CapitaLand Retail China Trust - Phillip Securities 2016-04-14: MAS flattening of S$ band to offset weakening RMB pressure

CapitaLand Retail China Trust - Phillip Securities 2016-04-14: MAS flattening of S$ band to offset weakening RMB pressure CAPITALAND RETAIL CHINA TRUST AU8U.SI 

CapitaLand Retail China Trust - MAS flattening of S$ band to offset weakening RMB pressure 

  • CapitaLand Retail China Trust (CRCT)’s 1Q16 DPU came in at 2.71cents, up 2.7% yoy, mainly due to rental price growth. This is 25.6% of our previously forecasted FY16 DPU. 
  • 1Q16 rental reversions slowed to 7.3% from 8.1% in 2015. 
  • Shopper traffic dropped slightly, down 1.4% yoy but tenant sales edged up 1.1% yoy. 
  • Gearing remains low at 28.7% (one of the lowest amongst S-Reits) while average cost of debt is 3.04%. 

Retail sales growth is slowing 

  • China’s retail sales, which averaged a 10.5% yoy growth in 2015, increased 10.2% yoy for the Jan-Feb 2016 period, the slowest growth since December 2003. 
  • Tenant sales for CRCT’s malls in 1Q16 increased 1% yoy, (vs 14.3% yoy in 1Q15), in line with the slowing sentiment. 

RMB weakening since end 2015 but new MAS policy should lessen impact 

  • The RMB has been on a weakening trend vs the SGD, after the PBOC devalued the yuan by the most in two decades, last August. 
  • Nonetheless, MAS’s surprise move on 14-April-2016 to flatten the S$ band should lessen the impact of a weakening RMB. 
  • In our previous results note, we factored in flat returns in terms of RMB/SGD translation when RMB revenue is converted to SGD for distributions. We now adjust our forecasts and pencil in a RMB depreciation which will account for a 5% drop in distributions, in view of the weakness in RMB in recent months. 
  • CRCT does not have a RMB hedging policy for its dividend distributions. 

Low gearing provides ammunition for growth as well 

  • The benign interest rate environment has fuelled S-REITs prices by boosting the attractiveness of S-REITs as investment vehicles vs 10-year bonds which are seeing declining yields. 
  • Low interest rates also reduce financing costs for REITs and make it easier for REITs to make yield accretive acquisitions. 
  • While a lot of S-REITs have gradually leveraged up over the past few years, CRCT’s low gearing (relative to other S-REITs) of 28.7% as of end March 2016 gives it ample ammunition to make yield accretive acquisitions going forward. 

Investment Action 

  • In view of our adjusted forecasts for currency translation losses and with the recent price appreciation, we downgrade our call from BUY to ACCUMULATE with a reduced DDM-derived target price of S$1.55 (translates to FY16 yield of 6.5%) from S$1.68. 

Dehong Tan Phillip Securities | http://www.poems.com.sg/ 2016-04-14
Phillip Securities SGX Stock Analyst Report ACCUMULATE Downgrade BUY 1.55 Down 1.68