Still ramping up

• Results in line; operational drag mitigated by earn-out income as properties stabilize
  
• Shenyang assets in stabilisation stage, development assets on track
  
• Maintain Buy, TP S$0.83
  

Highlights

Supported by earn out income. PCRT reported distribution income of S$10.9m for 2Q12, +3% q-o-q, supported by earn-out income of S$10.7m and S$0.2m from operations. This translates to a DPU of 0.96Scts. For 1H12, distribution income totaled S$21.5m or DPU of 1.9Scts. This is in line with expectations and makes up 49% of our FY12F.

SLSM, RSMFM yet to stabilise. Shenyang Longemont Shopping Mall (SLSM) saw occupancy trickling up to 70.7% vs 69.7% in 1Q while rents averaged RMB3.32psm/day. For the Shenyang Red Star Macalline Furniture Mall (RSMFM), occupancy dipped sequentially to 50.6% in 2Q from 60.2% as tenant rejigging and relocation continues. The group has revised target occupancy for the furniture mall to 60% (from 95%) and 75% (from 78%) for the shopping mall by end FY12. Leasing activities for Shenyang Longemont Office has begun with leases secured for 1,780sm of space (10% of total office) coming from names such as Hui Ming Transportation Agent, Kang Li Elevator and Zhi Lian Recruitment Company. Leasing activities will also be ramped up in coming month and the office component is scheduled to begin operations in 4Q12.

Our View

Shenyang properties still in a ramping up stage. SLSM and RSMFM will continue to be ramped up in 2H12. One block of the RSMFM is being converted into an outlet mall as well as for education, medical trades and wholesale centre. Discussions with potential tenants are ongoing and if committed, will boost occupancy levels. For SLSM, tenants offering local and mid-tier brands products are doing well as are those catering to family kids-focused trades. To strengthen its offering, it has secured a children language centre as third mini anchor (to commence in 1Q13) in addition to a KTV and a bowling centre as well as new tenants including Kids Photography Studio, Hotwind, Zodiac Restaurant as part of the move to rejig tenant mix during this stabilisation period.

Development assets on track. Perennial Jihua Mall in Foshan (former Foshan Yicui Shijia Mall) has secured key tenants such as H&M, Monki, KFC and Pizza Hut and together with anchor tenants secured earlier is 30% precommitted to date. This property is targeted to commence operations in 1Q13. For Perennial Qingyang Mall (former Chengdu Qingyang Guanghua Mall), construction has begun and preleasing stands at c21%. This mall is scheduled to commence operations in 2Q14. Meanwhile, the group has exercised its option to increase its stake in Perennial Dongzhan Mall to 80%. Gearing stands at 13.5%.

Recommendation

Maintain Buy. Maintain Buy with RNAV-backed TP of S$0.83. We see FY13 as the earnings inflexion point with new contributions from the Foshan development. As operational ramp up improves, we expect the stock to close the gap between share price and RNAV. The stock is trading close to implied replacement cost for its initial portfolio.

Perennial China Retail Trust ups stake in Chengdu mall to 80% for US$353.45m

Perennial China Retail Trust (PCRT) has exercised its option to increase its stake in Chengdu Longemont Shopping Mall Development to 80 per cent from 50 per cent, at a total purchase consideration of 2.24 billion yuan (US$353.45 million), its manager Perennial China Retail Trust Management Pte Ltd announced on Monday.

The manager said it is acquiring the additional 30 per cent stake in the mall as it believes the increased stake in the property will create potential upside for PCRT and a majority ownership gives PCRT greater control over the operations of the property.

The gross floor area of the Mall is expected to be reduced to 280,000 sqm from 455,260 sq m, hence reducing the planned number of above-ground levels to five from eight.

The manager said it expects the value of the mall to increase with the reduction of the gross floor area.

Looking past the rough patch

The recent sell-down has lifted dividend yields to attractive levels of 8-10% till 2014. We believe negatives have been priced in. While teething difficulties are here to stay, near-term weakness is mitigated by growth opportunities on the back of a more robust trust structure.

Long term prospects remain attractive when revaluation gains kick in to boost NAV growth. We maintain Outperform on an unchanged target price (still at 35% discount to RNAV). Strategic monetisation of assets and stronger-than-expected leasing progress are potential catalysts.

