PCRT – CIMB

Catching the wave of China’s consumer demand

Through PCRT’s well-located malls in Tier-2 cities, we see potential for strong NAV growth, backed by an experienced management. China’s 2012 focus on expanding consumer demand could not be better timed. CMA’s strong YTD performance(+36%) leaves room for catch-up.

We initiate coverage with an Outperform and target price based on a 35% discount to RNAV (wider than CMA’s 25% discount). Higher-than-expected rents and asset revaluations through physical completions are potential catalysts.

Growth, costs, yields

We see strong rental-growth potential for PCRT’s sites, located at transportation nodes (e.g. high-speed rails, local metros, bus terminals) and likely to benefit from higher shopper traffic. Acquired at low costs through local partnerships, PCRT should be able to achieve optimal yields. Once its malls stabilise, positive rental reversions should be backed by yoy retail sales growth of 15-20% (for 2011). We expect 2015 to be an inflexion point once its malls are completed. Dividend yields of 7% are guaranteed for 2012, after which stabilised recurring income should support 4-5% yields on a 50% payout.

Experienced management

We are confident of management’s ability to manage malls and deliver NAV growth. Real-estate veteran Mr Pua Seck Guan’s (ex-CEO of CMA/CMT) experience is invaluable. Thus far, management has delivered on projected distributions and acquisitions, namely the Chengdu Longemont development. Newly operational assets in Shenyang also achieved decent initial occupancy rates of 70-90%. Factoring in a longer 3-year gestation (vs. management’s target of one year), a portfolio yield-on-cost of 7% in 2015 should be within reach.

NAV growth milestones

On top of 4-5% dividend yields, we estimate that NAV can grow by up to 16% CAGR till 2015. Clear milestones are established with at least one asset to be completed a year till 2014, and two more in the pipeline. At a 45% discount to our RNAV, its share price has yet to reflect its growth potential, we believe. With CMA’s strong performance YTD (+36%) compared with PCRT (+15%), we see room for PCRT to catch up.