Perennial China Retail Trust

Transcription

1 Ride on China s long term consumption and urbanization trend Bloomberg Reuters POEMS PCRT SP PCRT.SI PCRT.SG Industry: Commercial Real Estate Report type: Initiation Company Overview ( PCRT ) is Singapore s first pureplay PRC retail development trust. Listed on the main board of SGX on 9 June 2011, PCRT has a market capitalization of approximately S$719 mn as at 4 May PCRT s key investment lies mainly in the 2 nd tier cities of China, including Shenyang, Foshan and Chengdu. PCRT also holds 10% in predominantly retail Bejing Tongzhou integrated development. Investment merits Ride on China s long term consumption and urbanization trend, with key properties located in faster growth major 2 nd tier cities PCRT s key properties mainly lie in Shenyang (the economic and transportation hub of Northeast China), Chengdu (the major economic hub of middle west China), and Foshan (sharing economic resources with Guangzhou, the economic hub of South China), whose GDP growths were typically higher than the nation s average and also 1 st tier cities over the past 10 years. Strategically sited on cities expanding edges with easy accessibility by subway lines (operational or planned) all the 6 key properties are easily accessible by operational and planned subway lines, which is conducive to bringing in and seizing shopper traffic. Negotiated earn-out Deed allows better visibility on dividend return the committed distribution of RMB 227 mil for FY2013 & FY2014 is fully covered by earn-out amount available for drawdown, translating to a dividend yield of above 6% in the next two years. Leasing activities expected to improve in the completed properties Pre-leasing in Foshan Jihua Mall and Chengdu Qingyang Mall are progressing well. Occupancies in Shenyang properties are expected to improve as the trustee manager strategically negotiates master lease agreement and provides rent free period to attract potential tenants. Experienced management team Mr. Pua Seck Guan, the executive director and CEO of PCRT and ex-ceo of CMA and CMT, has over 20 yrs of real estate experience in property investment and is widely regarded as a REIT pioneer in Singapore. Key risks Longer than expected time taken to ramp up occupancy of underlying properties; China s consumption slows down; CNY weakens. Investment Actions? Based on RNAV valuation, assigning a discount of 35%, we derive a target price of S$0.67, equivalent to an upside potential of 6.3% on top of the over 6% dividend yield. We initiate our coverage on PCRT with an ACCUMULATE rating. PCRT Phillip Securities Research Pte Ltd Rating 2 Accumulate - Previous Rating - Not Rated Target Price (SGD) Previous Target Price (SGD) - Closing Price (SGD) Expected Capital Gains (%) 6.3% Expected Dividend Yield (%) 6.3% Expected Total Return (%) 12.7% Raw Beta (Past 2yrs w eekly data) 1.26 Market Cap. (USD mn / SGD mn) 583 / 719 Enterprise Value (USD mn / SGD mn) 753 / 927 3M Average Daily T/O (mn) w eek range (SGD) Closing Price in 52 w eek range Major Shareholders (%) 1. KHOON HONG KUOK 2. DIN HWA CHEN 3. ASDEW ACQUISITIONS PTE LTD Key Financial Summary FYE Dec/12 Dec/13F Dec/14F Dec/15F Revenue (SGD mn) Net Profit, adj. (SGD mn) (27) (104) (10) 25 EPU, adj. (SGD cents) (2.42) (9.08) (0.86) 2.14 P/E (X),adj. (26.1) (6.9) (73.5) 29.4 BVPS (SGD) P/B (X) DPU (SGD cents) Div. Yield (%) 6.1% 6.3% 6.2% 5.3% Source: Bloomberg, PSR est. *All multiples & yields based on current market price Valuation Method RNAV May-12 Analyst Roy Chen Jun-12 roychencz@phillip.com.sg Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 0% 50% 100% Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 Volume, mn PCRT SP Equity STI rebased May MCI (P) 194/11/2012 Ref. No.: SG2013_087 1 of 16

