Strong SGD mute performance

• Robust revenue growth from strong rental reversions, but net impact eroded by strong SGD

• Healthy leasing market backed by AEI efforts and strong consumption

• Maintain Hold, S$1.29 TP

2Q11 in line. Gross revenue (in RMB) grew 10.9% yoy and NPI 11.3%. But a 7% stronger SGD led to smaller 3.8% and 4.1% reported numbers, respectively. The trust also recorded a 4.8% revaluation gain from Dec 2010. Excluding that, 2Q11 DPU increased by 3.9% to 2.15cts. Result was relatively flat qoq.

Reaping asset enhancement benefits. CRCT’s malls saw stronger 17% rental reversions for 104 new and renewal leases in Q2. Occupancy was stable at 98.1%. Tenant sales jumped 29.9% yoy (+2.1% qoq) on improving shopper traffic (+14% yoy, +2.5% qoq), supported by China’s robust consumption trend and growing urbanisation. The trust has another 320 leases, or 11.5% of gross income up for renewal in 2H11. With Saihan Mall in its 1st rental reversion cycle, and Wuhu and Xizhimen malls enjoying the benefits of earlier asset enhancement efforts, CRCT should continue to see positive rental reversions. The purchase of New Minzhong Leyuan Mall is completed and will see maiden contribution in 3Q11. Meanwhile, the trust has also successfully refinanced its RMB onshore term loan with an unsecured 3-year onshore term loan at a slight premium to PBOC rate.

Maintain HOLD, $1.29 TP. Balance sheet remains robust with 29.7% gearing post-placement. We nudged down DPU by <1% after imputing the enlarged unit base, which lowered our DCF value by 1ct to S$1.29. We are pleased with the result of the trust’s efforts to revamp its malls into multi-tenanted properties for better leverage to rising rents and retail sales, but its near term performance is likely to continue to be affected by the strong SGD.

CRCT’s Q2 DPU rises 3.9%; gross revenue up 10.9%

Trust observing market, doesn’t rule out pursuing a yuan-denominated dual listing

CONSUMERS in China are spending and CapitaRetail China Trust (CRCT) has ridden on that trend to post strong results for the second quarter ended June 30.

As more property groups eye yuan-denominated real estate investment trust (Reit) listings, CRCT does not rule out pursuing a yuan-denominated dual listing itself, although it is only watching the market for now, said chief executive officer of the trust’s manager Tony Tan.

Mr Tan was speaking at a briefing yesterday.

In Q2, CRCT posted a 10.9 per cent increase in gross revenue over the year to 161 million yuan (S$30.4 million), as occupancies and tenant sales at its malls rose.

Net property income went up by 11.3 per cent to 108.1 million yuan. Income for distribution – converted to Singapore dollars – was $13.5 million, up 11.5 per cent from the previous year.

Distribution per unit (DPU) for the quarter rose 3.9 per cent to 2.15 Singapore cents, and the annualised DPU also climbed 3.9 per cent to 8.62 Singapore cents.

The annualised distribution yield, based on CRCT’s closing unit price of $1.22 on June 30, was 7.1 per cent.

For the first half, CRCT’s income for distribution rose 2.7 per cent over the year to $26.9 million.

DPU for the period increased by 2.1 per cent to 4.3 Singapore cents.

CRCT is positive about China’s retail sector, notwithstanding talk of a hard landing in the country earlier.

It drew confidence from the rental reversion it has seen – of the 104 leases it renewed in Q2, the average rental increase over preceding rents was 17 per cent.

‘It takes a while to get the tenant and the shopper to understand our malls. Once you get that traction – you always have this inflection point – then a lot of people would be interested,’ Mr Tan said.

‘I think we are just beginning to reach that point for some of the malls,’ he added.

Of late, yuan-denominated Reit listings in Hong Kong have come under the spotlight.

Asked if CRCT would pursue a yuan-denominated dual listing, Mr Tan said that it is observing the market and has not ruled out this option.

Such a listing would make sense for CRCT because its cash flows are in yuan, he said.

But he added that careful consideration was needed.

One thing he noted: The performance of Hui Xian Reit – Hong Kong’s first yuan-denominated IPO – has not matched the initial hype surrounding the listing.

CRCT closed unchanged on the stock market yesterday at $1.23.

Spreading its wings into Wuhan

• First foray into Central China

• Numerous low hanging fruits to lift entry yield

• Maintain Hold with S$1.30 TP

First property purchase in Wuhan. CRCT announced that it is acquiring the New Minzhong Leyuan Mall in Wuhan from Capitaland for RMB395m (S$76m) or RMB9,469psm GFA. The purchase price is 5-6% below the valuation of RMB417-422m. The property comprises an annexe and a conserved building with a total NLA of 23,361sm. Fronting Zhongshan Ave, the prime-shopping belt in Wuhan, the mall is about 500m away from the Youyilu metro station and near the future Jianghanlu Metro Station, which is expected to open in 2012. Tenants are largely in the fashion and lifestyle trade sectors (61% of its rental income) and F&B including KFC, Pizza hut and MacDonalds, and it houses the only IMAX theatre in Wuhan. The deal, which could boost CRCT’s AUM by 6.4% to S$1.26b, is subject to unitholders’ approval at EGM and is expected to complete by mid 2011.

