CRCT – DBSV

Longterm optimism priced in

• 4Q14 DPU of 2.48 Scts (+13% y-o-y) below
  
• Weaker than expected contribution from Grand Canyonand Minzhongleyuan malls
  
• Cut FY15-17F DPU by 5-10% but still expect DPU growth on the back of positive rental reversions
  
• Downgrade to HOLD, TP lowered to S$1.64
  

4Q14 results below. 4Q14 DPU came in at 2.48 Scts (+12.7% y-o-y), taking FY14 DPU to 9.82 Scts (+8.9% y-o-y), which was below our and consensus estimates of 10.8 Scts and 10.2 Scts, respectively. The underperformance was due to (i) weaker than expected contribution from the Grand Canyon mall, (ii) an unexpected 4Q14NPI loss of Rmb3.7m at the Minzhongleyuan (MZLY) mall as it was impacted by road closures to facilitate the construction of a new subway line, and (iii) a larger number of units on issue on greater DRP take up. Nevertheless, 4Q14 NPI rose30% y-o-y to S$33.5m on the back of the initial contribution from Grand Canyon acquired in Dec13 and rental growth at its other properties. Overall occupancy dipped to 95.9% (97.6% in 3Q14) on account of the disruption to MZLY’s operations (73.9% occupancy).

Positive rental reversions. 4Q14 tenant sales were strong, up 21.3% y-o-y, which assisted CRCT in achieving 20.6% increase in rents over the quarter. Owing to growth in Chinese domestic consumption and CRCT’s strong track record, we expect positive rental reversions to continue, albeit at a lower rate due to the higher base effect. However, given weaker than expected performance, the need to reposition the Wuhu mall due to heightened competition, disruption to MZLY over the next two years and higher assumed units on issue, we cut our FY15-17F DPU by 5-10% and lowered our DCF-based TP to S$1.64 from S$1.70. Upside to our numbers would arise if CRCT utilises its strong balance sheet (c.29% gearing).

Downgrade to HOLD. While we remain positive on the long term prospects for CRCT, we believe this has largely been priced in and downgrade our recommendation to HOLD.