CapitaLand Retail China Trust - OCBC Investment 2017-04-24: Catalysts In Progress

CAPITALAND RETAIL CHINA TRUST AU8U.SI

CapitaLand Retail China Trust - Catalysts In Progress

CapitaLand Retail China Trust's (CRCT) 1Q17 results came in at the lower range of our expectations due to higher than expected tax as a result of the inclusion of CapitaMall Xinnan.
DPU increased 1.1% YoY to 2.74 S cents, or 23.3% of our full-year forecast. Otherwise, indicators for CRCT’s operational performance were very encouraging.
Gross revenue in RMB terms improved 13.4% YoY to RMB 290.9m while gross revenue in SGD terms jumped 8.2% to S$60.1m, or 26.1% of our forecast. The RMB exchange rate of 1 RMB to 0.207 SGD used in 1Q17 was close to our FY17F exchange rate assumption of 1 RMB to 0.208 SGD.

In our last report, we mentioned two catalysts for positive DPU growth in FY17.
First, as with what we expected, MZLY is undergoing a strong turnaround, clocking 35.1% growth in rental reversions for 11.0% of the leases by NLA in 1Q17. As of 31 Mar 2017, 33.6% of the leases by NLA or 38.6% of leases by rental income are due for renewal; we expect similarly strong rental reversions for the rest of the year. Shopper traffic and sales at the mall have grown > 90% and > 60% YoY, respectively.
Second, CapitaMall Xinnan recorded a NPI margin of 72.7% in 1Q17, a strong improvement over the 52.4% margin recorded in 4Q17. We also note that the mall clocked a healthy rental reversion of 13.7% in 1Q17 for 4.7% of the leases by NLA.

Using Mapletree Greater China Commercial Trust (MGCCT) as an approximate benchmark, we have adjusted our beta for CRCT and our cost of equity decreases from 8.7% to 8.5%.
CRCT currently has a healthy gearing level of 36.4% as at 31 Mar 2017. After incorporating the 1Q17 results and making slight adjustments to our assumptions, our fair value increases slightly from S$1.56 to S$1.58.
We continue to see upside potential with MZLY and Xinnan. We maintain BUY on CRCT with a fair value of S$1.58.

Deborah Ong OCBC Investment | http://www.ocbcresearch.com/ 2017-04-24

OCBC Investment SGX Stock Analyst Report BUY Maintain BUY 1.580 Up 1.560