CapitaLand Retail China Trust - OCBC Investment 2018-03-28: Same… But Different?

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CAPITALAND RETAIL CHINA TRUST AU8U.SI

CapitaLand Retail China Trust - Same… But Different?

• 6.8% yield as at 27 Mar close.
• Long term outlook is intact.
• Fair Value remains at S$1.66.

Retail sector expected to remain robust 

• Since we made our HOLD call on CapitaLand Retail China Trust (CRCT) on 12 Jul 2017, the REIT has delivered 2.4% in total returns, 4.8 ppt less than that of the FSTREI. As at the closing price on 27 Mar, CRCT is trading at a 6.8% FY18F yield. 
• Following the 13th National People’s Congress, there are a few data points we would like to highlight. 
  • Premier Li Keqiang set China’s real GDP growth target at 6.5%, which is the same as last year’s target. 
  • Meanwhile, the urban unemployment rate is projected to stay within 5.5%. 
  • In addition, retail sales of consumer goods increased 10.2% y-o-y in 2017 to RMB 36tn, according to the National Bureau of Statistics.
  We believe these data points and government forecasts continue to bode well for CRCT’s prospects. 
• Going forward, we expect retail sales growth in China to remain healthy for both online and offline stores.

Another Chinese Retail REIT… 

• With Sasseur REIT units starting trading today, we believe that both REITs may be closely compared as they both fall within “Chinese retail” space. Nonetheless, it is important to draw some distinctions as the rental structure is quite different. 
• From what we understand, Sasseur REIT’s resultant rent from the sponsor will consist of
  1. a fixed component with 3% annual escalation as well as
  2. variable component comprising a percentage of underlying tenant sales. 
  According to Sasseur’s forecasts, the fixed component is expected to make up ~70% of the total resultant rent in 2018. (Read also: Sasseur REIT – Asia’s First Outlet Mall REIT – Debuts on SGX)
• Ignoring Sasseur REIT’s two years of guaranteed total rent, we believe CapitaLand Retail China Trust (CRCT)’s structure enjoys greater stability though less upside participation. 
• CRCT’s rental income is directly determined by the underlying leases within its portfolio, of which we believe a much smaller proportion is determined by turnover sales. 
• We have kept our forecasts for CRCT largely intact and our fair value remains at S$1.66. Against 27 Mar’s close, this represents a total expected return of 14% including dividend yield. We upgrade CRCT from Hold to BUY.

Deborah Ong OCBC Investment | http://www.iocbc.com/ 2018-03-28

OCBC Investment SGX Stock Analyst Report BUY Upgrade HOLD 1.660 Same 1.660