CapitaLand Retail China Trust - DBS Research 2016-02-04: Undervalued China consumption play

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CAPITALAND RETAIL CHINA TRUST AU8U.SI 

CapitaLand Retail China Trust CRCT - Undervalued China consumption play 

• 4Q15 DPU of 2.59 Scts (+4.4% y-o-y) in line 
• Strong performance considering short-term disruptions and one-off costs 
• Expect positive rental reversions despite headwinds from slowing Chinese economy 
• Maintain BUY, TP of S$1.69 

Results highlights – Boost from weaker SGD 

• 4Q15 DPU came in at 2.59 Scts (+4.4% y-o-y), taking FY15 to 10.60 Scts (+7.9% y-o-y), in line with our expectations. 
• The improved performance was driven by 5.2% increase in NPI to S$35.3m, underpinned mainly by a stronger RMB versus SGD. Short-term disruptions in 4Q15 
• On a normalised basis, excluding one-off costs at Anzhen Mall and disruption at Wanjing Mall, group NPI in RMB terms was up 1.8% y-o-y. 
• Headline NPI in RMB fell 1% on the back of: 
  1. Lower contributions from Mingzhongleyuan (- 9.8%) and Wuhu (-20.7%) which were impacted by previously guided road closures for the construction of a subway line and tenancy adjustments 
  2. Dip at Anzhen (-7.1%) due to one-off stamp duty paid for the amendment of lease agreements with Beijing Hualian Group 
  3. Declines in NPI at Grand Canyon (-6.7%) and Xizhimen (-4.2%) which were impacted by frictionary occupancies over the quarter and the fit-out period for new tenants 
  4. Drag from disruptions caused by upgrading of the exterior facade at Wanjing mall 
• However, the Qibao (+12.3%) and Saihan (+36.3%) properties did well over the quarter on the back of higher rents as the major benefits from the repositioning of the malls a few years back begin to flow through. 
• Overall portfolio occupancy remains healthy at 95.1% versus 94.8% in 3Q15. 
• Over 4Q15, rental reversions decelerated to 4.5% (5.5% excluding the impact from repositioning of Wuhu) versus 10.9% in 3Q15. 4Q15 tenant sales and foot traffic also slowed to +1% and 3.6% y-o-y respectively. The slowdown was mainly due to higher base effect following CRCT’s strong performance over the past few years. 

Low gearing 

• Gearing remains low, dipping to 27.7% from 28.5% at end-Sep-15 on the back of portfolio revaluation gains. NAV per unit now stands at S$1.77 with adjusted NAV per unit (net of distribution) at S$1.72. 
• Average cost of debt was stable at c.3% with 74% of borrowings on fixed rates.

Outlook – leveraged on China’s switch towards consumption-based economy 

• Investors are currently fearful of the slowdown in China’s GDP growth. However, we believe CRCT should remain well positioned as it should benefit from China’s move towards a consumption-based economy. This can be seen by retail sales for FY15 growing at 10.7%, faster than the overall GDP growth of 6.9%. 
• Going forward, we understand CRCT remains confident of generating positive rental reversions (in the single-digit range), although lower than the 15- 20% achieved over the past few years. The lower level of rental reversion is also due to CRCT making a strategic decision to attract certain tenants as part of its constant tenant remixing to sustain the performance of its malls in the long term. 
• Beyond changing its tenant mix, CRCT is also undertaking AEI works at Wangjing (upgrading to be completed in 1H16), Grand Canyon (upgrading of toilets to be completed by 3Q16) and Saihan (façade upgrading commencing 1Q16) which should strengthen the competitive positioning of the respective malls. 
• CRCT’s earnings have been negatively impacted by the road closures surrounding Minzhongleyuan over the past two years. As these works are scheduled to be completed by end-2016, we believe we are approaching an inflection point for the mall’s earnings. 

Maintain BUY, TP S$1.69 

• With 4Q15 results being in line with expectations, we maintain our BUY call and TP of S$1.69. 
• We continue to like CRCT for its attractive valuations. At current level, CRCT trades at 0.85x P/Bk and 7.5% yield. 
• In addition, with gearing at only 27.7% (among the lowest in the S-REIT space), we believe CRCT has significant financial flexibility to pursue DPU-accretive acquisitions.

Mervin Song CFA DBS Vickers | Derek Tan DBS Vickers | http://www.dbsvickers.com/ 2016-02-04

DBS Vickers SGX Stock Analyst Report BUY MAINTAIN BUY 1.69 Same 1.69