• FY17 NPI and DPU were within our expectations.
• Stable portfolio occupancy with rental reversion inching up from FY16.
• S$3.7mn capital distribution from CapitaMall Anzhen’s divestment gains.
• 6% yoy drop in 4Q17 NPI at CapitaMall Grand Canyon (CGC) due to operational review checks by authorities.
• Maintain NEUTRAL with unchanged DDM-derived target price of S$1.66.

The positives

+ Stable portfolio occupancy with rental reversion inching up from FY16. FY17 Portfolio occupancy remains stable at 95.4%, with rental reversions inching up to 5.6%, led by the two largest malls in the portfolio Wangjing and Xizhimen.

+ S$3.7mn capital distribution from CapitaMall Anzhen’s divestment gains. This is to make up for the loss of income from the property from 1 July 2017. Total net gain from the Anzhen divestment was c.S$32mn.

The negatives

– 20.6% yoy drop in 4Q17 NPI at CapitaMall Grand Canyon (CGC) due to disruptions to trading activities. An operational review by authorities leading up to the 19^th National Congress led to disruptions in trading activities in CGC in Fengtai district, Beijing. Contributing to the drop was also the absence of a tax refund which took place in 4Q16. We expect the impact to be one-off in nature.

– Effective tax rate higher at 31% for FY17 (vs 28.6% FY16). As a result, taxes paid was 54% higher yoy. This is due to under provision of taxation from prior years and withholding tax payment on disposal of equity interest in Anzhen.

Outlook

We expect flat DPU growth for FY18e, with revenue contribution from Rock Square starting Feb’18, partially offset by a higher number of units in issue post private placement. Portfolio rental reversion should hover in the mid-single digit range led by Wangjing and Xizhimen.

Maintain NEUTRAL with unchanged target price of S$1.66.

We roll our forecasts forward to FY18 and target price remains unchanged. This translates to a FY18e yield of 6.1% and P/NAV of 1.02. Our forecast assumes a flat SGD/RMB exchange rate. We also prefer to see a more sustainable pick-up in rental reversions accompanied by corresponding improvement in tenant sales before relooking at our recommendation.

Figure 1: CRCT portfolio statistics – Rental reversions stabilizing in mid-single digits, though tenant sales has yet to catch up

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

Figure 3: Peer Comparison Table