CapitaLand & CapitaLand Retail China Trust - DBS Research 2019-06-11: Double Prosperity

CapitaLand & CapitaLand Retail China Trust | SGinvestors.io CAPITALAND LIMITED (SGX:C31) CAPITALAND RETAIL CHINA TRUST (SGX:AU8U)

CapitaLand & CapitaLand Retail China Trust - Double Prosperity

  • CapitaLand Retail China Trust proposed the acquisition of three fast-growing retail assets in China from CapitaLand-managed funds.
  • Move is mutually beneficial, leading to improved financial metrics for both, in our opinion.
  • CapitaLand Retail China Trust to benefit from immediate yield and DPU accretion; a larger market cap also awaits.
  • CapitaLand on track to meet divestment and ROE targets while demonstrating in-house recycling capabilities.

A mutually beneficial and transformative transaction

CRCT proposes strategic diversification into high-growth cities in Harbin and Changsha.

  • CAPITALAND RETAIL CHINA TRUST (CRCT, SGX:AU8U) has proposed the acquisition of companies holding retail assets, CapitaMall Xuefu, CapitaMall Aidemengdun, and CapitaMall Yuhuating, which have a combined NLA of 141,157 sqm (+ 27.1%) from entities related to the Sponsor, CAPITALAND LIMITED (SGX:C31).
  • CapitaMall Xuefu and CapitaMall Aidemengdun are located in Harbin (Heilongjiang Province) and CapitaMall Yuhuating in Changsha (Hunan Province) – Tier 2 cities, in our opinion.

Acquisition consideration of approximately S$505.4m.

  • The purchase price is based on the agreed market value of RMB2,960m (S$589.2m) for the portfolio – or RMB1,745m, RMB469m and RMB746m for CapitaMall Xuefu, CapitaMall Aidemengdun and CapitaMall Yuhuating, respectively. This represents slight discounts of 0.2%-1.3% to independent valuations by C&W and JLL.
  • We also observe that current valuations represent c.13% premium over its last valuation on 31 Dec 2018, which is likely to be driven by higher cashflows for two of the three properties, in our opinion.

Attractive property attributes, with longer-term organic growth opportunities in store.

  • All three incoming properties are characteristic of CapitaLand’s malls in China – offering exposure to markets with strong economic fundamentals, good transport connectivity and access to strong captive populations within high-density zones.
  • CapitaMall Xuefu, which is set to rank among the top 3 in CapitaLand Retail China Trust’s enlarged portfolio by GRI post acquisition, enjoys direct connectivity to Xuefu Road Station on Metro Line 1 and is poised to benefit from its sizeable, affluent catchment and tertiary student population from eight universities in the vicinity, as on-going efforts to further inject experiential elements continue to take shape. It is also of close proximity to CapitaMall Aidemengdun, which offers complementary retail offerings and synergies from leasing and operational perspective.
  • On the other hand, both CapitaMall Aidemengdun and CapitaMall Yuhuating, which cater mainly to necessity shopping, are defensive and bode well for the stability of DPU, with longer-term growth opportunities from AEI and tenant reconfiguration.

Our thoughts


Raising visibility amongst investors as it bulks up in China.

  • Similar to CapitaLand Retail China Trust’s Rock Square acquisition in 2017/2018, we believe that this acquisition could be transformative for the REIT. If successful, it is set to drive an 18.8% increase in portfolio value to approximately RMB18.7bn (~S$3.8bn) and a 22.8% jump in NPI to RMB959.3bn.
  • This would significant widen the AUM gap between CapitaLand Retail China Trust and SGX-listed China-centric REIT peers, which are largely below the S$2bn mark. As this plays out, could significantly enhance the REIT’s proposition to investors over time.

Implied NPI yield of 6% is accretive.

  • Based on FY18 NPI of RMB178.1m, the implied NPI yield for the three assets to be acquired stands at 6%, which is 30bps above CapitaLand Retail China Trust’s ex-Wuhu portfolio of approximately 5.7%.

Funding structure likely to include some form of equity raising.

  • Including c.S$16.4m in acquisition-related fees, the total outlay comes to approximately S$505.4m. Given its current gearing of 35.5% (as at 31 Mar 2019), the transaction is likely to be funded by a combination of equity and debt.

DPU accretion of 2-3%, according to our estimates.

  • While the proposed acquisition represents a diversification away from its Beijing and Shanghai-focused malls, it is also a strategic move that allows the REIT to capitalise on the strong economic and organic growth prospects in these markets, which have generally outpaced the national average.
  • Assuming 50%/50% debt/equity funding to meet its target gearing of c.38%, we estimate pro-forma FY18 DPU accretion of c.2.5% and between 2% and 3% for FY20F. However, due to the impact of EFR against just four months’ contributions from the acquired portfolio, we still expect a flattish FY19F DPU.

Maintain BUY.

  • Overall, we are positive on CapitaLand Retail China Trust’s move as the target portfolio offers both DPU accretion and organic growth prospects, unlocking a longer-term growth runway for the REIT.
  • We currently have a BUY call with a Target Price of S$1.65, and have yet to factor in positive contributions from the acquisition for CapitaLand Retail China Trust.


On track to meet its AUM divestment target in FY19.

  • The proposed sale of the three properties for close to RMB 3.0bn (S$589.2m) on a 100% basis, allows the group to realise the group’s property investment value and unlock capital for reinvestment. The sale will generate proceeds of about S$239.9m and a net gain of about S$37.6m for CapitaLand. While marginal, the cumulative impact adds towards to the group’s longer-term ROE of close to 10%.
  • The pro-forma impact of the transaction, if completed on 1 Jan 2019, will boost CapitaLand’s 3Q19 EPS from 7.1 to 7.9 Scts.
  • The transaction, which is conditional upon CapitaLand Retail China Trust unitholders’ approval, is expected to be completed in 3Q19.

Keeping its AUM within the group.

  • The properties will be divested from the CapitaLand Mall China Income Fund III (two Harbin properties) and CapitaLand Mall China Income Fund I (Changsha property), and with CapitaLand Retail China Trust being the purchaser, this keeps the AUM within the group.
  • Most importantly, CapitaLand through its stake in CapitaLand Retail China Trust, will continue to benefit from the longer-term uplift in operational performance and capital values for the three properties.

Derek TAN DBS Group Research | Rachel TAN DBS Research | Mervin SONG CFA DBS Research | https://www.dbsvickers.com/ 2019-06-11
SGX Stock Analyst Report BUY MAINTAIN BUY 4.000 SAME 4.000