CapitaLand Retail China Trust - Phillip Securities 2017-12-04: Capital Recycling Into Another Tier 1 City

CapitaLand Retail China Trust - Phillip Securities 2017-12-04: Capital Recycling Into Another Tier 1 City CAPITALAND RETAIL CHINA TRUST AU8U.SI

CapitaLand Retail China Trust - Capital Recycling Into Another Tier 1 City

  • CapitaLand Retail China Trust (CRCT) to jointly acquire Rock Square Mall in Guangzhou with CapitaLand for total purchase consideration of c.S$688.9mn.
  • Capital recycling after divestment of CapitaMall Anzhen for S$230mn in July this year.
  • Swapping Master Lease stability and higher yield for greater capital growth potential in another Tier 1 city.
  • Maintain NEUTRAL with adjusted target price of $1.66 after factoring in effects of acquisition and private placement.



What is the news?

  • CapitaLand Retail China Trust (CRCT) announced the joint acquisition of Rock Square in Guangzhou in a 51-49% JV with CapitaLand. This acquisition marks CRCT’s first strategic entry into another Tier 1 city in Guangzhou, after Beijing and Shanghai. 
  • Expected to be funded by debt/cash/private placement proceeds in the 50%/28%/22% ratio, acquisition will be DPU accretive with proforma FY16 DPU lifted by 1.1% to 10.16 cents after adjusting for acquisition. The transaction is expected to be completed by 1Q18.


How Do We View This?


NPI yield in line or slightly higher than recent market transaction. 

  • We estimate NPI yield on cost to be in the high 3+/4% region. We also note this is in line with HK-listed Link REIT’s recent purchase of the Metropolitan Plaza c.3km away from Rock Square in April this year, at an estimated 4% NPI yield. 
  • Land use rights for Rock Square expire in 2045, 3 years later than Metropolitan’s.

Swapping stability and higher yield for greater capital growth potential in a Tier 1 city.

  • Recall CapitaLand Retail China Trust (CRCT) recently divested CapitaMall Anzhen, which was on a Master Lease with a FY16 NPI yield of 6.7% for S$230mn. The recycled capital into Rock Square effectively means swapping a stable higher yield for greater capital appreciation potential in another Tier 1 city. 
  • We note valuations for CapitaMall Anzhen grew 17% post GFC from 2010-2016 vs the average 37% for commercial building prices in Guangzhou in the same period (Source: CEIC).

Accretive acquisition because of optimal financing structure 

  • Acquisition will grow pro-forma FY16 DPU by 1.1%. 
  • The funding structure utilising 50% debt and 28% internal cash was able to result in a low overall cost of capital for the acquisition, which we estimate could be 2.5-3%. Hence although the acquisition NPI yield is lower than the overall portfolio FY16 NPI yield of c.5.3%, the high usage of cheaper funding sources of debt and internal cash resulted in an accretive acquisition.

Room for yield to climb with average passing rent below current market price.

  • > 100 leases constituting 53% of total rent are up for renewal in 2018-2020. With average current passing rents below market spot rents, yield could be further enhanced over the next few years from positive rental reversions.


Maintain NEUTRAL with unchanged acquisition-adjusted target price of S$1.66.

  • This translates to a FY18e yield of 6.5% and P/NAV of 1.1. At a current yield of 6.0%, CRCT is trading at -1s.d. for post-GFC yields, which we deem fair given that tenant sales and rental reversions are stabilising around mid-single digits as malls mature. 
  • While the accretive acquisition lifted our FY18e DPU by 0.94%, we prefer to see a more sustainable pick-up in rental reversions or more accretive acquisitions before relooking at our recommendation.




Dehong Tan Phillip Securities | http://www.poems.com.sg/ 2017-12-04
Phillip Securities SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 1.66 Up 1.640



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