CapitaLand Retail China Trust - DBS Research 2017-04-24: Key Assets Performed Better Than Expected

CapitaLand Retail China Trust - DBS Vickers 2017-04-24: Key assets performed better than expected CAPITALAND RETAIL CHINA TRUST AU8U.SI

CapitaLand Retail China Trust - Key assets performed better than expected

  • 1Q17 NPI rose 15.1%, mainly contributed by Xinnan acquisition; DPU higher by 1.1%, exceeding our forecast.
  • Healthy reversion rate of 3.5% and high occupancy maintained at around 96%.
  • Raised FY17F DPU by 5% and TP by 5%; BUY.



TP raised to S$1.68. 

  • While CapitaLand Retail China Trust (CRCT) will face headwinds in the form of a weaker RMB exchange rate, higher property taxes in Beijing, and an increase in interest rates over the next few quarters, we believe these risks are largely priced in. 
  • The steady performance in 1Q17 leads us to believe that the market had underestimated the impact of positive rental reversions at key assets, namely Xizhimen and Wangjing, in the previous quarters. 
  • We have increased FY17F DPU from 10.1Scts to 10.6Scts, and raised our TP to S$1.68 from S$1.60.


Earnings still gestating. 

  • The potential of CRCT’s malls has not been maximised as several properties are still ramping up or are in a transition phase. These include 
    1. Grand Canyon (acquired in 2014) which is generating annualised net property income (NPI) yield of only c.5.3% (based on the original acquisition price) versus target of 7-8%, 
    2. Minzhongleyuan and Wuhu which are incurring losses due to road closures nearby 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 is around 37%, 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 increased FY17F DPU by 5% from 10.1Scts to 10.6Scts, and revised our DCF-based TP to S$1.68. 
  • At current levels, CRCT offers 11% capital upside and an attractive 7% yield.


Key Risks to Our View

  • Downside risk to our view would come from a significant depreciation of the RMB versus SGD, and downturn in Chinese consumption.




Singapore Research DBS Vickers | Mervin Song CFA DBS Vickers | Derek Tan DBS Vickers | http://www.dbsvickers.com/ 2017-04-24
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.680 Up 1.600



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