CapitaLand Retail China Trust - OCBC Investment 2016-06-17: CRCT’s 1Q results were in line with industry

CapitaLand Retail China Trust - OCBC Investment 2016-06-17: CRCT’s 1Q results were in line with industry CAPITALAND RETAIL CHINA TRUST AU8U.SI 

CapitaLand Retail China Trust: Pared down forecasts

  • Upcoming BJ retail supply
  • Retail sales up 10.2% YTD
  • Lowered FV; maintain HOLD

CRCT’s 1Q results were in line with industry

  • Out of CRCT’s portfolio of ten malls, five are located in Beijing, and the remaining five are each located in Shanghai, Wuhan, Zhengzhou, Hohhot, and Wuhu. 
  • According to Savills Beijing Spring Retail Briefing, retail sales in Beijing increased 1.0% YoY to RMB161.7 in the first two months of 2016, 6.8 ppt lower relative to the growth of the same period last year. 
  • Mall occupancy rates decreased 0.3 ppt to 94.5% city-wide by the end of 1Q16. This is in line with what CRCT reported for 1Q16: tenants’ sales had clocked a mild growth of 1.0% YoY, shopper traffic fell 1.4% YoY, while overall portfolio committed occupancy fell 0.5ppt QoQ to 94.6%. 
  • According to Savills, Beijing’s prime locations experienced the weakest performance, down 1 ppt to 94.2% for the quarter, mainly due to ongoing branding readjustment strategies being undertaken by several projects.

Beijing retail market to see 5.6% supply injection

  • According to Savills, the remainder of 2016 will see an influx of supply in the Beijing market, with the scheduled launch of eight more mid- to high-end shopping malls adding approx. 590,000 sq m, of retail GFA or a 5.6% increase over the current stock of 10.47m sq m. 
  • During the quarter, only one new project entered the retail market, BHG Shopping Mall in the Pinggu district, adding 59,000 sq m of retail GFA to the market.

Pared down growth forecasts

  • According to the National Bureau of Statistics, China’s retail sales grew 10.0% YoY in May (versus 10.1% in April) and were up 10.2% YoY YTD. 
  • Nonetheless, we judge the general retail market to be weak within Beijing where half of CRCT’s assets are located. 
  • Consequently, we have pared down our assumptions for rental reversions and occupancy. For 1Q16, portfolio rental reversions came in at 7.3% in 1Q16 (8.1% excluding Wuhu), slightly lower than FY15’s 8.1%. 
  • We note that for the rest of 2016, MZLY has 33.0% of its leases (as a percentage of the mall’s rental income) expiring while Wuhu has 19.4%; this may continue to exert a drag on CRCT’s rental reversions for FY16. 
  • Our FY16 DPU forecast drops from 11.1 S-cents to 10.9 S-cents. 
  • Our fair value estimate lowers from S$1.48 to S$1.43 as we update our assumptions for rental reversions and expected market return. 
  • Maintain HOLD. 

Deborah Ong OCBC Investment | http://www.ocbcresearch.com/ 2016-06-17
OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 1.43 Down 1.48