TCT – Phillip

Proactive asset management

•We visited commercial properties of TCT recently in Shanghai and Qingdao

•High quality of assets demonstrate capability of team in managing property

•Strong refurbishment and development pipeline, imply rental upside in future

•We have no rating on TCT

Background

Treasury China Trust (TCT) is a property owner, developer and manager with exposure purely in China commercial real estate market. Listed on SGX in June 2010, the trust is positioned as a ‘total return vehicle’ aims to increase shareholder value via both capital appreciation and income growth. These can be achieved by holding both income producing commercial real estate as well as development properties. Listed as a business trust also allows TCT to undertake higher component of development, up to 30% of total assets, compared to REIT. Currently the trust holds commercial property portfolio worth over RMB11.5bil (circa S$2.18bil).

Key takeaways

• Central Plaza is a showcase of TCT’s ability to carry out asset enhancement initiative to increase the assets rental and capital value. Current rental yield on cost improved from 5.5% to 6.7%.

• A sizable extension is being built to enlarge City Centre by ~50%. Higher rental reversion is expected when the current anchor tenant, Parkson, vacates the mall in 2012 as the existing rent is well below market rate. TCT has secured Marks & Spencer to be the next anchor.

• TCT is in the process of acquiring Huai Hai Mall, located in one of the high-end shopping precinct in Shanghai. Thorough refurbishment work is planned to reposition the status of the mall. We see great potential on this acquisition due to its prime locality.

• Out of Shanghai, TCT acquired Central Avenue Mall in Qingdao earlier this year with an attractive gross yield of 10% on the current operating mall, in addition to 3 adjoining land parcels to be developed into retail malls by 2015. The sites are situated in the centre of activities in the Laoshan District.

Investment merits

• Rental income upsides substantiate by the strong pipeline activities.

• Potential divestment of majority stake in Central Plaza allows redeployment of cash to other high-yielding investment opportunities.

• Expansion in Tier 2 and 3 cities, with the fast growing Xi’an is next in the line.

• Professional management team.

Key risks

• Interest rate hike and credit tightening are concerns to TCT as the Chinese government continues to curb runaway property price and inflation.

• Concentration risk is high with main exposure in Shanghai commercial market, and rental income is 70% derived from City Centre.

• Supply glut in Shanghai office sector may pose pressure on rental yield going forward.

Total Return Strategy

TCT’s total return strategy is to acquire, own, develop and manage commercial properties in China and thus diversify risks and income sources across the real estate spectrum.

Flexible investment vehicle

TCT is listed as a business trust featuring a more flexible capital and operating structure. Compared to conventional REIT, business trust has higher development cap of 30% of total asset value compared to 10% for REIT, and a self-imposed debt covenant of 45% gearing limit compared to 35% for REIT. The Manager has the discretion to make distribution from net distributable income as well as from realised and unrealised gains from asset enhancement of its properties. That aside, TCT is committed to distribute 80% of net rental income for the first 3 years compared to 90% compulsory distribution in REIT, which allows more funding capacity for future growth.