PCRT – Phillip

Occupancy ramped up in line with expectation

Company Overview

Perennial China Retail Trust (“PCRT”) is Singapore’s first pureplay PRC retail development trust. Listed on the main board of SGX on 9 June 2011. PCRT’s key investment lies mainly in major 2nd tier cities of China, including Shenyang, Foshan and Chengdu. PCRT also holds 10% in predominantly retail Bejing Tongzhou integrated development.

• Reported 1Q13 JV net operating income (from Shenyang properties) at $0.55mn (-41.4%y-y), distributable amount at $10.9mn (+2.7%y-y), DPU at $0.95 (+1.1%y-y).
  
• Overall occupancy improved in operational Shenyang properties and preleasing activities in Foshan Jihua and Chengdu Qingyang malls are progressing well.
  
• Sponsor secured for PCRT right of first refusal to acquire block retail component in Beijing Tongzhou Integrated Development Phase2, adding to PCRT’s potential pipeline.
  
• Maintain Accumulate with unchanged target price at $0.67.
  

What is the news?

Operating profit from Shenyang Properties fell by 41.4% y-y to $0.553mn, mainly attributable to seasonally higher utilities expenses from additional heating during the harsh winter as well as increased marketing expenses to improve sales in Longemont Mall. The management has strategically negotiated another master lease agreement with an antique wholesaler for Red Star Macalline Mall, raising occupancy rate from 60% to 93%. Occupancy (including committed leases) for Longemont Offices rose from 16% to 32.0%. Occupancy in Longemont Mall stayed at 70%, the same as from 4q12, but shopper traffic improve significantly by 136% over the same period last year. Committed occupancy for Foshan Jihua and Chengdu Qingyang Malls rose to 77% and 63% respectively as compared to 60% and 33% in 4q12. Operation commencement of Foshan Jihua Mall is delayed to 3q13 from 2q13. Sponsor secured for PCRT the right of first refusal to acquire the block retail component of Beijing Tongzhou Integrated Development Phase2 (~70,000 to 100,000 GFA).

How do we view this?

The pace of ramping up occupancies is generally in line with our expectation. Temporary shortfall in earnings due to an effort to ramp up leases does not affect our valuation because any shortfall in the FY2013 and FY2014 would be fully covered by the negotiated earn-out amount, a source of income support. Nevertheless, the overall portfolio has to be stabilized by the end of FY2014 to avoid a major decline in distribution.

Investment Actions?

We maintain our ‘ACCUMULATE’ rating with FY2013 target price at S$0.67 (35% discount to RNAV), equivalent to an upside potential of 5.5% on top of an above 6% dividend yield.