CRCT – Goldman Sachs

Source of opportunity

We initiate coverage of CRCT with a DCF-based 12-month target price of S$2.18 and a Sell rating. Listed on Dec 8, 2006, CRCT is the first pureplay China Retail REIT in Singapore, a spin-off from parent CapitaLand. We like acquisition growth prospects of CRCT, supplemented by a secured and proprietary acquisition pipeline from three CapitaLand private funds, with about US$ 1.6bn in equity; CapitaRetail China Development Fund I and II; and CapitaRetail China Incubator fund, but believe that much of the potential is already priced in the shares. We believe investors are already factoring in about $2.2 bn in acquisition prospects (or 2-3 years of acquisition growth), presenting potential downside risk if execution disappoints.

Organic growth has been weighed down by large mall anchors, and we find the relatively few asset enhancement initiatives disappointing, with the company’s growth profile further hampered by potential difficulty in funding its aggressive acquisition plans given the competitive equity market environment. We think the risk is to the downside, and find little support from low yields. We favor sector leader CapitaMall Trust, which we believe has better organic growth prospects and should see a rise in DPU via its 20% strategic stake in CRCT.

Catalyst

CRCT operates in arguably one of the fastest-growing retail markets worldwide, with nominal retail sales growth over the last decade of 11.7% p.a, driven by a strong economy, increasing income and consumer spending power. We note that that CapitaLand’s recent cooperative agreement with China Vanke to acquire malls developed in Vanke’s residential townships will expand its retail pipeline in China. CapitaLand has a sizable pipeline of 65 malls (excluding the tie-up with Vanke) through its private funds. While we think its pipeline is good, we believe investors need to allow time for malls to be ready for injection into CRCT and for CRCT’s malls to perform. Post IPO, CRCT has announced a pending acquisition, Xizhimen in Beijing, which would enlarge its portfolio to S$1,185 mn from S$806 mn.

Valuation

We derive our 12-month target price of S$2.18 using a base-case DCF per share value of S$1.46 and acquisition premium of S$0.72. With the completion of Xizhimen acquisition later this year, CRCT will have an enlarged portfolio of eight retail malls: GFA of 527,363 sq. m, with Beijing contributing 76% of 08E NPI, Shanghai 5%, and the rest from second-tier cities. Post S$280mn raised to finance Xizhimen, CRCT’s debt/asset ratio is 0.30x (FY08), implying debt capacity of only about S$80mn to fund new acquisitions (no credit rating). We estimate dividend yields of 3.3% in FY07E and 3.8% in FY08E.

Key risks

Positive news flow on CapitaLand’s China retail platform presents potential upside risk; we see aggressive market expectations and failure to execute on acquisition potential as downside risks.