Portfolio remixing bearing fruit

• Results slightly ahead of expectations

• Delivering on organic and AEI growth

• Maintain Hold, TP $1.28

FY10 DPU of 8.36Scts slightly ahead of consensus. 4Q10 revenue grew 6% q-o-q to S$30.2m while NPI was flat at S$19m, impacted by a strong S$ vs RMB and higher but normalized expense ratio of 37%. Distribution income of S$13m translates to DPU of 2.07Scts, bringing full year DPU to 8.36Scts, ahead of street estimates. The group revalued its portfolio up by 5.8% to book NAV of S$1.17 on better performance and lower property yield of 6.2%.

Portfolio performance boosted by AEI. In RMB terms, revenue grew 4.2% q-o-q to RMB153.5m, lifting full year topline to a record RMB589m, backed by a 25% jump in tenant sales and 15% higher shopper footfalls. Portfolio occupancy increased to 98.1%. The best performing malls were Wangjing and Xinwu, which enjoyed rental reversions of 12% and 11% y-o-y. AEI works including reconfiguring shops at Xinwu helped lift average rents on a RMB/sm basis. In all, the group renewed 451 leases in FY10, with new tenants making up c50% of the remix, including those from F&B and fashion trade sectors. Looking ahead, we expect performance at Saihan and Qibao malls to continue improving following the successful roll out of AEI works. Meanwhile, the recovery in retail rents from better supply/demand dynamics and rising consumption trends should benefit given that 19% of gross income will be renewed in 2011. The group would continue to execute its other growth drivers including potential asset enhancements, particularly at master-leased assets as well as looking for new acquisitions. Its current gearing stands at 31.1%. Debt expiry profile remains healthy with a maturity of 2.2 years with only 16% of total debt to be renewed this year.

Maintain Hold. We project a modest topline growth of 5% in FY11 as the group continues to fine-tune its portfolio tenant mix and occupancy. Maintain Hold with TP adjusted slightly to $1.28 as we fine-tune currency assumptions. CRCT currently offers FY11 and FY12 DPU yield of 6.6-6.7%.

CRCT distribution inches up in Q4

INCOME to be distributed by CapitaRetail China Trust (CRCT), a CapitaLand unit, for the fourth quarter of 2010 inched up 2 per cent to $12.97 million – from $12.72 million in Q4 2009 – as it recorded higher rental revenue from its malls.

Distribution per unit (DPU) for the October-December quarter rose 1.5 per cent to 2.07 cents from 2.04 cents a year earlier.

CRCT, which owns eight retail mall properties in China, reported better distribution even as net property income fell year-on-year. This is because for 2009, there was a net retention of income. But for 2010, it is paying out all of its distributable income.

The trust also said its performance was affected by the stronger Singapore dollar, which appreciated against the yuan in 2010.

In renminbi terms, gross revenue for Q4 2010 grew 6.3 per cent year-on- year to 153.5 million yuan (S$29.8 million) due to occupancy and rental growth in some of its malls following asset enhancement works. Net property income fell 1.4 per cent in renminbi terms to about 97 million yuan mainly due to increases in marketing and utility expenses, and higher provision for staff-related costs.

But in Sing dollar terms, CRCT’s performance was worse. Gross revenue rose 1.6 per cent y-o-y to reach $30.2 million in Q4 2010. Net property income fell 6.1 per cent to $19 million.

For the whole of 2010, CRCT’s total income to be distributed rose 3.1 per cent to $52.2 million. Total DPU for 2010 is 8.36 cents, an increase of about 2.7 per cent over 2009.

As at end-December 2010, CRCT’s total borrowing was $402 million, while its gearing stood at 31.1 per cent.

Looking ahead, CRCT said it remains optimistic about its growth prospects in China. ‘With the rapid emergence of China’s middle class, increasing income levels and continuing urbanisation, consumer spending is expected to remain robust,’ the trust said in a statement. ‘China’s strong economic growth momentum, especially when contrasted with the lacklustre growth prospects in the developed markets, will continue to entice retailers to further expand into China. CRCT, with its geographically diversified portfolio of eight malls, is well positioned to tap into China’s growing consumer market.’

CRCT shares gained three cents to close at $1.27 yesterday.

Portfolio remixing in progress

• DPU of 2.08 Scts in line with estimates

• Portfolio performance stable; AEI in Saihan yielding results

• Maintain HOLD given limited upside to raised TP of S$1.30; CRCT offers a total return of 12%.

DPU of 2.08 Scts in line. Topline and net property income were flattish at S$29.8m (-0.2% yoy, +0.7%qoq) and S$19.0m (+4.3%yoy, -3.8%qoq) respectively, due to a stronger S$:RMB exchange rate. Distributable income came in 3.2% higher, translating to a DPU of 2.08Scts.

