion of Amazon Fulfillment Services, and attracting new customers through Amazon Prime (annual subscription ¥3,900, tax inclusive).

No undue concern over

Japanese mass electronics

retailers

Three top e-commerce firms

have 49.2% share

Amazon Japan to take top

spot from Rakuten in FY12/18

Amazon Prime attracts with

low prices

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We believe Amazon Japan’s growing share is also attributable to its advantages in smartphone transactions thanks to its focus on 1P versus Rakuten’s 3P. Our first consumer survey in December 2016 found higher praise for Amazon Japan over Rakuten Ichiba in search relevance and delivery.

Figure 196: Score rankings of EC platforms by key features

Weighted scores Amazon Rakuten Yahoo Shopping LOHACO Zozotown Yahuoku Mercari

Rating/Search Engine 4.2 3.9 3.7 3.8 3.7 3.7 3.3

Rating/Delivery 4.3 3.7 3.6 4.1 3.6 3.3 3.2

Rating/Pricing 2.7 2.9 2.9 2.8 3.2 2.6 2.7 Source: Deutsche Bank 1= very difficult for search, 5= very easy 1= not satisfied for delivery, 5= extremely satisfied 1= very cheap as pricing, 5 = very expensive

The growth of e-commerce and surge in labour costs in Japan have made higher delivery fees unavoidable. Yamato Transport has announced a price hike for personal deliveries as well as price hikes and volume restrictions for large customers, which are expected to come into force in October.

If Amazon Japan gives priority to market share even in the face of rising supply chain costs and is unable to pass those costs on to the consumer in the form of recipient fees or such, its overall profitability could fall even if e-commerce market prospects remain solid. That could prompt simultaneous concern over Rakuten’s earnings outlook from a decline in Rakuten Ichiba’s profitability along with rising acclaim for Amazon in the stock markets thanks to Amazon Japan’s growing market share.

Figure 197: OPM trends for domestic e-commerce (OP/gross transaction

volume)

Transaction volume of domestic EC services ( left axis )

OPof domestic EC services ( right axis ) 2.00%

2.20%

2.40%

2.60%

2.80%

3.00%

3.20%

3.40%

3.60%

3.80%

4.00%

2,000

2,500

3,000

3,500

4,000

4,500

FY14/12 FY15/12 FY16/12 FY17/12e FY18/12e FY19/12e

（bn Yen）

Source: Company materials, Deutsche Securities forecasts

Amazon Japan beats Rakuten

in search and delivery

Monitoring Rakuten Ichiba’s

profitability

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Japan real estate

Looming risks of oversupply in logistics facilities

2Q 2017: Tokyo metropolitan area’s large-scale multi-tenant vacancy rate improves to 5.1% According to CBRE’s report, Logistics market view 2Q 2017, the 2Q (April-June) vacancy rate of large-scale multi-tenant logistics facilities (i.e., those with a total floor area of at least 10,000 tsubo, or about 33,000m2) in the Tokyo metropolitan area improved to 5.1% from 6.5% in the previous quarter.

Supply had remained at a substantial 100,000 tsubo per quarter since 4Q 2015, but subsequent sustained low levels of new supply, of 9,800 tsubo in 4Q 2016 and 22,000 tsubo in 1Q 2017, contributed to an improvement in vacancy rates. Moreover, new demand in 2Q was approximately 96,000 tsubo, the third highest level since the start of CBRE's survey. E-commerce and apparel firms continue to drive demand.

By location, a spate of large new tenant contracts in the National Route 16 area brought the 2Q vacancy rate down to 1.9%, its lowest-ever level. In the Ken-O Expressway area, where vacancy rates have remained high since 2016, contracts of several new large retail tenants reduced the vacancy rate from 19.8% in 1Q to 15.5% in 2Q. The Tokyo Bay area vacancy rate remained flat, while the completion of new buildings with remaining vacancies in the Tokyo-Gaikan Expressway area raised the vacancy rate from 2.6% in 1Q to 5.0% in 2Q.

The vacancy rate for facilities that are at least one year old also improved for the first time in six quarters, with a slight decline from 3.1% in 1Q to 2.7% in 2Q.

Figure 198: Vacancy rate of large-scale multi-tenant logistics facilities in the

Tokyo metropolitan area

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

Q12012

Q3 Q12013

Q3 Q12014

Q3 Q12015

Q3 Q12016

Q3 Q12017

(%)Total Facilities completed one year or more previously

Source: Deutsche Securities based on data from CBRE

Third-highest ever demand in

2Q 2017

Vacancy rates improved

slightly for facilities at least

one year old

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Rents remain broadly stable in all areas. However, 2Q rents in the Ken-O Expressway area fell 1.8% YoY, a third successive quarterly decline.

Figure 199: Rent index for large-scale multi-tenant logistics facilities (in the

Tokyo metropolitan area (monthly rent rate, per tsubo)

2,000

2,500

3,000

3,500

4,000

4,500

5,000

5,500

6,000

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Q12014

Q22014

Q32014

Q42014

Q12015

Q22015

Q32015

Q42015

Q12016

Q22016

Q32016

Q42016

Q12017

Q22017

(¥/tsubo)

Bay area Gaikan Expressway area

National Route 16 area Ken-O Expressway* area

*Metropolitan Inter-City Expressway Source: Deutsche Securities based on data from CBRE

Vacancy rate including medium-sized facilities is almost flat According to Ichigo Real Estate Service, an independent real estate research company specializing in logistics facilities and other industrial-use real estate, the vacancy rate of logistics facilities (with a total floor area of 10,000m2 or more) in the Tokyo area in April 2017 was 4.8%, down 0.1ppt from 4.9% in January 2017.

Figure 200: Leasable space and vacancy rate of logistics facilities in the Tokyo

metropolitan area

0

2

4

6

8

10

12

14

16

18

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

7/08 7/09 7/10 7/11 7/12 7/13 7/14 7/15 7/16

(%)(1,000 sq.m) Leasable space (LHS) Vacancy (RHS)

Note: The survey targets logistics facilities in the Tokyo area (Saitama, Chiba, Kanagawa, Ibaraki prefectures, and Tokyo) with total floor space or site area over 10,000 sqm. Source: Ichigo Real Estate Service

Rents stable in main Tokyo

metropolitan areas

13 December 2017

Property



The survey for the quarter (February–April 2017) showed supply/demand was largely balanced, with new supply of 229,000m2 (69,400 tsubo) and new demand of 235,000m2 (71,200 tsubo).

Monthly asking rents per tsubo rose from ¥4,170 in the previous quarter to ¥4,260 in this quarter. This is the third consecutive quarter that asking rents have risen. Ichigo Real Estate Service had been concerned that a boom in new development would depress rents. However, it now attributes the robust demand to greater convenience in the Tokyo area as logistics efficiency has improved with the construction of the Central Circular Route to include the Metropolitan Inter-City Expressway.

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Figure 201: Supply/demand conditions of logistics facilities in the Tokyo

metropolitan area

0

100

200

300

400

500

600

700

800

10/08 10/09 10/10 10/11 10/12 10/13 10/14 10/15 10/16

(1,000 sq.m) Supply Demand

Note: The survey targets logistics facilities in the Tokyo area (Saitama, Chiba, Kanagawa, Ibaraki prefectures, and Tokyo) with total floor space or site area over 10,000 sqm. Source: Ichigo Real Estate Service

Figure 202: Monthly rent rate (asking) of logistics facilities in the Tokyo

metropolitan area

-14%

-9%

-4%

1%

6%

11%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

7/09 7/10 7/11 7/12 7/13 7/14 7/15 7/16

(¥/tsubo) Rent rate (asking) (LHS) % YoY (RHS)

Note: The survey targets logistics facilities in the Tokyo area (Saitama, Chiba, Kanagawa, Ibaraki prefectures, and Tokyo) which have over 1,000 sqm of vacant space for leasing. Tsubo = about 3.3 sqm. Source: Ichigo Real Estate Service

Heading for record supply in 2018 CBRE reports that new supply of large-scale multi-tenant logistics facilities in 2016 came to 360,000 tsubo, well above the previous record of 290,000 in 2015.

As previously mentioned, the vacancy rate declined because new supply was just 9,800 tsubo in 4Q 2016, and only 22,000 tsubo in 1Q 2017.

Supply/demand are largely

balanced

Asking rents have risen for

three straight quarters

New supply in 2016 came to

360,000 tsubo, well above the

previous record of 290,000 in

2015

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However, new supply of large facilities with over 30,000 tsubo is scheduled from 2Q 2017, which is expected to bring supply to 240,000 tsubo in 2017. Currently over 400,000 tsubo of large facilities is scheduled for completion in 2018, which would set a new record high.

A record supply was not limited to the Tokyo Metropolitan area: the Kinki region also hit a new high of 146,000 tsubo in 2016, with 300,000 tsubo of supply planned for 2017. We expect this massive supply to keep a lid on rents and gradually erode the supply/demand balance.

