PCRT seals lease deal with Shanghai Summit

Contract value for mall lease totals 94.1m yuan over 2.5 years

MAINBOARD-LISTED Perennial China Retail Trust (PCRT) said yesterday that it has leased out parts of its Shenyang Longemont Shopping Mall to Shanghai Summit Group for a total contract value of 94.1 million yuan (S$19.2 million).

The lease agreements cover a total of 57,028 square metres of retail space at Shenyang Longemont Shopping Mall, and will be leased for the purposes of operating an indoor rooftop theme park, indoor ice-skating rink, a supermarket, a Yes Sir Coffee and several other food and beverage outlets.

The lease agreements are for two-and-a-half years, until June 30, 2014, with renewal at the lessor’s option and subject to terms and conditions to be agreed by both parties.

PCRT, which was listed here in June this year, owns half of the mall.

According to PCRT’s trustee- manager, Perennial China Retail Trust Management, the lease agreements and forward renewal terms with Summit will ensure long-term sustainable and stable income for the trust.

The lease agreement with respect to the indoor rooftop theme park and indoor ice skating rink is for a monthly rent of 1.15 million yuan and 132,632 yuan respectively, or 12 per cent of the month’s gross turnover, whichever is higher.

The lease agreement for the supermarket is for a monthly rent of 900,409 yuan or 4 per cent of the month’s gross turnover, whichever is higher.

The agreement for the F&B outlets is 888,023 yuan per month, from Dec 29, 2011 to June 30, 2013. From July 1, 2013 to June 30, 2014, a monthly rent of 947,586 yuan will be charged. Turnover rent is pegged at 13 per cent.

The lease agreement for Yes Sir Coffee is for a monthly rent of 55,967 yuan or turnover rent at the rate of 15 per cent, whichever is higher.

PCRT closed trading yesterday at 47.5 cents.

• Management may have committed to paying $26 mln for ye Dec’11, the fact that amount available for distribution for period to Sept’11 came in at only $6.33 mln vs forecast of $10.38 mln should not be ignored.

• The disappointment was attributed to the 3-month delay in the opening of the shopping mall in Shenyang, China.

• Therefore, while the property business trust‘s market price (note PCRT is not a reit) may well hold, we expect it to continue to languish.

• We do not find the China shopping mall story attractive – just look at CapitaMalls Asia.

• Based on annualized 3.71 cents per unit, yield is 8.2%.

Parkson and Perennial China announce first results since IPO

TWO companies listed this year have announced their financial results.

Department store operator Parkson Retail Asia reported revenue of $106.6 million for the first quarter ended Sept 30, up 19.6 per cent from the last corresponding quarter. Net profit stood at $13.2 million for the quarter, up 29.1 per cent over the same quarter last year.

Parkson began its share trading on Nov 3 after concluding its initial public offering (IPO) on Nov 1. Its offer shares were priced at 94 cents each. It recently opened two malls in Indonesia and one in Kuala Lumpur, Malaysia.

Parkson Retail Asia is a unit of Malaysia’s Parkson Holdings Bhd. Parkson closed at $1.20 yesterday, down 1.5 cents.

Another company, Perennial China Retail Trust (PCRT) had a net loss of $719,000 for the period from June 9 (its listing date) to Sept 30.

The business trust is a developer of retail space in China.

Its initial property portfolio with five properties is worth $1.1 billion.

In a filing to the SGX yesterday, PCRT said that its amount available for distribution to unitholders for the period from its listing to Sept 30 was $6.3 million – $4 million lower than it had forecast. It attributed the shortfall to a three-month delay in the opening of its Shenyang Longemont shopping mall, which took longer than expected to get its fire safety permit from the authorities.

PCRT announced last week that it intends to acquire a 50 per cent stake in Chengdu Longemont Shopping Mall Development from the Shanghai Summit Group for 2.28 billion yuan (S$462.3 million).

Its operating assets now comprise the Shenyang Red Star Macalline Furniture Mall and Shenyang Longemont Shopping Mall.

Its Foshan Yicui Shijia and Chengdu Qingyang Guanghua shopping malls are under development.

With the Chengdu development, PCRT’s asset size is expected to increase to $1.7 billion.

Perennial China Retail Trust closed at 45.5 cents yesterday, up one cent.