2 Trust Background in brief Singapore s first pure play PRC retail development trust Listed on the Main Board of SGX-ST on 9 June 2011 with an IPO price S$0.70 per unit. Trustee-Manager s objective: return unitholders with growth in net asset value through development and acquisitions, as well as regular distributions from rental income of its completed and stabilized predominantly retail real estate portfolio. Investment objective: Invest in, own and develop land, uncompleted developments and income-producing real estate in the PRC, and may also invest in the listed securities of real estate companies in the PRC. The sponsor, Perennial Real Estate Pte. Ltd., is a Singapore registered company founded in 2009 by retail real estate veteran Mr Pua Seck Guan (ex-ceo of CMA and CMT), who is also the CEO of PCRT. Real Estate Portfolio Fig.1 PCRT Property Portfolio Table 1 Details on PCRT s 6 core properties Source: Company Data, PSR Besides the 6 core properties, PCRT also owns 10.0% interest (S$ mil equity investment) in the Joint Venture of Beijing Tongzhou Integrated Development. Fig.2 Portfolio analysis by attributable GFA 10.9% 12.0% Land Area sqm Op start date per GFA cost RMB/ sqm By GFA total cost RMB mil 4.9% CD Dongzhan Mall - 80% 8.4% 27.2% SY Longemont Mall - 50% SY Macalline Mall - 50% SY Longemont Offices - 50% CD Qingyang Mall - 50% Value as if completed at 31 Dec 2012, RMB mil Property Type city eff stake GFA sqm NLA sqm LM Offices Office SY 50% , ,590 4Q RS Macalline Retail SY 50% , ,531 3Q LM Mall Retail SY 50% , ,292 4Q Jihua Mall Retail FS 100% ,833 47,410 2Q Qingyang Mall Retail CD 100% ,000 58,500 1Q Dongzhan Mall Retail CD 80% , ,363 3Q % 19.9% FS Jihua Mall - 100% BJ Tongzhou Development - 10% Potential Pipelines: Beyond the assets owned, PCRT has a right of first refusal ( ROFR ) over part of the retail component, a potential pipeline of 180,000 sqm, from the Joint Venture Consortium. In addition, PCRT s sponsor has assumed role of granting option, providing PCRT another potential pipeline of over 100,000 sqm in Xián North High Speed Railway Integrated Development. Core Portfolio: All the core properties of PCRT are located in faster growth 2 nd tier cities in China (See Appendix A1). The fund s initial portfolio comprises five properties, including two 50% owned shopping malls (Longemont Shopping Mall and Red Star Macalline Furniture Mall) and one 50% owned office building (Longemont Offices) in Shenyang, one 100% owned shopping mall (Jihua Mall) in Foshan and one 100% owned shopping mall (Qingyang Mall) in Chengdu. In 2q12, PCRT executed an option to acquire 80.0% stake in Perennial Dongzhan Mall, further increasing its presence in Chengdu. As of the report date, all the 3 Shenyang properties are in operation; Foshan Jihua Mall is expected to commence operation shortly in this quarter; Chengdu Qingyang Mall and Dongzhan Mall, whose legal ownerships have been officially transferred to PCRT in 4q12, are under development and expected to commence operations in 1q14 and 3q14 respectively. More details on PCRT s six core real estate assets are shown in table below. Fig.3 Effective GFA owned by PCRT 2 of 16

