Mapletree Greater China Commercial Trust - DBS Research 2016-03-03: Reiterates positive outlook

Mapletree Greater China Commercial Trust - DBS Research 2016-03-03: Reiterates positive outlook MAPLETREE GREATER CHINACOMM TR RW06.SI 

Mapletree Greater China Commercial Trust - Reiterates positive outlook 

  • Management highlights Festival Walk’s resiliency during its recent NDR 
  • Further growth to be driven by Sandhill Plaza, as rents are below market rates 
  • On the look out for acquisitions; focusing on decentralisation trend 
  • Maintain BUY, TP S$1.11 

What’s new 

We recently hosted MAGIC on a NDR in Kuala Lumpur, Malaysia. The key highlights from the meetings are : 

Allays fears over potential impact of HK slowdown on Festival Walk 

  • A key concern raised by investors was the potential impact of the slowdown in the HK retail market on Festival Walk’s rents. 
  • Management reiterated Festival Walk has demonstrated resiliency and fell only during SARS and GFC. 
  • One of the reasons why retail sales have been weak in HK is due to the decline in spending from Chinese tourists. However, Festival Walk has low exposure to tourists. Only 15-18% of tenant sales are driven by tourists, of which 70% is made up of Chinese visitors. Moreover, rents at Festival Walk are predominantly fixed, with the GTO (Gross Turnover) component representing only 5% of MAGIC’s overall group revenues. 
  • Risk to rents is also mitigated by the fact that occupancy cost for the mall stands at c.17%, which is towards the bottom end of the 16-22% range for other malls in HK. Furthermore, passing rents at Festival Walk of c.HKS$133 per sqft per month, is below the HK$160-165 level for other prime malls in HK, which presents an opportunity to raise rents over time. 
  • In addition, Festival Walk continues to see strong demand from potential tenants with very few existing tenants intending to leave the mall. This bodes well for asking rents going forward. 
  • Management highlighted that while tenant sales were down by 1.5% for 9M15(FYE Mar), this was due to the high base effect and in fact outperformed the c.3% fall in overall HK sales. Sales at Festival Walk last year were boosted as customers generally avoided central Hong Kong due to the street protests and shopped and ate at Festival Walk instead. Stripping this out, MAGIC estimates that tenant sales would have been slightly up anyway. 
  • Based on discussions with its tenants, MAGIC believes the threat from e-commerce is low. This is because online stores thus far have not cannibalised sales but rather have driven customers to the physical stores. 
  • Given the above factors, while MAGIC expects rental reversions to moderate from above 20%, it remains confident Festival Walk will continue to deliver steady growth ahead. 

Gateway Plaza seeing demand from local Chinese and pharmaceutical/biomedical companies 

  • MAGIC noted that MNCs and companies in the construction industry were generally cautious about expanding. This has impacted demand from such companies. 
  • Nevertheless, it continues to see healthy demand enquiries from local Chinese and pharmaceutical/biomedical companies, which would offset any potential weakness from MNCs. 
  • In terms of the growth outlook for Gateway Plaza, rental reversions should moderate going forward as passing rents (RMB318 psm per month) are approaching market rents (RMB320- 350 psm per month). However, MAGIC expects the property’s contribution should remain steady going forward. 

Sandhill Plaza’s rents are below market rates. 

  • Post the acquisition of Sandhill Plaza, MAGIC has been able to drive occupancies from 98.5% to 100%. 
  • Thus, the key driver for the property going forward is raising rents toward market rates. The current passing rent is c.RMB4.80 psm per day, which is below the RMB5-6 psm per day achieved for comparable properties nearby. 

Targeting decentralisation plays 

  • In reference to questions about potential acquisitions, MAGIC reiterated its preference for decentralisation plays i.e. specifically the shift of offices out of the CBD. 
  • On that front, MAGIC would be interested in two properties owned by its Sponsor. The first is a business park in Zhongguancun, Beijing and a Grade A office currently under construction in Kowloon East, Hong Kong. MAGIC has the first right of refusal over these two properties. 

Current gearing level is comfortable 

  • Some investors asked about MAGIC’s gearing, which currently stands at c.41%. Management reiterated that it remains comfortable with a gearing of 40-45%. 

Maintain BUY, TP S$1.11 

  • With MAGIC delivering among the highest y-o-y increase in DPU (+12% y-o-y) in the recent reporting season and management reiterating Festival Walk’s positive attributes during the recent NDR in KL, we believe the fears over a slowing HK retail market potentially leading to negative rental reversions in the near term have been overplayed. Thus, we reiterate our BUY call and TP of S$1.11, given attractive valuations. 
  • After the recent share price correction, MAGIC trades at 0.8x P/B (NAV per share of S$1.167) and offers a prospective 7.7% FY16F yield.

Mervin Song DBS Vickers | Derek Tan DBS Vickers | http://www.dbsvickers.com/ 2016-03-03
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.11 Same 1.11