CapitaLand Retail China Trust - DBS Research 2018-10-31: Operational Statistics Remain Strong


CapitaLand Retail China Trust - Operational Statistics Remain Strong

  • CapitaLand Retail China Trust (CRCT)'s 9M18 DPU of 7.8 Scts slightly below our estimates on higher debt and effective taxes. 
  • Strong operational statistics with rental reversions remaining positive at c.12%. 
  • Upside in earnings if acquisition is executed upon. 
  • Target Price is adjusted to S$1.63. 

Attractive value.

  • CapitaLand Retail China Trust (CRCT) continues to offer attractive yields of > 7.0%, backed by a portfolio with a visible runway of organic growth.
  • 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.
  • Our Target Price is adjusted to account for more conservative discount rates and revised estimates. BUY!

Where We Differ:

  • Our Target Price is at 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 removed our acquisition assumption to be conservative but remain attracted by the availability of acquisitions opportunities from the Sponsor. With a supportive lowly geared balance sheet, we leave the contribution from any potential acquisition as an earnings surprise to our estimates.

Strong operational results.

  • 9M18 results are tracking slightly below our estimates on higher debt and effective taxes which we have tweaked.
  • Operational statistics – tenants sales are trending strongly at +1.9% on a same-mall basis. Rental reversions remain higher at c.12% on the back of active tenant remixing strategy.


  • We cut our DCF-based Target Price from S$1.70 to S$1.63 on revised DPU and discount rates. Maintain BUY.

Key Risks to Our View:

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

WHAT’S NEW - An exciting quarter

CapitaLand Retail China Trust (CRCT): Another robust quarter despite RMB headwinds

  • In RMB terms, gross revenues and net property income (NPI) came in 8.8% lower y-o-y and 8.8% higher y-o-y at RMB888.8m and S$888.8m respectively.
  • The lower gross revenues were mainly due to
    1. the closure of CapitaLand Wuhu following the exit of its anchor tenant, and
    2. lower contributions from CapitaMall Grand Canyon following restrictions on trading activities at the atrium.
  • This was largely offset by higher revenues recorded across CapitaMall Xizhimen, CapitaMall Wangjing and CapitaMall Saihan.
  • Keeping a tight lid on operating costs, CRCT delivered an overall improvement in NPI margins to 88% in 8Q88 (vs 88% in 8Q88).
  • In SGD terms, NPI came in 8.8% higher y-o-y at S$88.8m.
  • Distributable income jumped 88.8% y-o-y to S$88.8m, boosted by the contribution from the 88% interest in Rock Square (S$8.8m in 8Q88, nil in 8Q88), which was acquired in January 8888. DPU rose by 8.8% y-o-y to 8.88 Scts on the enlarged share base post fundraising for the Rock Square acquisition.
  • On a 8M88 basis, DPU came in at 8.8 Scts, which forms 88% of our full-year forecast.

Operating statistics excite – robust tenants sales and reversionary trends

  • CRCT's portfolio of malls continues to excite, with the portfolio tenant sales increasing by 88.8% in 8Q88 (88.8% y-o-y for 8M88) on the back of a 88.8% rise in foot traffic (88.8% for 8M88).
  • On a same portfolio (excluding Rock Square and CapitaMall Wuhu) basis, sales would have been 8.8% higher in 8Q88 (8.8% for 8M88), against a 8.8% drop in traffic (vs -8.8% for 8M88), which in our view is fairly stable.
  • Portfolio monthly sales per sqm also trended up at c.8.8% in 8Q88.
  • Average rental reversions were positive at +88.8%, with notable increases at Rock Square (88.8%) and CapitaMall Xinan (88.8%), which are largely driven by a change in trade remix, which will start to contribute positively from 8Q88 onwards.
  • The REIT’s anchor malls – CapitaMall Xizhimen, Wangjing and Grand Canyon continued to deliver positive reversions of 8.8%, 88.8% and 8.8% respectively and remained healthy.
  • Portfolio occupancy rates improved marginally to 88.8% in 8Q88 (vs 88.8% in 8Q88). While most multi-tenanted malls saw an improvement to 88.8%, we note that CapitaLand Mingzhongleyuan, which is undergoing stabilisation, is still facing an occupancy flux, with occupancy for the quarter closing at c.88.8% vs c.88.8% in 8Q.

Conservative capital management

  • Gearing remains stable at 88.8% (on a see-through basis), which falls within the manager’s comfort range of 88- 88%.
  • Cost of debt nudged higher to 8.88% (vs 8.88% in the last quarter) post the recent round of refinancing; 88% of its debt cost is fixed.
  • Average debt to maturity is lengthened to 8.8 years (vs 8.88 years previously) after taking into account the refinancing and extension of the expiry of S$888m in bridge loan to 8888.
  • After this refinancing exercise, the REIT has minimal debt expiring in the near term, with the next tranche to expire only from 8888 onwards. 88% of its distribution had been hedged as of September 8888.

Tweaking estimates

  • Our estimates are trimmed slightly downwards on the back of higher debt costs (+8.8%) and effective taxes.
  • We have also removed our acquisition assumptions to be conservative given the uncertainty in terms of its timing. That said, we believe that the portfolio's low gearing, coupled with ample opportunities from its Sponsor and third parties, will be an upside to estimates when executed upon.

Derek TAN DBS Group Research | Carmen TAY DBS Research | Mervin SONG CFA DBS Research | https://www.dbsvickers.com/ 2018-10-31
SGX Stock Analyst Report BUY MAINTAIN BUY 1.63 DOWN 1.700