A good understanding of a company’s competitive strengths and weaknesses is important for an investor to grasp, keeping in mind that a business that has lots of strengths may just turn out to be a good investing opportunity. To assess a company’s competitive strengths and weaknesses, we can turn to Porter’s Five Forces, a framework created by Harvard professor Michael E. Porter that is also widely used by management to assess the risks their businesses are facing. Porter’s Five Forces looks at five different aspects of a business: Competition in the industry Threat of new entrants into the industry Power…
A good understanding of a company’s competitive strengths and weaknesses is important for an investor to grasp, keeping in mind that a business that has lots of strengths may just turn out to be a good investing opportunity.
To assess a company’s competitive strengths and weaknesses, we can turn to Porter’s Five Forces, a framework created by Harvard professor Michael E. Porter that is also widely used by management to assess the risks their businesses are facing.
Porter’s Five Forces looks at five different aspects of a business:
- Competition in the industry
- Threat of new entrants into the industry
- Power of suppliers
- Power of customers
- Threat of substitute products
So with these in mind, let’s run through the framework with Ascendas Real Estate Investment Trust (SGX: A17U).
Competition in the industry
Ascendas REIT owns industrial properties and business parks and is one of the largest REITs of its kind listed in Singapore. As of its latest quarter, the trust owns and manages 104 properties in Singapore and 2 business parks in China.
But, despite its size, the REIT is actually competing for rental business with all the industrial properties in Singapore as well as other neighbouring countries. Thus, the level of competition in Ascendas REIT’s space can be considered to be very high.
Threat of new entrants into the industry
Similarly, because the industry is so fragmented, there is really no stopping anyone with access to capital to purchase or develop an industrial property and start competing directly with Ascendas REIT for tenants.
Power of suppliers
In Ascendas REIT’s case, there are three main groups, in no particular order, which can be considered as critical suppliers.
The first is the land owners which supply the land on which new industrial properties can be developed on. The second would be the owners of industrial properties who will supply Ascendas REIT with more real estate. The third group consists of the owners of capital (like the REIT’s unitholders and creditors) who provide Ascendas REIT with the funds it needs to either develop or acquire new properties.
It seems that Ascendas REIT does wield some power over its suppliers on all three fronts. That’s because the interests of all three groups are well-aligned with that of Ascendas REIT.
The REIT’s largest unitholder, the Ascendas Group, is part of the JTC Corporation. The JTC Corporation in turn, is the largest supplier of real estate, land, and capital for the REIT. Given such a dynamic, it’s easy to see how the interests of both parties (Ascendas REIT and JTC Corporation) are well-aligned.
Power of customers
Ascendas REIT has nearly 1,400 different tenants across its entire property portfolio. In its financial year ended 31 March 2014, its top 10 tenants only accounted for 19.7% of its gross rental income.
With such a diversified tenant base, it would appear that Ascendas REIT is in a strong bargaining position with its customers. This is especially so when considering that the switching costs of moving for the tenants can be quite high at times.
But that said, it’s worth pointing out that around 11.3% of Ascendas REIT’s tenants are from the Information Technology sector. This might create some concentration risks for the REIT should there be a downturn in the IT sector.
Threat of substitute products
Ascendas REIT provides the most basic of needs for a business – a venue. With companies that require manufacturing facilities or a place to store inventory, there is hardly any alternative besides industrial properties. Therefore, Ascendas REIT might be quite protected in this sense.
Though, it should also be noted that prospective tenants have the option of choosing other industrial property providers besides Ascendas REIT.
So there you have it, my quick and dirty analysis of Ascendas REIT’s competitive strengths and weaknesses using the Porter’s Five Forces framework.
For more investing analyses and important updates about the financial and stock markets, sign up for The Motley Fool Singapore's free weekly investing newsletter, Take Stock Singapore. Written by David Kuo, it can help you grow your wealth in the years ahead.
Like us on Facebook to follow our latest hot articles.
The Motley Fool's purpose is to help the world invest, better.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim does not own any companies mentioned.