CapitaLand Retail China: Trust Weaker RMB and higher property tax provisions for Beijing properties dented earnings amidst stable mall operations October 26, 2016 411

PSR Recommendation: ACCUMULATE Status: Maintained
Target Price: 1.62
  • 3Q 2016 NPI in RMB terms grew 0.6% y-o-y. RMB weakened against SGD by c.8.1% from 3Q15 to 3Q16.
  • New Value-Added Tax (VAT) and property tax provisions also impacted earnings.
  • New acquisition Galleria to boost portfolio earnings from 1 Oct 2016.
  • We remain positive on China’s retail sales and CRCT’s portfolio of shopping malls.
  • Maintain ACCUMULATE with unchanged DDM-derived target price of S$1.62.


What is the news?

CapitaLand Retail China Trust (CRCT) announced a 3Q 2016 DPU of 2.36 Singapore cents, a 10.6% y-o-y drop. Weaker growth from Beijing malls due to higher property tax provisions to cater to a change in Beijing property tax policies, VAT expenses and a weaker RMB against the SGD contributed to a 10.6% y-o-y fall in 3Q DPU. Portfolio occupancy remained stable at 95.2% from 95.1% in FY15, and YTD rental reversions came in at 5.6% (vs 8.1% in FY15).

Higher property tax provisions, VAT, and weaker RMB adding to retail headwinds.

On top of slower YTD tenant sales growth of 1.8% (vs 11.6% in FY15), CRCT had to contend with higher property tax provisions, VAT, and a weaker RMB. Excluding the impact of the additional property taxes, 3Q16 NPI in RMB terms would have been 7.4% higher y-o-y.


How do we view this?

Light at the end of the tunnel for CapitaMall Minzhongleyuan in December 2016.

The road closure of Zhongshan Avenue for the construction of the new Subway Line 6 station impacted the operations of CapitaMall Minzhongleyuan. The road and new Subway station is now slated to reopen on 28 December 2016. Occupancy for the mall improved to 80.1% from 70.5% in 2Q16 with leasing momentum increasing. With the impending light at the end of the tunnel approaching, we expect Minzhongleyuan to start registering strong y-o-y growth in tenant sales and NPI from 4Q16.

Portfolio tenant sales stabilizing at low single digits growth.

Despite slowing portfolio tenant sales growth, we note that tenant sales growth y-o-y has been stabilizing at low single digit for the past three quarters. (Q1: 1%, Q2: 1.2%, Q3: 1.8%). We also note China’s improving sentiment and retail sales data in recent months since hitting a bottom of 10% y-o-y growth in May 2016. We remain confident of management’s ability and strong relationships with retailers to continue to attract quality retailers to boost tenant sales and mall rental revenue.

Figure 1: Ability to attract quality tenants to improve tenant sales and mall rental


Source: Company, Phillip Securities Research (Singapore)

Figure 2: China Monthly Retail Sales y/y growth


Figure 3: CRCT Portfolio Statistics and Rental Reversions


Investment Action

Maintain ACCUMULATE with unchanged target price of S$1.62.

We maintain our ACCUMULATE rating with an unchanged DDM-derived target price of S$1.62. With most of its main malls in Beijing largely stable operationally, CRCT continues to provide investors with exposure to the growing Chinese consumer spending power stemming from rapid urbanization in China.


Figure 4: Peer Comparison Table



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About the author

Profile photo of Tan Dehong

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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