• CapitaLand China Trust's NPI declined by 19% in FY20, missing our estimates due to additional rental rebates.
• Tenant sales at 95% of normalised levels, in line with broader retail index despite toll from COVID-hit malls.
• Portfolio valuation held steady at -1.5% y-o-y; Nuohemule launched with 100% occupancy.
• Maintain BUY with target price revised to S$1.55; business park portfolio to add to stability this year .

CapitaLand China Trust's FY20 Hit by Higher Than Expected Rental Rebates

Full year results impacted by additional tenant rebates

• CapitaLand China Trust (SGX:AU8U)'s FYH20 full year revenue of RMB 1056m (-12.2% y-o-y) and NPI of RMB 678m (-19% y-o-y) missed our estimates.
• The full year figures would have included incremental contributions from Yuhuating, Xuefu and Aidemengdun since their acquisitions in Aug 2019 and loss of income from Erqi mall that was divested in 3Q20.
• Additional tenant rebates were provided to tenants (above the 1 month worth of rebates previously guided) within CapitaLand China Trust’s Beijing malls, Grand Canyon and Qibao, due to a resurgence in COVID-19 cases.

Valuations held up relatively steady at -1.5% y-o-y

• CapitaLand China Trust's portfolio valuation retreated by 1.5% y-o-y with a flat / marginal 1-2% decline in value for most malls.
• Qibao’s valuation declined 81% y-o-y and reflects the assumption that the existing master lease arrangement will cease in 2024 (previously assumed to be extended for another 20 years).
• Nuohemule mall, which was part of the Hohhot bundle swap, saw a 17% y-o-y increase in valuation after securing 100% committed occupancy on launch day.

Outlook & Recommendation

Beijing resurgence causing recovery hiccups

• Tenant sales per sqm recovered to ~95% of normalised levels while shopper traffic recovered to ~84% of normalised levels on a same mall basis. This was brought down by operational performance within the non-Beijing malls, which lags the rest of the portfolio by 5-10 ppts.
• The broader China retail data trended positive y-o-y since Aug 2020 while full year retail sales was down 4% y-o-y, with CapitaLand China Trust’s operating figures in line with the broader market.
• We note that CapitaLand China Trust’s exposure in Beijing (~50% of NPI in FY20) has led to some hiccups in the recovery curve. The city is still under stringent restrictive measures since December, which will likely extend to after Chinese New Year.
• Overall portfolio reversion was negative 4%, dragged down by Grand Canyon (-33%) and Qibao (-13%).
• Positive COVID-19 cases were traced to Grand Canyon, resulting in a 3-week closure of the mall. This has weakened leasing sentiment at Grand Canyon, resulting in negative reversion.
• CapitaLand China Trust's portfolio occupancy declined by 4.4 ppts from 98.5% as at end 2019 to 94.1% as at end 2020.

Termination of master lease at Qibao

• CapitaLand China Trust will not be extending the operating master lease at Qibao when it expires in 2024. This reflects the decline in valuation from RMB435m in FY19 which was based on the assumption that the master lease is extended for another 20 years, to RMB83m in FY20.
• Qibao mall has been repositioned over the years. CapitaLand China Trust had previously given greater emphasis on the kids trade sector within the mall that is lower yielding in terms of rent in comparison to other trade sectors such as health & beauty.
• We note that the repositioning impact may not be visible for now. The mall experienced a double whammy from the pandemic toll, which resulted in occupancy declining from 93.5% to 80.6% y-o-y.
• Value extraction seems limited at Qibao, and we think CapitaLand China Trust’s decision to terminate the master lease is a good move to concentrate its focus on core portfolio assets or new assets in the portfolio.

Rental rebates should be lower in FY21

• Rental rebates were provided in FY20 to Beijing malls and Grand Canyon due to impact from COVID-19.
• Rental rebates should be lower in FY21 given that
  1. lockdown impact to mall downtime has shortened substantially given better control on the outbreak, and
  2. support to tenants at the newly launched Nuohemule is likely one-off in nature.
• Minimal rental rebates for the business park properties added to CapitaLand China Trust’s portfolio given the relative resiliency of this asset class.

Carry forward of divestment proceeds

• CapitaLand China Trust has made the decision to carry forward divestment reserves (~S$50m) from the divestments of Anzhen mall and Erqi mall. This divestment reserve may be deployed for acquisitions in the future.

Maintain BUY

• We maintain our BUY call for CapitaLand China Trust with a lower target price as we revised our estimates to account for:
  1. The delayed contribution of CapitaLand China Trust’s business park portfolio that will be acquired in tranches between January and April this year,
  2. Softer rental portfolio assumptions with a half month worth of rental rebates for FY21,
  3. Termination of Qibao operating lease after its expiry in 2024.
• After factoring the above, we lowered our CapitaLand China Trust's FY21F earnings forecasts by ~10%-20%.

Source: DBS Research - 1 Feb 2021