CapitaLand Retail China Trust - OCBC Investment 2018-07-03: Tariff Or Not, I Still Need To Shop

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CAPITALAND RETAIL CHINA TRUST SGX: AU8U

CapitaLand Retail China Trust - Tariff Or Not, I Still Need To Shop

• Operational resilience amidst trade tensions.
• Look out for RMB weakness.
• Attractive unit price as at 2 Jul close.

A tariff-resistant sector?

• With US and China set to impose their respective tariffs on 6 Jul, we look to sectors that are resistant to these trade tensions – specifically for investors who still seek to maintain their exposure to the China’s growth. We believe CapitaLand Retail China Trust (CRCT) is in one such sector. Its portfolio of retail assets is largely reliant on the medium-term consumer spending in key mainland Chinese cities.
• Relative to the export industries, China’s domestic consumer discretionary sectors are likely to be more resilient – though it is possible that retail sales growth in the next few months may be a tad softer as a result of the economic uncertainties. In any case, we expect CRCT’s operations to be largely shielded from short-term fluctuations in retail turnover given that the rental structures of its leases are primarily fixed (that is, unrelated to turnover).
• Meanwhile, the primary drivers underlying the robust growth in consumer spending are still in place: China’s shift to a consumer-driven economy, coupled with a growing middle class and the rise of higher- spending millennials.

But… RMB weakness is a legitimate concern

• We do note that CapitaLand Retail China Trust (CRCT) stands to be negatively impacted by any weakening in RMB against SGD, which may come as a result of the trade tariffs, since CRCT does not hedge its exchange rate risk. Notably, the RMB has weakened a dramatic ~2% against SGD in just the past half-month.
• As we update our exchange rate assumptions from 1 RMB = 0.204 SGD to 0.202 SGD for the whole of FY18, our fair value decreases from S$1.66 to S$1.64.

Attractive risk-reward at 2 Jul price levels

• Weighing the above issues, we still see value at 2 Jul price levels. Going forward, we are positive on the upcoming lease renewals at Rock Square as well as the AEI completion at Wangjing.
• Against 2 Jul’s close of S$1.51, which is 11% below its high of S$1.69 YTD, our fair value represents a total upside of 15% including a FY18F dividend yield of 6.9%.
• We re-iterate BUY on CapitaLand Retail China Trust (CRCT).

Deborah Ong OCBC Investment | https://www.iocbc.com/ 2018-07-03

SGX Stock Analyst Report BUY Maintain BUY 1.64 Down 1.660