CRCT – DBS

Rich valuations

• Results in line
• Asset devaluation brings NAV down to S$1.16
• Operational outlook remains mixed
• Valuation appears rich, downgrade to FULLY VALUED, TP S$1.04, representing potential downside of 20%.

Results in line. CRCT’s 2Q09 results were within expectations. Gross revenue and NPI increased by 15% and 17% respectively to S$30.4m and S$19.4m. This growth was brought about by a combination of an appreciating RMB vs S$ and increased occupancies at Qibao and Xinwu malls, which offset the 10% decline seen at Saihan. Distributable income grew by c.17% to 13.3m, translating to a DPU of 1.94 Scts. NAV down to S$1.16. CRCT devalued its assets by $9m or 1% of its portfolio, thus lowering its NAV to S$1.16. As a result, gearing increased slightly to 34%.

Mixed operational outlook. Portfolio occupancy weakened slightly by 1 ppt to 95.7%, as a result of lower occupancy level at Saihan mall (87% from 94%) – currently undergoing enhancement works, which is projected to only complete by end of the year. Rental reversions remained negative in WangJing and Xizhimen, which are offset by better performances at Xinwu and Saihan. Rental outlook remains tough, as tenants are cautious on their expansion plans and commitment to longer-term leases. CRCT is possibly looking to tie tenants on shorter leases to improve occupancy levels.

Downgrade to FULLY VALUED, TP $1.04. While we like CRCT for its exposure to the China consumption and urbanization story in the long term, valuation at current level – above its NAV appears rich, when compared against the sector’s average of c0.7x P/BV. As such, we downgrade the stock to FULLY VALUED, TP maintained at S$1.04 based on DCF ( WACC of 10% ,terminal growth 4%). CRCT offers a FY09-10F yield of 6.5-7.3%.