CapitaLand Retail China Trust - DBS Research 2021-01-12: Divestment Of Underperforming Mall MinzhongLeyuan A Positive Surprise


CapitaLand Retail China Trust - Divestment Of Underperforming Mall MinzhongLeyuan Is A Positive Surprise

  • CapitaLand Retail China Trust (SGX:AU8U)'s divestment of underperforming mall MinzhongLeyuan (民众乐园, at Wuhan, Hubei) above book value is a positive signal.
  • Divestment proceeds of ~S$47m can be used to pare down debt and optimise balance sheet.
  • The divestment of MinzhongLeyuan is relatively immaterial but a sharper positioning, divestment of other ‘non-core’ assets could further boost CapitaLand Retail China Trust's share price.

Divestment of MinzhongLeyuan (MZLY)

  • CapitaLand Retail China Trust announced the divestment of MinzhongLeyuan Mall (MZLY) yesterday at an agreed price of RMB 458m (~S$93.4m) which is ~3.9% above latest asset valuation of RMB 440m (~S$89.8m) and above its original cost of RMB 395m (S$76m) back in 2011.
  • In S$ terms, the proposed sale is expected to free up approximately S$46.8m in net divestment proceeds for CapitaLand Retail China Trust post loan settlements and fees.
  • Divestment proceeds will be recycled to pare down debt, finance capex and for internal working capital purposes.
  • The divestment is expected to be completed by 2Q this year.

Our thoughts:

Divestment will sharpen CRCT’s portfolio exposure

  • MinzhongLeyuan had long been a low hanging fruit for CapitaLand Retail China Trust to recapitalise its balance sheet with a view to steering towards the new economy clusters or malls with more dominant positioning.
  • Since the mall was acquired in 2011, its positioning within the submarket has weakened over time due to increased supply and in most recent times, due to the government’s resettlement initiatives in the area. This has resulted in occupancy deteriorating over time from 63% in 1Q19 to 49% in 1H20.
  • The asset is also non-core (in our view) to CapitaLand Retail China Trust’s portfolio, contributing less than 0.1% to revenues based on our 2021 estimates and operating below breaking even level since 2015. We thus view the divestment as positive.
  • We understand the buyer is a SOE with plans to turn the asset into a themed entertainment centre.

Other non-core assets may be next on the radar

  • Other non-core assets such as CapitaLand Retail China Trust’s last standing master-leased mall – CapitaMall Shuang Jing - may be next on the divestment radar following an earlier divestment of another master-leased mall, Erqi.
  • While CapitaLand Retail China Trust had been delivering strong rental reversions on its multi-tenanted malls, room for further growth at these master-leased malls is limited in comparison due to the longer nature of these leases. CapitaLand Retail China Trust had proven to be able to divest assets above book, which should help the REIT to extract value from the sale of these non-core assets.

Capital recycling to higher yielding assets

Geraldine WONG DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2021-01-12
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