CapitaLand Retail China Trust - DBS Research 2020-11-06: China Behemoth In The Making; Time To Board The CRCT Ship!


CapitaLand Retail China Trust - China Behemoth In The Making; Time To Board The CRCT Ship!

  • CapitaLand Retail China Trust is taking a leap higher with proposed S$1bn acquisition deal to acquire business parks and additional stakes in Rock Square from Sponsor.
  • AUM to enlarge c.28% to S$4.5bn; addition of business parks a strategic diversification which strengthens resilience and future-proof overall returns.
  • Accretion to SPUs of 5.1% without over-stretching balance sheet a positive.
  • The deal will likely be the first to come as CapitaLand Retail China Trust will continue to grow into a China behemoth with exposure within the mixed development/business park/retail sectors targeted at 40%/30%/30%. We maintain our BUY call as we look forward to revising our estimates.
  • Time to board the CapitaLand Retail China Trust ship!

What's New

S$1bn acquisition deal in five business park portfolios/assets and remaining 49% stake in Rock Square

  • CapitaLand Retail China Trust (SGX:AU8U) has proposed to acquire five business park properties (varying stakes of between 51% and 100%) and the remaining 49% stake in Rock Square for RMB4,945m (S$1,005.5m). See CapitaLand Retail China Trust Announcements.
  • The proposed acquisition price is at a discount of c.1.3% to independent valuations with a net property income (NPI) yield of 5.8%, above the existing portfolio’s yield of 4.3%.
  • The business park portfolio will be acquired at an initial yield of 6.8%, with Rock Square at a 4.4% NPI yield.

AUM enlarges to S$4.5bn with diversification triple-checked

  • Following the acquisition, CapitaLand Retail China Trust’s enlarged portfolio will consist of 18 properties, with AUM enlarging 28.5% to S$4.5bn and GFA increasing by 76% to 1.77m sqm.
  • The longer land lease tenures for the business park assets in China at c.50 years will also extend the land lease tenure for CapitaLand Retail China Trust’s existing portfolio (existing expiries between 2041 and 2054).
  • Business parks and industrial spaces will contribute 15% and 5% respectively to the enlarged portfolio by GRI by asset class from the existing full retail exposure.
  • The acquisition will carve out new geographical markets (Suzhou, Xi’an and Hangzhou) for CapitaLand Retail China Trust, and is expected to contribute c.20% to CapitaLand Retail China Trust by GRI. This reduces CapitaLand Retail China Trust’s geographical concentration in Beijing from 48% to 36%.
  • Top 10 tenant exposure will also be reduced significantly from 18.4% to 15.1% (by GRI), with the largest single tenant now accounting for 3.5% of portfolio (from 4.8%).
  • Within the new business park exposure, electronics, engineering and e-commerce are the three largest tenant base sectors by GRI at 19%/14.8%/11.8% respectively, with 62% of tenants within emerging high-growth economies.

Onboarding China’s new high-growth economies

  • The business park acquisition will be CapitaLand Retail China Trust’s maiden assets in three leading Tier 2 cities of Suzhou, Xi’an and Hangzhou, China.
  • Suzhou was ranked first amongst economic development zones for the last four consecutive years.
  • Xi-An is one of the largest business park markets in terms of economic scale in North-western China.
  • Hangzhou is an upcoming key hub for new economy businesses and the home of internet giants such as Alibaba and NetEase.
  • The business park incorporates a modern work-live-play concept and offers a comprehensive suite of amenities and a campus-style environment near green communal landscapes.
  • Prominent tenants within the business park portfolio include Ping An Insurance, Nio and Qualcomm amongst many other reputable domestic companies and multi-national corporations (MNCs).
  • Committed occupancy of the business park and industrial asset portfolio was at 91.5% as at 30 September 2020 with potential for further enhancement in the medium term.

Confidence in Rock Square with a historical double-digit rental reversion

  • Rock Square is a mall in which CapitaLand Retail China Trust has an existing 51% ownership. CapitaLand Retail China Trust will be looking to fully acquire the remaining stake in the mall as part of the acquisition deal.
  • The asset had been under the care of CapitaLand Retail China Trust for three years, over which the managers had managed to deliver double-digit rental reversion yearly since 2018 to 9M20.
  • As one of the largest shopping mall entrenched in the Jiangnanxi retail cluster (Guangzhou), the asset has demonstrated resilience post-COVID lockdown with a committed occupancy of 93.8% (as at 3Q20).
  • More AEI has been planned at the asset to yield an additional 1,000 sqm of NLA over the next 2-3 years, with the improved reconfiguration to appeal to high-yielding F&B tenants and improve shopper circulation.
  • The manager is targeting a 15% ROI for this project.

Outlook and recommendation

Value-accretive acquisition; income resilience to be enhanced

  • The NPI yield of 6.8% for the business park portfolios is slightly ahead of our expectations of c. 6.0-6.5%, which we believe is value accretive and enhances the overall portfolio yield.
  • We like the quality of the tenants and resilience offered with this acquisition. Business parks have proved to be resilient through the pandemic with strong rental growth profile, and will aid CapitaLand Retail China Trust in seeking a more optimal balance and over time, de-link its income profile against economic gyrations, complementing its existing retail exposure.
  • The land tenures for business park properties of over 50 years will lengthen CapitaLand Retail China Trust’s overall land lease tenures, further enhancing the resilience of its NAV.
  • In terms of potential upside in yields, business park rental growth is expected to rebound from a marginal 0.1% dip in 2020 to a growth of 2.5% and 1.6% in FY21/22, implying potential upside to rents and yields in the medium term.
  • We understand that the target property weighted average lease expiry (WALE) is similar to a typical office portfolio of c.2-3 years, with potential to mark-to-market the rents when leases come due.
  • Tier 2 business park assets had benefitted from decentralisation efforts by the Chinese government and are expected to enjoy a stronger rental growth outlook in comparison to Tier 1 cities.
  • There remains further value extraction potential through the alignment with strategic partners at AIH and SHSTP which hold the remaining 20% stake in the respective portfolios, while Ascendas Xinsu is expected to see further NAV and DPU upside with potential repurposing and redevelopment in a joint-venture with CapitaLand (SGX:C31) (which will hold a 49% stake in the property).

Rock Square under its belt

  • The decision to take full ownership of Rock Square also further anchors CapitaLand Retail China Trust’s asset rejuvenation plans for its retail portfolio.
  • CapitaLand Retail China Trust had in the past years been offloading older malls and enhancing exposure to anchor malls such as through the Hohhot Bundle swap.
  • Further bright spots within the retail portfolio we see happening are the divestments of master lease malls and lower performing assets to optimise and unlock capital.
  • We look forward to the launch of Yuquan mall come year-end as part of the Hohhot deal.

DPU accretion of +5.1% (vs annualised 1H20 pro forma) or 2.8% (vs 2019 DPU)

Geraldine WONG DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2020-11-06
SGX Stock Analyst Report BUY MAINTAIN BUY 1.550 SAME 1.550