Benefiting from active tenant remixing

• Results in line, positive rental reversions on higher tenant sales and shopper traffic
  
• Income vacuum from MZLY expected to be offset by rental expansion from other malls
  
• Maintain HOLD, TPS$1.78
  

Highlights

1Q13 results within expectations. Gross revenue and NPI, in Rmb terms, grew 6.6% and 4.6% respectively to Rmb200.7m and Rmb132m, on improved performance at all malls except MZLY, which is currently undergoing AEI. Tenant sales were up 11.1% and shopper traffic expanded 10.6% y-o-y. Distributable income, in S$, came in 4.2% higher to S$17.3m, translating to a DPU of 2.31Scts.

Successful tenant remixing strategies. The better performance was led by higher rental income on the back of an average 14.9% positive reversion over preceeding levels. CM Qibao, Saihan and Wuhu saw upward rental revisions of 7-10% on successful tenant remixing. Meanwhile, higher occupancy at Xizhimen and brand mix refinement exercise at Wangjing also lifted rents by 16-22%. This more than offset the drop in occupancy at MZLY to 72% as it ramps up its AEI.

Our View

Earnings growth q-o-q to moderate as MZLY AEI picks up pace. Going into the 2Q, we expect relatively flat q-o-q earnings growth as the MZLY AEI intensifies. The entire mall (except L1) is anticipated to close from Jul 13 to 2Q14. The income vacuum is expected to be offset by the strong rental reversions for the remaining malls. CRCT has a remaining 26.2% of income to be renewed for the rest of 2013 and a further 14% in FY14.

Low gearing. The trust has a low gearing of 25.4% and a cash hoard of S$82m on its balance sheet. This puts it in a good position to grow inorganically. Our current numbers have not factored in any potential acquisitions.

Recommendation

Maintain HOLD. We retain our HOLD call with a slightly higher TP of S$1.78 for CRCT. The trust is currently trading at 1.4xP/BV and 5.4-5.9% FY13/14F yields. We like CRCT’s ability to put in place initiatives that enable it to drive rental reversions.

ADDITIONAL AEI FOR MINZHONGLEYUAN

• 4Q12 results in line
  
• Fast-tracked AEI at MZLY
  
• Good LT outlook
  

NPI rose 6% YoY

CRCT’s 4Q12 results were generally in line with our expectations. Gross revenue climbed by 3.9% YoY to S$37.9m and net property income rose 6.0% YoY to S$24.2m. In RMB terms, gross revenue increased by 7.5% YoY to RMB195.4m and NPI expanded 9.9% YoY to RMB124.8m. Excluding Minzhongleyuan (MZLY), which is undergoing AEI, NPI grew 11.7% YoY to RMB117.9m. The portfolio was valued at RMB7.6b, up 4.7% from Jun 2012. According to management, capitalisation rates compressed by ~25 basis points.

CapitaMall Minzhongleyuan

The AEI at MZLY is being fast-tracked, with temporary closure of the mall from Jul 2013 to 2Q14, as opposed to completion by end 2014 as initially intended. Additional works planned include replacing the main atrium roof (which currently leaks during the rainy season), accentuating the facade and improving circulation with additional escalators. Tenants with frontage along Zhongshan Avenue will continue operations. Over 50% of tenants expressed leasing interest after AEI. Management estimates that FY13 DPU will be reduced by ~3% due to the accelerated AEI (assuming the other malls perform as they did in FY12). MZLY accounted for 5.3% of FY12 NPI. Estimated capital expenditure has been increased from RMB74m to RMB103m and expected return on AEI investment falls from 10.8% to 10.1%. Average rental rate of the mall is anticipated to increase ~35% versus pre-AEI.

Healthy financial position, positive LT outlook

CRCT has a good financial position, with gearing at 28.0%, and interest coverage ratio at 7.8x. The outlook for CRCT remains good in the longer-term. China’s 2012 GDP grew at 7.8% and the World Bank projects that GDP will grow by 8.4% in 2013. China has affirmed its target of doubling the country’s 2010 GDP and per capita income for residents by 2020 (7.2% p.a.).

Maintain HOLD

Increasing our longer-term growth rate assumptions, which were conservative previously, our fair value increase from S$1.56 to S$1.72 but we maintain our HOLD rating on CRCT on valuation grounds.