Figure 203: Major development plans for logistics facilities in the Tokyo metropolitan area (facilities with total floor

area 10,000 tsubo or more, or about 33,000m2)

Construction

completed Facility name Developer/owner Area Space Space

(plan) (sqm) (Tsubo)

Jan Redwood Kazo DC ESR (ex-Redwood Group) Ken-O Kazo Saitama 33,679 10,206

Jan GLP Kashiwa II GLP Route16 Kashiwa Chiba 33,122 10,037

Feb Redwood Kawajima DC ESR (ex-Redwood Group) Ken-O Hiki Saitama 39,762 12,049

Apr LogiSquare Urawamisono CRE Route16 Saitama Saitama 52,314 15,853

Apr GLP Kawajima GLP Ken-O Hiki Saitama 48,985 14,844

May LogiSquare Moriya CRE Ken-O Moriya Ibaraki 34,223 10,371

May DPL Kawasaki-Yako Daiwa House Industry Route16 Kawasaki Kanagawa 118,680 35,964

Spring Logiport Kashiwanuma-minami LaSalle Investment Route16 Kashiwa Chiba 38,626 11,705

Jul DPL Ami-Kasumigaura Daiwa House Industry Ken-O Inashiki Ibaraki 148,429 44,978

Jul Distribution Building B Tokyo Ryutsu Center Tokyo Bay Ota Tokyo 171,300 51,909

Sep SOSiLA Yokohama Kohoku Project Sumitomo Corporation Route16 Yokohama Kanagawa 87,445 26,498

Autumn Keihin Truck Terminal A Japan Motor Terminal Tokyo Bay Ota Tokyo 105,000 31,818

Winter Logiport Sagamihara II LaSalle Investment Route16 Sagamihara Kanagawa 45,500 13,788

TBD Prologis Park Higashi Matsuyama Prologis Ken-O Higashi Matsuyama Saitama 70,000 21,212

TBD Prologis Park Ebina 2 Prologis Route16 Ebina Kanagawa 38,000 11,515

2017 1,065,065 322,747

Major projects from 2018

2018 Feb GLP Nagareyama I GLP Route 16 Nagareyama Chiba 130,000 39,394

Feb Kasukabe Logistics Center Mitsubishi UFJ Lease & Finance Company Route 16 Kasukabe Saitama 38,853 11,774

Tokyu Land, Kenedix

Spring Logicross Narashino Mitsubishi Estate Route 16 Narashino Chiba 41,000 12,424

Jun MCUD Kawasaki I (Annex) Mitsubishi Corporation Urban Development Route 16 Kawasaki Kanagawa 48,921 14,824

Sep MFLP Hiratsuka II Mitsui Fudosan Route 16 Hiratsuka Kanagawa 43,400 13,152

Oct MFLP Prologis Park Kawagoe Mitsui Fudosan, Prologis Route 16 Kawagoe Saitama 130,798 39,636

Dec ESR Ichikawa DC ESR Gaikan Ichikawa Chiba 229,000 69,394

TBD DPL Nagareyama I Daiwa House Industry Route 16 Nagareyama Chiba 144,000 43,636

2019 Aug F-Plaza Tower M Japan Freight Railway Company Tokyo Bay Shinagawa Tokyo 61,000 18,485

TBD Landport Higashi-narashino Nomura Real Estate Development Route 16 Narashino Chiba 73,256 22,199

2021 Oct F-Plaza Tower N Japan Freight Railway Company Tokyo Bay Shinagawa Tokyo 161,000 48,788

from 2022 onward GLP Sagamihara Project GLP Route16 Sagamihara Kanagawa 655,000 198,485

Location

Above data include BTS facilities. Source: Deutsche Securities based on data from each company release, CBRE, and Ichigo Real Estate Service

4.75% expected NOI yield in Tokyo metropolitan bay area logistics facilities According to CBRE’s real estate investor survey (April 2017), the expected NOI yield on multi-tenant logistics facilities in the Tokyo metropolitan bay area is 4.75% (highest: 5.00%, lowest: 4.50%). The expected yield in logistics facilities has dropped 181bp over the past seven years, from 6.56% in the January 2010 survey. There was no change in the previous January 2017 survey; therefore we believe that the decline is finally nearing a trough.

The Kinki region also hit a

record high of new supply

Expected yield in logistics

facilities has fallen 181bp over

the past seven years

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Figure 204: Expected NOI yields for logistics facilities

6.56

4.75

4.6

4.8

5.0

5.2

5.4

5.6

5.8

6.0

6.2

6.4

6.6

6.8

1/09 7/09 1/10 7/10 1/11 7/11 1/12 7/12 1/13 7/13 1/14 7/14 1/15 7/15 1/16 7/16 1/17

(%)

Source: CBRE

Deteriorating sentiment in six-month outlook The Ichigo Real Estate Service survey also indicates that expected yield in logistics facilities is not likely to fall further. According to a survey of real estate practitioners and specialists, carried out by Ichigo Real Estate Service from late January through early February, logistics facilities’ price DI (the figure after subtracting responses that call for a "decline" in six months from forecasts for a "rise") and rent DI declined from the previous survey in July 2016.

The percentage of responses for a "rise" in prices dropped from 32.5% in the previous survey to 27.4%, while "flat" rose from 63.7% to 67.8% and "decline" rose from 3.8% to 4.8%. Of the top reasons given for a forecast of "flat", the number of respondents who cited: "A number of market players are refraining from investing due to the overheating market" increased sharply from the previous survey.

Rent DI had turned negative in the previous survey; it deteriorated further to -13% in the January survey. The percentage of "rise" replies declined from 16.3% in the previous survey to 11.9%, while "decline" replies climbed from 22.5% to 25.0%. Of the reasons cited for a "decline", the number of respondents choosing the option: "The large supply of logistics facilities raised the competitiveness for finding new tenants" increased from the previous survey.

Decline in DI for logistics

facility prices and rents

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Figure 205: Survey on outlook for prices and rent levels for logistic facilities

(DI)

67

27 292349

19

-6-13

-100

-80

-60

-40

-20

0

20

40

60

80

100

1/08 7/08 1/09 7/09 1/10 7/10 1/11 7/11 1/12 7/12 1/13 7/13 1/14 7/14 1/15 7/15 1/16 7/16 1/17

DI Real estate price Rent rate

Source: Deutsche Securities based on data from Ichigo Real Estate Service

Risk of slower revamp of logistics strategies In addition to online retailers, third-party logistics (3PL) service providers have supported demand for logistics facilities, and their emergence is directly attributable to the revamped logistics strategies observed among many companies. 3PL service providers occupy a position in the middle of freight owners and transportation companies. Hired by freight owners, they typically manage the distribution of goods via outsourcing to logistics facilities. There are various types of 3PL service providers, including affiliates of transportation and warehouse companies, such as Nippon Express and Senko, as well as companies under manufacturers, such as Hitachi Transport System.

The industrial production index momentum (defined as YoY production growth minus YoY inventory growth), which we use as a leading indicator of corporate production activity, remains below the 1997 pattern of the previous consumption tax hike.

Currently, industrial production index momentum is showing temporary improvement. However, we expect a slowdown, given that the 1997 pattern continues. These conditions do not seem conducive to a pick-up in investment in logistics facilities. At the very least, they are unlikely to prompt investment that would result in the sharp expansion of leased floor space, in our view.

Momentum for indices of

industrial production is below

the 1997 trend

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Figure 206: Industrial production momentum (1997 consumption tax hike and

current)

-15

-10

-5

0

5

10

15

20

(%)From 1995 From 2012

Note: Industrial production momentum refers to YoY production minus YoY inventories. Source: Deutsche Securities based on Ministry of Economy, Trade and Industry

As mentioned above, CBRE notes that the supply of large multi-tenant facilities in the Tokyo metropolitan area reached a record 290,000 tsubo in 2015, an even higher 360,000 tsubo in 2016, with 240,000 tsubo expected in 2017, and 400,000 tsubo in 2018, based just on publicly-disclosed plans.

Although recent demand has held firm, we do not believe current demand levels are sufficient to absorb the continuing large supply since 2015, based on the outlook for consumer spending and corporate earnings. We therefore see a high likelihood that the supply/demand balance will worsen gradually.

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Korea e-commerce

Key conclusions

The Korea e-commerce market is estimated to expand at 20.2% CAGR until 2021, significantly outgrowing the overall retail industry, according to Euromonitor.

We expect the Korean e-commerce market to remain fragmented with no clear winner, while a number of leading players compete, due to 1) no dominant player, 2) limited M&A opportunities, and 3) solid financial capabilities of major participants.

Most well protected among the offline retailers in this e-commerce expansion, in our view, are CVS companies. CVS format has limited overlap in merchandise offerings with e-commerce, consistent retail space expansion from new store openings, with greater accessibility to consumers as a small-scale format. CVS is the only offline format that grew at 15.7% CAGR in the past decade, in line with the e-commerce’s growth of 16.5% CAGR in 2006-2016.

While the larger e-commerce scene remains with no clear winner, we expect Emart to expand its presence in online grocery retail, strengthening its leadership in this under-penetrated segment of e-commerce. We expect Emart Mall to deliver 18% CAGR top line growth in the next three years to W1.37tr in 2019E, ramping up utilization of its delivery capacity, and strengthening its fresh food offering.

Structurally most vulnerable are the department stores, in our view, whose asset efficiency has been declining in the past few years. Top three department stores’ per sqm sales have decreased to W5.4mn in 2016 from W7.2mn in 2012, while the department store channel’s annual growth slowed to -2.4~-3.2% yoy since 2013 from 11.4% yoy in 2011/5.4% yoy in 2012, due to consumer migration to new retail formats such as e-commerce.

E-commerce growth to remain robust

E-commerce’s rapid penetration into Korea retail industry… E-commerce has been rapidly growing in Korea retail industry for the past decade, expanding at 15.7% CAGR since 2006 and reached W51.9tr of retail sales value (ex-sales tax basis) in 2016, according to Euromonitor. For the past three years, the e-commerce growth has even more accelerated, registering 19.0% CAGR (vs. 12.4% CAGR during 2010-2013). Meanwhile, domestic retail sales growth has remained sluggish at 2.9% CAGR for the past three years.

Jihyun Song Jeremy Kim


(+82) 2 316 8906 (+82) 2 316 8902


13 December 2017

Property



Figure 207: Online shopping market size has expanded

rapidly with yoy growth rate accelerating since 2013

Figure 208: Online shopping has enjoyed robust growth

while overall retail sales growth remained sluggish

0%

5%

10%

15%

20%

25%

-

10.0

20.0

30.0

40.0

50.0

60.0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Ecommerce retail sales and yoy growth

Ecommerce retail sales (W tr, LHS) % yoy (RHS)

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2011 2012 2013 2014 2015 2016

Retail sales growth vs. online retail sales growth

On-line shopping Retail sales

Source: Deutsche Bank, Euromonitor Source: Deutsche Bank, KOSIS

E-commerce has penetrated rapidly into the retail industry and it already captures 19.0% of retail sales as of 1Q17 (vs. 8.2% in 1Q10). By category, books & stationary shows the highest penetration of 33.2%, followed by electronics (electronics, computer & mobile) at 32.1% and cosmetics at 28.5%.

