CapitaLand Retail China Trust - DBS Research 2020-02-10: Catch The Portfolio Rejuvenation Wave


CapitaLand Retail China Trust - Catch The Portfolio Rejuvenation Wave

  • While short-term overhanging risks persist, we remain excited with CapitaLand Retail China Trust (SGX:AU8U)'s long-term milestones which remain intact as portfolio rejuvenation efforts are expected to unwind this year. We expect a strong DPU growth coming from the acquisition of three sponsor malls, while the Hohhot asset swap will underpin a stronger growth profile in the medium term.
  • BUY call maintained, Target Price adjusted for more conservative growth estimates.


DPU largely in line with estimates

  • Revenue grew 10.1% y-o-y to RMB1,203m, while NPI grew 15.5% y-o-y to RMB835m. This was mainly contributed by the first full-quarter contributions from CapitaLand Retail China Trust’s newly acquired sponsor malls, including Capitamall Xuefu, CapitaMall Yuhuating and CapitaMall Aidemengdun.
  • Distributable income of S$105.6m (12.6% increase y-o-y) made up 99% of our full-year estimate of S$107m.
  • DPU for the quarter was a slight dip at 2.34 Scts (4Q18: 2.41 Scts), bringing full-year 2019 dividends of 9.90 Scts (2.1% rise y-o-y), in line our full-year forecast of 10.0 Scts.

Portfolio maintains its resilience

  • Portfolio occupancy was flattish at 96.7% with positive rental reversions of 6.4% across the portfolio’s multi-tenanted malls.
  • Factoring in the acquisition of sponsor malls, total tenant sales for the year grew 14.4%, driven by a shopper traffic growth of 15.2%.
  • Total portfolio valuation rose to RMB20.0bn, representing a 26.0% increase from the last round of valuations at 30 June 2019.
  • All malls registered valuation gains in the range of 0.6- 3.7%, while CapitaMall Qibao and Mingzhongleyuan (MZLY) registered a drop in valuation of -5.2% and - 4.9% respectively.

Low-hanging fruits on the radar for divestments

  • Announced divestment of CapitaMall Erqi at RMB777m, at a 20.5% premium above the asset’s latest valuation. Net gain from the divestment would amount to S$12.7m after completion in 3Q20.
  • We estimate the mall’s exit yield to be at 4.5%.
  • This is in line with the manager’s strategy of divesting non-core and master-lease malls within the portfolio to unlock value and further pursue accretive growth opportunities.
  • The one-off compensation from pre-termination of master-lease at CapitaMall Erqi will help to absorb the loss of net property income from the asset after divestment, which is c.4.1% of total NPI for FY19.
  • Post transaction, CapitaLand Retail China Trust’s exposure to department stores by GRI will decrease from 5.1% to 1.4%, with the biggest tenant concentration reduced from 8.3% to 4.1%. We think this is a positive development given the ongoing pressure the department store business is facing in China.

Outlook in light of the 2019 (2020?)-nCoV situation

  • More China malls are taking preventive measures in the face of the 2019-nCoV epidemic.
  • CapitaLand Retail China Trust announced the closure of MZLY, its only asset that is situated in Wuhan, at the heart of the epidemic.
  • The financial impact with MZLY’s closure is not expected to be material given that the mall contributed only c.0.5% of NPI in 9M19.
  • Other malls within CapitaLand Retail China Trust will operate on shorter hours, and limit mass participation events as required by the respective local authorities.
  • We note that 1,227 leases will be due for renewal in 2020, representing 34.9% of GRI. Should the coronavirus situation worsen, there remains a risk of certain non-renewals that may hit occupancy rates.
  • However, we take comfort in CapitaLand Retail China Trust’s ability to provide a temporary capital buffer to supplement DPU for the coming years should the need arise.

Unwinding of portfolio rejuvenation efforts; capital reserve to provide a sufficient buffer

  • CapitaLand Retail China Trust’s asset swap in Hohhot (Inner Mongolia) will start unwinding this year and bump up DPUs starting from 2021.
  • Yuquan Mall is currently undergoing fit-out works as ownership of the asset was handed over to CapitaLand Retail China Trust at end-2019.
  • The manager aims to open the mall by the end of this year with a target occupancy of above 90% following the sequential transfer of existing tenants from Saihan mall to Yuquan mall.
  • Dwindling revenue contributions from Saihan mall and the lack of contributions from Erqi mall would likely result in a temporary income vacuum towards 3Q20- 4Q20 based on our estimates.
  • Nonetheless, we estimate that any income loss can be buffered by CapitaLand Retail China Trust’s existing capital reserve that works out to be c.3.7 Scts per unit.
  • The c.S$45m capital buffer is amalgamated from CapitaMall Anzhen’s divestment proceeds, c.S$5.3m of FY19’s distributable income which was retained for working capital purposes and CapitaMall Erqi’s divestment gains after completion in 3Q20.

Financial metrics within healthy levels; RMB weakness a short-term headwind

Singapore Research DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2020-02-10
SGX Stock Analyst Report BUY MAINTAIN BUY 1.75 DOWN 1.800