Positive pricing

• In line with expectations

• Strong rental reversions supported by healthy retail sale

• Upside catalysts to come from possible acquisitions

• Downgrade to HOLD on valuation grounds, TP raised to S$1.67

In-line results. CRCT’s distribution per unit (DPU) for 3Q came in at 2.42 cents representing an increase of 14.2% y-oy. 9M DPU makes up 77% of our forecast. While the growth was supported by 14.2% and 16.1% increase in gross revenue and NPI respectively, the group also benefited from a strong Rmb, which has strengthened by about 10% against the S$ in the reviewed quarter. Stripping that off, gross revenue and NPI would have increased by about 8-10%. Most malls continue to record strong NPI growth on a y-o-y basis offsetting the lower income at Mingzhongleyuan.

Positive rental reversions drive mall’s performance Occupancy continued to hold steady at c.97% except for MZLY which is undergoing AEI works and CapitaMall Wuhu which is undergoing tenancy adjustments. Rental reversion was also up by 18% vs 15% last quarter, largely driven by Wangjing (+33.7%), MZLY (+22.6%) and Xizhimen (+19.4%). The healthy reversion was supported by a 15.6% rise in tenant sales outperforming China’s overall Sep retail sales number at +14.2%. With 9.7% and 27.1% of the revenue up for renewal in 4Q12 and FY13, we believe this REIT should continue to see strong rental reversions.

Downgrade to HOLD on valuation grounds. We raise our TP by 6.3% and FY12/13 DPU by 4.4%-6.6% to account for the better-than expected rent. While FY13/14 yield remains attractive at 6.0-6.5%, we believe much of the positives have been priced in with the REIT trading at 1.27x P/BV vs the Asian retail average at 1.15x. With limited upside to our new TP, we downgrade the stock to HOLD largely on valuation grounds. Upside risk for share price performance of the stock could likely depend on news flow about potential acquisition of new properties in the pipeline.

3Q12 IN-LINE, RAISE FV SLIGHTLY

• Slight upward adjustment to estimates
  
• AEI showing results
  
• Solid financial position
  

Raising estimates up slightly

CapitaRetail China Trust (CRCT) reported 3Q12 DPU of 2.42 S cents, up 14.2% YoY, and in-line with our expectations. YTD 2012 DPU of 7.24 S cents formed 76% of our original 2012 DPU estimate of 9.5 S cents. We raise our estimates up slightly, increasing our FY12 DPU estimate to 9.7 S cents. 3Q12 gross revenue increased by 8.5% YoY to RMB194.2m, underpinned by tenants’ sales growth of 15.6% YoY at its six multi-tenanted malls. On a QoQ basis, tenants’ sales grew by 6.1%. Shopper traffic increased by 21.5% YoY and 8.0% QoQ. Higher revenue was registered across the portfolio except for Minzhongleyuan, which is undergoing asset enhancement. Net property income increased by 10.3% YoY to RMB126.5m. Excluding Minzhongleyuan, NPI grew 12.7% YoY. Strong NPI was posted for Xizhimen, Qibao, Saihan and Wuhu, with YoY growth of 18.5%, 57.2%, 35.5% and 30.4% respectively. Rental reversion across CRCT’s portfolio was good at +18.2%. As of 30 Sep, the weighted lease to expiry by gross rent was 5.3 years.

Good returns from completed AEI

CRCT gave an update on the completed AEI at Minzhongleyuan. Reconfigured space recovered from a Pizza Hut was split into six specialty shop lots, with new tenants such as Starbucks and Cache Cache. The average rental for the recovered space increased by 300%. In progress is the reconfiguring of the layout of a ~2,500 sqm space on level 2 that was previously master-leased. Space occupied by a food court on level 3 (~950 sqm) has been leased to fashion tenants on a short-term basis.

Healthy financial position

We note that CRCT continues to have a strong financial position, with 100% of assets being unencumbered, a gearing of 30.4% and an interest coverage of 10.1x. CRCT has no major financing due in 2012.

Maintain BUY

We raise our fair value slightly from S$1.70 to S$1.71 and maintain our BUY rating on CRCT. The FY12F dividend yield of 6.0% is attractive.