Figure 209: E-commerce penetration has climbed up to

19% of total retail sales

Figure 210: ...with rapid increase in penetration ratio of

electronics, books and cosmetics categories

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0% Ecommerce as a % of total retail sales

0.0%

5.0%

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15.0%

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30.0%

35.0%

1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17

Total retail EletronicsCosmetics Books/Stationery

Source: Deutsche Bank, KOSIS Source: Deutsche Bank, KOSIS

…expected to continue for the next several years We believe e-commerce will continue its robust growth for the next several years. According to Euromonitor, Korea internet retailing is estimated to expand at 20.2% CAGR until 2021, even more accelerating the pace of growth compared to 15.7% CAGR for the past 10 years. Based on the projection, we estimate e-commerce penetration ratio to increase to mid-30% by 2021. In our view, three key growth drivers will enable the e-commerce to sustain such a rapid growth momentum going forward.

Technical advancement of mobile commerce will enable e-commerce to expand the customer base.

E-commerce will be able to increase its presence in the under-penetrated categories.

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Key players’ ongoing investments into e-commerce infrastructure such as e-commerce platform, logistics, customer service and merchandise will allow e-commerce to broaden the customer base going forward.

Figure 211: Korea internet retailing growth expected to accelerate further until

2021

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

E

2018

E

2019

E

2020

E

2021

E

(W bn) Internet retailing

Source: Deutsche Bank, Euromonitor

Three key drivers to allow e-commerce to sustain robust growth momentum

Mobile commerce to enable e-commerce to broaden customer base In our view, mobile commerce will remain one of the key growth drivers for e-commerce going forward. Mobile commerce tends to increase consumers’ e-commerce usage hours, reducing the space-time limitations from PC-based e-commerce shopping. We believe ongoing technological advancements of the mobile commerce platforms (e.g. more convenient user interface, better safety in the payment system etc) will enable mobile commerce to get into under-penetrated customer bases such as the older generation.

Figure 212: Mobile commerce

expected to grow at 23% CAGR until

2021 (vs. 18% CAGR of PC)

Figure 213: Mobile commerce sales

already started outweighing PC

shopping from 2016

Figure 214: Mobile commerce

growth likely to continue to outpace

overall e-commerce growth

-

20

40

60

80

100

120

140

Ecommerce retail sales breakdown (PC vs. mobile)

PC Mobile Ecommerce

(W tr)

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%


Mobile PC

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

2017E 2018E 2019E 2020E 2021E


PC Mobile Ecommerce

(W tr)

Source: Euromonitor, Deutsche Bank Source: Euromonitor, Deutsche Bank Source: Euromonitor, Deutsche Bank

E-commerce to drive further growth from under-penetrated product categories We expect e-commerce to sustain robust growth by expanding its share in the under-penetrated categories. In our view, grocery, in particular, will likely be the key category where e-commerce would find more room to expand. E-commerce penetration ratio in Korea retail sales already stands at 19% as of

13 December 2017

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2016, much higher compared to most of the other countries, with the penetration ratio hovering around 19.0% for fashion and 32.1% for electronics. Yet, the e-commerce penetration ratio of grocery, which is the largest category in Korea retail, is 12.1% as of 1Q17, the lowest among all categories. We believe the lower penetration ratio of the grocery category was due to underdeveloped infrastructures such as cold chain distribution and storage, weakness in product quality and diversity and so on.

Figure 215: Fashion & sports

account for largest portion of e-

commerce sales, followed by travel

& booking

Figure 216: …while grocery

accounts for the largest portion of

total retail sales

Figure 217: E-commerce penetration

in grocery still much lower than

other categories

Eletronics17%

Books/Stationery3%

Grocery13%

Cosmetics8%

Fashion, sports & leisure

19%

Travel & booking17%

Lifestyle & Car appliances

13%

Others10%

Ecommerce retail sales by category

Eletronics, 11.7%

Fashion, 19.6%

Grocery, 25.8%Cosmetics, 6.0%

Books/Stationery, 1.7%

Lifestyle & Car appliances, 15.2%

Others, 19.9%

Retail sales portion by category (ex-automobile)

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0%

Total retail

Eletronics

Fashion

Grocery

Cosmetics

Books/Stationery

Ecommerce penetration by merchandise category (1Q10 vs. 1Q17)

1Q17 1Q10

Source: KOSIS, Deutsche Bank Source: KOSIS, Deutsche Bank Source: KOSIS, Deutsche Bank

In our view, e-commerce will be able to increase its presence in the grocery category going forward, owing to supply quality improvement driving consumer demand to grow robustly.

Major grocery retailers such as hypermarkets will continue to expand their e-commerce operations with aggressive investments into infrastructure and merchandise diversification, in order to compensate for dwindling offline hypermarket sales. Key e-commerce retailers will also try to grow grocery category sales in order to widen their portfolio scope. Major e-commerce players have been aggressively extending their online supermarket portfolio from non-perishable foods and non-food daily necessities to short shelf-life food items.

We believe such a supply quality improvement will enable consumer demand to grow meaningfully going forward. In our view, the key reason why grocery remained an untouched category, while e-commerce grew rapidly, was that consumers were reluctant to use e-commerce for grocery shopping until they could build up enough e-commerce shopping experience. It takes longer for consumers to become confident about e-commerce grocery shopping, as the product quality is less standardized and return/cancellations are less convenient for grocery, compared to other items.

E-commerce players’ infrastructure investments to continue The major grocery retailers (hypermarket players) and e-commerce operators will likely focus their investments more toward the e-commerce platform, infrastructure developments and improvement of merchandise quality and diversity, rather than price competition and promotion activities in the future, in our view. We believe this strategic direction will upgrade the competitiveness of e-commerce over other major retailing channels from a long-term perspective.

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Consequences of e-commerce expansion

Offline retailers’ asset efficiency to be compromised with rapid growth of e-commerce We expect the rapid expansion of e-commerce to disrupt the asset efficiency of offline retailers, department stores, in particular. In case of department stores, top three players’ sales per sqm fell to W5.4mn in 2016 from W7.2mn in 2012. Department store retail sales growth has slowed to -2.4%~3.2% yoy since 2013 from 11.4% yoy/5.4% yoy in 2011-2012 due to consumer migration to new retail platforms such as e-commerce, while the top-three department store operators have retained space expansion at 11.0% CAGR during 2013-2016.

Figure 218: Korea department store

sales growth have been slowing

Figure 219: Department store space

increase accelerated in 2016 (top

three players combined)

Figure 220: Department store space

increase accelerated in 2016 (top

three players combined)

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

01,0002,0003,0004,0005,0006,0007,0008,0009,000

10,000

1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17

Korea department store sales and growth

Department store sales (W bn, LHS) % yoy (RHS)

-

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

4,000.0Department store space ('000 sqm)

Lotte Shopping HDS Shinsegae Sum

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Department store space yoy growth

Source: KOSIS, Deutsche Bank Source: Company data, Deutsche Bank Source: Company data, Deutsche Bank

We believe the asset efficiency (sales per sqm) of department stores will continue to weaken for the next few years. First, we anticipate department stores to continue slower growth of low single digit % p.a. (vs. overall retail sales growth of 3-4% p.a) as retail channel dynamics continues to shift toward e-commerce. Second, top three department stores will maintain steady store space addition through new department store openings, store format diversifications (e.g. outlets, shopping malls etc) and expansions/renovations of existing stores. Furthermore, in our view, the department operators’ increased space allocation to non-retail space (e.g. entertainment, convenience and consumer service facilities) will also dilute space efficiency.

13 December 2017

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Figure 221: Department store sales per sqm have been

deteriorating rapidly…

Figure 222: …across all top three department stores

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Top-three department store sales per sqm (W mn)

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018E

Department store sales per sqm (W mn)

Lotte Shopping HDS Shinsegae Source: Company data, Deutsche Bank Source: Company data, Deutsche Bank

Hypermarket has also experienced significant deterioration in asset efficiency with the market share shift to new retail channels resulting in significant slowdown in sales growth. However, we believe hypermarket’s asset efficiency dilution will moderate in coming years, given: a) very limited new store openings by top three players; b) possibility of store closures and transformations into different formats; and c) restructuring of the competing retail format, the chain supermarket.

Benefits to e-commerce players limited; industry consolidation unlikely near term In our view, the e-commerce market will remain rather fragmented with quite a few leading players continuing to compete. We see a few reasons why industry consolidation is unlikely in the near term: a) no dominant player; b) limited motivation for acquisitions and mergers; and c) strong financial capability of offline retailers, which keeps expanding into e-commerce etc.

First, the Korea e-commerce market has no dominant player, and remains largely fragmented with a large number of corporate participants, as shown in Figure 223. While C2C marketplace operators like Ebay Korea, 11st street etc generate the highest GMV, together estimated at W18tr in 2016, the combined market share of these top three GMV companies stands at 28% of the online shopping transaction value in 2016. In addition, follower groups such as social commerce, TV home shopping and traditional retailers still compete with each other.

Second, given this backdrop, M&A activity in the Korea e-commerce market has been relatively muted in the recent past. Except for the very early cases of Auction (in 2001) and Gmarket (in 2009), which were acquired by global online retailer Ebay, we have not seen any meaningful M&A track record that could accelerate the market consolidation process, if such consolidation were to happen at all.

Third, e-commerce operators with relatively smaller GMV (vs. the leading C2C marketplaces and social commerce) are unlikely to weaken from their current position meaningfully, as most of these platforms are operated by large retailers with strong financial capabilities. Even pure online operators like 11st Street or social commerce players have secured funding from private equity funds and

Figure 223: Estimated GMV

breakdown by large corporate

operators (2016)

Ebay (Gmarket + Auction)

11st StreetWeMakePrice

TicketMonster

Coupang

CJOS

GSHS

Hyundai HS

InterparkEmart

ShinsegaeLotte MartLotte Dept StoreHDS

Esimated GMV breakdown by large corporate operators (2016)

Source: Company data, Money Today, Deutsche Bank estimates

13 December 2017

Property



other investment sources that could sustain the company’s growth initiatives going for the time being.

