CapitaLand Retail China Trust - OCBC Investment 2016-08-22: Chengdu Mall acquisition

CapitaLand Retail China Trust - OCBC Investment 2016-08-22:  Chengdu Mall acquisition CAPITALAND RETAIL CHINA TRUST AU8U.SI

CapitaLand Retail China Trust - Chengdu Mall acquisition

  • Acquisition of potential core asset.
  • Trading at FY16/17 yield of 7.7%.
  • FV increases to S$1.67. 

Acquisition of Chengdu Mall 

  • The trustee of CapitaLand Retail China Trust (CRCT) has entered into a sale and purchase agreement to acquire what will be CRCT’s 11th mall, currently known as Galleria, Chengdu for RMB 1.5bn. 
  • The manager expects the acquisition to be DPU accretive, with about 2/3 of the mall’s total rent up for renewal by 2018. Including acquisition-related expenses, the total investment cost for the mall is expected to be about RMB 1,527m (S$310.4m), against which the current NPI yield is 5.4%. 
  • The transaction is expected to be completed by the end of the year and will enlarge CRCT’s portfolio size by about 14% to RMB 12,547m (S$2,550.3m). 
  • Post acquisition, CRCT’s gearing ratio is expected to increase to about 37%.

Strong operational fundamentals 

  • The management views the mall as a potential core asset, offering a steady contribution within the portfolio. 
  • The mall is located in the Xinnan Tiandi retail precinct of Gaoxin District in the south of Chengdu and enjoyed 100% occupancy as of 31 May 2016. While around 2/3 of the leases by gross rent are to expire by 2018, the management has emphasized that rental reversions will likely be muted. Instead, they will focus on improving the F&B tenant mix and reaping cost savings from the property management, which is currently outsourced to a third party. 
  • We note that its sponsor CapitaLand has five existing malls in Chengdu, which will give CRCT an opportunity to expand their footprint in the city going forward.

DPU-accretive, FV increases to S$1.67 

  • Assuming the acquisition is completed around Sept/Oct of this year and an all-in weighted cost of debt of ~3% for FY16, our FY16 DPU forecast increases from 10.7 to 10.9 S-cents while our FY17 DPU forecast increases from 10.9 to 12.0 S-cents. 
  • Our fair value increases from S$1.51 to S$1.67 as we update the parameters of our DDM model. 
  • Using last week’s closing price of S$1.60, CRCT is trading at a blended FY16/17 distribution yield of 7.7%. 
  • We upgrade CRCT to a BUY from Hold, with an updated fair value of S$1.67.

Deborah Ong OCBC Investment | http://www.ocbcresearch.com/ 2016-08-22
OCBC Investment SGX Stock Analyst Report BUY Upgrade HOLD 1.67 Up 1.510