CapitaLand Retail China Trust - DBS Research 2017-12-13: Rock Square ~ On Growth Path

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CAPITALAND RETAIL CHINA TRUST AU8U.SI

CapitaLand Retail China Trust - Rock Square ~ On Growth Path

• 51% interest of Rock Square acquired at S$357m.
• A new property with high growth potential.
• Priced in another acquisition of S$250m in the near term, given cash in hand.
• Maintain BUY, TP trimmed to S$1.75.

Acquisition of Rock Square an indication growth. 

• After the divestment of CapitaMall Anzhen, CapitaLand Retail China Trust (CRCT) has acquired a much younger asset, Rock Square in the first-tier city of Guangzhou. 
• Although the initial yield is lower in comparison, we believe the asset has greater growth potential and is also an indication of CRCT’s embarking on a growth path.

Where we differ: priced in more acquisitions with growth potential. 

• We have priced in another acquisition of S$250m for the start of FY18 with 5% initial NPI yield and 3% p.a. growth potential. As such, our revised TP of S$1.75 is 5.4% higher than consensus mean.

Potential Catalyst: more acquisitions in the near term. 

• CapitaLand Retail China Trust (CRCT)’s gearing is around 38% after the Rock Square acquisition, and could be further reduced to 34% if proceeds from the divestment of Anzhen is used to repay debt. This translates into a debt headroom of over S$550m, which provides flexibility for further acquisitions. 
• We believe the divestment of Anzhen signals a shift in the Manager’s focus from stability to growth generated from more actively managed assets; the acquisition of Rock Square is a confirmation of such a move, and more acquisitions could be on the radar.

Valuation

• Trimmed DCF-based TP from S$1.80 to S$1.75 after assuming a less aggressive initial acquisition yield for the next acquisition.
• No immediate DPU accretion to pre-Anzhen levels but future earnings may be lifted due to greater growth potential from new acquisitions. 
• Maintain BUY.

Key Risks to Our View

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

WHAT’S NEW - CRCT embarks on growth path with Rock Square acquisition 

Rock Square acquisition: higher growth outweighs lower initial yield: 

• Following the divestment of CapitaMall Anzhen in September 2017, CapitaLand Retail China Trust (CRCT) has made its first step of embarking on a growth track by entering into a 51%/49% JV acquisition of Rock Square, a shopping mall located in Guangzhou, for a total purchase consideration of RMB3,360.7m (or S$688.9m).
• CRCT’s 51% stake is equivalent to S$356.6m, after all related costs. 
• The initial yield is believed to be c.4%, lower than the exit yield of Anzhen which we estimated to be close to 6%. However, we believe Rock Square has much greater growth potential because
  1. it is a newer property that started operations only in 2013, versus 2005 for Anzhen; and
  2. it is a multi-tenanted property with around 60% of leases due in the next three years; 
  this gives rental upside potential as well as flexibility to alter tenant mix optimise efficiency. 
• In contrast, Anzhen was a master-leased property with limited upside potential.

Strategic entry into Guangzhou: 

• The acquisition marks CRCT’s strategic entry into another first-tier city after Beijing and Shanghai, effectively diversifying its portfolio and enhancing its resilience. 
• With the divestment of CapitaMall Anzhen in September 2017, the move represents a progression of CRCT’s portfolio-reconstitution strategy whereby capital from the sale of a low-growth, master-leased asset is recycled into a younger multi-tenanted mall with a diverse trade mix.

Cash in hand implies further acquisition(s) in the pipeline: 

• The most noteworthy point we believe was that CRCT received c.S$180m in cash proceeds from the divestment of Anzhen.
• While this sum was not used to pare down debt, only S$100m will be utilised from its cash balance to fund the acquisition of Rock Square. This leaves a total debt headroom of over S$550m post the acquisition, which provides ample financial flexibility for further acquisitions in the near term. This reiterates CRCT’s repositioning from stability to growth. As such, we have priced in another acquisition of S$250m from the start of FY18.

Maintain BUY. 

• We have priced in another acquisition for the start of FY18 with total purchase consideration of S$250m, S$150m of which will be funded from the cash balance, with the remaining from a combination of debt and equity. Gearing, as a result, will be lifted to 39% from the current 38%. 
• We have lowered our previous assumption of the slightly more aggressive initial acquisition yield and, hence, have trimmed TP from S$1.80 to S1.75. Maintain BUY.

Singapore Research Team DBS Vickers | Mervin SONG CFA DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2017-12-13

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.75 Down 1.800