CapitaLand Retail China Trust: Mall rejuvenations at multi-tenanted malls driving NPI October 24, 2017

PSR Recommendation: NEUTRALStatus: MaintainedTarget Price: SGD1.64
  • 3Q17 NPI and DPU were within our expectations.
  • Portfolio occupancy (95.6%) and rental reversions (7.5%) remain healthy.
  • Stable average cost of debt at 2.42%.
  • Tenant sales slowing, 3Q17 down 2.0% YoY.
  • Maintain NEUTRAL with unchanged DDM-derived target price of S$1.64.

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POSITIVES

+ Stripping out impact from acquisition (Xinnan) and divestment (Anzhen), NPI grew 6.1% YoY in RMB terms. Multi-tenanted (non-Master lease) malls grew NPI by 4.9%, excluding new acquisition Xinnan. This is driven by stable portfolio occupancy (3Q17: 95.6% vs 2Q17: 96.2%) and positive rental reversions of 7.5% for the 20,283 sqm of leases renewed in the quarter.

+ Stable average cost of debt at 2.42%: This compares with 2.44% as at 2Q17. The stable cost of debt is achieved despite the re-financing of a S$300mn 1-year bridging term loan secured in FY16 for the financing of Xinnan’s acquisition into longer term debt. The new loan now expires >2021. Gearing remains stable at 35.4%.

+ Gradual shifting away from underperforming department stores into higher yielding trade sectors: Percentage of total rental income as at Sept17 (disclosed in results slides) from department stores saw a significant drop YoY to 6.5% (FY16: 16.8%). The shift is towards higher yielding trade sectors such as fashion and F&B.

NEGATIVES

Tenant sales slowing, 3Q17 down 2.0% YoY (2Q up 1.9% YoY): YTD tenant sales is up 0.8%. Weaker trade sectors include leisure (cinema) and supermarkets, while stronger sectors include fashion and F&B.

OUTLOOK

We expect flat DPU YoY for FY17e and a 5.1% increase for FY18e. Tenant sales should stabilise after falling the past 2 years as CRCT’s malls mature. Mall rejuvenations at CapitaMall Wangjing, Xinnan and Minzhongleyuan are expected to drive FY18 tenant sales and rental reversions.

Maintain NEUTRAL with unchanged target price of S$1.64.

This translates to a FY18e yield of 6.4% and P/NAV of 1.0. At a current yield of 6.0%, CRCT is trading at -1s.d. for post-GFC yields (Figure 2), which we deem fair given that tenant sales and rental reversions are stabilising around mid-single digits as malls mature. We also prefer to see a more sustainable pick-up in rental reversions or more accretive acquisitions before relooking at our recommendation.

 

Figure 1: CRCT portfolio statistics – Rental reversions stabilizing in mid-single digits 

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Figure 2: CRCT trades at close to -1S.D. average yields (post GFC) and above average P/NAV

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Figure 3: Peer Comparison Table 

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Tan Dehong
Research Analyst
Phillip Securities Research Pte Ltd

Dehong covers primarily the REITs and property developer sector. He has close to 7 years experience in equities related dealing and research roles.

He graduated with a Masters of Science in Applied Finance from SMU and Bachelors of Accountancy from NTU.

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