DBS Group Research 2015-07-30: CapitaLand Retail China Trust - Take refuge here. Upgrade to BUY.

Take refuge here 

  • 2Q15 DPU of 2.73 Scts (+5% y-o-y) in line. 
  • Tailwind from healthy tenant sales and FX. 
  • Offers high DPU growth amid slowing Singapore-focused REITs. 
  • Upgrade to BUY, TP raised to S$1.80. 

2Q15 results in line. 

  • 2Q15 DPU came in at 2.73 Scts (+5% y-o-y) which was in line with our expectations. 
  • The results were driven by a 5% y-o-y increase in NPI to S$36m largely on the back of currency gains (avg. 2Q15 SGD/RMB exchange rate of 4.6 vs 2Q14 average of 4.9). 
  • NPI in RMB terms was down 1% due to lower contribution from Minzhongleyuan (impact of road closure), Wuhu (undergoing tenancy adjustments) and Saihan (impact of higher property taxes). 
  • However, we note that CRCT’s other stabilised multi-tenanted malls (Xizhimen, Wanjing, Grand Grand Canyon and Qibao) had a solid quarter, with NPI’s up 4-15%. 
  • In addition, as CRCT navigates the near-term challenges at some of its malls, we believe it should report stronger 2H results. 

Investing for future growth. 

  • CRCT made the strategic decision in 2Q15 to attract various popular international retailers such as UNIQLO. 
  • While 2Q15 rental reversions took a short-term hit, down to +4.6% y-o-y (+10.8% excluding this investment) versus 13-25% achieved over the last few six quarters, we expect this to lead to stronger foot traffic, tenants sales and healthy rental reversions in the medium term. 
  • To account for the short-term investment and potential impact from a slowdown of the Chinese economy, we trimmed our FY15-16F DPU by 3-7%. 

Upgrade to BUY. 

  • Amid the uncertainty in Singapore, with headwinds in various property sub-segments translating into DPU growth in the low single digits, we recommend investors to seek refuge in CRCT which offers one of the highest DPU CAGR of 6% and an attractive 6.5% yield. 
  • In addition, its low gearing of only 28% provides DPU upside from debt-funded acquisitions. 
  • Thus, we upgrade our recommendation to BUY from HOLD, with a revised DCF-based TP of S$1.80 (we roll forward to FY16). 
  • Our TP implies a P/BV of 1.1x, in line with its historical average.

(Mervin SONG CFA; Derek TAN)

Source: http://www.dbsvickers.com/