Global Logistic Properties (GLP) is a leading provider of modern logistics facilities with a US$38 billion portfolio comprising 53.7 million square meters of logistics facilities across China, Japan, Brazil and USA.
Since our previous coverage in December 2015, GLP’s shares have advanced over $0.60, or approximately 30 percent, to $2.79 as at 6 April 2017. The rally was fueled by market rumours which began in early November 2016, following an article published by Bloomberg which mentioned that GLP has attracted takeover interest from an investor group that includes China Investment Corporation, China’s sovereign fund.
On 27 February 2017, GLP announced that a Special Committee was in discussions with several parties whom it had shortlisted following its evaluation of non-binding proposals received. As of 30 March 2017, the abovementioned parties have commenced due diligence on the company.
Currently valued at $12.9 billion, the deal, if materialized, could become Asia’s biggest buyout. While remaining hopeful on the buyout, we explore to see if the steep valuations will be able to hold should the deal fall through.
GLP derives its revenue from three main segments namely, operation, development, as well as fund management. Incorporating a range of strategies, the group owns and manages its own logistics facilities, while generating value though development activities. Also, the fund management platform allows the group to unlock the value of its properties so as to recycle its funds for future developments.
As at FY16, in terms of total area completed, GLP holds the top position in China, Japan and Brazil, while ranking second in the United States. To provide a clearer picture of GLP’s dominant position, the group’s total area completed in China stands at 14.9 million square metres overshadowing the second largest logistics facility provider at 1.9 million square metres. In addition, GLP has a development book of 11.7 million square metres, which will propel the group’s lead further once completed.
On the surface, GLP has shown a strong improvement in its financial performance over the past few years. Revenue and net profit grew steadily at a compounded annual growth rate of 8.2 percent and 7.4 percent respectively. However, reading between the lines of the group’s financial statements, we noticed that a significant portion of net profits were made up of positive changes in fair value of subsidiaries’ investment properties.
In GLP’s latest full year results, FY16, changes in fair value of subsidiaries’ investment properties stood at a whooping US$720.4 million, already exceeding the full year net profit.
Revaluation gains are common amongst companies which engage in the real estate business and are generally viewed positively as it increases the value of the company as a whole. However, it would paint a worrying picture should such gains make up the bulk of a company’s bottom line as it indicates the heavy reliance on the upward trend of logistics property prices.
Nonetheless, the group’s fund management segment boasts of much potential in the coming years. For FY16, GLP’s assets under management grew by an impressive 75 percent to US$35 billion, generating US$150 million of fund fees on US$24 billion of invested capital. Additional fees will be generated as the remaining US$11 billion is invested.
Apart from the e-commerce boom in China, the group’s success in the logistics industry can be attributed to its unrivalled size and network. With capabilities allowing customers to reduce transportation costs by approximately 20 percent, it is no surprise that the group has been able to retain 73 percent of customers while maintaining a strong lease ratio of 92 percent.
Briefly mentioned in the group’s earnings call for 3Q17, GLP seeks to provide financing to its customers. The move comes about as small and medium-sized customers in China face difficulty in obtaining financing due to the underdeveloped credit system.
In a typical scenario, customers would approach a financial institution for financing. However, interest rates charged by financial institutions could be higher depending on their individual creditworthiness as well as the types of equipment involved in the business. As such GLP seeks to finance its customers at a lower cost.
What are the benefits? While earning a spread, GLP also charges a deposit for such equipment to protect against any losses. In addition, should the customer’s business fail, GLP is able to lease the equipment to other customers as well. While such financing segment is not a main business of the group, it holds much intangible value by creating a win-win situation for both the business as well as its customers.
Following the recent surge in GLP’s share price, how do the group’s current valuations fare against its rivals?
Against global industrial real estate giant, Prologis, as well as Australia-based Goodman Group, GLP does not appear to be grossly overvalued. However, investors should exercise caution when trading on buyout rumors.