Mapletree Greater China Commercial Trust

DBS Group Research, Jan 27

MAPLETREE Greater China Commercial Trust booked $65.7 million revenue in Q3, 10 per cent better than forecast, while net property income (NPI) was ahead by 13 per cent at $53.8 million and distribution income by 17 per cent at $40.6 million. 9M FY2014 profit is 78 per cent of our full-year estimate.

The better-than-projected results were driven by higher operating income, cost savings and lower interest expense.

Distribution income translated into 1.52 cents DPU or 7.5 per cent annualised yield.

Income growth was driven by higher contributions from Festival Walk and Gateway Plaza in Beijing. Festival Walk enjoyed positive rental reversion of 20-22 per cent, with tenant sales growing 5.6 per cent in 9M FY2014 and 6.6 per cent higher shopper footfall. There was slight frictional vacancy at Gateway Plaza but the property has remained popular with 97 per cent occupancy this month. It benefited from 78 per cent rental uplift from expiring leases in Q3.

More importantly, rents are being renewed at 320-360 yuan ($67-$76) per sq m per month in this micromarket, despite weakness in the Beijing office market.

Hedged income will reduce forex impact. About 7 per cent of leases at Festival Walk and 1 per cent in Gateway Plaza are due to be recontracted in FY2014, and another 19 per cent and 9 per cent in FY2015.

Given prospect of positive economic growth in Hong Kong as well as limited supply and continued appetite for office space in its micromarket in Beijing, the trust will continue to enjoy robust income growth. In addition, 71 per cent of its interest cost is fixed until end FY2016, minimising the potential impact of rising financing costs.

In terms of capital management, its balance sheet remains healthy with gearing at 41 per cent. The manager has also hedged 100 per cent of FY2014 and 90 per cent of FY2015 Hong Kong-dollar income and is progressively converting yuan distributable income to Singapore dollar to reduce the impact of forex volatility.

Following the recent price weakness, we upgrade Mapletree Greater China trust to "buy" with a target price of $0.97. At the current price, it offers FY2015 DPU yield of 7.5 per cent and 27-28 per cent total return.

BUY