• Proposed acquisition of business park in Shanghai
• Initial NPI yield of 3.85%; but room to improve
• Upgrade to BUY

Proposed acquisition of Sandhill Plaza Business Park in Shanghai

Mapletree Greater China Commercial Trust (MGCCT) announced that it has entered into a conditional sale and purchase agreement with an unrelated third party vendor to acquire a 100% interest in Sandhill Plaza for a purchase consideration of CNY1,888.1m (~S$412.2m). This translates into an initial NPI yield of 3.85%. Sandhill Plaza is a premium quality business park with a total GFA of 83,801.48 sqm. It is situated within the mature northern zone of the Zhangjiang Hi-Tech Park, which is part of the Free Trade Zone in Shanghai. Sandhill Plaza also has good connectivity, as it is within walking distance to a subway line and within 30-minutes’ drive to Pudong International Airport and Lujiazui CBD. Management intends to fund this acquisition with existing banking facilities. Thereafter, MGCCT’s gearing ratio is expected to increase from 36.2% to 40.6%.

Potential for rental growth

On a pro forma basis, DPU for the 12 months ended 31 Mar 2015 would remain relatively flat (from 6.543 S cents to 6.55 S cents) after this acquisition. Management clarified that the pro forma figures are not reflective of the potential of the asset, as operationally, the property had not yet stabilised during that period, with an average occupancy of just 73%. As at 31 Mar 2015, Sandhill Plaza’s occupancy rate had improved to 96.2%. Major tenants include Broadcom, Disney and Borouge. Future growth would likely come from positive rental reversions, in our view, as the current passing rent at Sandhill Plaza (~CNY4.82 psm per day) is ~10% below the average rental of its Comparable Basket (Premier Grade A, higher quality specs buildings). Management is targeting to grow the NPI yield of this asset to above 5%.

Recent share price weakness presents buying opportunities

We incorporate this acquisition in our model, and raise our FY16 and FY17 revenue/DPU projections by 5.7%/2.4% and 7.6%/3.1%, respectively. Correspondingly, our fair value estimate is lifted from S$1.07 to S$1.11. Coupled with MGGCT’s recent share price correction, we now see value emerging. The stock also offers a prospective FY16F distribution yield of 7.1%. Upgrade from HOLD to BUY .

Source: OCBC Research - 16 Jun 2015