Portfolio performance remains stable, enhancement works (“AEI”) in Saihan yielding positive results. In RMB terms, the portfolio delivered a topline growth of 4.5% yoy to RMB 147.2m. The improvement was portfolio wide with average occupancy levels inching up to 97.3% (against 95.0% a year ago), backed by stronger tenant sales growth of 24.9% yoy and 10.1% qoq. A major contributor came from Xizhimen Mall (recorded new contribution from Beijing Hualian Supermarket in Basement 1) and Wangjing Mall, which enjoyed higher rental revenues and occupancy rates. Sequentially, topline remained stable but we note that Saihan, Xinwu Mall – smaller malls in the portfolio have shown a sustained improvement in operational performance. Qibao Mall, however, reported lower revenues as it is undergoing asset enhancement and tenant remixing program. Looking ahead, we expect single digit uplift in topline as the manager continues to fine-tune the tenant profiles in order to attain the optimal portfolio mix and offering to consumers.

Renewed S$200m of short term loans. Renewed loans willextend debt expiry profile to 2.37 years from 1.01 years currently. Interest cover remains high at 6.2x.

Maintain Hold, TP raised to S$1.30. We maintain our HOLD call, given limited upside to our raised TP of S$1.30 after rolling valuation forward to FY11. CRCT offers forward yields of 6.7-6.9%.

Strong Sing$ eats into CRCT’s Q3 earnings

Income available for distribution for the period up 3.2% at $13m

CAPITARETAIL China Trust (CRCT) posted improved third-quarter earnings yesterday, although the strengthening Singapore dollar took some shine off its results.

CRCT’s eight malls in China brought in a gross revenue of 147.2 million yuan (S$29.8 million) for the quarter ended Sept 30 – up 4.5 per cent from a year ago as some malls collected more rent. Net property income rose 9.1 per cent to 94.2 million yuan.

Converted to Singapore dollars, however, gross revenue slipped 0.2 per cent from last year to $29.8 million, while net property income increased by a smaller 4.3 per cent to $19 million.

‘The lower growth in Singapore dollar terms was due to the stronger Singapore dollar against yuan between Q3 2009 and Q3 2010,’ CRCT said.

Income available for distribution for Q3 rose 3.2 per cent year on year to $13 million. This sent distribution per unit (DPU) up 3 per cent to 2.08 cents.

The annualised DPU works out to 8.25 cents. Based on CRCT’s closing unit price of $1.25 on Sept 30, the annualised distribution yield is 6.6 per cent. The counter closed one cent up at $1.25 yesterday.

CRCT’s gearing as at Sept 30 was 33.7 per cent, slightly higher than the 33 per cent a year ago.

CRCT’s manager, CapitaRetail China Trust Management, is optimistic about prospects.

According to its chairman, Victor Liew, China’s total retail sales of consumer goods rose 18.2 per cent year on year for the first eight months of the year.

Tony Tan, CEO of the manager, also said that there had been ‘positive rental renewal momentum’ at CRCT’s malls.

Stabilising portfolio

• Results in line

• Organic growth near term driver

• Maintain Hold with TP of $1.26

1H10 within expectations. CRCT reported a -2.8% y-o-y dip in topline to S$29.6m due to impact from the stronger SGD, while NPI and distribution income rose 1.9% and 7.3% to $19.8m and $12.9m (DPU 2.07Scts) respectively, on better cost management. In Rmb terms, revenue grew 3.7% to RMB145.1m thanks to better portfolio occupancy, higher contributions from Xizhimen and Saihan malls, partially offset by lower income from Qibao mall. Rental renewals averaged 3.4% over preceeding levels. Higher gross turnover rents as tenant sales picked up 28.8% yoy and 7.6% qoq. NPI rose 8.8% yoy to Rmb97.2m. The group enjoyed a 1.7% revaluation surplus in 1H10, bringing adjusted book NAV to S$1.09.

Benefiting from AEI and firming rents. Looking ahead, we expect 2H to remain robust on the back of firming rents and improved demand as retailers regain confidence and resume expansion activities in the Beijing and Shanghai micromarkets. This will benefit CRCT with a remaining 15.9% of rental income to be renewed this year and a further 15.1% next year, in particular at Xizhimen and Wangjing malls. Moreover, the planned opening of another c2ksm in B2 at Xizhimen later this year should provide some income uplift. Saihan Mall is also anticipated to continue its positive traffic and contribution trend with the establishment of a cinema operator in 2H10. Repositioning of Qibao is underway in tandem with the rejuvenation activities in this Shanghai satellite city, to tap opportunities offered by the new infrastructure and population catchment in the area. In terms of capital management, the trust has a remaining S$231m of debt to be refinanced this year. We expect average cost of debt to rise to 3-3.5% from the present 2.8% after renewal. This has been accounted for in our estimates.

We retain Hold rating. CRCT is trading at FY10 and FY11 yields of 6.6-6.7%. Our target price translates to a 6-7% absolute return. Maintain Hold. Key risk to our view include faster than expected improvement in operating fundamentals.