CRCT upgraded by Daiwa, saying it no longer looks expensive after correction

China yuan coins

Daiwa upgraded CapitaLand Retail China Trust to Hold from Underperform, saying the portfolio no longer looks expensive after the unit price’s around 9 percent drop so far this year.

“By all indications, the underlying trends are still positive in China with retail sales growth of 9.4 percent year-on-year and urban disposable income growth of 8.7 percent year-on-year in the second quarter of 2018,” Daiwa said in a note on Friday. “Even though CRCT’s portfolio tenant sales only improved 1.2 percent year-on-year in the second quarter of 2018, the overall portfolio rental reversion of 10.5 percent was still encouraging.”

Daiwa noted that while malls in China are facing challenges from new supply and e-commerce, CRCT’s core properties are backed by the “highly experienced and deep platform” of sponsor CapitaLand and they have generally been “thriving.”

The investment bank also noted that it wasn’t clear why the unit price had fallen recently.

“The trading volumes have not been particularly high (the units have always been illiquid), so the correction could be due to tepid demand for the units rather than large sellers exiting,” Daiwa said.

It also pointed to some concerns about acquisitions for CRCT ahead.

“The recent reliance on third party acquisitions suggests to us that although investment opportunities are still available, it is a major challenge for CRCT to tap its sponsor’s mall pipeline given the net property income yield on valuation of less than 5 percent for CapitaLand’s China malls ex-CRCT (such that the acquisitions would not be DPU-accretive for CRCT),” it said.

DPU stands for distribution per unit.

It kept its target price unchanged at S$1.44.

The unit was flat at S$1.45 at 11:19 A.M. SGT on Monday.


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