Phillip Securities Research 2015-07-30: CapitaLand Retail China Trust - 2Q15 Results: Portfolio tenant sales still going strong. Upgrade to BUY.

2Q15 Results: Portfolio tenant sales still going strong

Post 2Q15 results, we continue to view CapitaLand Retail China Trust as a good proxy for the secular growth in Chinese consumer spending power as China reshapes its economy to a consumption-driven one. We are encouraged by its consistent strong tenant sales growth and think the proactive leasing strategy of management is an important contributing factor to this.

  • Increase in gross revenue and DPU largely driven by strong performance in the multitenanted malls, CapitaMall Wangjing, Grand Canyon, Qibao, and Xizhimen 
  • Distributable income and DPU for 1H15 at 50.2% and 49.7% of our FY15 estimates 
  • 2Q and 1H2015 tenant sales grew 17.8% and 15.9% y/y respectively.

Highlights of CRCT’s results briefing: 

 Strong tenant sales to continue to drive rental reversions. 

  • Rental reversions slowed this quarter, partially distorted due to strategic initiatives to entice popular international retailers to certain malls (read more info in next bullet point). 
  • We note the strong 2Q tenant sales growth (17.8% y/y) despite relatively flat shopper traffic numbers (up 2% y/y). 
  • We think the proactive leasing initiatives of the manager in attracting the right and popular mix of tenants is an important contributing factor to the strong tenant sales CRCT has consistently displayed. 
  • The soaring Chinese stock market in 1H2015 could also have helped consumer spending. 
  • One likely big question on investors’ mind is how much of an impact could the current stock market turmoil have on retail spending. On that front, management guided that things are still pretty vibrant on the ground thus far. 
  • Latest figures in July also saw an increase in footfall. 
  • We think any weakness in the retail market currently due to the stock market fallout is likely to be transient and remain convinced of the long term growth potential of the Chinese consumer story. 

 Rental reversions negatively skewed by strategic decision to bring in leading fashion retailer – Portfolio rental reversion of 4.6% for 2Q15 is down from 12.8% from 1Q15. 

  • Average rental reversions for the past 14 quarters stand at 17%. 
  • Management made strategic decisions in the previous quarter to bring in leading fashion retailers Tommy Hilfiger and UNIQLO to CapitaMall Wangjing and CapitaMall Grand Canyon. 
  • This affected rental reversions at these two malls as lower rents were offered to these fashion giants as an incentive to sign up. 
  • Excluding the strategic initiatives to entice these international retailers, 1H2015 would have been 11.6%, instead of 7.8%. 

 Important to consider other positives from the entrance of leading fashion retailers, notwithstanding lower rental reversions this quarter. 

  • Notwithstanding the lower rental reversions due to these leading fashion retailers, higher sales figures from these retailers could see them contributing more on the turnover rent component. 
  • These big brands could also boost footfall in the malls. 

 RMB 2billion debt headroom for potential acquisitions. 

  • This debt headroom assumes a gearing ratio of ~37%. 
  • Ideally management would like to fund future acquisitions with a blend of debt and equity, if the market pricing is right. 
  • This would have the effect of improving the trading liquidity of the stock as well. 

 Supermarkets and Department Stores the two biggest laggards in tenant sales. 

  • Management guided that the above two tenant sectors were amongst the two most affected sectors in terms of tenant sales. 
  • These two sectors accounted for ~24% of total rental income for FY14. 
  • Other strong sectors include F&B and fashion which are still doing healthy ~10% year on year increases in tenant sales. 

 Flight to quality as number of mall operators and competition increase. 

  • Management shared that the increase in mall operators and non-conventional competitors such as e-commerce has intensified and changed the competitive landscape of the retail scene. 
  • A flight to quality mall operators is expected as weaker mall operators fall out. 

Investment Action: 

  • We maintain our TP of S1.90 but upgrade our call to “BUY” from “ACCUMULATE” on the back of recent weakness in the share price. 

(Dehong Tan)

Source: http://www.poems.com.sg/