CapitaLand Retail China Trust - DBS Research 2019-07-04: Harbin-ger Of Growth


CapitaLand Retail China Trust - Harbin-ger Of Growth

  • CapitaLand Retail China Trust’s strong organic growth profile and attractive yield of c.7% should place it favourably on investors’ radars.
  • Soon after doubling its exposure in Inner Mongolia, moves to acquire three fast-growing malls in Harbin and Changsha, which signals a new growth era.
  • Upside from new acquisitions yet to be priced in pending the upcoming EGM, which could boost FY20F DPU by 2-3%.
  • Maintain BUY; Target Price raised to S$1.80.

BUY; Target Price lifted to S$1.80 as CRCT doubles down on Inner Mongolia.

  • CAPITALAND RETAIL CHINA TRUST (SGX:AU8U) has done well YTD but continues to offer atwtractive yields of c.7.0% - above its historical mean of 6.6%since listing. Riding on a portfolio with clear organic growth catalysts, CapitaLand Retail China Trust should continue to garner interest among investors and drive further compression in yields.
  • A lower interest rate environment could also be conducive for CapitaLand Retail China Trust as it ramps up on its acquisition-led growth strategy.
  • Maintain BUY as lower interest cost assumptions takes our Target Price higher to S$1.80, implying a target yield of 6%.

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 CapitaLand Retail China Trust to look at acquisitions.
  • Aided by an active asset reconstitution strategy, CapitaLand Retail China Trust continues to realise value for investors and proceeds can be deployed to value-accretive deals, which we believe could lead to higher earnings momentum.

Strong operational performance.

  • CapitaLand Retail China Trust delivered another robust quarter, as its multi-tenanted malls continued to shine in 1Q19. Occupancy remained healthy at 97.4% while rental reversions came in strongly at +9.5% (even after delivering average reversions of +10.9% in FY18) as its active repositioning and tenant remixing strategies, among others, bore fruit.


  • Maintain BUY; Target Price raised to S$1.80 after reducing interest cost assumptions, with upside from its recent acquisitions in Harbin and Changsha, which have yet to be inputted in our forecasts.

Key Risks to Our View:

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


Beijing retail market a key driver to revenues.

  • Given its operations in China, CapitaLand Retail China Trust’s share price is sensitive to changes in property-related policies in China. These policies differ from city to city – close attention should be paid to Beijing as c.75% of the portfolio’s NPI is derived from properties in Beijing.
  • That said, well-located assets (Wangjing, Xizhimen, Rock Square and Xinnan) that are dominant malls in their respective submarkets enable CapitaLand Retail China Trust to deliver a sustained improvement in operating metrics over time.
  • With a proactive tenant remixing strategy to constantly refresh its tenant mix, the manager had been able to maintain reversions at a high of c.11 % in 9M18, implying that CapitaLand Retail China Trust's organic growth profile will likely remain steady over time.

China retail sales could point to potential upside risk to rental reversions.

  • We note that the REIT has shown a close correlation coefficient of 0.69 with China retail sales, in view that rental growth prospects are supported somewhat by retailers achieving healthy retail sales momentum.
  • While near-term forex fluctuations (CapitaLand Retail China Trust pays distributions in SGD while reporting in RMB) overshadow China's consistently steady retail data in recent times, we believe that once the currency stabilises, investors will refocus on China retail sales as a proxy to the potential forward performance for CapitaLand Retail China Trust.

Visible pipeline and a lowly geared balance sheet infuse the REIT with ample firepower to acquire.

  • CapitaLand Retail China Trust benefits from a visible acquisition pipeline from sponsor, CapitaMalls Asia, one of Asia’s largest mall operators, managers and owners. While the availability of the pipeline from the sponsor offers significant inorganic growth potential for the REIT, the ability to acquire from the sponsor has been limited, given the market’s tight cap rates as compared to CapitaLand Retail China Trust’s high implied yields.
  • That said, CapitaLand Retail China Trust has been able to source deals from external parties, expanding the group’s real estate exposure in China, driving inorganic growth to distributions while keeping its gearing low at an optimal level to maintain its flexibility to acquire opportunistically.
  • The high take-up rates in the REIT’s dividend reinvestment programme also infuse the REIT with much-needed equity to part-fund any future growth opportunities. See CapitaLand Retail China Trust's dividend history.

Carmen TAY DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2019-07-04
SGX Stock Analyst Report BUY MAINTAIN BUY 1.80 UP 1.650