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Broker's take: CRCT a 'China behemoth in the making' with S$33b pipeline, says DBS

CRCT's CapitaMall Yuhuating in Changsha. With the Reit pivoting away from the retail sector, DBS expects less earnings volatility.

DBS Group Research sees CapitaLand Retail China Trust (CRCT) as a "China behemoth in the making", and noted that the upward trajectory in China sales has not been priced in.

"We remain excited that CRCT will emerge as the group's pure play into China with an addressable pipeline of more than S$33 billion (from its sponsor CapitaLand)," analyst Derek Tan wrote.

The real estate investment trust's (Reit) manager last week announced it is expanding its investment strategy beyond the retail sector to include office and industrial assets, including business parks, logistics facilities, data centres and integrated developments.

In DBS's view, this expanded mandate will pave the way for CRCT to further tap on its sponsor's expertise and network in China.

The Reit's shift in identity from a "pure retail" to a "pure China" play will also be more attractive to investors given the wider investable universe and relevance, the research team said. It noted that the Covid-19 pandemic disrupted pure retail Reits' operations more significantly disrupted than other types of Reits.

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This diversification will bring greater balance and visibility to future distributions, Mr Tan wrote. With CRCT pivoting away from the retail sector over time, he expects less volatility in future earnings and greater exposure to future economy sectors such as technology and media.

Acquisitions in the new asset classes - such as business parks and data centres - will "future-proof" the trust's earnings profile against other pandemics and shifts in consumer behaviour, even though the transaction yields are likely to be higher than retail which lowers the accretion for CRCT to achieve, according to DBS.

The research team estimated that the pipeline from CapitaLand available for injection into the Reit amounts to S$33 billion, which implies an expansion in CRCT's current assets under management of more than 10 times. With this, a "possible giant (is) in the works", Mr Tan said.

Of DBS's S$33 billion estimate in pipeline assets, about three quarters by value are integrated developments. Some 14 per cent are malls, 7 per cent are commercial properties, while 5 per cent are industrial assets.

As for retail sales within China, DBS said the slew of shopping events in the fourth quarter this year - such as e-commerce giant Alibaba's Singles' Day event - will lead to consumers opening up their wallets further.

China's retail sales grew 8 per cent year on year in 2019, as opposed to the average 8.7 decline for the first eight months of 2020. This indicates that there may be further room for sales in the country to normalise, DBS noted.

It added that the upward trajectory will likely continue towards the end of this year as the peak season approaches.

With green shoots emerging within the broader market, DBS continues to believe that China will set the stage for a retail recovery globally.

"CRCT continues to be one step ahead of its Singapore peers, especially the ones focused in the suburban space," Mr Tan wrote.

"With many opportunities to spend and fatter-than-normal wallets for the Chinese consumer, we think CRCT's upcoming results may spring a further surprise in terms of operational performance."

The research team maintained its "buy" rating on the counter and S$1.55 target price. DBS sees "compelling value" for the Reit, with a price-to-net-asset-value ratio of 0.8 times based on its 2020-2022 forecasts.

CRCT units rose S$0.01 or 0.9 per cent to trade at S$1.17 as at 1.13pm on Thursday.

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