RETAILERS’ GROWTH VS NEW BEIJING MALL SUPPLY

•Good commitment rates for new retail space

•Well-located malls

•Good dividend yield of 7.1%

Growth in Beijing retail space supply

Beijing’s retail market has multi prime retail areas, including Wangfujing (Dongcheng district), CBD (Chaoyang district) and Zhongguancun (Haidian district). According to Savills, the supply of shopping mall space in Beijing is set to increase by 17% this year, or some 1.06m sqm. The majority of new projects in prime areas have achieved strong pre-commitment rates of 70%-90%, while projects in non-prime areas are more likely to face pressure on the occupancy front.

CRCT’s malls enjoy good traffic flow

The rent from the four malls that CRCT owns in Beijing contributed 69% of 2011’s revenue. The remaining five malls are spread over five cities. One of the Beijing malls, CapitaMall Xizhimen, is located at the transportation hub Xizhimen and sees a whopping daily footfall of 85k-90k people, largely due to transient traffic. At a prime location, Xizhimen has substantial bargaining power. The other three Beijing malls are located in the sizable Chaoyang district (~475 square kilometers). CapitaMall Anzhen and CapitaMall Shuangjing are on long-term master lease structures, thus their rents should be fairly immune to the upcoming supply. CapitaMall Wangjing is located in an unofficial “Korea Town” and services many white-collar workers. While shopping mall supply could increase by ~21% in 2012 in the Wangjing area, we believe the mall has an incumbent’s advantage, being voted “Most Influential Mall in Wangjing Area” by Beijing News in 2010.

Beijing a focal point for brand penetration

As the capital, Beijing is still a key city for international brand penetration. Apart from new entrants, many established retailers like Chloe, Valentino, Godiva and Tesco are pursuing aggressive expansion. The good positioning of CRCT’s malls, especially Xizhimen, places them in good stead to attract quality retailers even as retail space supply grows.

Maintain BUY

We maintain our BUY rating on CRCT and S$1.44 fair value. CRCT is offering a fine FY12F dividend yield of 7.1%.

GROWING PIE FOR PHYSICAL AND ONLINE RETAIL

•Acceptable May retail sales

•Rise of online retail…

•…but physical channels will grow fine

Reasonable May retail sales

Data released on Saturday shows that China’s retail sales grew 13.8% YoY in May to RMB1.67t, slightly down from the 14.1% growth in April and lower than economists’ expectation of a 14.2% rise but still acceptable. Adjusted for inflation, May’s figure was up 11% YoY. For the first five months of this year, retail sales totaled RMB8.16t, up 14.5% YoY (10.9% YoY in real terms). China’s rate cut last Thursday had already caused many to anticipate disappointing economic data over the weekend. Inflation slowed to 3.0% in May from 3.4% in April, which should give the central bank more leeway to enact further interest rate cuts. We believe that domestic demand could be boosted starting in 3Q12.

Growth in online retail…

According to the Ministry of Commerce, China recorded 194 million online shoppers and RMB782.56b in online retail trade last year. The sales were 53.7% higher YoY and accounted for 4.3% of China’s total consumer goods retail volume in 2011. The importance of the online channel is increasingly recognized by retailers. In Feb, Walmart increased its stake in Yihaodian, the biggest online grocery retailer in China, to 51%. Department store retailer Neiman Marcus invested in the Glamour Sales site in March. In May, Macy’s invested in online retailer VIPStore, which operates jiapin.com.

…but physical retail will do well

Even if online retail sales continue to grow at 50% p.a. through till 2015 and total retail sales grow at a conservative 10%-15% p.a., physical retail sales can grow at a healthy 7-12% p.a. Among real estate investments, retail is quite heterogeneous, whereby differentiation and strong execution are key. We have confidence in CRCT’s operational capability given its manager is a wholly-owned subsidiary of CapitaMalls Asia.

Maintain BUY

We maintain our BUY rating on CRCT and S$1.44 fair value. CRCT is trading at an attractive FY12F dividend yield of 7.4%.

