Mapletree Greater China Commercial Trust - DBS Research 2017-10-24: Join The Magical Ride

Mapletree Greater China Commercial Trust - DBS Vickers 2017-10-24: Join The Magical Ride MAPLETREE GREATER CHINACOMM TR RW0U.SI

Mapletree Greater China Commercial Trust - Join The Magical Ride

  • Mapletree Greater China Commercial Trust (MAGIC)'s 2Q18 DPU of 1.868 (+5.8% y-o-y) in line with expectations.
  • Acceleration in tenant sales and rental reversions a positive sign for improved performance ahead.
  • Re-rating still has legs with MAGIC trading at elevated yields despite the quality of its asset portfolio.

Rally not over. 

  • We maintain our BUY call with a revised Target Price of S$1.30 for Mapletree Greater China Commercial Trust (MAGIC).
  • MAGIC's share price has rallied over 15% since our out of consensus call in late April that MAGIC’s yield should compress significantly given its strong track record and investors’ incorrect perception of the stock’s exposure to forex volatility despite the earnings resilience shown by MAGIC. However, we believe the share price rally can continue given improving macro conditions in HK and the discount it trades to its HK peers.

Where we differ – Yield to match HK peers. 

  • Consensus’ TPs imply that MAGIC should trade at a yield premium to its HK peers due to concerns over FX volatility, and a lack of familiarity with HK/China and history as a listed REIT. However, we believe this is unwarranted given its strong record as seen by FY17 DPU being 17% higher than its initial DPU in FY14, and MAGIC recording the fourth best total cumulative return for a SREIT since its listing (over 65% in capital and distribution returns) as well as having a portfolio with well-located assets. 
  • Thus, MAGIC should re-rate closer to mid 5% forward yield consistent with its HK peers, from its current 6.1% yield.

Improving HK consumer sentiment. 

  • In 2016, MAGIC’s share price performance was mixed, due to the higher property taxes in Beijing and weakness in HK retail sales resulting in concerns over the ability of Festival Walk to increase rents. We believe the positive news flow from improving retail sales and consumer sentiment should provide a tailwind to MAGIC’s share price.
  • Festival Walk represents c.70% of MAGIC’s income.


  • After rolling forward our valuation to FY19, we raised our DCF-based TP to S$1.30 from S$1.25.

Key Risks to Our View

  • The key risk to our view is a significant downturn in the HK and Chinese economies, causing a decline in rents at Festival Walk, Gateway Plaza and Sandhill Plaza.

WHAT’S NEW - Growth resumes 

3Q17 results in line

  • After a few quarters of modest to flattish DPU, growth has returned.
  • Mapletree Greater China Commercial Trust (MAGIC)''s 2Q18 DPU rose 5.8% y-o-y to 1.868 Scts. This represents 25% of our FY18F DPU and was in line with our expectations.
  • The improved performance was largely attributed to higher rental rates at Festival Walk. In addition, Gateway Plaza had a better quarter on the back of higher occupancies (95.8% versus 90.5% in 2Q17) and the impact of higher accrued VAT in 2Q17. MAGIC had conservatively assumed a higher VAT previously given the uncertainty over the applicable VAT rate a year before. As a consequence of these drivers, overall 2Q18 NPI rose 5.7% y-o-y to S$70.9m. 
  • Underlying 2Q18 NPI for Festival Walk, Gateway Plaza and Sandhill Plaza rose 2.7%, 17.4% and 1.8% y-o-y respectively. Excluding the impact of currency movements, MAGIC still had a healthy quarter. 
  • NPI for Festival Walk rose 2.9% y-o-y in HKD terms while Gateway Plaza and Sandhill Plaza increased 16.7% and 1.3% y-o-y respectively in RMB terms.
  • Overall portfolio occupancy remains robust at 98.2%, up from 95.7% in 2Q17. However, there was a slight decline q-o-q from 98.8% largely due to occupancy at Gateway Plaza dropping to 95.8% from 98.8% in 1Q18, partially offset by Sandhill Plaza now being fully occupied (97.5% in 1Q18). Festival Walk continues to be fully leased.

