• 3Q DPU up 1.7% YoY
• Rental reversions of 12%
• FV drops to S$1.39

Lower Capital Distribution Than Expected

CapitaLand Retail China Trust’s (CRCT) 3Q18 gross revenue dropped 1.1% YoY to S$55.4m while NPI increased 2.2% to S$36.7m. Including a capital distribution of S$0.75m, DPU increased 1.7% YoY to 2.41 S cents on an enlarged unit base.

The results were below expectations in terms of DPU with 3Q making up only 22.7% of our initial full-year forecast, largely because we expected higher capital distributions. Besides this, CRCT’s 3Q results were in line with income available for distribution coming up to 24.6% of our initial full-year forecast.

High Rental Reversions Continue, Helped by Successful Asset Management

Portfolio occupancy as at 30 September 2018 was 97.7%, which we consider healthy. Rental reversions came in at 12.1% for new leases/renewals signed during the quarter, which made up 4.6% of the portfolio’s NLA. Notably, management has been able to drive high rental reversions through active asset management.

For instance, Rock Square clocked a rental reversion of 28.3% during the quarter for 12.4% of the asset’s leases by NLA – this is the third quarter of consecutive rental reversions above 20%.

CapitaMall Xinnan also clocked a 35.6% rental reversion for 5.9% of the asset’s leases by NLA, due to strong space demand and reconfiguration of a dated foodcourt and restroom into specialty NLA.

In terms of the portfolio lease expiry profile, 11.0% of leases by Gross Rental Income are up for renewal for 4Q18, while 25.3% are up for renewal in 2019.

Operating Fundamentals Appear to Remain Healthy for Now, But Concerns Remain

On a same portfolio basis (excluding Rock Square and CapitaMall Wuhu), shopper traffic was down 3.0% YoY while tenants’ sales psm were up 0.8% YoY. We find these metrics reasonably healthy, albeit not particularly robust.

On the back of concerns surrounding China’s economic growth going forward, we decrease our nominal growth rate in mature state from 2.5% to 2.0%.

Given that CRCT’s average exchange rate was 1 RMB = 0.206 SGD for 9M18, and that the rate was 1 RMB = 0.202 SGD for 3Q18, we believe our FY18 and FY19 assumption of 1 RMB = 0.202 SGD remain sufficiently conservative for now.

After adjustments, our fair value drops from S$1.55 to S$1.39. We maintain HOLD on CRCT.

Source: OCBC Research - 1 Nov 2018