Figure 224: Many key e-commerce operators have associations with retailers/groups with strong financial capabilities

Key platforms Operator NotePure online operators (C2C marketplace + B2C malls)Gmarket, Auction Ebay Korea Auction and Gmarket were acquired by Ebay Korea in 2001/2009, respectively11st Street SK Planet SK Telecom owns 98.1% of SK Planet, which is an entity spun off from SK Telecom in 2011Interpark Interpark Interpark is one the earliest entrant to online commerce business in Korea, with the company setting up its first e-commerce platform as early as in 1996Social commerce (Format originally evolved from Groupon-type commerce sites)Coupang Coupang Coupang's parent Forward Ventures received USD1bn funding from SoftBank in 2015; and USD0.4bn from Sequoia Capital and BlackRock in 2014Wemakeprice WeMakePrice Founder Min Huh (and related parties) own 88% of the company; WeMakePrice received W100bn funding from NXC, a holding company of Nexon, in 2015Tmon TicketMonster Private equity funds KKR and Anchor Equity Partners and founder Hyun-sung Shin acquried 59% of stake from Groupon in 2015TV home shopping operatorsCJ Mall CJOS CJOS is a part of a CJ Group, one of the largest consumer goods conglomerates in Korea, with businesses in F&B, cultural contents, and retailGS Shop GSHS GSHS is a part of GS Group, which operates chemical, oil/refinery, and retail businesses in KoreaHyundai Hmall Hyundai HS HDS group is one of the largest retail business conglomerates in Korea, operating HDS and Hyundai HSTraditional retailers (department stores and hypermarkets)SSG.com Emart Shinsegae Group operates SSG.com as a consolidated platform that serves both Emart and Shinsegae mall's merchandisesSSG.com Shinsegae Shinsegae Group operates SSG.com as a consolidated platform that serves both Emart and Shinsegae mall's merchandisesLotte.com, Lotte i-mall, El Lotte, etc. Lotte Shopping Lotte Shopping is one of the largest retailers in Korea, with exposure from department stores, to hypermarkets, CVS and home shopping businessesTheHyundai.com, Hyundai Hmall, etc. HDS HDS group is one of the largest retail business conglomerates in Korea, operating HDS and Hyundai HS


CVS to sustain growth momentum, sheltered from e-commerce expansion Among various offline retail formats in Korea, CVS is a rare offline retail format that sustained strong growth momentum, on account of structural drivers, while being well protected from the expansion of e-commerce. We view minimal overlap in merchandise offerings, consistent retail space expansion from new store openings, greater accessibility and proximity to consumers as a result, have been and will continue driving CVS growth in the near future.

Reviewing the retail sales growth by channel since 2000 shows that the CVS industry has sustained robust growth momentum, relatively sheltered from e-commerce expansion, while other offline retail channels did not capture the incremental increase in consumption. CVS format grew at 15.7% CAGR over the past ten years (2006-2016), largely in line with online shopping’s growth of 16.5% CAGR during the same period, outgrowing other offline retail formats (4.5~6.2% CAGR for dept store, disc store and supermarkets) as well as the overall retail market growth (5.0% CAGR). As a result of such growth, CVS format as percentage of total retail sales doubled from 2.5% in 2010 to 5.1% in 2016.

Figure 225: CVS and online shopping consistently

outgrew other retail formats since 2000…

Figure 226: …with both channels growing its share

within retail sales

(10.0%)

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

YoY % growth of retail salex index (2010=100)Dept stores Disc stores Supermarket Retail sales index CVS Online shopping

2.5%

9.5%

2.7%

9.6%

3.1%

10.2%

3.3%

10.9%

3.5%

11.5%

4.5%

12.3%

5.1%

13.7%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

CVS Non store retail (online, home shopping, etc.)

CVS and non-store retail as % of total retail sales

2010 2011 2012 2013 2014 2015 2016

Source: KOSIS, Deutsche Bank Source: KOSIS

13 December 2017

Property



First, we believe the CVS industry is sheltered from the e-commerce expansion, thanks in part to the minimal overlap with the high growth channel in terms of merchandise mix. In 2016, Korean CVS generated 51% of sales from tobacco (42%) and liquor (9%), which according to the regulation in Korea, cannot be distributed via e-commerce. In addition, key growth drivers of CVS in recent years were from fresh food, which was 7% of sales. In contrast, according to KOSIS data, travel services and fashion/apparel, living and home appliances accounts for 56% of e-commerce transaction value, while food and beverage (11%) and groceries (3%) still account for relatively small portions of shoppers’ baskets on the e-commerce platform.

Figure 227: CVS merchandise mix (BGF Retail) in 2016 Figure 228: Online shopping merchandise mix in 2016

Tobacco, 42.1%

Liquor, 8.5%

Processed foood, 25.1%

Snack, 7.3%

Fresh food, 6.6%

Dairy, 4.4% Sundries, 5.2%

Others, 0.8%

CVS merchandise mix (BGF Retail in 2016)

Travel arrangement, 17.2%

Fashion/Apparel, 15.6%

Living/Vehicle, 12.7% Home

applainces/Telecom, 10.9%

Food and beverage, 10.8%

Cosmetics, 7.9%

Computer, etc., 6.1%

Children/Toys, 4.5%

Sports/Leisure, 3.8% Groceries, 2.6%

Books, 2.0% Others, 5.9%

Online shopping (mobile included) - transaction value by merchandise (2016)

Source: Company data Source: KOSIS

Second, Korea CVS has been increasing its floor space over the past decade. CVS floor space, according to the industry data of Korea CVS Association, expanded to 2.07mn sqm in 2015 from 0.81mn sqm in 2006. Such a retail space expansion was possible, due to the consistent new store openings that the industry saw during the same period, with the number of CVS stores growing at 13.1% CAGR over the 2006-2016 period. We also saw the format’s sales efficiency improved, which drove the consistent store openings, with sales per sqm over the same period improved from W7.1mn per sqm in 2006 to W8.4mn per sqm in 2015, due to merchandise improvements, tobacco price hikes, and better traction with the customers.

Due to increased accessibility and proximity to customers, with over 35,000 stores nationwide, and different merchandise offerings to customers, we find consumers continue to use CVS formats for quick and immediate consumption experiences, while using e-commerce for more regular shopping experiences.

13 December 2017

Property



Figure 229: CVS floor space

consistently increasing

Figure 230: No. of stores growing at

a robust pace in a consistent fashion

Figure 231: …due to improving sales

efficiency per sqm

0.81 0.89

0.99 1.09

1.27

1.56

1.77 1.79 1.87

2.07

0%

5%

10%

15%

20%

25%

-

0.50

1.00

1.50

2.00

2.50

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

(% yoy)(mn sqm)CVS floor space (mn sqm; LHS) % yoy (RHS)

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

# of CVS stores

7.1

7.6 7.6 7.6

7.9

7.3 7.4

7.1

7.6

8.4

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

6.0

6.5

7.0

7.5

8.0

8.5

9.0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

(% yoy)(W mn))Average sales per sqm (W mn; LHS) % yoy (RHS)

Source: Korea CVS Association, Deutsche Bank Source: Korea CVS Association, Deutsche Bank Source: Korea CVS Association, Deutsche Bank

13 December 2017

Property



Emart to strengthen its leadership in grocery e-commerce We believe Emart will be able to accelerate its growth momentum, driven by the e-commerce business (Emart Mall), which will take a growth opportunity from grocery e-commerce market expansion. First, we believe Emart Mall will continue to enhance its leadership in the grocery e-commerce market, increasing logistics capacity and improving merchandising competitiveness. Second, in our view, other e-commerce players would be less capable of rapidly catching up with Emart Mall, the leading player in the grocery e-commerce category, given their weakness in merchandise capability with a rather narrow portfolio scope for the grocery category, limited infrastructure capability (e.g. logistics, delivery, storage etc) for grocery retailing and weaker consumer loyalty for the grocery category. Lastly, we believe Emart Mall has a potential to generate decent profits from e-commerce business unlike most of the other e-commerce players, due to higher gross margin and less cost/price competition pressure, compared to other e-commerce platforms.

In our view, Emart Mall will continue to enjoy rapid growth for the next few years, delivering 20% CAGR of Emart Mall for the next three years (from W838bn in 2016 to W1.45tr in 2019E). The most important growth driver is that the company will keep ramping up the delivery capacity through increase in utilisation of logistics centres, addition of new logistics centres and efficiency improvement of store-based delivery system. Emart Mall’s strength in the fresh food merchandise will be also a meaningful leverage for the business to enhance its leadership in the online grocery retailing, differentiating it from other e-commerce players. Emart has been focusing on strengthening the competitiveness of the fresh food category by: a) increasing direct sourcing from quality vendors; b) using overseas sourcing more aggressively to offer a wider variety of fresh foods with competitive price points; and c) improving fresh food processing and storage systems to maintain the quality of fresh food. Emart’s effort to differentiate its merchandising from competitors by developing private labels and exclusive merchandises will also allow Emart Mall to gain strong consumer traction.

Figure 232: Emart Mall to grow at 20% CAGR until 2019,

reaching 7.8% of Emart consolidated sales…

Figure 233: …on account of increasing central logistics

centre capacity and utilisation ratio

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

-

200.00

400.00

600.00

800.00

1,000.00

1,200.00

1,400.00

1,600.00

2014 2015 2016 2017E 2018E 2019E

(%)(W bn)Emart Mall sales and % of consolidated sales

Emart mall sales (W bn, LHS) Emart Mall % of consolidated sales (RHS)

0%

20%

40%

60%

80%

100%

120%

-

100

200

300

400

500

600

700

800

900

1,000

2014 2015 2016 2017E 2018E 2019E

2nd center capacity (LHS)1st center capacity (LHS)Utilization of two logistics centers (RHS)

(W bn)

Source: Company data, Deutsche Bank estimates Source: Company data, Deutsche Bank estimates

13 December 2017

Property



Although most of the leading e-commerce players including the market place operators and social commerce companies aim to develop the grocery category in order to extend their business scope, we believe Emart Mall will be able to maintain the leadership in grocery e-commerce over other e-commerce players. We believe Emart Mall is competitive as a one-stop shopping place for grocery shopping, as it offers all hypermarket merchandise, while other e-commerce players tend to focus on limited merchandise, which have high turnover and long shelf life. Emart Mall also provides higher convenience to grocery shoppers with more efficient last-mile delivery system, utilising its two central logistics centres and offline Emart stores nationwide. Emart Mall can deliver products to customers as fast as 5~6 hours after the order and customers can designate delivery time between 6 hours to three days after they place orders. Most e-commerce players pursue ‘next-day’ delivery or ‘delivery in 24 hours’ as their best last-mile delivery policy.

