CapitaLand Retail China Trust - OCBC Investment 2016-10-26: Additional tax provision for BJ malls

CAPITALAND RETAIL CHINA TRUST AU8U.SI

CapitaLand Retail China Trust - Additional tax provision for BJ malls

CapitaLand Retail China Trust’s (CRCT) 3Q16 results were impacted by a stronger SGD against RMB as well as an additional tax provision for its Beijing assets.
3Q NPI in RMB terms was 0.6% higher YoY at RMB 161.3m while NPI in SGD terms fell 6.9% YoY to S$35.8m.
3Q DPU dropped 10.6% YoY to 2.36 S cents, or 21.6% of our initial FY16 forecast which we consider marginally below our expectations. Without additional tax provision, DPU would have made up 23.4% of our FY16 forecast.
9M DPU came up to 7.68 S cents, or 70.3% of our full-year forecast.

The average RMB to SGD conversion rate for the quarter was 4.92, vs 4.96 in 2Q16 and 4.62 in 1Q16.
Our model factors in Bloomberg median forecasts: an average rate of 1 SGD = 4.85 RMB for FY16, 4.96 RMB for FY17 and 5.02 RMB for FY18.
Do note that CRCT does not hedge its distributable income due to the high cost of hedging.

Going forward, we look to contributions from Chengdu, Galleria starting from 1 Oct 2016 as well as the recovery of rental income from Minzhongleyuan (MZLY) in FY17.
Zhongshan Avenue and Subway Line 6 are both expected to open on 28 Dec 2016.
Furthermore, we note that leasing momentum has picked up at MZLY, with committed occupancy increasing to 80.1% from 70.5% as at end 2Q16.
URWORK, a co-working space operator, forms the bulk of this increase in the committed occupancy and is targeted to open in Dec 2016.
Nonetheless, after accounting for the change in tax provision for Beijing malls (which is now a % of revenue, as opposed to a % of book value by Chinese accounting standards), our fair value drops from S$1.67 to S$1.60 as we update the parameters of our DDM model.
Using yesterday’s closing price of S$1.565, CRCT is trading at a blended FY16/17 distribution yield of 6.9%.
We downgrade CRCT from a Buy to a HOLD, with an updated fair value of S$1.60.

Deborah Ong OCBC Investment | http://www.ocbcresearch.com/ 2016-10-26

OCBC Investment SGX Stock Analyst Report HOLD Downgrade BUY 1.60 Down 1.670