CRCT – JPMorgan

9 for ’09: China retail property looks like the place to be

• Refocus on property fundamentals: CRCT has de-rated more than 40% over the last 3 months, reflecting the stock’s relatively small market cap and illiquidity, and pricing in what we believe are extreme pessimistic assumptions. We think the era of virtual cycle fueled by cheap funding has ended, and we expect the market will start to re-focus on property fundamentals. In our view, CRCT will stand out given high quality management, resilient cash flow and strong organic growth. We believe the trust offers one of the best and purest proxies for the exposure to China retail and retail property sectors, and we add CRCT to our Asia Analyst’s Focus List.

• REIT model is not broken despite higher cost of capital: Part of CRCT’s share price underperformance could be attributed to concern about the REIT business model in a high-cost-of-capital environment. We believe, however, that CRCT will be able to withstand the current situation given a much higher asset yield and rental growth in China. We expect, on a normalized basis, the trust to acquire assets at 6-8% net yield, funded with capital cost about 4-6%, and to generate 3-4% longterm growth. In our view, it is also in CapitaLand’s interest to ensure CRCT maintains a competitive cost of capital.

• Private-equity-like return: Our Dec-09 price target is S$1.55/share, based on DDM. We estimate that even on an ungeared basis, CRCT’s portfolio offers a private-equity-liked five-year IRR of 20% (assuming exit cap rate of 7%). Furthermore, the long-term dual listing or listing restructuring potential should help to ensure the long-term valuation of the underlying properties.

• We reiterate our OW rating on CRCT. Key risks to our call include: 1) a significant decrease in retail rents or withdrawal of tenants due to a severe economic downturn in China; 2) a higher-than-expected cost of borrowings upon refinancing.