• 2Q DPU up 0.4% YoY
• Updated currency assumptions
• Maintain HOLD; S$1.55 FV

2Q17 Results Within Expectations

CapitaLand Retail China Trust's (CRCT) 2Q17 results were within expectations. 2Q17 revenue increased 14.5% YoY to S$59.0m, mainly due to new contribution from CapitaMall Xinnan. Similarly, NPI increased 12.6% YoY to S$40.0m. Property expenses for 2Q17 increased by S$3.0m, or 18.9% YoY, mainly due to additional property tax of S$2.5m for malls in Beijing and higher property management fees of $0.4m from CapitaMall Xinnan. 2Q17 DPU increased 0.4% YoY to 2.62 S cents or 24.1% of our initial fullyear forecast. 1H DPU came to 5.36 S cents or 49.3% of our full-year forecast.

Divestment of CapitaMall Anzhen

CRCT has also agreed to sell its entire interest in a company that holds CapitaMall Anzhen for RMB 1,129.5m (~S$230.0m), which is 12.9% above valuation or at a 5.9% FY16F NPI yield. Targeted for completion in 4Q17, the divestment is expected to generate a net gain of ~S$31.5m. The management will decide whether to use the divestment proceeds to top up the loss in distributable income from the divestment at the end of the year.

As of now, we assume that there will be a top-up from the Anzhen divestment proceeds in 4Q17 and FY18 for any lost income due to the disposal. Note that CapitaMall Anzhen contributed 10.0% of NPI in FY16, and 8.4% in 1H17.

Look Forward to Growth in Wangjing Contributions

Together with the divestment, CRCT will recover 4.7K sqm of Level 4 space in CapitaMall Wangjing from BHG, which it will convert to house high-yielding specialty stores. As a result, CapitaMall Wangjing will increase its proportion of non-anchor NLA from 50% to 60%. Given the high double-digit rental reversions we expect for this conversion on Level 4, we forecast that contributions from Wangjing will improve from 2Q18 onwards.

We lower our cost of equity from 8.5% to 8.0% given the lower gearing expected following the divestment. After adjustments including an updated RMB exchange rate to 1 RMB = 0.204 SGD (0.208 SGD previously), our fair value estimate decreases from S$1.58 to S$1.55. Maintain HOLD.

Source: OCBC Research - 28 Jul 2017