PCRT – CIMB

Switch to PREH

PCRT’s 3Q and 9MFY14 DPUs were in line, at 26% and 77% of our full-year forecast, respectively, largely coming from the earn-out in place. While operations improved marginally in terms of occupancy, core net profit was affected by one-off losses. We believe investors will be better off switching to the new vehicle PREHL which offers greater value as PCRT’s fundamentals are expected to remain anaemic. We maintain our Hold rating, with an unchanged RNAV-based target price (30% discount to RNAV).

Marginal operational performance offset by one-off losses

The commencement of operations at Jihua Mall, Foshan and Qingyang Mall, Chengdu in Aug 2013 and Apr 2014 increased both PCRT’s revenue and NPI. However, the improvements in underlying earnings was offset by one-off losses from impairment loss on receivables from master lease tenant of Shengyang Red Star Macaline Furniture mall (Guangcai Group), higher finance cost and net foreign exchange loss. As the earn-out for PCRT is set to expire at end-2014, we believe operational performance will be the key to PCRT’s share price performance. With overall occupancy at 80.3% and rental reversion anaemic given the challenging situation facing retailers, we believe investors could be better off by switching to PREHL.

Switch to PREHL

The voluntary conditional general offer to acquire PCRT shares using PREHL shares has commenced and is expected to have its first closing date on 8 Dec 2014. Current PCRT shares allow investors to get exposure to PREH at a 51-56% discount to RNAV. So essentially, PREHL allows investors to get greater value at the expense of lower dividend yield. Over the long term, we believe PREHL could re-rate in 3-steps: i) strata sales of up to 50% of the units in Chengdu and Beijing will be realised in 2015, ii) most China assets in PREHL will be completed in 2016/17, following which recurring rental income for the remaining 50% of the assets will commence and PREHL should record significant revaluation gains, and iii) stabilisation of investment properties in 2019/2020.

Maintain Hold

We keep our Hold rating on PCRT. While downside is limited by the value in PREHL, re-rating catalysts could take a while to materialise.