We believe the industry environment will continue to evolve, but the competitive landscape will likely develop in favour of Emart Mall’s margin outlook. First, in our view, the strong sales growth of Emart Mall at 20% CAGR for the next three years will allow the business to turn profitable in a couple of years. We believe better economies of scale will naturally improve the margin structure of Emart Mall, covering the headquarter cost burden, which is the key reason behind Emart Mall’s loss making, while the operating margin at the operation level has already turned profitable. Second, we expect excessive price/cost competition to moderate as major e-commerce commerce companies are rationalising margin-disruptive promotion strategies due to significant earnings deterioration as a result of price discount/promotion-driven market share gain strategies for the past couple of years.

Figure 234: Emart Mall operating

margin continuing to improve with

rapid sales growth

-7.0%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17

Emart Mall OPM (one-off adjusted) One-off cost impact Emart Mall OPM

Source: Company data, Deutsche Bank

13 December 2017

Property



Singapore

Key conclusions

We forecast subdued rental growth for the next few years as we see Singapore continue being challenged by growing e-commerce and abundant supply. The active managed portfolios should, however, outperform the overall market.

The recovery in the underlying economy and the positive outlook for residential market should see a cyclical recovery in retail in Singapore. This, together with better supply outlook post 2018 could surprise the market on the upside.

Valuation has already priced in pessimistic outlook and could surprise on the upside. Diversified developer with quality retail exposure, CapitaLand, is our preferred pick. For the brave heart, we see opportunity with CapitaLand Mall Trust, which has a well-managed quality retail portfolio.

Cyclical versus structural

Retail sales have bottomed out After a period of strong retail sales, which grew at 5.8% CAGR from 2002 to 2008, retail sales in Singapore have decelerated, growing 1.1% CAGR in the post financial crisis years from 2010 to 2016. Meanwhile, F&B has become an increasingly important feature of the retail space, now accounting for c.20% of total sales. However, growth has moderated following the implementation of labour restrictions since the introduction of aggressive measures to reduce foreign worker dependence in 2012. At the same time, foreign consumption declined from 18% of the total to c.15% from 2011-2015, driven by negative foreigner sentiment, relative FX appreciation to regional currencies, and the Malaysian Airlines incidents.

Figure 235: Retail sales index Figure 236: Food & Beverage as % of total retail sales

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

110.0

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

199

71

998

199

92

000

200

12

002

200

32

004

200

52

006

200

72

008

200

92

010

201

12

012

201

32

014

201

52

016

F&B F&B as % of retail sales

Source: Deutsche Bank, Singstat Source: Deutsche Bank, Singstat

Joy Wang Chien-Fie Man


(+65 ) 6423 5958 (+65 ) 6423 6897


13 December 2017

Property



Figure 237: Retail sales per square foot & occupancy

costs

Figure 238: Foreign expenditure as % of total private

consumption vs. Indonesia & North Asia arrivals

7.5%

9.5%

11.5%

13.5%

15.5%

17.5%

19.5%

$450

$500

$550

$600

$650

$700

$750

$800

199

7

199

8

199

9

200

0

200

1

200

2

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201

1

201

2

201

3

201

4

201

5

201

6

Physical sales (S$psf) Occupancy Cost

-

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

9,000,000

0%2%4%6%8%

10%12%14%16%18%20%

Foreign expenditure as % of total Indonesia & North Asia arrivals

Source: Deutsche Bank, Singstat, JLL Source: Deutsche Bank, Singstat

Looking forward, we believe that retail headwinds will abate. The relative weakening of the SGD to regional currencies, resurgent tourism arrivals, improving economic outlook and wealth effect from rising property prices should catalyse a resurgence in retail sales.

Figure 239: SGD NEER Figure 240: Hiring expectations have stabilised at c.35%

0

10

20

30

40

50

60

70

4Q

01

3Q

02

2Q

03

1Q

04

4Q

04

3Q

05

2Q

06

1Q

07

4Q

07

3Q

08

2Q

09

1Q

10

4Q

10

3Q

11

2Q

12

1Q

13

4Q

13

3Q

14

2Q

15

1Q

16

4Q

16

Source: Deutsche Bank, Bloomberg Finance LP Source: Hudson Singapore

Supply to peak in 2018 While retail sales have shown steady growth, the rise in retail sales was mirrored by an aggressive buildout of retail space, especially in the prime Orchard Road area, but also in new township projects in Jurong and Punggol. As a result, tenant sales per square foot have fallen c.13.6% from the peak. Meanwhile, overall average occupancy costs have declined to about 13% from c.15% in 2011. Looking ahead, we believe that new supply should peak in 2018. New supply is set to halve in 2019 from 1.2m sqft to 650k sqft, with Funan the sole major completion beyond 2018. The government has also limited the availability of new retail space, with new space restricted to minor components of mixed development sites.

13 December 2017

Property



Figure 241: Prime retail supply forecasts Figure 242: Suburban retail supply forecasts

80%82%84%86%88%90%92%94%96%98%100%

(0.5)

0.0

0.5

1.0

1.5

2.0

2.5

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

E

2019

E

Net absorption Net supply Occupancy rate

90%91%92%93%94%95%96%97%98%99%100%

(0.5)(0.3)(0.1)0.10.30.50.70.91.11.31.5

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

17E

20

19E

Net absorption Net supply Occupancy rate

Source: Deutsche Bank estimates Source: Deutsche Bank estimate

Figure 243: List of upcoming supply 2017

Duo Galleria Prime Q2 2017 54,136 Ophir-Rochor Commercial Pte Ltd

Marina One The Heart Prime Q2 2017 140,000 MS Commercial Pte Ltd

Additions to Existing Singapore Post Centre Suburban Q2-Q3 2017 180,000 Singpost Limited

Northpoint City Suburban Q3 2017 315,248 Frasers Centrepoint

Kampung Admiralty Suburban 2H 2017 83,878 Housing & Development Board

Vision Exchange Suburban Q1 2017 52,150 Sim Lian JV (Vision) Pte Ltd

Refurbishment of Gallery Hotel Suburban Q2 2017 63,000 RB Capital

JTC Space @ Tuas Suburban 2017 40,122 JTC

Retail development Suburban 2017 62,404 National Environmental Agency

Royal Square at Novena Suburban H2 2017 42,302 Hoi Hup Sunway Novena Pte Ltd

Novotel and Ibis Singapore on Stevens Suburban Q4 2017 43,432 Oxley Gem

Imall (Former RepublicTheatre) Suburban 2017 55,865 Marine Parade Central Pte Ltd

Downtown East (AEI) Suburban Q4 2017 48,760 NTUC Club Investments Pte Ltd

Others Mixed 2017 59,304

Sub-total 1,176,202

2018

Shopping Development at Robinson Road Prime Q1 2018 59,820 Tuan Sing

Paya Lebar Quarter (GLS Site) Suburban H1 2018 340,000 Lend Lease

Project Jewel (Terminal 1 Carpark) Suburban Q4 2018 576,000 Capitamalls Asia

Oasis Terraces Suburban 2018 72,495 Housing & Development Board

Buangkok Square Suburban 2018 63,776 Housing & Development Board

City Gate (former Keypoint) Suburban 2018 76,289 Bayfront Ventures Pte Ltd

Others Mixed 2018 37,817

Sub-total 1,226,197

2019

Funan DigitaLife Mall Redevelopment Prime Q4 2019 327,000 CapitaLand Mall Trust

Outpost Hotel Sentosa & Village Hotel Sentosa Suburban 2019 40,607 Fontaine Investment Pte Ltd

Poiz Centre (GLS Site) Suburban 2019 40,365 MCC Land (Potong Pasir) Pte Ltd

Woods Square (GLS Site) Suburban 2019 44,885 Woodlands Square Pte Ltd (Far East)

Wisteria Mall (GLS Site) Suburban 2019 83,361 Northern Resi Pte Ltd/ Northern Retail Pte Ltd

Park Mall Redevelopment Suburban 2019 20,990 Park Mall Pte Ltd.

Canberra Plaza Suburban 2019 88,802 Housing & Development Board

Sub-total 646,010

Grand total 5,080,099 Source: Deutsche Bank

13 December 2017

Property



E-commerce penetration accelerated Singapore’s e-commerce marketplace started in earnest with eBay in 2002, accounting for c. 1-2% of the total retail market until 2011-2012 where it has since grown at 30% CAGR. The growth has been catalysed by a surge in online offerings, supported by improved online payment infrastructure, logistics and goods availability. The uptick in e-commerce has also largely tracked the growth of e-commerce in China. Moving ahead, we expect e-commerce penetration to continue to accelerate given Singapore’s city-state and as last-mile logistics improve. We believe that Singapore will continue to emulate China’s growth trajectory, and forecast e-commerce penetration by 20%.

Figure 244: E-commerce revenue growth trend Figure 245: E-commerce market size and share

2.6 3.0

3.3 3.7

4.2 4.6

5.1

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2015 2016 2017 2018 2019 2020 2021

US

$b

illio

n

Singapore

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

e-comemerce market size (S$m) e-commerce as a % of total retail sales

Source: Deutsche Bank, Statista Source: Deutsche Bank, Google, Temasek

Figure 246: Entrance timeline of major players Year of entry Company Type

2002 eBay C2C

2009 Reebonz Luxury and services

2010 Qoo10 B2C

Clozette C2C

Luxola Beauty and cosmetics

Groupon Deals

Deal.com.sg Deals

2011 NoQ Store Books

Bellabox Cosmetics and groceries

Redmart B2C

VanityTrove Beauty

2012 Kwerkee Home and lifestyle

Zalora Fashion

Carousell C2C

Food Panda Food

2013 Taobao B2C and C2C

Uber Ride sharing

HipVan Home furnishing and fashion

Omigo B2C

Grab Taxi Ride sharing

2014 Rakuten B2C

Lazada B2C

2015 Honestbee Grocery

99.co Property

Deliveroo Food

2016 UberEats Food

2017 Tmall B2C

Amazon B2C and C2C Source: Deutsche Bank, Competition Commission of Singapore

13 December 2017

Property



Figure 247: Entrance timeline of major e-commerce players

eBay

Reebonz

Qoo10

Clozette

Luxola

Groupon

Deal.com.sg

NoQ Store

Bellabox

VanityTrove

Kwerkee

Zalora

Carousell

Food Panda

Taobao

HipVan

Omigo

Amazon freeshipping

to SG

Rakuten

Lazada

Hobestbee

Deliveroo

2002 2009··· 2010 2011 2012 2013 2014 2015 2016 2017

UberEats

Tmall

Amazon (expected)

Source: Deutsche Bank, Competition Commission of Singapore

The structural shift

Shifting tenant mix to experiential offerings, lower margin tenancies suffer In Singapore, we have seen an increasing shift from traditional department store, hyper market and lower-margin goods towards experiential and F&B offerings. In the case of CapitaLand Mall Trust, we have seen F&B shifting from 18.8% of total GFA to 30% currently. While department stores have fallen from 6.6% to 6%, we note the effect of e-commerce as electronics have fallen from 12.8% to 3%, while gift/hobby/bookstores and leisure/music have fallen from 14.7% of the portfolio down to 10%.

