CRCT – UBS

Steady yield and attractive theme priced in

Exposure to China theme remains attractive

We continue to like CRCT for its exposure to the China consumption and urbanization theme. However at 6.5% 2010 DPU yield, it is trading near our DCF derived price target. Our estimates are unchanged. We downgrade our rating from Buy to Neutral.

Acquisition only like towards end 2010/2011 and hinges on cost of capital

As the majority of CMA's pipeline of malls is still in the stabilization phase, we think acquisitions are only likely to happen towards end 2010/2011. Cost of capital is likely to be a key determinant as the gearing is 34% and capped at 35% given no credit rating. Assuming 35%/65% debt/equity funding, we estimate accretion from new deal flow would make sense when CRCT is at S$1.70. In the past, CRCT's share price had outperformed strongly when the market was willing to price in the option of acquisition.

Credit rating could lift debt headroom

The key risk, in our view, is that CRCT obtains a credit rating which would lift the debt headroom for acquisitions. Speaking with management, it does not appear that this is likely to occur in the near term. The implementation of a formal REIT legislation in China could potentially facilitate this process but the actual timing is hard to determine.

Valuation: Downgrade to Neutral

Our price target uses 2.6% risk-free, 1.1x beta, 5% ERP and 2.5% terminal growth.