CRCT – DBSV

Spreading its wings into Wuhan

• First foray into Central China

• Numerous low hanging fruits to lift entry yield

• Maintain Hold with S$1.30 TP

First property purchase in Wuhan. CRCT announced that it is acquiring the New Minzhong Leyuan Mall in Wuhan from Capitaland for RMB395m (S$76m) or RMB9,469psm GFA. The purchase price is 5-6% below the valuation of RMB417-422m. The property comprises an annexe and a conserved building with a total NLA of 23,361sm. Fronting Zhongshan Ave, the prime-shopping belt in Wuhan, the mall is about 500m away from the Youyilu metro station and near the future Jianghanlu Metro Station, which is expected to open in 2012. Tenants are largely in the fashion and lifestyle trade sectors (61% of its rental income) and F&B including KFC, Pizza hut and MacDonalds, and it houses the only IMAX theatre in Wuhan. The deal, which could boost CRCT’s AUM by 6.4% to S$1.26b, is subject to unitholders’ approval at EGM and is expected to complete by mid 2011.

A step in the right direction. We are positive on the acquisition. Not only is the deal yield accretive from the start, we see the addition of this high shopper footfall property as enhancing portfolio mix as well as boost rental revenue profile with greater diversification of short and long term leases that will enable it to leverage on strong consumption and retail spending trend. In the near term, we believe low-hanging fruits could come from (i) raising present occupancy of 90.6%; (ii) positive rental reversions with c.64.2% and 24.8% of gross rental income expiring in FY11 and FY12 respectively; historically, we believe the property had been able to achieve average rental growth that is above CPI; and (iii) potential tenant remixing by reviewing big box tenants.

A combination of debt/equity financing planned. At an acquisition NPI yield of 8.1%, the purchase would be yield enhancing vs the implied property yield of 7% for the existing portfolio. With an existing gearing of 32.6%, close to the ceiling of 35%, we expect CRCT to adopt a combination of debt/equity financing. This provides a mean to improve trading liquidity as well. Assuming that it raises S$70m of equity funding and the remainder through debt, we estimate FY11-12 earnings could be raised by 4-9% while at DPU level, accretion would be a more modest 2-3%.

Maintain Hold. We believe the acquisition will provide not only an immediate earnings boost but will also strengthen the portfolio’s tenant and lease reversion profile in the longer run. However, with the relatively small DPU uplift and limited upside to our revised DCF-backed TP of S$1.30, we are maintaining our HOLD call. The stock offers a total return of c10%.