Friday, August 23, 2013

CapitaRetail China Trust : Worth a re-look (DBSV)

CapitaRetail China Trust
BUY S$1.38
STI : 3,108.99
Price Target : 12-month S$ 1.60 (Prev S$ 1.75)
Worth a re-look
• Strong operating metrics underscores AEI success
• Acquisition of Grand Canyon Mall likely accretive
• Maintain Buy, TP revised to S$1.60

Coming into its own. The recent strong 2Q results highlighted that operating metrics are tracking closely to sales growth in China. This demonstrates CRCT’s successful key asset enhancement initiatives which had resulted in expanding tenant sales as well as shopper traffic, resulting in the trust’s ability to boost rental reversions. This solid track record bodes well for its upcoming AEI at Minzhongleyuan Mall in Wuhan. We believe its ability to generate better asset returns through this route would provide the trust with a strong inbuilt engine for growth and catalyst for share price performance going forward.


Proposed acquisition of Grand Canyon Mall in Beijing to be accretive. Grand Canyon Mall is the trust’s first third party acquisition and demonstrates CRCT’s ability to work with CMA to leverage on its platform and network. The under-rented mall is expected to be earnings accretive when the deal is completed in 2Q14, with NPI yield projected to rise from the present 3.5% to 5% and likely to reach 6-7% by 2016-17 when its leases are fully re-contracted. CRCT plans to fund this Rmb1.82bn acquisition via existing cash, new debt as well as equity. The recent roll out of its Dividend Reinvestment Plan offers unitholders the flexibility of dividend options while the trust can also conserve cash for its acquisition.

Maintain Buy. We retain our Buy call with an adjusted DCF-backed TP of S$1.60, as we adjust our sector-wide beta up by 0.05x and adopt a higher through-the-cycle interest cost of 4%. CRCT offers investors a pure China consumption driven exposure, which we believe will remain robust, through its portfolio of retail malls. CRCT’s share price had weakened in recent weeks in tandem with the broader market, and at the current share price, valuations look attractive. The stock provides a FY13-14F yields of 6.8-7.2% and total return of 23%.

Coming into its own
CRCT’s strong set of 2Q13 results with revenue and NPI growing 5% and 8% y-o-y respectively continues to demonstrate the characteristics of a maturing portfolio with rental reversions that are tracking closer to China retail sales growth and a beneficiary of asset enhancement (AEI) works. The AEIs have enabled the trust to unwind some of its long master lease structures and improve utilisation of its portfolio assets, key factors that provide an inbuilt engine of organic growth for the trust.

In 2Q13, CRCT saw rental reversions of c17.3% as well as higher tenant sales (+10% y-o-y) showing that their malls are performing well in their respective micro markets against weaker sentiment for China at large. The strong performance was also supported by higher shopper traffic footfalls.

The largest mall in the portfolio, CM Xizhimen, where the larger units were reconfigured and F&B options refreshed, helped boost shopper traffic in the property by 12% q-o-q while tenant sales grew 20% y-o-y. At CM Saihan, which was successfully transformed into a multi-tenanted mall from a master lease structure, tenant sales in 2Q was up 28% y-o-y and helped grow gross rental revenue by 18.5% y-o-y. These solid performances bode well for its other ongoing AEIs such as at Minzhongleyuan in Wuhan.

Key AEI works in the coming months include the closure of Minzhongleyuan (MZLY) for 9-10 months from 2Q13 onwards and is scheduled to reopen in May 2014. Post AEI, higher rent and income are likely to compensate for the earnings vacuum in the first 4-5 months of FY14. The Manager intends to enhance the shopping experience at MZLY by upgrading facilities to attract a new tenant mix, brands and shoppers. It will also optimise use of large spaces currently leased to single tenants and introduce more exciting brands and F&B choices. Layout will also be improved by reconfiguring space to improve visibility and introduce additional corridors to enhance circulation.

Purchase of Grand Canyon Mall to be accretive
Going into the next 6-9 months, CRCT is proposing to buy the under-rented Grand Canyon Mall, which we believe will likely boost yields and be a catalyst for share price performance in the medium term.

CRCT has exercised its option to purchase the Grand Canyon Mall in Beijing in a back-to-back deal with CMA. This will be the trust’s first third party acquisition. The mall, located in the Fengtai District in Beijing, has a GFA of c70,000sm. It currently has 163 tenants including key names such as Carrefour, Poly Cinema, Gap, Sephora and Watsons. The property was acquired at a total cost of Rmb1.82bn (property Rmb1.74bn) translating to a cost of Rmb26,000psm. The deal is expected to complete by 2Q14, after approval by the Chinese government.

The deal highlights the two-fold benefit of being part of the group, which has the ability to leverage on its network and platforms to secure and warehouse good operational assets in addition to a traditional developer/ REIT model which CRCT would, otherwise, not be able to obtain, thus enabling the latter to growth its AUM more rapidly.

In addition, the property is under-rented. Based on a present occupancy of 92.7%, the mall is trading at an NPI of 3.5%, expected to reach 5% by 2014 and expand to a target yield of 7-8% by 2016-17 after positive rental reversions.

CRCT intends to fund this purchase via a combination of existing cash, new debt (total 78%) as well as equity (22%). With the roll out of its Dividend Reinvestment Plan (DRP) in the recent 2Q13 results, which provides unitholders an option of receive distribution in units (at a 4% discount) in lieu of cash, we believe this is a cost effective way to raise equity as well as partly conserve cash to finance the purchase of Grand Canyon Mall. If fully exercised, the DRP could increase CRCT’s share base by 25m units (3.3% of current total units in issue). This will likely be more than offset by the new stream of income from the mall. Current gearing is at 23.5%

Valuation
Maintain Buy. We retain our Buy call with an adjusted DCF backed TP of S$1.60, as we adjust our sector wide beta up by 50bps and adopt a higher through-the-cycle interest cost of 4%. CRCT offers investors a pure China consumption driven exposure, which we believe will remain robust, through its portfolio of retail malls. The trust’s share price had weakened in past weeks on the back of current market weakness and currently provides yields of 6.8-7.2% and total return of 23%.



Source/Extract/Excerpts/来源/转贴/摘录: DBSV-Research,
Publish date: 22/08/13

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