CapitaRetail China Trust

OCBC on 13 Sept 2012

According to the 12th Five-year Development Plan for Domestic Trade released by the State Council recently, China aims to grow its retail sales of consumer goods at an average annual growth rate of 15% for 2011-2015. Beijing, which accounted for 67% of CRCT’s 2Q12 gross property revenue, saw overall retail sales grow 13.0% YoY in 1H12. While Beijing’s 1H12 expenditure per capita only expanded by 3.6% YoY, disposable income climbed 6.4%, which means that consumers have growing amounts of unutilized “firepower”. We are confident that CRCT can achieve healthy double-digit positive rental reversions for 2012 for its multi-tenanted malls. The only listed pure-play China retail REIT globally, CRCT is our top pick in the overseas retail REIT space. We maintain our BUY rating on CRCT and our fair value of S$1.70.

Targeting 15% p.a. growth in retail sales
According to the 12th Five-year Development Plan for Domestic Trade released by the State Council recently, China aims to expand its retail sales of consumer goods to around RMB32tr (~US$5.05tr) by 2015, with an average annual growth rate of 15%. While the targeted growth rate is slightly lower than the 16.1% p.a. growth rate over the past decade that propelled retail sales to RMB18.4tr in 2011, 15% is still very good. China's retail sales rose 13.2% YoY in Aug, 0.1 percentage points higher than the growth rate in Jul. To make a simple comparison with a developed country, we note that for the month of Jun (the latest month for which data is available), Singapore’s retail sales actually decreased by 0.9% YoY.

Positive demographics means increasing “firepower”
We see the MoM decline in consumer confidence to be short-term; the Bankcard Consumer Confidence Index fell 0.5 percentage points MoM to 86.21 points in Aug. Having gathered demographic data on the cities that CRCT operates in, we believe that long-term fundamentals remain good for the retail industry. Beijing, which accounted for 67% of CRCT’s 2Q12 gross property revenue, saw overall retail sales grow 13.0% YoY in 1H12. While Beijing’s 1H12 expenditure per capita only expanded by 3.6% YoY, disposable income climbed 6.4%, which means that consumers have growing amounts of unutilized “firepower”, especially given that the rate of inflation is historically low (consumer inflation grew at only 2.0% in Aug).

The only pure-play China retail REIT
We are confident that CRCT can achieve healthy double-digit positive rental reversions for 2012 for its multi-tenanted malls. For 2Q12, CRCT’s multi-tenanted malls achieved rental versions of 15.2%, excluding the gross turnover component. Most of the leases have rental escalation clauses. The only listed pure-play China retail REIT globally, CRCT is our top pick in the overseas retail REIT space.

Maintain BUY
We maintain our BUY rating on CRCT and our fair value of S$1.70.