CapitaLand Retail China Trust - DBS Research 2016-12-01: Down but not out

CapitaLand Retail China Trust - DBS Vickers 2016-12-01: Down but not out CAPITALAND RETAIL CHINA TRUST AU8U.SI

CapitaLand Retail China Trust - Down but not out

  • Past sell downs were opportunities to buy and is no different this time.
  • Undervalued with yields at +1 SD and already pricing in a rise in 10-year bonds yields to 3%.
  • Attractive 7.5-7.7% yield and trading at a discount to book.


Yields at +1 SD of mean; already pricing in a rise in 10-year bond yields rise to 3%. 

  • Following the recent share price correction, we upgrade our recommendation on CapitaLand Retail China Trust (CRCT) from HOLD to BUY with an unchanged TP of S$1.60. 
  • While CRCT will face headwinds in the form of a weaker average RMB exchange rate, impact from higher property taxes in Beijing and an increase in interest rates over the next few quarters, we believe these risks have largely been priced in. 
  • At current levels, CRCT trades on a yield of 7.5- 7.7%, which is +1 SD above its average yield of 7.4% and already accounts for the risk of the 10-year SGD bond yield rising to 3% (versus spot rate of 2.3%); CRCT is trading at a yield spread of 4.5-4.7% (assuming 10-year bond yield of 3%) compared to its average yield spread of 4.6% since 2010.


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 net property income (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 repositioning 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 at around 37% but will still be below the 45% limit imposed by MAS. CRCT has some debt headroom to leverage on increasing acquisition opportunities.
  • Our understanding is that price expectations from potential sellers are now lower and some retail mall operators are looking to exit the sector given challengers in managing a retail asset.


Valuation

  • We maintain our DCF-based TP of S$1.60. 
  • At current levels, CRCT offers 17% capital upside and an attractive 7.5% yield.


Key Risks to Our View

  • Downside risk to our view would result from a significant depreciation of the RMB versus SGD and downturn in Chinese consumption which will negatively affect tenant sales and rents at CRCT’s malls.




Mervin Song CFA DBS Vickers | Derek Tan DBS Vickers | http://www.dbsvickers.com/ 2016-12-01
DBS Vickers SGX Stock Analyst Report BUY Upgrade HOLD 1.600 Same 1.600






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