Company Reports

We trimmed our fair value estimate of ESR Group to HKD 15.80 per share from HKD 17.80 after lowering our growth assumptions and factoring in the divestment of its ARA private funds business in Australia, Singapore, South Korea, and the US. The group’s 2023 net profit was below our expectation, falling 59.8% year on year to USD 231 million due to higher finance costs and share of losses from its associate, Cromwell Property Group, that recorded fair value losses on its investment properties. We lowered our fair value gain and gain on disposal assumptions for the group’s capital recycling, as we expect pressure on real estate valuations to persist in the near to medium term. Consequently, our earnings per share, or EPS, estimate for fiscal 2024-26 was reduced by 14%-24%.

ESR Group is one of the leading logistics real estate investment and asset managers in the Asia-Pacific, with total assets under management, or AUM, of USD 156 billion. At the core of ESR’s business model is its highly scalable, fully integrated real estate investment platform that begins from sourcing land for development to design, to the construction and then the leasing up of the property. Once the property is leased up and stabilized, the group will look to realize development profits by divesting the asset and recycling capital into future projects.

We cut ESR Group’s fair value estimate to HKD 17.80 from HKD 19.50 after factoring in the challenging market environment due to high interest rates and a weak Chinese economy. We think narrow-moat ESR Group remains undervalued, but we believe near-term share price performance will be capped by low market sentiment. According to data from PitchBook, real estate fundraising fell 63% year on year in 2023 as higher interest rates dampened fundraising and deal activities. While we had previously expected the group’s assets under management to grow by 8% and 10% in fiscal 2023 and fiscal 2024, respectively, we have now moderated our assumptions to 5% in fiscal 2023 and 8% in fiscal 2024. Aside from Japan, which is still seeing positive yield spreads, we expect the group to continue facing headwinds in raising real estate funds in other regions. The group may also find it difficult to deploy the capital it has raised due to higher hurdle rates. In addition, we forecast a lower contribution from the group’s investment properties in China, judging from the poorer performances of other listed peers with industrial properties in China. We expect rental reversions in China to be under pressure on the back of weaker demand for industrial and logistics spaces as business sentiment remains poor. We believe the group may see some pressure on the fiscal end-2023 valuation of its properties with cap rates rising in Australia and South Korea. This also hits our capital recycling assumption as the value that could be unlocked and redeployed will be lower. Overall, we lower our EPS estimates for 2023, 2024, and 2025 by 24%, 13%, and 6% respectively.

ESR Group is one of the leading logistics real estate investment and asset managers in the Asia-Pacific, with total assets under management, or AUM, of USD 145 billion. At the core of ESR’s business model is its highly scalable, fully integrated real estate investment platform that begins from sourcing land for development to design, to the construction and then the leasing up of the property. Once the property is leased up and stabilized, the group will look to realize development profits by divesting the asset and recycling capital into future projects.

We lower ESR Group’s fair value estimate to HKD 19.50 from HKD 24.50 after its disappointing first-half 2023 results. Revenue increased 5.5% year on year to USD 455 million but net profit fell 24.1% to USD 289 million, making up only 37% and 42% of our full-year estimates, respectively. The weakness was due to the absence of fair value gains on its completed investment properties, lower gains on disposal, and a drop in dividend income received. We have included uncalled capital in our assets under management, or AUM, assumptions as we previously expected that the capital would be deployed in the immediate 12 months and generate fee income for the group. However, given the slow capital deployment due to macroeconomic uncertainties, we lowered our fee income as a percentage of AUM assumptions, to factor in a slightly higher ratio of non-fee-earning AUM. We also reduced our forecast AUM growth rates for 2023 and 2024 to reflect the elevated interest-rate environment that has negatively affected the group’s fundraising and deployment activity. As a result, our net profit estimates decreased by 25%, 19%, and 15% respectively for 2023, 2024, and 2025. Despite that, we continue to see the group as undervalued, as it trades at 0.6 times our fair value estimate. We think the group is well-positioned to benefit from a recovery in the real estate transaction market when the interest rate pivots. The firm has dry powder of USD 19.3 billion that we think can be deployed toward the end of 2024 .

ESR Group, or ESR, is one of the leading logistics real estate investment and asset managers in the Asia-Pacific, with total assets under management, or AUM, of USD 145 billion. At the core of ESR’s business model is its highly scalable, fully integrated real estate investment platform that begins from sourcing land for development to design, to the construction and then the leasing up of the property. Once the property is leased up and stabilized, the group will look to realize development profits by divesting the asset and recycling capital into future projects.

Sabana REIT’s unitholders have voted to remove ESR Group as its manager and internalize the REIT manager. Overall, we think the financial impact is low as we estimate the loss of annual fee income from Sabana REIT is immaterial, making up less than 1% of ESR Group’s 2022 revenue. Hence, our fair value estimate of HKD 24.50 is unchanged. We think the group is currently undervalued and we like its highly scalable and fully integrated real estate investment platform. We think that the likelihood of the other REITs, managed by ESR Group, calling for a similar vote and succeeding is currently low as the perceived conflict of interest no longer stands now that Sabana REIT has removed ESR Group as the REIT manager. However, we think there are bigger questions for ESR Group about a review of its REIT management strategy and whether it needs to increase holdings of the REITs it manages to protect its right to continue managing the REIT.

ESR Group’s 2022 profit of USD 574 million disappointed with currency headwinds shaving 14% off earnings. Our main concern for ESR is that the value of its assets under management, or AUM, have declined and growth is likely slower for the next year with our base-case view now looking for interest rates to remain high through much of 2023.

ESR Group, or ESR, is one of the leading logistics real estate investment and asset managers in the Asia-Pacific, with total assets under management, or AUM, of USD 145 billion. At the core of ESR’s business model is its highly scalable, fully integrated real estate investment platform that begins from sourcing land for development to design, to the construction and then the leasing up of the property. Once the property is leased up and stabilized, the group will look to realize development profits by divesting the asset and recycling capital into future projects.

ESR Group, or ESR, is one of the leading logistics real estate investment and asset managers in the Asia-Pacific, with total assets under management, or AUM, of USD 138 billion. At the core of ESR’s business model is its highly scalable, fully integrated real estate investment platform that begins from sourcing land for development to design, to the construction and then the leasing up of the property. Once the property is leased up and stabilized, the group will look to realize development profits by divesting the asset and recycling capital into future projects.

We are initiating coverage on ESR Group, or ESR, with a fair value estimate of HKD 28.50 per share, narrow moat, stable moat trend and Standard capital allocation ratings. Our fair value estimate translates to a 2022 price/earnings multiple of 20.3 times. We think the group is undervalued at the current price and we like its highly scalable fund management business and fully integrated real estate investment platform. Together, these allow the group to retain long-term operational control of its assets while capturing fee income—such as base management fees, asset management fees, development fees, leasing fees, acquisition fees and performance fees—across the entire life cycle of an asset.

ESR Group, or ESR, is one of the leading logistics real estate investment and asset managers in the Asia-Pacific, with total assets under management, or AUM, of USD 138 billion. At the core of ESR’s business model is its highly scalable, fully integrated real estate investment platform that begins from sourcing land for development to design, to the construction and then the leasing up of the property. Once the property is leased up and stabilized, the group will look to realize development profits by divesting the asset and recycling capital into future projects.