CapitaLand Retail China Trust - DBS Research 2019-08-01: Bigger, Bolder Moves


CapitaLand Retail China Trust - Bigger, Bolder Moves

  • CAPITALAND RETAIL CHINA TRUST (SGX:AU8U)'s core 2Q19 DPU (excluding capital distributions) of 2.54 Scts represents 2% y-o-y growth.
  • Multi-tenanted properties continued to shine during the quarter; rental reversions rose 7.5% for 1H19.
  • Strong core portfolio leasing momentum and proposed acquisition of three malls in Harbin and Changsha to reignite DPU growth over FY19F-20F.
  • Maintain BUY and Target Price of S$1.80.

BUY; Target Price of S$1.80.

  • CAPITALAND RETAIL CHINA TRUST (SGX:AU8U) continues to trade at an attractive FY20F yield of 6.6% – similar to its post-listing historical mean, which offers value compared to many S-REITS that are trading at -1SD yield.
  • We project FY18-FY21F DPU to grow at a c.2.6% CAGR as CapitaLand Retail China Trust rides on organic growth catalysts in its core portfolio and as contributions from its acquisitions in Changsha and Harbin, and Yuquan Mall in Inner Mongolia kick in.
  • Maintain BUY and Target Price of S$1.80, with further upside if CapitaLand Retail China Trust’s success in driving value-add at Rock Square can be replicated in Harbin and Changsha.

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 2Q19. Occupancy remained healthy at 97% while 1H19 rental reversions came in strongly at +7.5% (even after delivering average reversions of +10.9% in FY18) as active repositioning strategies, among others, bore fruit.

WHAT’S NEW - Another shining quarter for multi-tenanted properties

2Q19 DPU of 2.54 Scts in line

  • In SGD terms, CapitaLand Retail China Trust's gross revenues fell 1.3% lower y-o-y to S$55.2m while net property income (NPI) jumped 7.3% y-o-y to S$40.4m. Meanwhile in RMB terms, gross revenues and NPI would otherwise have been 1.9% and 11.5% higher respectively.
  • The higher revenues were mainly led by bigger contributions from its larger malls Xizhimen and Wangjing, after benefitting from past strong rental reversions, to more than offset larger declines at Mingzhongleyuan which is undergoing tenancy adjustments.
  • Keeping a tight lid on operating costs, CapitaLand Retail China Trust delivered broad-based NPI improvements across its portfolio (with the exception of Erqi, which was flattish y-o-y). However, the sizeable y-o-y NPI jumps at Qibao and Mingzhongleyuan were mainly due to FRS 116 adjustments.
  • Overall, NPI margins improved to 73.1% vs 66.9% a year ago. Distributable income thus moderated 1.2% y-o-y to S$25.4m.
  • While 2Q19 DPU of 2.54 Scts appeared to be c.3.8% lower y-o-y, it did not include any capital top-ups – which were introduced from 4Q17 to smoothen earnings volatility post Anzhen’s divestment and the subsequent reinvestment of divestment proceeds into Rock Square, which has since undergone a rigorous tenant portfolio rebalancing exercise.
  • On a comparable basis, DPU growth in 2Q19 would have otherwise been positive at c.2% y-o-y, which is decent.
  • Overall, 1H19 DPU of 5.03 Scts formed half of our full-year forecasts, in line with expectations.

Strong operating results from ongoing tenancy adjustment efforts – a key priority for the REIT

  • CapitaLand Retail China Trust’s strong operating record was maintained during the quarter with tenants’ sales and shopper traffic up 2.8% and 0.3% y-o-y respectively. Rental reversions came in at +7% and +7.5% for 2Q19 and 1H19 respectively.
  • Excluding positive rent impact arising from tactical portfolio decisions, the manager estimates that underlying rental reversionary growth would have been approximately +4.2% YTD Jun 2019.
  • The strong reversions were largely attributed to active tenancy adjustment efforts, which we believe will have a lasting effect on sustainability and growth of future rents.
  • The 2.3% valuation uplift further reflects the portfolio’s strength and valuers’ optimism over longer-term prospects for CapitaLand Retail China Trust’s core multi-tenanted portfolio, particularly its two anchor malls in Beijing.
  • While Mingzhongleyuan is currently facing near-term challenges in occupancy, it should soon see brighter days if plans to introduce prominent F&B and/or co-working anchors into the building materialises.

Replicating successful Rock Square acquisition

  • CapitaLand Retail China Trust has delivered substantial value-add post the acquisition of Rock Square in Jan 2018. Through the injection of new concepts and offerings and asset reconfiguration, it has successfully repositioned the mall and unlocked higher growth in the process.
  • Rental reversions have remained consistently strong at high double-digit levels, ranging between 15.1% and 29.3% each quarter since 1Q18. Tenants’ sales growth (on a per sqm basis) has since jumped 26% y-o-y, led mainly by the F&B segment, which gained a remarkable c.30% y-o-y. The retail category has also done well, expanding 10% y-o-y.
  • With the divestment of Wuhu now complete, this allows CapitaLand Retail China Trust to refocus on its core portfolio of Tier 1 and soon, promising Tier 2 cities.
  • Its proposed acquisitions in Changsha and Harbin are poised to deliver immediate DPU accretion of 1.7- 1.9% on a pro forma basis.
  • Strong organic growth prospects in its core portfolio, coupled with full-year contributions from the three incoming malls, are set to reignite growth for CapitaLand Retail China Trust. There would be further upside if its success in driving value-add at Rock Square is replicated in Harbin and Changsha.
  • Assuming 50%/50% debt/equity funding mix for the acquisition of these three malls, we project DPU growth to accelerate to c.4% CAGR over FY19F-21F.

Carmen TAY DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2019-08-01
SGX Stock Analyst Report BUY MAINTAIN BUY 1.800 SAME 1.800