CapitaLand Retail China Trust - DBS Research 2016-10-26: Circumstances beyond CRCT’s control

CapitaLand Retail China Trust - DBS Vickers 2016-10-26: Circumstances beyond CRCT’s control CAPITALAND RETAIL CHINA TRUST AU8U.SI

CapitaLand Retail China Trust - Circumstances beyond CRCT’s control

  • 3Q16 DPU of 2.36 Scts (-10.6% y-o-y) below expectations on weaker RMB and higher property taxes in Beijing.
  • Recent acquisition of Galleria mall from 4Q16 to partially mitigate near-term FX and tax headwinds.
  • Lower FY16-17F DPU by 3-5% on weaker-than-expected results.



Currency and higher property taxes an unfortunate hindrance.

  • We maintain our HOLD call with a revised TP of S$1.60. 
  • While we remain positive on CRCT’s medium-term outlook on the back of growing Chinese consumption and uplift from still gestating assets, the recent depreciation of the RMB vs. SGD as well as higher property taxes in Beijing which are out of management's control, might cap CRCT’s near-term performance. 
  • However, should there be any share price weakness, we recommend investors to increase exposure to CRCT, especially given rising acquisition opportunities in China.


Earnings still gestating. 

  • The potential of CRCT’s malls have not been maximised as several properties are still ramping up or in a transition phase. These include 
    1. Grand Canyon (acquired in 2014) which is generating an annualised NPI yield of only c.5.3% (based on the original acquisition price) vs. target range of 7-8%, 
    2. Minzhongleyuan and Wuhu which are incurring losses due to nearby road closures and reposition works respectively, and 
    3. the recently announced acquisition of Galleria mall whose margins are sub-optimal owing to previous management by third-party operators.


Upside from acquisitions. 

  • Post the acquisition of Galleria mall, CRCT’s gearing will stabilise around 37% but will still be below the 45% limit imposed by MAS. 
  • With some debt headroom, our understanding that price expectations from potential sellers are now lower and as some retail mall operators are looking to exit the sector given challengers in managing a retail asset, there may be increasing acquisition opportunities for CRCT.


Valuation

  • After assuming higher property taxes offset by better performance at Qibao and lower interest rates, we trimmed our FY16-17F DPU by 3-5%. 
  • We also lowered our DCF-based TP to S$1.60 from S$1.65 previously.


Key Risks to Our View

  • Acquisitions. Upside will come from potential acquisitions that management may be reviewing. We have not factored any additional acquisitions in our numbers at this point.




Mervin Song CFA DBS Vickers | Derek Tan DBS Vickers | http://www.dbsvickers.com/ 2016-10-26
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 1.60 Down 1.650



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