CapitaLand Retail China Trust - Allaying Growth Fears

Over-reaction to China slowdown vs a strong set of 3Q15 results
CRCT has corrected c.14% since end-Jun-15 on results the back of Chinese growth fears. We believe this is an overreaction as CRCT has delivered another strong set of results with 3Q15 DPU rising 12.3% y-o-y to 2.64 Scts. In addition, during 3Q15, CRCT’s malls continue to deliver healthy tenants sales (+12.7%) and positive rental reversions (+8.9%). With CRCT trading at 0.9x book and offering an attractive FY15-17F DPU of 7.0-7.4% yield, we maintain our BUY recommendation and S$1.69 TP.

Investment opportunity during earnings lull
Several of CRCT’s malls still ramping up or in a transition phase, CRCT offers an opportunity to invest during an earnings lull before an uptick in growth. For example, Grand Canyon (acquired in 2014) is generating a 9M15 annualised NPI yield of only c.5% (based on the original acquisition price) versus target range of 7-8%. Meanwhile, Minzhongleyuan and Wuhu are incurring losses due to nearby road closures and reposition works respectively. Upon stabilisation of these three malls, we estimate 14% upside from our FY15F NPI. This is on top of the expected 4% CAGR in NPI for CRCT’s other multi-tenanted malls over the next three years. Additional upside to earnings could also come from the strengthening of the CNY.

Low gearing provides upside from acquisitions
CRCT’s gearing of only 28.5% (as at end Sep15) versus the new 45% limit imposed by MAS, places CRCT in a strong position to pursue DPU-accretive acquisitions.

Technical Analysis
Daily Chart
Valuation:
With a 19% 12-month total return (12% capital upside and 7.0% yield), we maintain BUY and TP of S$1.69. We expect the delivery of DPU growth in the coming year should allay investors' fears over possible negative rental reversions and trigger a re-rating from the current depressed levels.

Key Risks to Our View:
Significant downturn in China. The key risk to our p Significant downturn in China. ositive view is if China experiences a hard landing which would result in lower-than-expected or negative growth in retail sales. This in turn would translate into lower rents and DPU for CRCT. (Read Report)

Read Related Reports
1) CapitaLand Retail China Trust - Lowering our FV on softer CNY assumptions‏ by OCBC Investment Research, published on 26 October 2015

2) CapitaLand Retail China Trust - Operational trends in line, lower-than-expected income tax for 3Q15 by Daiwa Capital Markets, published on 23 October 2015

Source : DBS Group Research

Labels: ,