Acceleration in positive rental reversions and tenant sales

  • Rental reversions at Festival Walk (Retail) and Sandhill Plaza (Office) accelerated over the quarter. For 1H18, Festival Walk (Retail) signing rents were 11% higher than expiring rents, up from 9% reported in 1Q18. Meanwhile, Sandhill Plaza recorded 14% positive rental reversion for 1H18 versus 13% in 1Q18.
  • Meanwhile Gateway Plaza, maintained the 10% increase in signing rents for 1H18.
  • Thus far, MAGIC has renewed or re-let 54% of leases that were due to expire in FY18. In 2H18, there are another 22.7% of leases that are due to expire, of which 16% has already been renewed or re-let. Beyond FY18, another 22.9% and 25.7% of leases in FY19 are due to expire.
  • After tenant sales rose 2.1% y-o-y for the first time in seven quarters in 1Q18, the positive momentum has flowed into 2Q18, with tenant sales jumping 2.9% y-oy.
  • The sectors that have done well over the prior quarters such as cosmetics and supermarkets sustained their growth momentum. In 3Q17, Festival Walk also saw an uptick in the electronics.
  • Nevertheless, foot traffic was subdued, flat y-o-y at 10.4m partially due to the two typhoons that hit HK during the quarter.

Capital structure

  • MAGIC’s gearing fell marginally to 38.5% from 39.4% as at end 1Q18 with its effective interest rate dropping slightly to 2.71% from 2.74% in 1Q18.
  • The proportion of fixed rate debt was stable at 76%.
  • MAGIC has also entered additional hedges with 69% of FY18 distributable income now hedged versus 58% at end 1Q18.
  • MAGIC’s net asset value per unit was relatively stable at S$1.244 compared its value at end 1Q18.

Moderate rental reversions ahead translating to steady growth ahead

  • MAGIC guided that it should continue to achieve positive but moderate rental reversions going forward.
  • In particular, with passing rents for Gateway Plaza at RMB338 per sqm per month that are between asking rents of RMB320-350, we can expect modest rental reversions. In addition, with a slowdown in demand in Beijing, MAGIC guided that there may be some volatility in Gateway Plaza’s occupancy. Thus, we expect a more stable performance for Gateway Plaza ahead
  • For Festival Walk, with tenant sales recovering and overall consumer sentiment in HK firming, we believe some investor concerns over the risk of negative rental reversions should ease especially as occupancy costs has now dipped below the 20% level. Therefore, we expect Festival Walk to deliver high single digit to low teen rental reversions.
  • Meanwhile, Sandhill Plaza should maintain its steady growth profile, as the property remains under rented.
  • Passing rent stands at RMB5.32 per sqm per day versus asking rents of RMB5.30-6.00.

Disciplined acquisition strategy

  • MAGIC guided that cap rates for decentralised office properties, the key asset class it is targeting, remains low at around 4% which makes it difficult for the REIT to make DPU accretive acquisitions.
  • We commend MAGIC for having a disciplined acquisition strategy and willingness to even ride this property cycle out.
  • MAGIC guided that some of its sponsor’s assets are also not sufficiently stabilised for an acquisition to take place.

Maintain BUY with revised TP of S$1.30

  • We maintain our BUY call with a revised TP of S$1.30. We have raised our DCF based TP to S$1.30 from S$1.25 as we rolled forward our valuation base to FY19. We continue to like MAGIC for its attractive valuations.
  • MAGIC’s 6.1% forward yield in our view remains too high considering its quality properties in the gateway cities of HK, Beijing and Shanghai and it continues to trade at a yield premium to its HK peers which we believe is unwarranted given its strong track record of DPU delivery. 
  • Moreover, we believe the improving macro trends in HK (firming consumer sentiment and recovery in retail sales) should act as catalysts to trigger a further re-rating.

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 1.300 Up 1.250