Attractive dividend yields

While we remain watchful of operational difficulties on the ground, strong dividend yields buffer weaker earnings as malls go through the gestation phase. Negotiated earn-out structures are sufficient to guarantee a minimum of 8-10% dividend yields till 2014, providing 1-3 years of buffer time for malls to stabilise. Factoring in more conservative rental growth estimates, we anticipate a decent portfolio yield-on-cost 0f >6% when earn-out structure tapers off. We look forward to the 2014/15 turnaround, with strong NAV growth when revaluation gains kick in, and self-sustaining dividend yields of approx. 6% on cash-generative assets.

Robust trust structure: better equipped for growth

Despite the Apr 2012 sell-down of shareholdings by key local partner, we see Mr. Kuok’s buy-in as reducing over-reliance on any single partner, and establishing greater certainty of a pipeline of retail assets for PCRT via: (1) establishment of joint-investment vehicle (Mr. Pua/Mr. Kuok) with target capital of S$500m, providing additional firepower to PCRT’s sponsor; and (2) alignment of interest between sponsor and business trust with the increase in Mr. Kuok’s shareholding in PCRT from 5% to 16.9% (deemed interest).

Potential monetisation; compelling valuations

Management has indicated the possibility of monetisation of assets, at the right price. With retail assets in Tier 2 cities transacted at Rmb20,000-30,000psm in 2011, we see potential RNAV uplift from strategic divestments. With the stock trading at 0.7x P/BV (CRCT: 1x P/BV) and 50% discount to RNAV, we see value at the current share price of S$0.45 vs. Mr. Kuok’s Apr 2012 off-market purchase price of S$0.446 per unit.

Awaiting a turnaround

A strong buffer of earn-out funds protected dividend yields, but operational numbers disappointed with profits from joint entity coming in weak. Repositioning and leasing of Shenyang malls are likely to come to fruition in 4Q12-1Q13.

1Q12 DPU was in line at 24% of our and consensus full-year estimates, backed by earn-out funds. We adjust FY12-14 earnings and lower our RNAV target price (still at 35% discount to RNAV) on longer gestation and lower rents. Maintain Outperform, with pick-up in leasing momentum/retail sales as catalysts.

Weaker operational figures

1Q12 profits from joint entities (contributions from two Shenyang malls) came in below, forming 15% of management’s forecast for the quarter on weaker rental contributions. Occupancies for the two malls inched up, from 56.1% to 60.2% for furniture mall and 67.1% to 69.7% for Longemont mall. The bulk of committed tenants have commenced operations. Construction is on track for properties under development and anchor tenants (supermarket/cineplex) have been secured for Foshan Yicui Shijia and Chengdu Qingyang Guanghua malls, to open in 1Q13 and 2Q14 respectively.

Guidance for gestation period at Shenyang malls

The substantial earnings miss against management forecast was primarily due to the repositioning of 40% of the furniture mall’s NLA. We estimate longer gestation periods for Shenyang malls with slower-than-expected leasing and pockets of rent-free periods. Guidance is for restructuring efforts to be reflected in 4Q12-1Q13. We await a turnaround in mall operations, and a pick-up in shopper traffic with new tenants secured (most recently Carrefour, the anchor tenant at Longemont Mall).

Dividend yields secured

Secured dividend yields tide over a weak quarter. Ample earn-out funds alone are sufficient to ensure the same FY13/14 distributions as FY12, implying 7.6% dividend yields on current share price. Dividend payout ratio remains at 50% from FY13.

Perennial China Retail Trust's DPU at S$0.094

Perennial China Retail Trust (PCRT) announced on Wednesday its Amount Available for Distribution to Unitholders for the period ended March 31 2012 to be at S$10.6 million, in line with its forecast.

The available Distribution per Unit (DPU) for the period ended 31 March 2012 is at 0.94 Singapore cents while its annualised DPU is at 3.81 cents.

It will be paid together with the DPU for the period from April 1 2012 to June 30 2012 on or before September 2012.

As at 8 May 2012, the Distribution Yield is valued at 7.33 per cent, based on closing price of S$0.520 per unit.