CapitaLand Retail China Trust - DBS Research 2016-04-14: Continues to deliver

CapitaLand Retail China Trust - DBS Research 2016-04-14: Continues to deliver CAPITALAND RETAIL CHINA TRUST AU8U.SI 

CapitaLand Retail China Trust - Continues to deliver 

  • 1Q16 DPU of 2.71 Scts (+2.7% y-o-y) in line with expectations. 
  • NPI for core multi-tenanted malls up 3.7% with reduced loses at Minzhongleyuan and Wuhu. 
  • Uptick in rental reversions from 5.9% in 4Q15 to 8.1% in 1Q16.

Over-reaction to China slowdown. 

  • CRCT has corrected since end-Jun-15 on the back of China growth fears. 
  • We believe this is an over-reaction as CRCT continues to perform, delivering positive DPU growth over the past few quarters. 
  • With CRCT trading at 0.8x book and offering attractive FY16-17F yields of 7.5%-7.7%, we maintain our BUY rating 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 is still able to deliver growth. For example, Grand Canyon (acquired in 2014) is generating an annualised NPI yield of only c.5.5% (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 and continued growth for CRCT’s multi-tenanted malls (3-year NPI CAGR of 3%), we expect to see a pick up in CRCT’s earnings in the medium term. 

Low gearing provides upside from acquisitions. 

  • CRCT’s gearing of only 28.7% (as at end Mar16) versus the new 45% limit imposed by MAS, places CRCT in a strong position to pursue DPU-accretive acquisitions. 

Valuation: 

  • With a potential 12-month total return of 25% (16% capital upside and 7.4% yield), we maintain BUY and TP of S$1.69. 
  • 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 CFA DBS Vickers | Derek Tan DBS Vickers | http://www.dbsvickers.com/ 2016-04-14
DBS Vickers SGX Stock Analyst Report BUY MAINTAIN BUY 1.69 Same 1.69


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