Perennial China Retail Trust

CIMB on 12 June 2012

LONG term prospects remain attractive when revaluation gains kick in to boost net asset value (NAV) growth.

We maintain "outperform" on an unchanged target price (still at 35 per cent discount to revised net asset value, or 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 per cent 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 of over 6 per cent 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 approximately 6 per cent on cash-generative assets.

Robust trust structure: Better equipped for growth: Despite the April 2012 sell-down of shareholdings by key local partner, we see Kuok Khoon Hong's buy-in as reducing over-reliance on any single partner, and establishing greater certainty of a pipeline of retail assets for Perennial China Retail Trust (PCRT) via:

(1) establishment of joint-investment vehicle with target capital of $500 million, 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 per cent to 16.9 per cent (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 20,000-30,000 yuan (S$4,039-$6,058) per square metre (psm) in 2011, we see potential RNAV uplift from strategic divestments.

With the stock trading at 0.7 times price-to-book, and 50 per cent discount to RNAV, we see value at the current share price of $0.45 vs Mr Kuok's April 2012 off-market purchase price of $0.446 per unit.

OUTPERFORM