CapitaLand Retail China Trust - DBS Research 2016-07-28: Lost in translation

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CAPITALAND RETAIL CHINA TRUST AU8U.SI 

CapitaLand Retail China Trust - Lost in translation

• 2Q16 DPU of 2.61 Scts (-4.4% y-o-y) below expectations.
• Weaker RMB offset 3% NPI growth in CRCT’s core properties.
• Potential FX headwinds in 2H16 partially mitigated by the revival of Minzhongleyuan.

Currency an unfortunate hindrance. 

• We downgrade to HOLD from BUY with a lower TP of S$1.60. 
• While we remain positive on CRCT’s medium-term outlook, forecasting a 4% 3-year NPI CAGR in RMB terms, the recent depreciation of the CNY versus SGD might cap CRCT’s near-term performance. However, should there be any share price weakness we would use it as an opportunity to gain exposure to the growing Chinese consumption story.

Earnings still gestating. 

• The potential of CRCT’s malls have not been maximised as several properties are still ramping up or in a transition phase. These include 
  1. Grand Canyon (acquired in 2014) which is generating an annualised NPI yield of only c.5.4% (based on the original acquisition price) versus target range of 7-8%, and 
  2. Minzhongleyuan and Wuhu which are incurring losses due to nearby road closures and reposition works respectively. 
• Upon stabilisation of these properties and continued growth at CRCT’s other multi-tenanted malls, we project a 4% p.a. growth in NPI (in RMB terms) over the next three years.

Strong balance sheet provides upside from acquisitions. 

• CRCT’s gearing of only c.29% (as at end-June 2016) versus the new 45% limit imposed by MAS, places CRCT in a strong position to pursue DPU-accretive acquisitions. We understand price expectations from potential sellers are now lower which potentially opens up more opportunities for CRCT.

Valuation:

• After incorporating an expected depreciation of the CNY versus SGD (as per our DBS economists’ forecasts), we lowered our DCF-based TP to S$1.60 from S$1.69 previously.

Key Risks to Our View:

• Acquisitions. Upside will come from potential acquisitions that management is currently reviewing. We have not factored any acquisitions in our numbers at this point.

Mervin Song CFA DBS Vickers | Derek Tan DBS Vickers | http://www.dbsvickers.com/ 2016-07-28

DBS Vickers SGX Stock Analyst Report HOLD Downgrade BUY 1.60 Down 1.69