CapitaRetail China Trust

OCBC on 8 Aug 2012

Given the recent run-up in REIT share prices across the board and general yield compressions, we believe that CRCT’s FY12F dividend yield of 6.4% is quite attractive. Local retail REITs are trading at Bloomberg consensus current FY dividend yields of 5.0%-5.9%. Among the overseas retail REITs, although CRCT’s forward yield is lower than LMIRT’s 7.4%, it is higher than FRT’s 5.9%. We believe that CRCT deserves a scarcity premium since, as we understand, it is the only pure-play mainland China retail REIT in the world, offering positive exposure to structural shift towards domestic consumption in the second largest economy. We lower the cost of equity assumption in our DDM model from 9.5% to 8.6% to better reflect the prevailing lower interest rate environment. We maintain our BUY rating on CRCT and raise our fair value from S$1.50 to S$1.70.

Deserves scarcity premium
We believe that CRCT deserves a scarcity premium since, as we understand, it is the only pure-play mainland China retail REIT in the world, offering positive exposure to structural shift towards domestic consumption in the second largest economy. In our view, the closest two peers are Hui Xian REIT and Perennial China Retail Trust. Hui Xian is a mixed PRC REIT play, which exposure to mainland retail, office and hospitality segments. Perennial is a PRC retail development trust and is thus exposed to development risks. Hui Xian and Perennial are trading at Bloomberg consensus yields of 7.8% and 6.7% respectively.

Good outlook, operationally solid
China’s real GDP grew by 7.8% YoY in 1H12. 1H12 total retail sales of consumer goods grew faster at 14.4%. On a long term basis, retail sales growth should continue to outpace GDP growth as people increasingly turn towards organized retail with urbanization and rising disposable incomes. CRCT has nine malls in first-tier and second/third-tier cities. We believe the vicinity of the four Beijing malls will see limited increase in retail supply space over the next few years. Occupancy in CRCT’s portfolio is good at 97.1%, the highest among the overseas retail S-REITs; we note Lippo Malls Indonesia Retail Trust’s occupancy is at 94.7% while Fortune REIT’s occupancy is at 96.5%.

Attractive dividend yield
Given the recent run-up in REIT share prices across the board and general yield compressions, we believe that CRCT’s FY12F dividend yield of 6.4% is fairly attractive. For example, local retail REITs are trading at Bloomberg consensus dividend yields of 5.0%-5.9%. Among the overseas retail REITs, although CRCT’s forward yield is lower than LMIRT’s 7.4%, it is higher than FRT’s 5.9%.

Maintain BUY
We lower the cost of equity assumption in the DDM model for CRCT from 9.5% to 8.6% to better reflect the prevailing lower interest rate environment. We raise our fair value from S$1.50 to S$1.70 and maintain our BUY rating on CRCT.