• 1H17 revenue, NPI and DPU were within our expectations.
• Occupancy and rental reversions in main Beijing and Chengdu malls remain healthy.
• Tenant sales growth look to be stabilising, at low-mid single digit as malls mature.
• We raise our FY18e DPU by 4.6% to factor in the stronger rental growth prospect for CapitaMall Wangjing.
• Maintain NEUTRAL with higher DDM-derived target price of S$1.64.

The positives

+ Occupancy and rental reversions in main Beijing and Chengdu malls remain healthy: CRCT’s 1H17 overall rental reversions improved to 5.2% (FY16: 3.9%). The main Beijing and Chengdu multi-tenanted malls (c.70% of total portfolio) maintained near full occupancy with rental reversions ranging from 0.8%-11% in the quarter. We expect overall rental reversions to stabilise in the mid-single digit range as CRCT’s main Beijing malls mature.

+ Conversion of part of departmental store to specialty retail space in CapitaMall Wangjing could increase portfolio NPI by 1% in FY18: CRCT will recover c.4,700sqm of department store space in Wangjing (c.9% of total mall NLA) from anchor tenant Beijing Hualian Group to house higher-yielding specialty stores. Rental reversions are expected to range from 50%-60%, according to management. Assuming 50% rental reversions, we estimate this initiative alone could increase portfolio NPI by at least 1%. (vs -3.2% organic NPI growth for total portfolio in FY16).

+ Tenant sales stabilising, at low single digit rate: Tenant sales growth have fallen from 2014 (16%), but looks to be stabilising at the mid-single digit level as CRCT’s malls reach a mature stage.

The negatives

– Divestment of CapitaMall Anzhen could mean loss of rental income in short term as divestment proceeds get re-allocated for other accretive acquisitions: Sale price represents an exit yield of c.5.9% and a net gain of S$31.5mn (2.3x Anzhen’s FY16 NPI). Rental income in FY18 could face a shortfall as a result of the divested property unless partial divestment proceeds are re-distributed.

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.

Maintain NEUTRAL with higher target price of S$1.64.

We raise our FY18e DPU by 4.6% to factor in stronger growth prospects for Wangjing. We expect management to utilise divestment proceeds to stabilise DPU from loss of income if needed. We also raised our terminal growth rate to 1.5% (from 1%) as divestment proceeds from Master-leased Anzhen get reinvested into stronger growth malls. This translates to a FY17e yield of 6.1% and P/NAV of 0.98.

Figure 1: CRCT tenant sales stabilizing while rental reversions show signs of improvement

Source: Company, PSR

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

Figure 3: Peer Comparison Table 

Source: Bloomberg, Company, PSR