OCBC upgraded CapitaLand Retail China Trust to Buy from Hold, pointing to improved data points from China.
It noted that Premier Li Keqiang set China’s real gross domestic product (GDP) target at 6.5 percent, in line with last year, while urban unemployment was forecast to stay within 5.5 percent and 2017 retail sales of consumer goods rose 10.2 percent on year.
“We believe these data points and government forecasts continue to bode well for CRCT’s prospects. Going forward, we expect retail sales growth in China to remain healthy for both online and offline stores,” OCBC said in a note on Wednesday.
While the bank expected CRCT would be compared with Sasseur REIT, which made its trade debut on Wednesday, as both were in the China retail segment, it added that their rental structures were “quite different.”
While Sasseur REIT’s rent from its sponsor will have a fixed component with 3 percent annual escalation and a variable component from underlying tenant sales, CRCT would likely see greater stability in earnings, although there would be less “upside participation,” OCBC said.
“CRCT’s rental income is directly determined by the underlying leases within its portfolio, of which we believe a much smaller proportion is determined by turnover sales,” OCBC said.
It kept its fair value for CRCT at S$1.66, indicating a total expected return of 14 percent, including the dividend yield.