CRCT – JPM

Portfolio still a work-in-progress

• FY09 results in line. CRCT announced FY09 DPU of S$0.0814/unit after retaining 1.1% of income, annualizing 6.8% yield and is in line with J.P. Morgan and consensus estimates, thanks to effective cost cutting and lower interest expense. Portfolio was revalued up in RMB terms by 1.2% to RMB5.7bn, 6.3% passing yield. Stock will trade ex-2H09 DPU of S$0.0406/unit on 8th March.

• Shift in leasing strategy. Management indicated that the negative rental reversion for 2H09 is partly due to the trust’s strategic move towards a lower base rent but a higher turnover component lease structure. Total gross revenue did increase 2.9% Y/Y on a SSS basis. The new lease structure, in our view, would allow the trust to be more competitive in rent negotiations, but introduced a lot more volatility in earnings. We also estimate that overall rental will increase only if the revise GTO rent component equals to previous base rent.

• Still a work-in-progress portfolio. With management still trying out different lease structures and also different tenant mix, we see CRCT’s portfolio still a work in progress. The operating performance is likely to be unexciting for the next 2 quarters in our view. Therefore, we have revised our FY10E – FY12E DPU estimates down by 3-5%. In addition, given management is unlikely to acquire assets from CMA, we have retained our long-term growth rate at a lower level of 3%.

• We retain our Neutral rating, but reduce our Dec-10 DDM based price target to S$1.25/unit as we lower our earnings estimates. Key risks to our rating and price target include surprises on operating fundamentals both on the upside or downside; and the uncertain timing of the introduction of China REIT code, which is likely to support or even lift up the valuation of the trust.