CRCT – DBSV

Ramping up growth engines

Upgrade to BUY on acceleration in earnings growth

Highest yielding retail reit and undemanding P/BK

More room for growth via AEI works, tenancy remixing and acquisitions

Upgrade to BUY. CRCT offers investors a pure play into the largest and fastest growing retail market in the world, China. We believe that investors should re-evaluate this stock as earnings growth is set to accelerate. The portfolio is maturing with growing shopper footfalls and rising tenant sales while tenancy remixing and asset enhancement activities over the past 24 months have also created a greater correlation between rising retail sales and rental reversions. It is trading at an undemanding 1x FY12F P/BV and offers attractive yields of 6.9 -7% for both FY12 and FY13 – one of the highest amongst Asian retail reits. We see strong organic growth from rising rentals and AEI works, while its large and visible pipeline from its sponsor (CMA) would provide a solid platform to grow its portfolio. We upgrade the stock to BUY. TP is raised to S$1.48, offering investors a total return of 20%.

Strong positive rental reversion to continue, more value to be unlock. Going forward, strong positive rental reversion will be likely supported by (1) the opening of the basement 1 connection at Xizhimen mall to the subway interchange in Dec 11. Leveraging on the increased footfall (+30% y-o-y), the manager intends to widen its retail offering and transform it into a destination mall, which should attract strong leasing interest; (2) a series of tenancy adjustments to the seven-storey block at Wangjing to drive footfall. This should help raise average rents, which is at a significant discount to market rents; and (3) the execution of the AEI works at Mingzhongleyuan (MZLY). AEI works costing Rmb74m will improve the mall’s overall yield from c.6% to 8.4% and generate an estimated incremental NPI of Rmb 8.0m post the completion of the AEI works. In the longer term, we see significant value to be unlocked from the repositioning of its three single tenant malls to multi-tenanted buildings.

Sound financial metrics, able to leverage on sponsor’s pipeline. Gearing at c.28% is one of the lowest in the reit space and the trust has limited refinancing obligations this year. In addition, the S$500m MTN facility established recently will enable the trust to tap into funds when necessary.

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