CapitaLand Retail China Trust - DBS Research 2018-02-01: On Growth Trajectory

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CAPITALAND RETAIL CHINA TRUST AU8U.SI

CapitaLand Retail China Trust - On Growth Trajectory

• CapitaLand Retail China Trust's FY17 top line up 7% in SGD terms, as contribution from Xinnan offsets vacuum from Anzhen divestment.
• FY17 DPU was 10.1 Scts, up 0.5% only as a result of larger unit base from share placement.
• Raised Target Price to S$1.80 after assuming more positive rental growth prospects for Rock Square; Maintain BUY.

Acquisition of Rock Square; good growth potential. 

• 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 embarking on a growth path.

Where we differ: 

• Our Target Price is 6.5% higher than consensus as we believe new acquisitions have higher growth potential. We have priced in another acquisition of S$250m to kick in from 2Q18 with 4.5% initial yield and 2.5% p.a. NPI growth. 
• We have also booked rental reversion in the mid-10% for the new acquisition Rock Square for the next few years. As such, our revised Target Price of S$1.80 is 6.5% higher than the consensus average.

Potential Catalyst: more acquisitions in the near term. 

• CRCT’s gearing is around 34% after the Rock Square acquisition. This translates into a debt headroom of over S$550m, which provides flexibility for further acquisitions. We have booked in an additional S$250m acquisition in FY18. 
• We believe management’s move to divest Anzhen and acquire Rock Square signals its shift in focus from stability from master leases to growth generated from more actively managed assets. More of such acquisitions would confirm such a move.

Valuation

• Raised DCF-based Target Price from S$1.75 to S$1.80 after assuming higher rental growth from Rock Square. DPUs in the next few years should grow steadily given the flexibility of distribution of disposal gains from Anzhen. 
• Maintain BUY.

Key Risks to Our View

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

WHAT’S NEW

• 4Q/FY17 DPU in line; higher contribution from Xinnan offset by larger unit base due to private placement to partially fund Rock Square

Lower top line in 4Q17 due to divestment of Anzhen. 

• In RMB terms, gross revenue in 4Q17 decreased by 3.9% or RMB10.6m y-o-y, mainly due to the divestment of CapitaMall Anzhen with effect from 1 July 2017, and lower revenue at CapitaMall Grand Canyon due to disruption to trading activities arising from an operational review by the authorities leading up to the 19th National Congress. This was partially offset by revenue growth from other multi-tenanted malls. 
• In SGD terms, gross revenue for 4Q17 was down by 4.6% y-o-y to S$54,107, while NPI declined 5.2% to S$32,987.

Higher full year revenue as contribution from Xinnan more than offset vacuum from Anzhen. 

• For the full-year, gross revenue for FY17 in RMB terms increased by RMB 96.7m or 9.2%, mainly due to the contribution from CapitaMall Xinnan and rental growth from core multi-tenanted malls, and this had more than offset the lower revenue from CapitaMall Qibao, and CapitaMall Anzhen following its divestment in July 2017. 
• In SGD terms, gross revenue increased 6.9% to S$229.2m, and NPI increased 6.8% to S$149.2m The percentage of increase is lower than that in RMB terms due to stronger SGD against RMB.

DPU up 0.5% y-o-y, in line. 

• Distributable income for FY17 was 5.1% higher y-o-y after the inclusion of disposal gains from Anzhen. DPU for FY17 summed to 10.10 Scts (+0.5%) after adjusting for the private placement relating to the acquisition of Rock Square in November 2017. 
• The full year DPU represents 100.1% of our forecasted DPU of 10.09 Scts, in line with our expectations.

Maintained high occupancy of 95.4%. 

• All malls have occupancies above 98%, except Qibao (94.6% due to new competition nearby), MZLY (78.0%) and Wuhu (69.7%) – the latter two are still undergoing stabilisation after structural repositioning. The portfolio achieved positive rental reversion of 5.6% in FY2017, led by Xizhimen (7.7%), Wangjing (6.5%) and Saihan (10.2%). 
• MZLY saw a positive reversion rate of 22.5% for 14% of its mall space renewed over the year. Growth in shopper traffic and tenant sales was 4.7% and 0.8% respectively.

Gearing expected to move above 35%. 

• The aggregative leverage has fallen to 28.4% as at end-Dec 2017, from 35.4% the previous quarter after the repayment of S$175m term loan using proceeds from the divestment of Anzhen and the private placement to partially fund the acquisition of Rock Square. 
• Gearing is expected to go up to 34% after the loan portion of the funding of Rock Square acquisition is taken in full next quarter. Additionally, we expect gearing to go up further to 37% after our assumption of more acquisitions of S$250m in FY18. 
• Average cost of debt inched up slightly from 2.42% to 2.48% over the quarter. CRCT has completed all its refinancing in 2017, with no refinancing requirements until 2019.

OUR VIEW

Trimmed FY18F DPU as we book in contribution of Rock Square and other acquisitions only from 2Q18 (vs full year previously). 

• We have trimmed our FY18F DPU after assuming contribution from Rock Square and new acquisitions only from 2Q18, as opposed to previously assuming full year contribution in FY18. 
• The revised FY18F DPU represents a y-o- y DPU growth of 5.9%. The actual timing of new acquisitions is uncertain but we believe CRCT will manage the distribution to achieve DPU at around this level as it has the flexibility to distribute its gains from the disposal of Anzhen – it has about S$28m available after making a S$3.7m distribution in 4Q17.

Increased Target Price to S$1.80 to account for more positive view on rental growth of Rock Square. 

• Even though Rock Square was only acquired at an initial NPI yield of 4%, management is confident about its rental growth in the near future because 
  1. more than 50% of the gross rental income of the mall is due to be renewed in the next three years, and 
  2. the passing rent is below market peers. Based on the management’s confidence of double-digit rental reversion at Rock Square, we lifted our rental growth assumptions at the property. 
• As a result, Target Price is raised from S$1.75 to S$1.80. We believe the acquisition strategy going forward is to continue to buy assets with greater growth potential, even if not immediately yield accretive. Maintain BUY.

CRCT deserves to trade at a higher premium to NAV. 

• From a valuation perspective, CRCT has historically traded at an average of more than 10% premium to its net asset value (NAV). 
• We noticed that the exchange rate of SGD/RMB has stabilised in the last two years. As a cross-check, applying the historical mean P/NAV multiple of 1.16x to CRCT’s historical 2-year mean NAV of S$1.60, we would derive a potential price of S$1.86. Hence, we believe our Target Price of S$1.80 is achievable.

Singapore Research Team DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2018-02-01

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.80 Up 1.750