CapitaLand Retail China Trust (CRCT SP) - DBS Research 2017-07-28: 2Q Results In Line, MZLY Turnaround, Bye-bye Anzhen

CapitaLand Retail China Trust (CRCT SP) - DBS Vickers 2017-07-28: 2Q Results In Line, MZLY Turnaround, Bye-bye Anzhen CAPITALAND RETAIL CHINA TRUST AU8U.SI

CapitaLand Retail China Trust (CRCT SP) - 2Q Results In Line, MZLY Turnaround, Bye-bye Anzhen

  • CapitaLand Retail China Trust (CRCT SP) DPU 2.62 Scts, 0.4% higher y-o-y; in line.
  • Minzhongleyuan coming out of the woods.
  • Divestment of Anzhen at 13% higher than valuation – testament to the REIT’s premium to book.
  • Raise TP to S$1.70 after rolling earnings forward.

What’s New 

Topline mainly lifted by CapitaLand Xinnan acquisition (Sep 2016), DPU in line: 2Q17 gross revenue was RMB291.5m, 18.2% higher y-o-y and 0.2% higher q-o-q.

  • The on-year increase was mainly due to the new contribution from CapitaMall Xinnan which was acquired on 30 September 2016. This was partially offset by lower revenue, due to the implementation of China’s VAT reform on 1 May 2016 whereby 5% VAT was netted against gross revenue reported for 2Q17. 
  • NPI was RMB197.7m, up 16.3% y-o-y and 1.4% q-o-q. In SGD terms, gross revenue increased by S$7.5m or 14.5% to S$59.0m, and NPI increased by 12.6% to S$40.0m. The increases are lower than those in RMB terms due to the stronger SGD against RMB. 
  • DPU was 2.62 Scts, 0.4% higher y-o-y. 1H17 DPU accounts for 50.5% of our fullyear forecast; in line.

Mingzhongleyuan turning around: 

  • Stripping out CapitaLand Xinnan (acquired in September 2016), NPI in RMB terms increased by 3.3%, thanks to higher contributions from CapitaMall Wangjing (up 3.9%) and CapitaMall Grand Canyon (up 7.2%), and the turnaround at CapitaMall Minzhongleyuan (MZLY) (NPI turned from - RMB1.8m to RMB 2.5m). 
  • MZLY is gradually recovering from its weak performance in the last two years due to the road closure outside its entrance, with the reopening of UA cinemas on 9 June 2017 garnering a positive response and drawing more traffic. Nonetheless, the Management believes it will still take another two renewal cycles for rents to recover to pre-closure levels. 
  • On the bright side, high positive rental reversions are expected at MZLY for the next couple of years. The main drag to portfolio performance was CapitaMall Qibao (NPI down 7.6%) – near-term volatility of the mall is expected as its tenant mix is being changed to concentrate on children and education.

7% rental reversion with stable occupancy rate. 

  • The portfolio registered healthy reversion of 7.1% this quarter with 4.1% of portfolio NLA re-signed. The reversion was led by Xizhimen (11%), Xinnan (3.7%) and Saihan (10.7%). For the remaining FY17, 15.3% of gross rental income will be due for renewal, mainly concentrated at Xinzhimen, Wangjing, and Xinnan which we expect to bring single-digit positive reversions. 
  • Occupancy remains stable at 96.2%, flat from the last quarter. Shopper traffic (excluding three master-leased malls) was up 7.3% onyear, led by new asset CapitaLand Xinnan, excluding which, traffic decreased by 2.3%, mainly due to the decrease in transit commuters for Xinzhimen since the closure of the Beijing North Train Station in November 2016 to facilitate the construction of the BeijingZhangjiakou high-speed railway. We believe the traffic lost were not productive shoppers, given the gross revenue from Xizhimen was higher compared to 2Q16.
  • Tenant sales were up by 1.9% y-o-y, excluding Xinnan – which has a lower tenants’ sales psm than the portfolio average – where tenant sales were up by 4.3% y-o-y.

Divestment of CapitaLand Anzhen at 13% higher than latest valuation, exit yield c.6%: 

  • The REIT has entered into an agreement to divest of CapitaLand Anzhen to BHG, currently the master lessor of the mall, with target completion by end-2017. 
  • The realised value of divestment is RMB 1.13bn, 12.9% higher than the latest valuation of RMB 966m on 30 June 2017, and underpins our view that the book value of CRCT is cheap and the REIT deserves to trade at a premium. The exit yield is around 5.9% based on FY16 NPI of the mall and transaction price. 
  • We believe the divestment offers the REIT an opportunity to more efficiently deploy its capital as the upside from CapitaLand Anzhen will be limited due to the long master lease expiring only in 2025 and low annual step-up rent of 1.0%. CapitaLand Anzhen contributed to 8.3% of the portfolio NPI in 2Q17. 

Use of Anzhen divestment proceeds likely to fund future acquisitions. 

  • Net proceeds from the divestment would be RMB 888.5m (c.S$180.9m), after the deduction of all divestment-related fees and expenses. While the management did not stipulate the use of the proceeds, we believe it will most likely be retained to fund future acquisitions. 
  • The management has expressed interest to acquire assets with growth potential in tier-1/2 cities such as Guangzhou and Chengdu, and possibly gear up to 40%. In the unlikely scenario where the proceeds are used to repay debt, aggregate leverage will be decreased to c.31% from the current level of 35.3%.

Revaluation gain of 0.7% in RMB terms. 

  • CRCT’s properties were revalued on 30 June 2017, with a revaluation gain of 0.7% in RMB terms. Most properties were valued slightly higher with the exception of a 3.4% revaluation loss on Wuhu, the smallest asset in the portfolio.

Revamping CapitaWangjing. 

  • Non-anchor area will be increased from c.50% to c.60% by converting level 4 BHG department store to specialty retail space. The new specialty area is expected to contribute progressively from 2Q18. 
  • BHG is also revamping the existing department store on level 1-3 to target higher-end consumers.


  • We have raised our TP slightly by 1.2% from S$1.68 to S$1.70 after rolling our earnings forward for one year.
  • We have removed earnings contributions from CapitaMall Anzhen and left the sales proceeds in cash without repaying debt, as it is likely to be deployed for the next acquisition. Our TP offers 4.3% potential upside, FY17F DPU has a forward yield of 6.5%, leading to the total potential return of c.11%. Maintain BUY.
  • As we have not incorporated potential acquisitions in our model, DPU from FY18F onwards will drop around 10- 11% due to the removal of CapitaLand Anzhen. We believe the loss in income will be replenished soon from future acquisitions. Therefore, our DPU forecast for FY18F onwards are currently on the conservative side.

Singapore Research DBS Vickers | Derek Tan DBS Vickers | Mervin Song CFA DBS Vickers | http://www.dbsvickers.com/ 2017-07-28
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.70 Up 1.680