• Acquisition of potential core asset
• Trading at FY16/17 yield of 7.7%
• FV increases to S$1.67

Acquisition of Chengdu Mall

The trustee of CapitaLand Retail China Trust (CRCT) has entered into a sale and purchase agreement to acquire what will be CRCT’s 11th mall, currently known as Galleria, Chengdu for RMB 1.5bn. The manager expects the acquisition to be DPU accretive, with about 2/3 of the mall’s total rent up for renewal by 2018.

Including acquisition-related expenses, the total investment cost for the mall is expected to be about RMB 1,527m (S$310.4m), against which the current NPI yield is 5.4%. The transaction is expected to be completed by the end of the year and will enlarge CRCT’s portfolio size by about 14% to RMB 12,547m (S$2,550.3m). Postacquisition, CRCT’s gearing ratio is expected to increase to about 37%.

Strong operational fundamentals

The management views the mall as a potential core asset, offering a steady contribution within the portfolio. The mall is located in the Xinnan Tiandi retail precinct of Gaoxin District in the south of Chengdu and enjoyed 100% occupancy as of 31 May 2016. While around 2/3 of the leases by gross rent are to expire by 2018, the management has emphasized that rental reversions will likely be muted.

Instead, they will focus on improving the F&B tenant mix and reaping cost savings from the property management, which is currently outsourced to a third party. We note that its sponsor CapitaLand has five existing malls in Chengdu, which will give CRCT an opportunity to expand their footprint in the city going forward.

DPU-accretive, FV increases to S$1.67

Assuming the acquisition is completed around Sept/Oct of this year and an all-in weighted cost of debt of ~3% for FY16, our FY16 DPU forecast increases from 10.7 to 10.9 S-cents while our FY17 DPU forecast increases from 10.9 to 12.0 S-cents. Our fair value increases from S$1.51 to S$1.67 as we update the parameters of our DDM model.

Using last week’s closing price of S$1.60, CRCT is trading at a blended FY16/17 distribution yield of 7.7%. We upgrade CRCT to a BUY from Hold, with an updated fair value of S$1.67.  

Source: OCBC Research - 22 Aug 2016