A step in the right direction. We are positive on the acquisition. Not only is the deal yield accretive from the start, we see the addition of this high shopper footfall property as enhancing portfolio mix as well as boost rental revenue profile with greater diversification of short and long term leases that will enable it to leverage on strong consumption and retail spending trend. In the near term, we believe low-hanging fruits could come from (i) raising present occupancy of 90.6%; (ii) positive rental reversions with c.64.2% and 24.8% of gross rental income expiring in FY11 and FY12 respectively; historically, we believe the property had been able to achieve average rental growth that is above CPI; and (iii) potential tenant remixing by reviewing big box tenants.

A combination of debt/equity financing planned. At an acquisition NPI yield of 8.1%, the purchase would be yield enhancing vs the implied property yield of 7% for the existing portfolio. With an existing gearing of 32.6%, close to the ceiling of 35%, we expect CRCT to adopt a combination of debt/equity financing. This provides a mean to improve trading liquidity as well. Assuming that it raises S$70m of equity funding and the remainder through debt, we estimate FY11-12 earnings could be raised by 4-9% while at DPU level, accretion would be a more modest 2-3%.

Maintain Hold. We believe the acquisition will provide not only an immediate earnings boost but will also strengthen the portfolio’s tenant and lease reversion profile in the longer run. However, with the relatively small DPU uplift and limited upside to our revised DCF-backed TP of S$1.30, we are maintaining our HOLD call. The stock offers a total return of c10%.

Performance dragged by strong S$

• Improved operating performance and cost management dragged by strong S$

• Asset enhancement works successfully rolled out

• Maintain Hold with TP $1.28

Commendable quarter. CRCT reported a 4.7% yoy (+2.5% qoq) growth in topline to S$30.9m. Operating performance improved but hit by stronger S$ vs RMB. NPI rose 7.1% yoy and 8.8% qoq sequentially to $20.7m on improved cost management. In RMB terms, revenue grew by 11.1% yoy to RMB159m thanks to higher portfolio occupancy of 98.4% and an average 8% higher rental renewals on the back of +33.7% yoy greater tenant sales and 18.4% yoy increase in shoppers’ traffic. Distributable income grew a modest 1.0% yoy to S$13.5m due to under-provision of tax in prior years, translating to DPU of 2.15 Scts.

AEI works bearing fruit. AEI works undertaken in the past year has begun to bear fruits and the remaining 440 leases expiring this year should do well with the management’s proactive leasing strategies. Reconfiguration of shops at Xinwu and conversion of Saihan into a multi-tenanted mall raised renewal rents by 21% and 29% respectively. Occupancy at Qibao Mall improved to 92.1% post tenancy repositioning, including bringing in arcade operator Tom’s World ad children fashion retailer BaoDaXiang, led to a 47% jump in NPI. Meanwhile increased shopper footfalls in Xizhimen and Wangjing malls boosted revenue from tenant sales. Continued AEI and adoption of proactive leasing strategy would deliver future growths. With current gearing of 32.6%, CRCT will explore further acquisitions. Debts profile remains healthy with only $77m of debts due this year, of which $24.8m are onshore loans. Average cost of funds should remain fairly low compared to the present 2.8%.

Maintain Hold. As a pure China retail landlord, CRCT should benefit from the strong retail sales in China as domestic and international retailers expand their presence. Maintain Hold with TP of $1.28. CRCT currently offers FY11 and FY12 DPU yield of 6.6-6.7%.

CRCT does better in Q1, sees rosy outlook in China

CAPITARETAIL China Trust (CRCT) yesterday posted improved results for the first quarter ended March 31.

Gross revenue climbed 11.1 per cent year-on-year to 159.1 million yuan (S$30.4 million) largely from higher occupancy rates and higher tenant sales at some malls.

Net property income increased 13.6 per cent to 106.6 million yuan.

The results were slightly eroded by the Singapore dollar’s appreciation against the yuan. Converted to Sing dollars, gross revenue grew a smaller 4.7 per cent while net property income rose 7.1 per cent.

Income available for distribution was $13.5 million, up one per cent from a year ago. Distribution per unit (DPU) for the period was 2.15 cents, above last year’s 2.14 cents.

On an annualised basis, Q1’s DPU was 8.72 cents. Seen against CRCT’s closing unit price of $1.25 on March 31, the annualised distribution yield is 7 per cent.

The counter lost one cent on the stock market yesterday to end trading at $1.26.

CRCT is confident about the outlook for China’s retail market, pointing out that the Chinese government committed to boosting domestic consumer demand in its 12th Five-Year Plan in March.

‘Retail sales in China grew 15.8 per cent year-on-year in the first two months of 2011. Retail sales, driven by growing urbanisation and rising disposable income, are expected to remain robust,’ said Victor Liew, chairman of CRCT’s manager.

CRCT added that the authorities are also investing more in transport infrastructure and public transport, which is expected to improve accessibility and ‘retail footfall’.

CRCT’s portfolio comprises eight malls across five cities in China.

It said it will explore yield-accretive acquisitions to expand its portfolio, and continue rolling out asset enhancement initiatives. Its gearing in the first quarter was 32.6 per cent, up from 31.1 per cent in the fourth quarter of 2010.