Mapletree Greater China Commercial Trust

DBS Group Research, Nov 4

MAPLETREE Greater China Commercial Trust (Magic) reported gross revenue of $63.1 million for Q2 FY2014 - 9.5 per cent ahead of prospectus forecast. Net property income (NPI) and distributable income came in 10 per cent and 13.2 per cent higher than projected to $50.6 million and $38.8 million respectively. Q2 distribution per unit (DPU) was 1.455 cents.

The better performance was achieved on higher portfolio occupancy of 99 per cent with Festival Walk (FW) being 100 per cent taken up and Gateway Plaza (GP) at 98.3 per cent leased. Rents achieved were 22 per cent higher than previous corresponding levels at FW and 81 per cent better at GP. FW continues to enjoy consistently robust shopper footfall growth of 5.2 per cent y-o-y and sales turnover growth of 6.1 per cent.

With only a remaining 11 per cent of leases due to be renewed at FW for the remainder of FY2014 and another 4 per cent at GP, the trust should continue to be underpinned by strong cashflow from FW while consolidation activities and expansion demand should continue to generate demand for niche office markets such as at GP.

Transacted rents at GP remain at between 320-350 yuan per square metre per month. The manager is also in talks to renew its lease with anchor tenant BMW a year ahead of expiry at end 2014 and any conformation towards this end would extend the strong income visibility profile of the trust.

With the repayment of HK$695 million of term-loan facility using operating cash, gearing dipped to 40.1 per cent. Interest cost remains unchanged at 2 per cent. Average loan maturity is 3.5 years and 71 per cent of interest costs are hedged.

We continue to like Magic for its quality assets and stable cashflow. With the latest organic income growth, we estimate that FW is trading at an annualised implied NPI yield of 4.8 per cent while GP is trading at an NPI yield of about 5.9 per cent. This represents an attractive 280 and 170 basis point spread over the respective country risk free rate.

However, with our economist's latest revision in the 10-year bond rate projections for HK and China, which lifted the blended average risk free rate assumptions for the trust by 30 basis points, our DCF-backed TP is lowered to $0.97, translating to a total return of only 10 per cent. Hence, we lower our call to "hold" on valuation grounds.

HOLD