Global Logistic Properties - Strong development profit and fee income

Results in line, accounting for 25% of our FY17 core net profit 
1Q17 revenue rose 9% yoy to US$207m, net profit fell 24% yoy to US$203m on lower revaluation surplus, forex impact, partly offset by better operating results. Excluding revaluations, bottomline of US$69m, +23% yoy, is in line with our expectations. Although portfolio occupancy fell on slower leasing in China and Brazil, same-store NOI and rent growth rose c.8% and 9.6% on higher leasing demand of 2.5m sq m. There was higher development profit of US$65m, largely from Japan and increased fee income. 
 
Strong performance from Japan and the US 
Japan and the US performed strongly with rent growth of 2.1%/20.7% while occupancy was high at 94-99%. There was added operating and fee income from its share of GLP US Income Partners II. Given the strong sector fundamentals in the US, we expect the strong performance to continue. In Japan, it has achieved 16%/58% of its development starts and completions and this will underpin rental and development income. 
 
China faces some near term headwinds 
New and renewed leases in China totalled 0.92m sq m in 1Q with a 60% retention ratio. Domestic consumption remains the key driver of demand. However, occupancy dipped to 86% on slower leasing volumes. This was offset by effective rent growth of 6.2%, with stronger performance in Tier 1 cities. On outlook, there continues to be short term oversupply in Tier 2 cities with drags on rents and occupancy. Management expects this to be digested over the next 12-18 months.   
 
Expanding fee income platform 
Fee income rose 17% yoy to US$42m, on higher asset and property management fees, led by higher AUM of US$36.5m. With an additional US$12bn of uncalled capital, we expect recurrent fee income to continue expanding as this capital is deployed. It is also looking at setting up a China income fund.   
 
Strong balance sheet 
Balance sheet is healthy with look-through net debt to asset ratio of 0.28x. To date, GLP has commenced 20% of its US$2.1bn of development starts and completed 18% of its targeted completion of US$1.5bn. This funding headroom provides the group with deep capacity for development activities as well as to evaluate potential new acquisition opportunities such as in the US. 
 
Maintain Add 
We tweak our FY17-19 estimates for the latest results and leave our RNAV-backed target price of S$2.72 unchanged. Given its position as a market leader in China, vast landbank, strong execution track record and expanding fund management platform, we believe GLP will continue to create value and earnings growth. Key catalysts are acceleration in fund management activity and improved rental outlook. Risk to call includes slower than expected China market.