For Mapletree Commercial Trust, over the past five years, we have seen a shift in tenant mix away from lifestyle brands and department stores/hyper marts towards F&B, fashion electronics stores. This was partly driven by the shuttering of non-performing retailers (e.g. FrancFranc, National Geographic), active re-tenanting away from department stores towards more experiential offerings, and well as demand from stronger brands to establish footprints outside of department stores (e.g. Chanel, Kiehls, L’Occitane) in order to better manage brand image and retail concepts.

13 December 2017

Property



Figure 248: Change in CT’s tenant mix over time Figure 249: Change in MCT’s tenant mix over time

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

2002 2005 2010 2015 2016F&BFashion / Jewellery & Watches / Shoes & BagsEducation & Services / Beauty & Health / Art GalleryDepartment StoreGifts / Toys & Hobbies / Books / Sporting Goods / Leisure & MusicSupermarketOfficeHouseware & FurnishingElectrical & Electronics / ITWarehouse

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

2013 2014 2015 2016 2017F&B Fashion

Fashion Related Department store/Hypermart

Beauty Lifestyle

Electronics Sports

Entertainment Others

Source: Deutsche Bank, Company data Source: Deutsche Bank, Company data

Quantifying the impact from e-commerce There is no doubt that e-commerce will increase its market share over time and will become a meaningful part of the retail in Singapore. There is also no doubt that physical retail and retail real estate will be affected as a result of this structural shift. The question is how this will change rents going forward and how much would the return on retail real estate be affected. We attempt to quantify the impact from e-commerce by looking at the overall retail market structure, retail sales composition and occupancy cost for the whole market in Singapore.

We have based our analysis on 2016 statistics on retail space (including pipeline), average rental for the market and retail spending. We note that the two key assumptions in this calculations are retail sales growth and e-commerce penetration ratio. To our surprise, occupancy cost for the entire market has actually declined on average over the past five years, despite the significant increase in online retailing, and is on par to the long-term average occupancy cost of 13%.

Figure 250: Singapore overall occupancy costs vs. physical sales

7.5%

9.5%

11.5%

13.5%

15.5%

17.5%

19.5%

$450

$500

$550

$600

$650

$700

$750

$800

Physical sales (S$psf) Occupancy Cost

Source: Deutsche Bank, Singstat

13 December 2017

Property



That said, most of the listed REITs have recorded an increase in occupancy cost as landlords continue to push through rental growth over the past few years.

Figure 251: Occupancy costs at major Singapore retail REITs

12.0%

13.0%

14.0%

15.0%

16.0%

17.0%

18.0%

19.0%

20.0%

21.0%

22.0%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

CMT FCT MCT

Source: Deutsche Bank, Company data

We estimated that sales at malls owned by the listed REITs amount to 18% of the total market. For the malls to continue to achieve positive rental reversion, increasing market share in physical sales would be crucial. This would, however, also mean loss of market share over time for malls that are either less well located or not properly managed, and might turn into unproductive space and eventually up for repurpose. We estimate that every 10% reduction in space would increase physical sales psf by over 11% today and reduce occupancy cost by over 1.5%.

Despite the declining rentals across Singapore, capital value for retail mall in the country has continued to rise as a result of cap rate compression. While some of the latest transactions are done at record-low cap rates, we note that yield spread versus 10-year bond yield remains at c. 300bps. With retail sales growth a more meaningful driver than e-commerce penetration, and with our base case expecting a cyclical recovery in retail sales in Singapore, we foresee capital value to remain stable through the challenging period for top grade retail malls.

13 December 2017

Property



Figure 252: Prime retail yields vs. 10-yr Figure 253: Suburban retail yields vs. 10-yr

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00

3Q

01

2Q

02

1Q

03

4Q

03

3Q

04

2Q

05

1Q

06

4Q

06

3Q

07

2Q

08

1Q

09

4Q

09

3Q

10

2Q

11

1Q

12

4Q

12

3Q

13

2Q

14

1Q

15

4Q

15

3Q

16

2Q

17

Market Yield Spread vs 10-yr

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

1Q

00

4Q

00

3Q

01

2Q

02

1Q

03

4Q

03

3Q

04

2Q

05

1Q

06

4Q

06

3Q

07

2Q

08

1Q

09

4Q

09

3Q

10

2Q

11

1Q

12

4Q

12

3Q

13

2Q

14

1Q

15

4Q

15

3Q

16

2Q

17

Market Yield Spread vs 10-yr

Source: Deutsche Bank, JLL, Bloomberg Finance LP Source: Deutsche Bank, JLL, Bloomberg Finance LP

Stock pricing in pessimistic outcome, cyclical recovery to surprise The retail REITs are trading at implied cap rates of 5.3% and capital value of about S$2,000 psf on average, pricing in potential cap rate expansion of about 50-80bps and capital value decline of 10-15%. While we acknowledge the structural challenge brought by e-commerce, the potential cyclical recovery of retail sales and the bearish expectation could see stocks surprise on the upside, in our view.

13 December 2017

Property



Appendix A 1) Online/offline retail sales by category

Figure 254: Offline retail sales by category – China Figure 255: Online retail sales by category – China

14%2%

1%

9%

1%4%

12%

7%

0%2%

48%

China Offline Sales by CategoryApparel and Footwear

Beauty and Personal Care

Consumer Health

Home and Garden

Home Care

Luxury Goods

Packaged Food

Personal Accessories

Pet Care

Tissue and Hygiene

Others

23%

3%

1%2%

1%

2%5%

2%

0%2%

59%

China Online Sales by Category

Apparel and Footwear


Consumer Health

Home and Garden

Home Care

Luxury Goods

Packaged Food


Pet Care

Tissue and Hygiene

Others


Figure 256: Offline retail sales by category – Korea Figure 257: Online retail sales by category – Korea

12%

5%2%

3%1%

5%

10%

6%

0%1%

55%

Korea Offline Sales by Category



Consumer Health

Home and Garden

Home Care

Luxury Goods

Packaged Food


Pet Care

Tissue and Hygiene

Others

9%2% 1%

3% 0%

3%

5%2%

1%2%

72%

Korea Online Sales by Category



Consumer Health

Home and Garden

Home Care

Luxury Goods

Packaged Food


Pet Care

Tissue and Hygiene

Others


13 December 2017

Property



Figure 258: Offline retail sales by category – Singapore Figure 259: Online retail sales by category – Singapore

12%

5% 3%

8%

1%

17%

9%

19%

0%

1%

25%

Singapore Offline Sales by CategoryApparel and Footwear


Consumer Health

Home and Garden

Home Care

Luxury Goods

Packaged Food


Pet Care

Tissue and Hygiene

Others

22%

2%3%

4%

2%4%

3%10%

0%1%

49%

Singapore Online Sales by Category



Consumer Health

Home and Garden

Home Care

Luxury Goods

Packaged Food


Pet Care

Tissue and Hygiene

Others


Figure 260: Offline retail sales by category – HK Figure 261: Online retail sales by category – HK

6%

20%

4%

3%

2%4%

0.4%1%

16%

13%

24%

0.2%

4%

1%

HK offline sales by catagory Alcoholic DrinksApparel and FootwearBeauty and Personal CareConsumer AppliancesConsumer HealthHome and GardenHome CareHot drinksLuxury GoodsPackaged FoodPersonal AccessoriesPet CareSoft DrinksTissue and Hygiene

8%

25%

1%1%

5%6%

1%1%

11%

9%

29%

1%1%

2%

HK online sales by catagory

Alcoholic DrinksApparel and FootwearBeauty and Personal CareConsumer AppliancesConsumer HealthHome and GardenHome CareHot drinksLuxury GoodsPackaged FoodPersonal AccessoriesPet CareSoft DrinksTissue and Hygiene


Figure 262: Offline retail sales by category – Japan Figure 263: Online retail sales by category – Japan

8%4%

2%

4% 1%

3%

18%

3%0%1%

56%

Japan Offline Sales by CategoryApparel and Footwear


Consumer Health

Home and Garden

Home Care

Luxury Goods

Packaged Food


Pet Care

Tissue and Hygiene

Others

13%

4% 2%

5%0%

4%

5%

3%1%

1%

62%

Japan Online Sales by CategoryApparel and Footwear


Consumer Health

Home and Garden

Home Care

Luxury Goods

Packaged Food


Pet Care

Tissue and Hygiene

Others


13 December 2017

Property



Figure 264: Offline retail sales by category – Australia Figure 265: Online retail sales by category – Australia

