CRCT – Goldman Sachs

Discounting the pace of acquisition growth; maintain Sell

What’s changed
Since its placement and maiden acquisition of Xizhimen Mall (Beijing) in early Feb 08, CRCT’s stock has fallen ~22% and is now trading below the placement price of S$1.36; it has declined ~62% from its Oct 07 peak. Higher funding costs and uncertainty in realizing the value of an impressive acquisition pipeline have weighed on the shares, in our view. Across the SREIT universe, we continue to favor stocks with strong organic growth over those for which acquisition growth is a key driver. Maintain Sell.

Implications
For much of its trading history (Dec 06 listing), CRCT, fueled by investors focused on its acquisition growth prospects, has traded at distribution yields (i.e., funding cost) that have facilitated accretive acquisition growth. However, with CRCT trading at a 6% 08E yield, we believe it will be difficult for the company to raise equity to fund growth. We view CRCT’s exposure to Chinese domestic consumption as positive and see value in its right of refusal to about 65 malls from CapitaLand and its funds, of which 16 malls are operational. But we think the challenge of raising equity could cast doubt on CRCT’s target to grow portfolio size from S$1.1 bn today to S$3 bn by 2009. We note CRCT’s leverage of 31.6% vs. regulatory cap of 35%
means acquisition growth needs to be largely equity funded. Also, S$171 mn of debt is due for refinancing end-08.

Valuation
We have removed acquisition premiums in setting TPs for most REITs under our coverage, but not for CRCT. Our new DCF-based 12m TP of S$1.46 (vs. S$1.80 previously) comprises a base-case S$1.25 (unchanged) and premium of S$0.21 (vs. S$0.55), reflecting a 50 bp rise in funding costs and slowdown in the pace of acquisitions to S$450-500mn p.a. till 2010.

Key risks
Performance of the underlying malls could surprise on the upside.