GROWING WITH THE CHINESE CONSUMER

•One-stop shopping destinations

•Growing Chinese consumption

•Acquisition and asset enhancement

Quality assets with good location

Located in mainland China, CRCT’s retail malls are positioned as onestop family-oriented shopping, dining and entertainment destinations for areas with large population catchment. Anchor tenants include Carrefour, Walmart and the Beijing Hualian Group. The majority of CRCT’s exposure is to Beijing, where four out of its nine properties are located. The Beijing malls accounted for 69% of revenue in 2011, with the two larger ones accounting for 51%. Based on FY11 figures, CRCT’s portfolio has an average property yield of 6.5% (based on book valuation), which is attractive compared to Singapore retail property yields of around 5-6%.

Consumption as a pillar of growth

China is pursuing domestic consumption as the key strategy to reduce the economy’s reliance on exports. Consumption is likely to overtake investment as China’s largest driver of growth in 2012 for the first time in over a decade. Increasing urbanization and the continued growth in household disposable income serve as powerful long-term drivers for retail sales, which could grow faster than the GDP for at least the next few years. We note that that a healthy 82% of CRCT’s committed leases have turnover rent provisions. This allows CRCT to see direct upside from growth in retail sales.

Organic and inorganic growth

Partially due to the purchase of CapitaMall Minzhongleyuan last year, a significant 28% of CRCT’s leases by gross rental income is due for expiry in 2012. This should enable it to see good positive rental reversions. CRCT is also looking to enhance the performance of its two largest assets, CapitaMall Xizhimen and CapitaMall Wangjing. The opening of Xizhimen’s basement connection to the subway interchange has led to significantly increased footfall and strong leasing interest.

Initiate with a BUY

We initiate with a BUY rating and a S$1.44 fair value based on a DDM analysis. CRCT is currently trading at an est. FY12 yield of 7.0%.

Ramping up growth engines

• Upgrade to BUY on acceleration in earnings growth

• Highest yielding retail reit and undemanding P/BK

• More room for growth via AEI works, tenancy remixing and acquisitions

Upgrade to BUY. CRCT offers investors a pure play into the largest and fastest growing retail market in the world, China. We believe that investors should re-evaluate this stock as earnings growth is set to accelerate. The portfolio is maturing with growing shopper footfalls and rising tenant sales while tenancy remixing and asset enhancement activities over the past 24 months have also created a greater correlation between rising retail sales and rental reversions. It is trading at an undemanding 1x FY12F P/BV and offers attractive yields of 6.9 -7% for both FY12 and FY13 – one of the highest amongst Asian retail reits. We see strong organic growth from rising rentals and AEI works, while its large and visible pipeline from its sponsor (CMA) would provide a solid platform to grow its portfolio. We upgrade the stock to BUY. TP is raised to S$1.48, offering investors a total return of 20%.

Strong positive rental reversion to continue, more value to be unlock. Going forward, strong positive rental reversion will be likely supported by (1) the opening of the basement 1 connection at Xizhimen mall to the subway interchange in Dec 11. Leveraging on the increased footfall (+30% y-o-y), the manager intends to widen its retail offering and transform it into a destination mall, which should attract strong leasing interest; (2) a series of tenancy adjustments to the seven-storey block at Wangjing to drive footfall. This should help raise average rents, which is at a significant discount to market rents; and (3) the execution of the AEI works at Mingzhongleyuan (MZLY). AEI works costing Rmb74m will improve the mall’s overall yield from c.6% to 8.4% and generate an estimated incremental NPI of Rmb 8.0m post the completion of the AEI works. In the longer term, we see significant value to be unlocked from the repositioning of its three single tenant malls to multi-tenanted buildings.

Sound financial metrics, able to leverage on sponsor’s pipeline. Gearing at c.28% is one of the lowest in the reit space and the trust has limited refinancing obligations this year. In addition, the S$500m MTN facility established recently will enable the trust to tap into funds when necessary.