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

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

  • Trading at FY16/17 yield of 6.9%.
  • Expected recovery for MZLY.
  • FV drops to S$1.60.

3Q results hit by stronger SGD, Beijing tax provision 

  • 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.

Currency volatility an issue 

  • 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.

Chengdu mall contribution in 4Q16 

  • 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