CapitaLand Retail China Trust - Overcorrected – Upgrade to BUY
- DPU growth catalysts - CapitaMall Minzhongleyuan (MZLY) and CapitaMall Xinnan.
- Current price levels attractive.
- Fair value of S$1.56.
FY16 results within expectations
- CapitaLand Retail China Trust's (CRCT) FY16 results were within expectations.
- DPU dropped 5.2% to 10.05 S cents, or 97% of our full-year forecast, mainly due to a weaker yuan and higher property tax provision for Beijing malls.
- Gross revenue in RMB terms improved 2.2% to RMB 1,027.5m while gross revenue in SGD terms dropped 2.7% to S$214.4m, or 102% of our forecast.
All eyes on CapitaMall Minzhongleyuan (MZLY) and CapitaMall Xinnan
- We believe CRCT has two catalysts for positive DPU growth in FY17.
- First, MZLY appears to be on the cusp of a turnaround with the reopening of Zhongshan Avenue and commencement of Metro Line 6 in Wuhan; the asset ended 2016 with an improved committed occupancy of 93.6%. Given that MZLY’s FY16 revenue is 25% of its FY12 levels of RMB 50.6m (FY12 NPI of RMB 26.5m), we believe our projections of NPI improvement – from a loss of RMB 9.0m in FY16 to a profit of RMB 14.8m in FY21 – are reasonable.
- Second, beyond the full-year contributions from Xinnan to be expected this year, NPI margins at the asset are also expected to increase as retail space efficiencies are improved. We estimate margins to grow from its current 53% to 65% in three years.
Yuan weakness is a risk, but share price seems to have over-corrected
- Yuan weakness is a risk to be watched – we have refreshed our RMBSGD assumptions with Bloomberg median forecasts and currently use a rate of 1 SGD = 4.88 RMB for FY17, 5.13 RMB for FY18 and 5.41 RMB for FY19.
- After increasing our risk-free rate from 2.4% to 2.7%, our cost of equity now comes up to 8.7%. After adjusting our projections for Xinnan and MZLY, as well as for Wuhu (which we expect to continue to be under stabilization), our fair value drops slightly from S$1.60 to S$1.56.
- CRCT currently trades at 8.3% FY17 forward yield.
- Having corrected 12% since its 3Q results were announced, CRCT’s price levels appear to offer good value given the DPU catalysts.
- We upgrade CRCT from a Hold to a BUY.