CapitaLand Retail China Trust - DBS Research 2020-12-09: New Horizons Beyond Scale

CAPITALAND RETAIL CHINA TRUST (SGX:AU8U)

CapitaLand Retail China Trust - New Horizons Beyond Scale

Shopper traffic and tenant sales at c.90% of normalised levels.
Yuquan mall to prepare for year-end launch at a 94% committed occupancy.
8% DPU CAGR as we price in the recent S$1bn acquisition deal; compelling 8.5% forward yield at current CapitaLand Retail China Trust Share Price.
Reiterate BUY call on CapitaLand Retail China Trust with S$1.70 target price.

CapitaLand Retail China Trust (SGX:AU8U)’s shopper traffic has recovered to 89% of pre-COVID levels (3Q19) while tenant sales have recovered to 92% of pre-COVID levels.
Recovery momentum remains strong with a 35% and 26% q-o-q improvement in shopper traffic and tenant sales respectively.
Broader portfolio occupancy improved by 0.3ppt to 93.7% in the quarter.
We note that leasing momentum within Beijing malls, that was hit in the past quarter by city-wide lockdown measures, had since eased in 3Q20.
Occupancy amongst the Beijing malls improved 1ppt to 94.7% q-o-q, led by Xizhimen (+2.6ppts to 95.2%).
Occupancy amongst the non-Beijing malls retreated 0.3ppt to 89.9% in the quarter, with weakness within Rock Square (91.9% occupancy) which is undergoing AEI.
10.4% of leases by GRI will be up for renewal in 4Q20, with 32% expiring next year.
A big portion of lease expiries originate from Yuhuating which has an upcoming lease expiry of an anchor tenant (contributing c.50% of NLA at the mall).

Rock Square is undergoing a reconfiguration project at level 3 to generate five smaller and higher-yielding retail plots in 2020.
Project ROI is expected to be c.15% and new plots will be leased to tenants in the F&B space.
CapitaLand Retail China Trust has plans to extract an additional 1,000 sqm in portfolio NLA over the next 2-3 years.
The launch of Yuquan mall to replace Saihan mall in the ‘Hohhot bundle swap’ remains on track and scheduled for year-end.
The mall surprised with a strong 94% committed occupancy and will place emphasis on concepts such as edutainment and feature ‘eco-garden’ aesthetics.

We price in the recent deal comprising business park assets/portfolios, acquired at an initial yield of 6.8% and on the assumption of a 75% NPI margin and the remaining 49% stake in Rock Square at a 4.4% NPI yield.
Revised DPUs of 10.6 cents/11.0 cents come FY21/FY22 represent a 5.0% yield increment from our previous FY21 forecast.
Our assumptions follow a 44% debt: 40% equity: 16% equity & perpetuals (S$100m) funding structure with revenue contribution to begin at the start of 2021.
Following the acquisition, CapitaLand Retail China Trust’s enlarged portfolio will consist of 18 properties, with its AUM enlarged by 28.5% to S$4.5bn and GFA increasing by 76% to 1.77m sqm.
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 with more deals to ensue.
Going into the medium term, this deal will likely be the first of many as CapitaLand Retail China Trust steers the ship towards a target asset exposure comprised of mixed development/business park/retail sectors targeted at 40%/30%/30%.

Geraldine WONG DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2020-12-09

SGX Stock Analyst Report BUY MAINTAIN BUY 1.70 UP 1.550