CapitaLand Retail China Trust - DBS Research 2017-10-24: On The Verge Of A New Acquisition

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CAPITALAND RETAIL CHINA TRUST AU8U.SI

CapitaLand Retail China Trust - On The Verge Of A New Acquisition

• CapitaLand Retail China Trust (CRCT)'s 3Q17 DPU was 2.37 Scts, flat y-o-y as stronger operations offset by one-off higher taxes. 
• CapitaLand Retail China Trust (CRCT) deserves to trade at premium to NAV given its high-quality assets, and good earnings delivery. 
• Raised Target Price to S$1.80 after assuming S$250m acquisition in 4Q17. 
• Maintain BUY.

Deserves to trade at a premium to NAV

• Deserves to trade at a premium to NAV due to its high-quality assets with growth upside as well as acquisition potential. The recent divestment of CapitaMall Anzhen at a 13% premium to its latest valuation demonstrates that CapitaLand Retail China Trust (CRCT) deserves to trade above its NAV (historical P/NAV is 1.16x). 
• Organic growth will be led by positive rental reversions at its key high-quality assets, namely CapitaMall Xizhimen and CapitaMall Wangjing, together with revamps at several malls such as Grand Canyon, Minzhongleyuan and Xinnan. Moreover, we believe acquisition is on the radar after the divestment of Anzhen which will bring inorganic growth.

Where we differ: priced in acquisition with growth potential.

• We have priced in an acquisition of S$250m in 4Q17 with 6% initial NPI yield and 3% p.a. growth potential. As such, our revised TP of S$1.80 is 7% higher than consensus mean.

Potential Catalyst: acquisitions in the near term. 

• CRCT’s gearing is around 35%, and could be further reduced to 31% if proceeds from the divestment of CapitaMall Anzhen is used to repay debt. This translates to a debt headroom of over S$450m which provides flexibility for debt-funded acquisitions. 
• We believe the divestment of Anzhen is a signal of a shift in Manager’s focus from stability to growth generated from more actively managed assets and acquisition of such assets could be on the radar.

Valuation

• Raised DCF-based TP by 5.9% from S$1.70 to S$1.80 after assuming an acquisition of S$250m by end-2017. 
• No immediate DPU accretion to pre-Anzhen levels but future earnings may be lifted due to greater growth potential of its portfolio and acquisitions. 
• Maintain BUY.

Key Risks to Our View

• A significant depreciation of the RMB versus SGD, and downturn in Chinese consumption.

3Q17 Results: Strong operational improvement; Raised TP after assuming acquisition 

Strong operational improvement lifted earnings. 

• 3Q17 gross revenue was RMB 275.0m, 10.5% higher y-o-y, mainly due to the contribution from the acquisition of CapitaMall Xinnan (Sep 2016) and rental growth from the multi-tenanted malls.
• This was partially offset by lower revenue from CapitaMall Qibao due to competition faced in the vicinity and no contribution from CapitaMall Anzhen since its divestment with effect from July 2017. Net property income (NPI) was RMB 176.6m, up 9.5% y-o-y. In SGD terms, gross revenue increased by 10.6% y-o-y to S$56.0m and NPI increased by 9.7% y-o-y to S$36.0m. The increases were similar to those in RMB terms, thanks to a stable RMB against SGD given that CRCT does not hedge its currency exposure.

Flat y-o-y DPU mainly due to higher taxation. 

• Distributable income increased by 4.2% y-o-y. The magnitude of this increase was less than that of NPI as the acquisition of CapitaLand Xinnan resulted in higher management fees, finance costs, and taxation. 
• Taxation was further increased due to related tax expense on the gain on disposal of Anzhen SPV. With a bigger unit base, DPU was 2.37 Scts, up a marginal 0.4% y-o-y. 
• The annualised DPU for FY17 is about 10.10 Scts, which is very close to our revised full-year forecast of 10.06 Scts, after the removal of Anzhen from 3Q17, in line with our expectations.

Healthy portfolio performance will support future earnings.

• Portfolio occupancy remains high at 95.6%. Rental reversion was 7.5% at the portfolio level, led by 10.3% reversion at CapitaMall Xinnan and 9.0% reversion at CapitaMall Xizhimen. 
• What is more, 28% of NLA at CapitaMall Wangjing was renewed at 5.9% higher rents, including the renegotiated lease with its anchor tenant BHG.

Current price is unjustified, as it has traded at a premium to NAV. 

• Since the net asset value (NAV) of CRCT is translated from valuation in RMB terms to SGD at the spot rate at the end of each quarter, the reported NAV fluctuates and does not represent CRCT’s asset value on a sustainable basis, but we note that the exchange rate of SGD/CNY has stabilised in the last 18 months. After applying the historical mean P/NAV multiple of 1.16x to its mean NAV over the last two years (to mitigate the effect of FX fluctuations), we believe CRCT’s price should trade above S$1.80.
• Bear in mind that this is before any revaluation gains which we believe is likely to be recorded next quarter.

Increase TP to S$1.80 after assuming acquisition. 

• From a fundamental perspective, we think it is highly probable that CRCT is on the verge of acquiring a new asset, as soon as 4Q17. The Management indicated last quarter that it is keen to purchase assets with growth potential in tier-1 or tier-2 cities, and is comfortable to push gearing up to 40%. 
• As CRCT has received net proceeds of S$181m from the divestment of Anzhen, we have assumed an acquisition of S$250m to be funded by both debt and equity, which would raise the REIT’s gearing slightly from 35.4% to 37-38%. 
• We have made conservative estimates of a NPI yield of around 6% for the new acquisition (similar as the exit yield of Anzhen). The upside will be generated from future growth potential of the new asset as opposed to Anzhen’s rather flat outlook due to its master lease structure. As such, we have assumed no immediate DPU accretion to pre-Anzhen levels but a higher growth rate of 3% from the new asset to lift future earnings. As such, our TP is raised to S$1.80.

Maintain BUY. 

• The new TP of S$1.80 represents 1.07x P/NAV (latest NAV was S$1.60). 
• With a price upside of 6.8% (based on latest close of S$1.69) and a forward yield of 6.0%, CRCT provides investors a potential total return over 12%. Maintain BUY.

Singapore Research Team DBS Vickers | Mervin SONG CFA DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2017-10-24

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.800 Up 1.700