• 4Q DPU flat, includes capital dist.
• Acquisition of Guangzhou Mall completed
• FV increases to S$1.66

Results Within Expectations

CapitaLand Retail China Trust's (CRCT) results were within expectation. 4Q17 revenue fell 4.6% YoY to S$54.1m while NPI fell 5.2% to S$33.0m, mainly due to the absence of contribution from CapitaMall Anzhen. For the rest of the portfolio, higher NPI was clocked at all the assets except Grand Canyon and Qibao. In particular, Grand Canyon suffered from disruptions to trading activities arising from operational reviews by the authorities leading up to the 19th National Congress.

4Q17 DPU ended flat at 2.37 S cents; it includes a S$3.7m distribution of the gain from the disposal of Anzhen. FY17 DPU came up to 10.10 S cents or 100% of our full-year forecast. The REIT achieved a positive rental reversion of 4.8% in 4Q17 and 5.6% in FY17, while portfolio occupancy came to 95.4% as at end-2017.

Look to Rock Square for Growth

CRCT’s manager also announced that its special purpose vehicle have acquired 51% of the target company holding Rock Square, Guangzhou, China. Going forward, management expects Rock Square to be a significant driver of DPU growth. Notably, 52% of Rock Square’s total rent or 32% of its NLA is up for renewal from 2018 to 2020. Management believes that average passing rents are currently below market.

Conversion of Space at Wangjing Also a Positive

Investors should also focus on the uplift at CapitaMall Wangjing from the conversion of 4.7k sqm of anchor space into specialty stores. Tenants, which include YID Cooking School, Sisyphe book café and popular F&B outlets, are on track to open progressively from 2Q18. Committed occupancy rate stands at over 90%. CRCT’s distributable income will continue to be impacted by the absence of Anzhen.

We assume that management decides to smoothen out DPU for shareholders in the near term, and currently project a S$7.4m capital distribution of the gain from the Anzhen disposal. We believe China’s retail story remains robust and increase our terminal growth rate from 2.2% to 2.5%.

After adjustments, our fair value increases slightly from S$1.63 to S$1.66. As at the closing price on 31 Jan, CRCT is trading at a 6.3% FY18F yield.

Source: OCBC Research - 1 Feb 2018