CapitaRetail China Trust

DBS GROUP RESEARCH on 4 Feb 2013

Q4 2012 gross revenues and net property income grew 4 per cent and 6 per cent y-o-y respectively, which were lifted by strong rental reversions, offsetting the weaker renminbi and income vacuum from the ongoing asset enhancement initiative (AEI) work at Mingzhongleyuan. While distributable income came in 7 per cent higher at $16.8 million, distribution per unit rose by 0.9 per cent y-o-y to 2.30 cents due to the enlarged share base after the recent placement. The group revalued its portfolio up by 4.7 per cent to book NAV of $1.29 on better performance and lower cap rate of 25 basis points.

A more intensive make-over for MingzhongLeyuan. New plans will involve the closure of the entire mall from July 2013 to Q2 2014 (except for the newly renovated L1), which should strengthen its positioning in the longer term. Estimated capex will increase by 39 per cent to about $20.6 million but is expected to generate an additional NPI of about $2 million, representing a decent 10.1 per cent return on investment. We believe the income vacuum from the mall, which management guided will have a 3 per cent impact on distributions which we believe will be more than offset by the strong rental reversion for the remaining malls.

In the reviewed quarter, the trust recorded strong rental reversions of 23.6 per cent, supported by robust shopper footfall and tenant sales, which grew 23.1 per cent and 11.7 per cent y-o-y respectively. Tenancy remixing at Qibao saw higher tenant sales of 35.9 per cent y-o-y. The strong reversions will continue to help lift revenue in the coming quarters. Meanwhile, the opening of the basement linkway to the train station at Xizhimen drove foot fall up 48.6 per cent but only lifted tenant sales by 12.5 per cent. Hence, there is still room to raise retail sales and drive rental rates.

Maintain "hold". We continue to like CRCT's ability to drive rental reversions and its conservative balance sheet which we believe can be utilised to drive inorganic growth. However, with the trust trading at 1.4x P/BV, offering FY2013/2014 yields of 5.2-5.4 per cent, we think much of the positives have already been priced in. Upside earnings exist from potential acquisitions given a recapitalised balance sheet coupled with yet-to-be deployed proceeds of about $86 million from recent placements.

HOLD