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

CAPITALAND RETAIL CHINA TRUST (SGX:AU8U)

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.

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 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.

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.

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.

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.

About 80.0% of CapitaLand Retail China Trust’s total term loans is on fixed interest rates, which will mitigate interest rate volatility.
CapitaLand Retail China Trust’s currently hedges approximately 62% of undistributed income into SGD to absorb the impact of foreign currency fluctuations.
Gearing was a healthy 36.7%, with a moderately low average bt of 2.98%.
See Capitaland Retail China Trust Share Price; Capitaland Retail China Trust Target Price; Capitaland Retail China Trust Analyst Reports; Capitaland Retail China Trust Dividend History; Capitaland Retail China Trust Announcements; Capitaland Retail China Trust Latest News.

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