CapitaLand Retail China Trust - Phillip Securities 2015-10-26: Sentiment little impacted by stock market rout

CapitaLand Retail China Trust - Phillip Securities 2015-10-26: Sentiment little impacted by stock market rout CAPITALAND RETAIL CHINA TRUST AU8U.SI 

CapitaLand Retail China Trust - Sentiment little impacted by stock market rout

  • CapitaLand Retail China Trust (CRCT) reported its 3Q 2015 results last Friday evening. 
  • Helped by the strong RMB against SGD, CRCT registered strong growth across most metrics. 
  • Despite concerns on retail sentiment with the Chinese stock market rout, tenant sales remained strong with a 12.7% y/y and 1.3% q/q growth. 
  • Shopper traffic registered a 2.4% y/y and 6.5% q/q growth. 

Some key points: 

 June-August stock market rout - Consumers don’t seem to bother. 

  • Despite concerns on the impact of the Chinese market crash starting June this year, retail sentiment remained strong on the ground. 3Q tenant sales grew 1.3% q/q and 12.7% y/y. Shopper traffic also grew 2.4% y/y and 6.5% q/q, reflecting strong sentiment on the ground despite lacklustre stock market performance after 2Q15. China’s September retail sales registered a 10.8% y/y growth, the highest y/y growth this year, not including the volatile Chinese New Year effect in Jan-Feb. 

 Healthy occupancy except for malls under stabilization. 

  • The 3 multi-tenanted malls in Beijing, which takes up c.63% of CRCT’s portfolio (by valuation) continue to see healthy near-full occupancy. CapitaMall Minzhong Leyuan and CapitaMall Wuhu remain the malls under stabilization, impacted by road closure for subway line construction and ongoing tenancy adjustments respectively. The former should see improvements in performance in 2H16 when the new subway line becomes operational, while tenancy adjustments for the latter will likely take until end 2015. These two malls under stabilization take up around 7% of CRCT’s portfolio by valuation. 

 Renewals in stabilizing malls in 4Q15 likely to be a drag on rental reversions. 

  • 12.5% of NLA for CapitaMall Minzhongleyuan still remains up for renewal for FY15. With the subway line construction not expected to end until end 2016, rental reversions should continue to be weak. This could be a temporary drag on reversion levels in 4Q. 

 Stable cost of borrowing, with healthy debt headroom. 

  • Cost of borrowing remained stable at 2.98% with c.84.7% of debt hedged on fixed interest rates (excluding RMB denominated loans) 

Investment Actions 

  • We maintain our BUY call with an unchanged DDM-derived target price of S$1.90. 
  • Results were broadly in line with expectations. CRCT is currently trading at an annualised yield of c.6.58%, which offers an attractive spread vs the Singapore 10-year government bond yield of 2.5% and China’s at 3.3%. 
  • We remain optimistic on the Chinese consumer strength on the back of rising middle class income and rapid urbanization.

Dehong Tan Phillip Securities | http://www.poems.com.sg/ 2015-10-26
Phillip Securities SGX Stock Analyst Report BUY Maintain BUY 1.90 Same 1.90