Perennial China Retail Trust
2014 - eyes on operational assets
DPU came in a shade below our forecast, at 23% for 4Q and 92% for FY13 due to higher operating expenses. Existing earn-out continues to support distributions but is set to expire in 2014. We, therefore, see 2014 as an important year, during which its operational assets will the focus. Our FY14-15 DPUs drop by 6-10% as we factor in project delays. We maintain our Hold rating and RNAV-based target price. Health of its underlying operations can be a re-rating or de-rating catalyst.
FY13 core earnings from JVs increased 6.5% yoy due to improving Shenyang assets as committed occupancy rose for both Longemont Shopping Mall (LSM) and Red Star Macalline Furniture Mall (RSMF). All assets other than RSMF were revalued upwards, resulting in a 1.6% valuation gain for the overall portfolio. Jihua Mall, which opened in Aug 2013, has achieved strong committed occupancy of about 95%.
Core earnings remained weak and missed our forecast due to higher-than-expected pre-operational expenses for Jihua and Qingyang mall. Committed occupancy remained low for Longemont Office at 46%. The expected commencement dates for Dongzhan and Qingyang Mall in Chengdu have been pushed back to 1Q15 and Apr 2014, respectively (vs. 4Q13-1Q14 and 3Q14 announced in 4Q12) as bad weather hampered construction. On the balance sheet front, we see incremental risks from increased borrowing to make progressive payments and a relatively low debt service ratio of 1.94.
With the earn-out set to expire by end-2014, we see this year as an important one where its operational assets will be put to the test. While committed occupancy for its newer malls such as Qingyang and Jihua is healthy at 85-93%, we believe that earnings will be reduced by higher marketing expenses and rent-free periods for their first year. The LSM will be a good litmus test for PCRT’s management capabilities given that it is the longest operating mall in the portfolio and 48% of its leases (by gross rental income) expire in 2014. We will be looking at its retention rate and rental reversion as key indicators.
Publish date: 10/02/14