CapitaLand Retail China Trust - OCBC Investment 2018-11-01: Healthy Operating Metrics For Now


CapitaLand Retail China Trust - Healthy Operating Metrics For Now

  • CapitaLand Retail China Trust’s (CRCT) 3Q DPU up 1.7% y-o-y.
  • Rental reversions of 12%.
  • Fair Value drops to S$1.39.

Lower capital distribution than expected

  • CapitaLand Retail China Trust’s (CRCT) 3Q18 gross revenue dropped 1.1% y-o-y to S$55.4m while NPI increased 2.2% to S$36.7m. Including a capital distribution of S$0.75m, DPU increased 1.7% y-o-y to 2.41 S cents on an enlarged unit base.
  • The results were below expectations in terms of DPU with 3Q making up only 22.7% of our initial full-year forecast, largely because we expected higher capital distributions.
  • Besides this, CRCT’s 3Q results were in line with income available for distribution coming up to 24.6% of our initial full-year forecast.

High rental reversions continue, helped by successful asset management

  • Portfolio occupancy as at 30 September 2018 was 97.7%, which we consider healthy. Rental reversions came in at 12.1% for new leases/renewals signed during the quarter, which made up 4.6% of the portfolio’s NLA.
  • Notably, management has been able to drive high rental reversions through active asset management. For instance, Rock Square clocked a rental reversion of 28.3% during the quarter for 12.4% of the asset’s leases by NLA – this is the third quarter of consecutive rental reversions above 20%. CapitaMall Xinnan also clocked a 35.6% rental reversion for 5.9% of the asset’s leases by NLA, due to strong space demand and reconfiguration of a dated foodcourt and restroom into specialty NLA.
  • In terms of the portfolio lease expiry profile, 11.0% of leases by Gross Rental Income are up for renewal for 4Q18, while 25.3% are up for renewal in 2019.

Operating fundamentals appear to remain healthy for now, but concerns remain

  • On a same portfolio basis (excluding Rock Square and CapitaMall Wuhu), shopper traffic was down 3.0% y-o-y while tenants’ sales psm were up 0.8% y-o-y. We find these metrics reasonably healthy, albeit not particularly robust.
  • On the back of concerns surrounding China’s economic growth going forward, we decrease our nominal growth rate in mature state from 2.5% to 2.0%.
  • Given that CRCT’s average exchange rate was 1 RMB = 0.206 SGD for 9M18, and that the rate was 1 RMB = 0.202 SGD for 3Q18, we believe our FY18 and FY19 assumption of 1 RMB = 0.202 SGD remain sufficiently conservative for now.
  • After adjustments, our fair value drops from S$1.55 to S$1.39. We maintain HOLD on CRCT.

Deborah Ong OCBC Investment Research | https://www.iocbc.com/ 2018-11-01
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.39 DOWN 1.550