CapitaRetail China Trust

OCBC on 18 May 2012

Located in mainland China, CRCT’s retail malls are positioned as one-stop family-oriented shopping, dining and entertainment destinations for areas with large population catchment. 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%. Increasing urbanization and the continued growth in household disposable income serve as powerful long-term drivers for retail sales, which should grow faster than the GDP for at least the next few years. With some 28% of its leases by gross rental income due for renewal this year, CRCT could see significant positive rental reversions. We initiate with a BUY rating and S$1.44 fair value based on a dividend discount model analysis.

Quality assets with good locations
Located in mainland China, CRCT’s retail malls are positioned as one-stop 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%.