CAPITALAND RETAIL CHINA TRUST
AU8U.SI
CapitaLand Retail China Trust - ALLAYING GROWTH FEARS
Over-reaction to China slowdown vs a strong set of 3Q15 results.
- CRCT has corrected c.14% since end-Jun-15 on results the back of Chinese growth fears. We believe this is an over-reaction as CRCT has delivered another strong set of results with 3Q15 DPU rising 12.3% y-o-y to 2.64 Scts.
- In addition, during 3Q15, CRCT’s malls continue to deliver healthy tenants sales (+12.7%) and positive rental reversions (+8.9%).
- With CRCT trading at 0.9x book and offering an attractive FY15-17F DPU of 7.0-7.4% yield, we maintain our BUY recommendation and S$1.69 TP.
Investment opportunity during earnings lull.
- With several of CRCT’s malls still ramping up or in a transition phase, CRCT offers an opportunity to invest during an earnings lull before an uptick in growth. For example, Grand Canyon (acquired in 2014) is generating a 9M15 annualised NPI yield of only c.5% (based on the original acquisition price) versus target range of 7-8%.
- Meanwhile, Minzhongleyuan and Wuhu are incurring losses due to nearby road closures and reposition works respectively. Upon stabilisation of these three malls, we estimate 14% upside from our FY15F NPI. This is on top of the expected 4% CAGR in NPI for CRCT’s other multi-tenanted malls over the next three years.
- Additional upside to earnings could also come from the strengthening of the CNY.
Low gearing provides upside from acquisitions.
- CRCT’s gearing of only 28.5% (as at end Sep15) versus the new 45% limit imposed by MAS, places CRCT in a strong position to pursue DPU-accretive acquisitions.
Valuation:
- With a 19% 12-month total return (12% capital upside and 7.0% yield), we maintain BUY and TP of S$1.69.
- We expect the delivery of DPU growth in the coming year should allay investors' fears over possible negative rental reversions and trigger a re-rating from the current depressed levels.
Key Risks to Our View:
- Significant downturn in China. The key risk to our positive view is if China experiences a hard landing which would result in lower-than-expected or negative growth in retail sales. This in turn would translate into lower rents and DPU for CRCT.
Mervin Song
DBS Vickers
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Derek Tan
DBS Vickers
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http://www.dbsvickers.com/
2015-10-26
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SGX Stock
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