Execution on track

• Site visit reaffirms our view that execution is on track at Shenyang Longemont Mall

• Chengdu Qingyang in final stages of design, recent acquisition of 50% of Chengdu Longemont Mall likely earnings and NAV accretive

• Maintain Buy, TP $0.83

Site visit to Chengdu and Shenyang. Our site visit to Chengdu and Shenyang reaffirmed our view that execution is on track. Shenyang Longemont Shopping Mall (SLM) has opened in July and is currently about 60% occupied (70% committed). Including leases pending receipt and under negotiations, commitment would have been a higher 83%. SLM is well laid out with thematic zones to attract shoppers conveniently as well as offer destination attractions such as indoor theme parks and ice staking rink. Daily shopper traffic average 40,000 while the Golden Week saw a 90,000 throughput. The Mall has currently secured an average daily rent of RMB3.28psm and is on track to achieve a targeted daily rent of RMB4.28psm.

Deepens exposure in Chengdu. The group is in the final stages of design for the Chengdu Qingyang mall. Located in the west of Chengdu, it will cater to a wide existing catchment of resident and working population of 641,000 (and growing) when completed in 2Q14. Meanwhile, recent purchase of a 50% stake in the Chengdu Longemont Mall, which connects directly to the operational Chengdu East High Speed Rail station will enable the group to benefit from accelerated growth footfalls when fully ramped up. More importantly, the purchase will likely to be earnings and NAV accretive as it will be debt funded and have favourable payment terms that is back-end loaded. As such, gearing will only rise in stages to 27% in FY12.

Maintain Buy, TP $0.83. At the current share price, investors are essentially valuing the Shenyang portfolio (excluding Chengdu Qingyang and Foshan) at below replacement cost or getting the Shenyang furniture and shopping mall, with the office component thrown in for free. Our TP of $0.83 is based on the present value of the initial portfolio when fully operational by FY14 and have not included any accretion from the recent Chengdu Longemont acquisition. As the group continues to execute and convert the development component of its portfolio into an income generating portfolio, thereby reducing execution risks, we believe share price should narrow the gap to RNAV. Our TP offers significant upside.

PCRT to buy half stake in Chengdu mall

Acquisition costing 2.28b yuan to be fully funded by debt

MAINBOARD-LISTED Perennial China Retail Trust (PCRT) intends to acquire a 50 per cent stake in Chengdu Longemont Shopping Mall Development from the Shanghai Summit Group for some 2.28 billion yuan (S$455 million).

Based on the mall’s gross floor area (GFA) of 455,260 square metres when completed, the 50 per cent stake translates to a price of 10,000 yuan per square metre of GFA. The remaining 50 per cent stake in the mall will be held by the Summit Group.

According to PCRT, the total transaction is expected to be fully funded through debt and subject to unitholders’ approval at an extraordinary general meeting. Only 15 per cent of the total transaction consideration will be paid at the initial stage of development in 2012.

Financing of the first two payments (55 per cent in total) up to the topping-out stage will be funded from an existing loan facility and other forms of financing such as a new debt facility and through debt capital markets.

Financing for the payment of the remaining 45 per cent, which will be due when the mall commences operations and receives its building title deed, is expected to be secured on the shares of PCRT’s subsidiaries.

With the proposed financing arrangement, PCRT’s projected gearing throughout the acquisition timeline, without taking into consideration any valuation increase on its existing portfolio, is expected to remain below 60 per cent, the trust said.

In view of market volatility, a new earn-out of 226.5 million yuan was negotiated with the Summit Group, PCRT added.

The master framework agreement with the Summit Group was entered via Perennial China Retail Pte Ltd, a wholly owned subsidiary of PCRT.

PCRT, which was listed in June this year, had on March 21 secured an option from the Summit Group to acquire a 50 per cent stake in at least one million sq m GFA in the Chengdu Longemont mixed-use development.

Following the proposed acquisition, PCRT has up to June 8 2012 to acquire a 50 per cent stake in another 544,740 sq m of GFA.

The Chengdu Longemont Mall is part of the 1.7 million sq m Chengdu Longemont mixed-use development, and is situated in Chenghua District within the Third Ring Road of South-East Chengdu in Sichuan province.

With the acquisition, PCRT’s asset size is expected to increase from $1.1 billion to $1.7 billion. PCRT is also expected to benefit from the additional income stream when the mall commences operations in the third quarter of 2014.

The acquisition is expected to increase PCRT’s adjusted proforma NAV per unit of $0.99 to $1.19 based on the estimated future values of all the properties of PCRT in 2014.

PCRT’s counter yesterday hit a high of 47.5 cents, before closing at 46 cents.