Press Release

Presentations

Financials

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.

Ends FY14 on a strong footing

• 4Q14 DPU grew 12.7% YoY
  
• Positive rental reversions of 23.1% in FY14
  
• Healthy financial position
  

4Q14 results within expectations

CapitaRetail China Trust (CRCT) reported a good set of 4Q14 results which met our expectations. DPU grew 12.7% YoY to 2.48 S cents on the back of a 27.7% increase in its gross revenue to S$52.7m. The latter was driven by new contributions from its acquired CapitaMall Grand Canyon and organic rental growth from its other multi-tenanted malls, but partially offset by a decline in revenue from CapitaMall Wuhu. For FY14, revenue and DPU increased by 27.0% and 8.9% to S$203.3m and 9.82 S cents, such that these figures constituted 102.3% and 101.3% of our FY14 projections, respectively.

Fundamentals remain strong

CRCT’s overall portfolio occupancy stood at 95.9% as at 31 Dec 2014, a slight 1.7 ppt QoQ decline. The drag came from weaker occupancy from CapitaMall Wuhu and CapitaMall Minzhongleyuan. The former is undergoing a repositioning phase due to competitive pressures, while the latter was impacted by a major road closure to facilitate the construction of subway Line 6 for two years from Aug 2014 (estimated -0.4 S cents impact to FY14 DPU). Nevertheless, CRCT’s other malls have performed strongly. The REIT manager also secured solid rental reversions of 20.6% and 23.1% in 4Q14 and FY14, respectively, making it the fourth consecutive quarter where it saw a rental uplift of more than 20%. Shopper traffic and tenants’ sales rose 3.9% and 16.2% in FY14, respectively.

Maintain HOLD

As at 31 Dec 2014, CRCT had a healthy gearing ratio of 28.7%. 72.6% of its total borrowings are at fixed rate (86.0% if weexclude onshore RMB loans). We raise our DDM-derived fair value estimate on CRCT from S$1.58 to S$1.64 after rolling forward our estimates. CRCT is trading at FY15F distribution yield of 6.2%, which is approximately one standard deviation below its 5-year average forward yield of 6.8%. Maintain HOLD.

Boost from Grand Canyon

• 1Q14 DPU up 3.9% YoY
  
• Rental reversion of 23.0%
  
• Minzhongleyuan to reopen in 2Q
  

Positive start to FY14

CapitaRetail China Trust (CRCT) reported a promising set of 1Q14 results, with gross revenue growing 15.5% YoY to RMB231.7m and NPI up 17.9% to RMB155.6m. The improved performance was due to contributions from newly-acquired Grand Canyon and higher rentals from its existing malls. In SGD terms, gross revenue and NPI grew at a faster 22.4% and 25.0% YoY to S$48.1m and S$32.3m, respectively, as a result of a stronger RMB. Distributable income rose 13.2% to S$19.6m, while DPU was up 3.9% to 2.40 S cents. This is largely in line with our expectations, as the quarterly DPU formed 25.1% of our FY14 forecast.

Strong operational performance

Leasing demand at the multi-tenanted malls remained robust. Particularly, CRCT again strengthened the occupancy and tenant mix at Grand Canyon since its acquisition in Dec 2013. Occupancy at the mall, we note, stood at 99.8%, up from 95.9% in prior quarter, and included new quality tenants such as Li Ning and Childhood Villas. Over the quarter, positive rental reversion averaging 23.0%

was also achieved for the 165 leases renewed/secured at the multi-tenanted portfolio, with Grand Canyon leading the pack at 42.8% growth. Management shared that tenant sales increased 13.9% YoY, whereas shopper traffic grew 7.3%. All these activities helped to contribute to a 39.2% NPI growth for the multi-tenanted malls. For CRCT’s master-leased malls, a 10.1% NPI growth was registered, similarly respectable in our view.

in our view.

Downgrade on valuation grounds

CRCT disclosed that the asset enhancement works for CapitaMall Minzhongleyuan is near completion, and that ~90.0% of the mall’s total NLA has been secured or in advanced negotiations for leasing commitments. In addition, the secured rental was 11.5% higher than budgeted. With the mall’s scheduled reopening in 2Q14, we expect it to provide additional rental uplift to CRCT’s earnings. CRCT is currently the top performer in the S-REITs sector, clocking a 13.2% gain YTD. At its present level, we believe CRCT is justly valued, with limited upside over the near term. As such, we downgrade CRCT to HOLD from Buy. Our fair value is raised marginally from S$1.54 to S$1.55 after factoring in the results.

Worth a re-look

• Strong operating metrics underscores AEI success
  
• Acquisition of Grand Canyon Mall likely accretive
  
• Maintain Buy, TP revised to S$1.60
  

Strong operating metrics underscores AEI success

Coming into its own. The recent strong 2Q results highlighted that operating metrics are tracking closely to sales growth in China. This demonstrates CRCT’s successful key asset enhancement initiatives which had resulted in expanding tenant sales as well as shopper traffic, resulting in the trust’s ability to boost rental reversions. This solid track record bodes well for its upcoming AEI at Minzhongleyuan Mall in Wuhan. We believe its ability to generate better asset returns through this route would provide the trust with a strong inbuilt engine for growth and catalyst for share price performance going forward.

Proposed acquisition of Grand Canyon Mall in Beijing to be accretive. Grand Canyon Mall is the trust’s first third party acquisition and demonstrates CRCT’s ability to work with CMA to leverage on its platform and network. The under-rented mall is expected to be earnings accretive when the deal is completed in 2Q14, with NPI yield projected to rise from the present 3.5% to 5% and likely to reach 6-7% by 2016-17 when its leases are fully re-contracted. CRCT plans to fund this Rmb1.82bn acquisition via existing cash, new debt as well as equity. The recent roll out of its Dividend Reinvestment Plan offers unitholders the flexibility of dividend options while the trust can also conserve cash for its acquisition.

Maintain Buy. We retain our Buy call with an adjusted DCF-backed TP of S$1.60, as we adjust our sector-wide beta up by 0.05x and adopt a higher through-the-cycle interest cost of 3%. CRCT offers investors a pure China consumption driven exposure, which we believe will remain robust, through its portfolio of retail malls. CRCT’s share price had weakened in recent weeks in tandem with the broader market, and at the current share price, valuations look attractive. The stock provides a FY13-14F yields of 6.8-7.2% and total return of 23%.