CapitaRetail China Trust

DBS GROUP RESEARCH on 24 Oct 2012

IN-LINE results. CapitaRetail China Trust's (CRCT) distribution per unit (DPU) for Q3 came in at 2.42 cents representing an increase of 14.2 per cent y-o-y. Nine-month DPU makes up 77 per cent of our forecast. While the growth was supported by 14.2 per cent and 16.1 per cent increase in gross revenue and net property income (NPI) respectively, the group also benefited from a strong yuan, which has strengthened by about 10 per cent against the Singapore dollar in the reviewed quarter. Stripping this out, gross revenue and NPI would have increased by 8-10 per cent. Most malls continue to record strong NPI growth on a y-o-y basis, offsetting the lower income at Mingzhongleyuan.

Positive rental reversions drive mall's performance. Occupancy continued to hold steady at about 97 per cent except for MZLY, which is undergoing asset-enhancement works, and CapitaMall Wuhu, which is undergoing tenancy adjustments. Rental reversion was also up 18 per cent versus 15 per cent last quarter, largely driven by Wangjing (+33.7 per cent), MZLY (+22.6 per cent) and Xizhimen (+19.4 per cent).

The healthy reversion was supported by a 15.6 per cent rise in tenant sales outperforming China's overall September retail sales number at +14.2 per cent. With 9.7 per cent and 27.1 per cent of the revenue up for renewal in Q4 2012 and FY2013, we believe this Reit should continue to see strong rental reversions.

Downgrade to 'hold' on valuation grounds. We raise our TP by 6.3 per cent and FY2012/2013 DPU by 4.4-6.6 per cent to account for the better-than-expected rent. While FY2013/2014 yield remains attractive at 6-6.5 per cent, we believe many of the positives have been priced in with the Reit trading at 1.27x P/BV versus the Asian retail average at 1.15x. With limited upside to our new TP, we downgrade the stock to "hold" largely on valuation grounds.

Upside risk for share price performance of the stock could likely depend on newsflow about potential acquisition of new properties in the pipeline.
HOLD