CRCT – Daiwa

Subdued organic growth, rental reversions

What has changed?

• CapitaRetail China Trust (CRCT) announced its 1Q10 results on 23 April 2010. Distribution per unit (DPU) of 2.14¢ was 1.9% above our forecast.

Impact

• Net-property income (NPI) was 1.6% above our forecast. In local currency terms, gross revenue dipped by 0.8% QoQ due to an 11% QoQ drop for the Qibao Mall. NPI (in local currency) was 1.5% above our forecast, with Xizhimen Mall, Anzhen Mall and Wangjing Mall exceeding our forecasts, while Qibao Mall fell short.

• Rental reversions for 1Q10 (involving 52 leases) were subdued at an average of 2.4% above preceding rents. Only Wangjing Mall (21 leases) recorded a positive average rental reversion (of 9.2%). CRCT’s portfolio occupancy improved slightly over the previous quarter to 95.2% from 95.0%. The overall leasing environment appears stable, but still delicate, in our opinion.

• We have revised up our FY10 DPU forecast by 0.5% after revising up our NPI forecast by 0.9%. However, we have revised down our DPU forecast for FY11 by 14.1%. We assumed previously that CRCT would acquire about S$1bn of China-mall properties annually from its sponsor’s private equity funds from the start of FY11. We assume now that these acquisitions will begin from FY12.

Valuation

• We maintain our six-month target price, based on parity to our RNG (a finitelife Gordon Growth model) valuation, of S$1.11. We have assumed an effective cap rate of 6% (consisting of a discount rate of 11% and an internal growth rate of 5% p.a. over the portfolio’s remaining leasehold of 34 years). Our valuation also assumes the inclusion of about S$966m of acquisitions at a yield of 7.5%.

Catalysts and action

• We maintain our 4 (Underperform) rating for CRCT and believe it is on track to record a year-on-year decline in DPU for FY10. Moreover, FY11 could be another listless year for DPU growth, by our estimates, unless CRCT makes a major accretive acquisition.