8%3%

2%

8%1%

2%

17%

2%2%1%

54%

Australia Offline Sales by CategoryApparel and Footwear


Consumer Health

Home and Garden

Home Care

Luxury Goods

Packaged Food


Pet Care

Tissue and Hygiene

Others

16%2%

2%

4%0%

2%4%3%

0%1%

66%

Australia Online Sales by CategoryApparel and Footwear


Consumer Health

Home and Garden

Home Care

Luxury Goods

Packaged Food


Pet Care

Tissue and Hygiene

Others


2) Online/offline Top 3 players’ concentration by country

Figure 266: Top 3 offline retailers market share % 2010

vs 2016

Figure 267: Top 3 online retailers market share % 2010

vs 2016

3%

16% 15%11%

20%

42%

3%

17% 17%13%

22%

43%

0%

10%

20%

30%

40%

50%

China HK Singapore Japan Korea Australia

Top 3 offline retailers concentration 2010 vs 2016

2010 2016

42%35%

16%

50%43%

20%

67%

34%

52% 49%

38%

21%

0%

10%

20%

30%

40%

50%

60%

70%

80%

China HK Singapore Japan Korea Australia

Top 3 online retailers concentration 2010 vs 2016

2010 2016


13 December 2017

Property



3) Imported brands as percentage of total retail sales by category, by country

Figure 268: Imported brands as % of total apparel and

footwear spending by country

Figure 269: Imported brands as % of total consumer

appliance spending by country

9%

15% 17%

26%29%

44%

0%5%

10%15%20%25%30%35%40%45%50%

China Japan Australia Korea HK Singapore

Import brands as of % total Apparel and Footwear retail sales (2016)

14%

25%32%

60%66%

71%

0%

10%

20%

30%

40%

50%

60%

70%

80%

China Japan Korea Singapore Australia HK

Import brands as of % total Consumer applianceretail sales (2016)


Figure 270: Imported brands as % of total soft drinks

spending by country

Figure 271: Imported brands as % of total packaged

goods spending by country

23%29%

64%74%

82%

94%

0%10%20%30%40%50%60%70%80%90%

100%

China Korea Japan Australia HK Singapore

Import brands as of % total soft drinks retail sales (2016)

24% 25%

32%36%

60%66%

0%

10%

20%

30%

40%

50%

60%

70%

China Japan Korea Australia Singapore HK

Import brands as of % total packaged goodsretail sales (2016)


4) Smartphone penetration by country

Figure 36: Smartphone adoption as % of total connection

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

2010 2011 2012 2013 2014 2015 2016

Smartphone adoption as % of total connection

China Japan Korea Overall (Asia Pcific)

b

Source: Deutsche Bank, GSMAsr

13 December 2017

Property



5) Country metrics for e-commerce development

Figure 272: E-commerce

development metrics – China


development metrics – South Korea


development metrics – HK

012345

Low labor cost

Access to capital

Access to suppliers

Market size

Tech penetration

Favorable regulation

Metropolitans as oftotal regions

Population density

China

012345

Low labor cost

Access to capital

Access to suppliers

Market size

Tech penetration

Favorable regulation


Population density

South Korea

012345

Low labor cost

Access to capital

Access to suppliers

Market size

Tech penetration

Favorableregulation


Population density

HK

Source: Deutsche Bank Source: Deutsche Bank Source: Deutsche Bank


development metrics – Singapore


development metrics – Japan


development metrics – Australia

012345

Low labor cost

Access to capital

Access to suppliers

Market size

Tech penetration

Favorableregulation

Metropolitans asof total regions

Population density

Singapore

0

1

2

3

4Low labor cost

Access to capital

Access to suppliers

Market size

Tech penetration

Favorableregulation


Population density

Japan

0

1

2

3

4Low labor cost

Access to capital

Access to suppliers

Market size

Tech penetration

Favorableregulation


Population density

Australia

Source: Deutsche Bank Source: Deutsche Bank Source: Deutsche Bank

6) Historical trading charts for real estate top picks

Figure 278: CapitaLand prem/disc to RNAV Figure 279: CapitaLand price-to-book

-90%

-70%

-50%

-30%

-10%

10%

30%

50%

70%

Jan-91 Jan-95 Jan-99 Jan-03 Jan-07 Jan-11 Jan-15

CAPL Mean +1 s.d.+2 s.d. -1 s.d. -2 s.d.

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

Jan-90 Jan-94 Jan-98 Jan-02 Jan-06 Jan-10 Jan-14

CAPL Mean +1 s.d.

+2 s.d. -1 s.d. -2 s.d. Source: Deutsche Bank, Bloomberg Finance LP Source: Deutsche Bank, Bloomberg Finance LP

13 December 2017

Property



Figure 280: Longfor discount to NAV Figure 281: Longfor price-to-book

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

Discount to NAV Average +1 SD

-1 SD +2 SD -2 SD

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

P/B Average +1 SD

-1 SD +2 SD -2 SD


Figure 282: Stockland prem/disc to NAV Figure 283: Stockland price-to-NTA

-16.0%

-14.0%

-12.0%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17

Prem/disc to NAV Average

- 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0

Jun-

01

Jun-

03

Jun-

05

Jun-

07

Jun-

09

Jun-

11

Jun-

13

Jun-

15

Jun-

17

SGP Mean +1 s.d.+2 s.d. -1 s.d. -2 s.d.


13 December 2017

Property



Figure 284: Valuation and risks Company Valuation RisksRetail

Yum China

Our primary valuation methodology is DCF. As YUMC's business is 100% from China, w e use the China COE provided by Deutsche Bank's Economics Team. We use beta of 0.95x (same as YUM's beta). The company's COE is 9.2%. We use a long-term grow th rate of 2%. This is at the high end of the 0-2% range that w e apply for the consumer sector, as w e believe there is still potential for an increase in market penetration. We also look at trading multiples PE and EV/EBITDA in the China/HK consumer sector and regional/global QSR sectors, w hich w e believe support our target price w hen taking into account its leading position in China, sustainability of the business and the steady EPS grow th.

Key dow nside risks: 1) intense competition; 2) changes in consumer preference and its multi-format model failed to lure consumers; 3) negative new s or publicity (food safety issues and Sino-US tensions); 4) a failure to pass on cost increase w ith chicken prices potentially on the rise in 2018s; 5) a failure to optimize store portfolio; and 6) RMB depreciation and repatriation of cash outside China.

Fast Retailing

We use a residual income model w ith assumptions of a 5.5% cost of capital and 2.0% terminal grow th rate, and earnings forecasts going out f ive years.

Donw side risks include unexpectedly rapid decline of earnings of Uniqlo International; earnings damage from changes in the management team, including the founder Tadashi Yanai; supply troubles due to political instability and rising labor costs in China (the f irm's production hub) or higher raw material costs; and short-term volatility related to M&A.

Anta

We value Anta using DCF methodology as w e expect investors to focus on their long-term grow th profile. Cost of equity of 10.6%: risk-free rate = 3.9% (Deutsche Bank assumption), equity risk premium= 5.6% (Deutsche Bank assumption), beta of 1.3. We assume a perpetual grow th rate of 2%, in line w ith Hong Kong & China consumer discretionary space of 1-2%.

Dow nside risks to our view :(1) intense competition and any increase in industry discounting. (2) w eaker-than-expected macro conditions that w ould dampen demand and (3) higher-than-expected channel inventory (4) Fila failing to drive sustainable grow th.

Robam

Our primary valuation methodology is DCF. As most of Robam's business comes from China, w e use a 9.5% China COE, provided by Deutsche Bank's economics team. We use a beta of 1 and a long-term grow th rate of 1.5%, in line w ith our 1.0-2.0% sector assumption for the other consumer stocks that w e cover.

Volatility of the property market, hiking of raw material prices, new entrants and a price w ar w ould damage players' profitability. Company risks include failure to maintain its leading position and inability to continuously launch new products.

Emart

We value Emart's operating value, applying 14.0x of P/E against Emart's adjusted 12-month forw ard EPS. Our target P/E is the average of global grocery retailers 12-month forw ard P/E excluding Yonghui Superstores, w hich is an outlier, trading at extremely high valuations. Although Emart's EPS CAGR until 2017E is slightly higher than peers, w e apply no premium to global peer average P/E, given that the company's EPS grow th should come in line w ith the global peers once the low base effect normalizes.

Key dow nside risks are: a) larger-than-expected cash outf low s for shopping mall investments, w hich may w eaken the f inancial health of the company, and a slow er-than-expected turnaround of the online business; and b) greater-than-expected cost for the China operation restructuring.

Real estate

Longfor

Our end-FY18 NAV estimate comprises development properties, investment properties, and net cash. Our NAV estimate values existing land bank and properties based on a sum-of-the-parts methodology: 1) DCF for development properties, w ith a WACC of 10.2% (3.0% risk-free rate, 1.8 beta, 6.0% risk premium and 4.7% cost of debt); and 2) a cap-rate approach (5-9%) for investment properties. We assume full prepayment of the land appreciation tax. We assume property prices w ill drop 5% in T1 and T2 cities in 2017 and remain f lat thereafter. For T3 cities, w e assume 3% property price grow th in 2017 and f lat pricing thereafter. Our target price reflects a 25% discount to our NAV estimate, based on eight key measures by w hich w e analyze the companies w e cover. Our target price implies 9.9x FY18F P/E and 1.6x FY17F P/B. The benchmark index for the stock is MSCI China.

Macro risks: Government property tightening measures might be stricter than expected, w hich could result in volatile moves in housing transaction volumes, housing prices, land prices, and f inancing available to developers and homebuyers. Unexpected economic f luctuations in China's economy also add risks to the sector. In addition, potential RMB depreciation may result in FX losses for developers w ith offshore f inancing. Company-specif ic risks: 1) w eaker-than-expected sales; 2) slow er-than-expected gross margin expansion; and 3) delays in the openings of investment properties.

CapitaLand

We set our target price on an average of our earnings-based SOTP and RNAV. Our SOTP values the development business using a 7x P/E multiple and values the recurring business using a four-year DCF w ith 1% long-term grow th rate and 6.81% WACC. Our LT grow th rates are based on through-the-cycle expected rental grow th. Our RNAV valuation is based on a DCF of development projects, market cap rates for commercial assets and market prices for listed subsidiaries

Key risks are: (1) sharp slow dow n in grow th; (2) execution risk on key projects (Chongqing); (3) government policy in key markets; and (4) acquisition risk.

Stockland

Our price target is equal to 50% of our DCF and 50% of our SOTP . Key inputs for DCF include: beta 0.7x; CoE 7.7% & TGR 3% (broadly in-line long term GDP and inflation grow th rates). Key inputs for SOTP: Commercial WACR of 6.9%, Residential Development EBIT multiplier of 11.5x, Retirement Living EBIT multiplier of 12.5x, Corporate Cost EBIT multiplier of 8x.

Key dow nside risks: (1) Cap rates softening; (2) Competition from landlords; (3) Key tenants forfeiting current leases (4) Unexpected changes to real estate fundamentals (5) Cost of debt rising.

