CapitaLand Retail China Trust - DBS Research 2018-07-31: Time To Shine

CAPITALAND RETAIL CHINA TRUST SGX:AU8U

CapitaLand Retail China Trust - Time To Shine

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.
In addition, with a recapitalised balance sheet, we believe that the time is ripe for CRCT to take on a more aggressive acquisition-led growth strategy.

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Our Target Price is among the higher end of consensus estimates as we believe new acquisitions have higher growth potential. With a visible pipeline from the Sponsor, we believe that it is an opportune time for CRCT to look at acquisitions.
We have priced in an acquisition of S$100m (vs S$250m previously) to kick 2019 with 4.5% initial yield. We have also tweaked our estimates to account for the closure of CapitaMall Wuhu. As such, we revised our Target Price to S$1.70.

CRCT’s gearing is around 32% 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$100m 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.

We cut DCF-based Target Price from S$1.80 to S$1.70. DPUs in the next few years should grow steadily given the flexibility of distribution of disposal gains from Anzhen.
Maintain BUY.

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

While gross revenue and NPI fell on a y-o-y basis following the divestment of Anzhen in July 2017, it remained supported at the distribution level as contributions from Rock Square (acquired on 31 Jan 2018) kicked in.
Distributable income grew 10% y-o-y to S$25.7m in 2Q18 from S$23.3m in 2Q17. Post the private placement in Dec 2017, CRCT’s 2Q18 DPU on the enlarged share base was 0.8% y-o-y higher at 2.64 Scts. Barring one-off effects such as the receipt of government subsidies for Grand Canyon in 2Q17, CRCT’s 2Q18 DPU growth would have been more pronounced.
Overall, 1H18 DPU of 5.39 Scts formed 50.4% of our FY18F estimates and was in line.

Excluding CapitaMall Wuhu, which is set to close following the exit of its anchor tenant, portfolio occupancy remained firm at 97.4%. The Manager shared that plans to exit this market is currently in the final stages. A further update to investors is expected in 3Q – we think a divestment of the asset is plausible over the longer term.
After a strong showing in 1Q18, reversion trends continued to track expectations in 2Q18. Led by Rock Square (+24.3%) and Wangjing (+14.1%), portfolio rental reversion of +10.5% was broad based, with the exception of Minzhongleyuan (-1.8%) due to ongoing initiatives to differentiate the mall’s offerings.
Anchored by Rock Square, Xizhimen and Wangjing, we expect reversions in 2H18 to be sustained near current levels.

Substantial debt headroom on gearing of 32.1% provides CRCT with the financial flexibility to take on further AEIs and acquisition opportunities as they arise.
As sponsor CapitaLand ramps up on its capital recycling strategy, this presents CRCT with a firm pipeline of mature assets which are ripe for acquisition over the near term.

Derek TAN DBS Group Research Research | Mervin SONG CFA DBS Research | Carmen TAY DBS Research | https://www.dbsvickers.com/ 2018-07-31

SGX Stock Analyst Report BUY Maintain BUY 1.70 Down 1.800