CapitaLand Mall Trust

Our 12-month forw ard price target is based on an average of our DDM and RNAV valuation. Our DDM valuation of S$2.17/unit is derived using discount rate of 6.82% and long-term grow th rate of 1.0% factoring our expectations for a recovery in retail sales. Our RNAV valuation of S$2.10/unit is based on portfolio w eighted average cap rate of 5.07%.

Dow nside risks include (1) a sharper than expected economic slow dow n or recession affecting retail spending w hich could reduce CMT's ability to achieve positive rental reversion and continuous GTO rent grow th, (2) competition from upcoming suburban supply, (3) execution risks on AEIs, (4) credit market uncertainty, (5) acquisition and capital raising risk.

Scentre Group

Our PT is equal to 50% of our DCF and 50% of our SOTP. DCF inputs include: geared beta 0.7; CoE 7.9% & TGR 3%. SOTP inputs include: Investment portfolio WACR of 5.8%, Property Management EBIT multiplier of 12.3x, Development EBIT multiplier of 11.5x and Corporate Cost EBIT multiplier of 8.0x.

Key dow nside risks for SCG (1)Cap rates softening; (2) Competition from other landlords; (3) Key tenants forfeiting on current leases (4) Unexpected changes to real estate fundamentals (in particular supply and demand) (5) Cost of debt rising (6) Signif icant delays on property developments or material changes to development cost.


13 December 2017

Property



Appendix 1

Important Disclosures *Other information available upon request Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr. Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing. Analyst Certification

The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report. Joy Wang/Anne Ling/Emily Smith/Michael Simotas/Jason Ching/Jeffrey Gao/Jeremy Kim/Takahiro Kazahaya/Yoji Otani/Jihyun Song

Equity rating key Equity rating dispersion and banking relationships

Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ) , we recommend that investors buy the stock.

Sell: Based on a current 12-month view of total share-holder return, we recommend that investors sell the stock

Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell.

Newly issued research recommendations and target prices supersede previously published research.

56 %

33 %

11 %18 % 17 % 12 %0

100

200

300

400

500

600

Buy Hold Sell

Asia-Pacific Universe

Companies Covered Cos. w/ Banking Relationship

13 December 2017

Property



Additional Information

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13 December 2017

Property



German Banking Law and is subject to supervision by the European Central Bank and by BaFin, Germany’s Federal Financial Supervisory Authority. United Kingdom: Approved and/or distributed by Deutsche Bank AG acting through its London Branch at Winchester House, 1 Great Winchester Street, London EC2N 2DB. Deutsche Bank AG in the United Kingdom is authorised by the Prudential Regulation Authority and is subject to limited regulation by the Prudential Regulation Authority and Financial Conduct Authority. Details about the extent of our authorisation and regulation are available on request. Hong Kong: Distributed by Deutsche Bank AG, Hong Kong Branch or Deutsche Securities Asia Limited. India: Prepared by Deutsche Equities India Private Limited (DEIPL) having CIN: U65990MH2002PTC137431 and registered office at 14th Floor, The Capital, C-70, G Block, Bandra Kurla Complex Mumbai (India) 400051. Tel: + 91 22 7180 4444. It is registered by the Securities and Exchange Board of India (SEBI) as a Stock broker bearing registration nos.: NSE (Capital Market Segment) - INB231196834, NSE (F&O Segment) INF231196834, NSE (Currency Derivatives Segment) INE231196834, BSE (Capital Market Segment) INB011196830; Merchant Banker bearing SEBI Registration no.: INM000010833 and Research Analyst bearing SEBI Registration no.: INH000001741. DEIPL may have received administrative warnings from the SEBI for breaches of Indian regulations. Deutsche Bank and/or its affiliate(s) may have debt holdings or positions in the subject company. With regard to information on associates, please refer to the “Shareholdings” section in the Annual Report at: https://www.db.com/ir/en/annual-reports.htm. Japan: Approved and/or distributed by Deutsche Securities Inc.(DSI). Registration number - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117. Member of associations: JSDA, Type II Financial Instruments Firms Association and The Financial Futures Association of Japan. Commissions and risks involved in stock transactions - for stock transactions, we charge stock commissions and consumption tax by multiplying the transaction amount by the commission rate agreed with each customer. Stock transactions can lead to losses as a result of share price fluctuations and other factors. Transactions in foreign stocks can lead to additional losses stemming from foreign exchange fluctuations. We may also charge commissions and fees for certain categories of investment advice, products and services. Recommended investment strategies, products and services carry the risk of losses to principal and other losses as a result of changes in market and/or economic trends, and/or fluctuations in market value. Before deciding on the purchase of financial products and/or services, customers should carefully read the relevant disclosures, prospectuses and other documentation. "Moody's", "Standard & Poor's", and "Fitch" mentioned in this report are not registered credit rating agencies in Japan unless Japan or "Nippon" is specifically designated in the name of the entity. Reports on Japanese listed companies not written by analysts of DSI are written by Deutsche Bank Group's analysts with the coverage companies specified by DSI. Some of the foreign securities stated on this report are not disclosed according to the Financial Instruments and Exchange Law of Japan. Target prices set by Deutsche Bank's equity analysts are based on a 12-month forecast period.. Korea: Distributed by Deutsche Securities Korea Co. South Africa: Deutsche Bank AG Johannesburg is incorporated in the Federal Republic of Germany (Branch Register Number in South Africa: 1998/003298/10). Singapore: This report is issued by Deutsche Bank AG, Singapore Branch or Deutsche Securities Asia Limited, Singapore Branch (One Raffles Quay #18-00 South Tower Singapore 048583, +65 6423 8001), which may be contacted in respect of any matters arising from, or in connection with, this report. Where this report is issued or promulgated by Deutsche Bank in Singapore to a person who is not an accredited investor, expert investor or institutional investor (as defined in the applicable Singapore laws and regulations), they accept legal responsibility to such person for its contents. Taiwan: Information on securities/investments that trade in Taiwan is for your reference only. Readers should independently evaluate investment risks and are solely responsible for their investment decisions. Deutsche Bank research may not be distributed to the Taiwan public media or quoted or used by the Taiwan public media without written consent. Information on securities/instruments that do not trade in Taiwan is for informational purposes only and is not to be construed as a recommendation to trade in such securities/instruments. Deutsche Securities Asia Limited, Taipei Branch may not execute transactions for clients in these securities/instruments.

13 December 2017

Property



Qatar: Deutsche Bank AG in the Qatar Financial Centre (registered no. 00032) is regulated by the Qatar Financial Centre Regulatory Authority. Deutsche Bank AG - QFC Branch may undertake only the financial services activities that fall within the scope of its existing QFCRA license. Its principal place of business in the QFC: Qatar Financial Centre, Tower, West Bay, Level 5, PO Box 14928, Doha, Qatar. This information has been distributed by Deutsche Bank AG. Related financial products or services are only available only to Business Customers, as defined by the Qatar Financial Centre Regulatory Authority. Russia: The information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any appraisal or evaluation activity requiring a license in the Russian Federation. Kingdom of Saudi Arabia: Deutsche Securities Saudi Arabia LLC Company (registered no. 07073-37) is regulated by the Capital Market Authority. Deutsche Securities Saudi Arabia may undertake only the financial services activities that fall within the scope of its existing CMA license. Its principal place of business in Saudi Arabia: King Fahad Road, Al Olaya District, P.O. Box 301809, Faisaliah Tower - 17th Floor, 11372 Riyadh, Saudi Arabia. United Arab Emirates: Deutsche Bank AG in the Dubai International Financial Centre (registered no. 00045) is regulated by the Dubai Financial Services Authority. Deutsche Bank AG - DIFC Branch may undertake only the financial services activities that fall within the scope of its existing DFSA license. Its principal place of business in the DIFC: Dubai International Financial Centre, The Gate Village, Building 5, PO Box 504902, Dubai, U.A.E. This information has been distributed by Deutsche Bank AG. Related financial products or services are available only to Professional Clients, as defined by the Dubai Financial Services Authority. Australia: Retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product referred to in this report and consider the PDS before making any decision about whether to acquire the product. Please refer to Australia-specific research disclosures and related information at https://australia.db.com/australia/content/research-information.html Australia and New Zealand: This research is intended only for "wholesale clients" within the meaning of the Australian Corporations Act and New Zealand Financial Advisors Act, respectively. Additional information relative to securities, other financial products or issuers discussed in this report is available upon request. This report may not be reproduced, distributed or published without Deutsche Bank's prior written consent. Copyright © 2017 Deutsche Bank AG

David Folkerts-Landau

Group Chief Economist and Global Head of Research

Raj Hindocha Global Chief Operating Officer

Research

Michael Spencer Head of APAC Research

Global Head of Economics

Steve Pollard Head of Americas Research

Global Head of Equity Research

Anthony Klarman Global Head of Debt Research

Paul Reynolds Head of EMEA

Equity Research

Dave Clark Head of APAC

Equity Research

Pam Finelli Global Head of

Equity Derivatives Research

Andreas Neubauer Head of Research - Germany

Spyros Mesomeris Global Head of Quantitative

and QIS Research

International locations Deutsche Bank AG Deutsche Bank Place Level 16 Corner of Hunter & Phillip Streets Sydney, NSW 2000 Australia Tel: (61) 2 8258 1234

Deutsche Bank AG Mainzer Landstrasse 11-17 60329 Frankfurt am Main Germany Tel: (49) 69 910 00

Deutsche Bank AG Filiale Hongkong International Commerce Centre, 1 Austin Road West,Kowloon, Hong Kong Tel: (852) 2203 8888

Deutsche Securities Inc. 2-11-1 Nagatacho Sanno Park Tower Chiyoda-ku, Tokyo 100-6171 Japan Tel: (81) 3 5156 6770

Deutsche Bank AG London 1 Great Winchester Street London EC2N 2EQ United Kingdom Tel: (44) 20 7545 8000

Deutsche Bank Securities Inc. 60 Wall Street New York, NY 10005 United States of America Tel: (1) 212 250 2500

Documents

Date APAC Retail and Property - jrj.com.cnpg.jrj.com.cn › acc › Res › CN_RES › INVEST › 2017 › 12 › 13 › f77cb29… · more active management of their retail assets