3 Shenyang Properties Fig.4 Site View of 3 Shenyang Properties PCRT a more stable and visible income. A similar arrangement is likely to be negotiated for the West Wing as the management is evaluating offers from wholesale center tenants. Expected to ramp up occupancy in Longemont Offices by strategically providing rent free period - In the company s 4q12 financial result presentation, the management disclosed that leasing was challenging due to inter-district/provincial taxation incentive issues that potential tenants face. This issue was mitigated as the local government has indicated the same incentive would be granted for potential tenants. As in Dec 2012, committed and expected leases takes up 16%. Occupancy is expected to improve as the management is planning for rent free period to attract potential tenants. During the rent free period, the shortage of distributable amount would be fully covered by the earn-out amount negotiated with Shanghai Summit (Group) Co., Ltd., a strategic partner of PCRT. More details on the earn-out deed would be provided later. Part of mixed commercial development and expected to be complemented by other components - PCRT s 3 Shenyang assets, namely Shenyang Longemont Shopping Mall, Shenyang, Shenyang Longemont Offices and Shenyang Red Star Macalline Furniture Mall, are part of the Shenyang Longemont Asia Pacific City ( APC ), one of the largest single mixed-use commercial developments in PRC with a total development site area of 557,000 sqm. Besides the 3 operational assets of PCRT, other phased developments of APC include a jewellery mall, luxury hotels, high-rise residences, and other entertainment components. Shopper traffic of the 2 Shenyang malls are expected to be further enhanced by the complementary effect when these components are established in the future. Enjoying prime frontage along the first Ring Road and direct connectivity to subway station - The 3 Shenyang properties are strategically located in Dadong District along Shenyang s 1 st ring road on Pangjiang Street, a major arterial road serving as inner ring road around the centre of Shenyang. The premise is also next to the Pangjiang Sreet subway station and a transportation hub designed to support 56 inter/intra-city bus lines. (See Appendix A2) Malls targeting middle income households - The main consumer group targeted by the two shopping malls are middle income households, whose consumption style is less likely affected by adverse economic conditions compared to those high-end consumers. Besides major anchor tenants who takes up about 47% of the total net leasable area (as of 4q12), the leasable area left is expected to accommodate middle-priced local brands. Master Lease Agreement negotiated to secure definite rent income and enhance leasing activities - Furniture selling business was adversely affected by China s tightening policies on residential market, resulting in loss of tenants in Macalline Mall in early In 3q12, PCRT signed a master lease contract with Red Star Macalline s operator, according to which Red Star Macalline occupies the whole East Wing of the shopping mall, approximately 60.0% the mall s total GFA. Despite a lower psm rental, the master lease agreement entitles Fig 5. As at 31 Dec, top 10 tenants comprise 49.3% of the two malls committed leases, which is in turn 70.4% of the two malls total leasable area. Fig 6. Contributions to Committed Leases of Longemont Mall 7.5% 13.5% 3.8% 3.8% 4.5% 2.3%1.0% 16.4% 27.0% 20.1% As at 31 Dec 2012 By NLA Leisure & Entertainment Fashion & Related Food/Beverage Supermarket Specialties/Others Education/School Home Furnishings/IT Sports/Fitness/Health Children Services 3 of 16

4 Foshan Jihua Mall Fig 7. Site View of Foshan Jihua Mall Fig 9. Site View of Chengdu Dongzhan Mall Easy accessibility and strong shopper catchment potential from the dense residential catchment in the vicinity Strategically sited at the intersection of Guilan Road and Jihua Road, two of the most heavily-utilised arterial roads in Foshan, Jihua mall is well served by major bus routes as well as a planned subway station (See Appendix A2). The easy accessibility, together with the 16 high-rise residential towers developed nearby, is expected to bring the mall strong shopper traffic. Healthy pre-leasing activities - Construction completed in 4q12, business operation of Foshan Jihua Mall is to commence shortly in this quarter (2q13). As the end of 2012, 60.0% leasing commitment was achieved. We expect this relatively smaller size shopping mall (as compared to PCRT s other retail malls) to achieve 90% occupancy rate on the commencement date. Major anchor tenants include Yonghui Superstore (a supermarket) and Jinyi Media (a cinema operator), other key tenants secured include strong fashion retailers such as H&M, Zara, Monki, Bershka and F&B tenants such as Pizza Hut and KFC. Chengdu Qingyang & Dongzhan Mall Fig 8. Site View of Chengdu Qingyang Mall Property Information - Both shopping malls are currently under development. Qingyang Mall is targeted to commence operation in 4q13 or 1q14, and Dongzhan Mall in 3q14. Both two malls are sited close to Chengdu s 3 rd ring (suburban), with accessibility by subway lines (operational line 2 for DZ mall, and planned line 4 for QY mall) (See Appendix A2). Qingyang Mall is nestled in the heart of an integrated development, comprising a five-star hotel, office blocks and SOHO, surrounded by an estimated population catchment of approximately 641,000 people in the vicinity (within 7 km of the mall). Dongzhan Mall is designed as a large-scale regional shopping mall near Chengdu East High Speed Railway, one of China s eight major integrated transportation hubs comprising the inter-city railway, intra-city subway, long and short distance bus terminals and taxi services. Expected leasing performance - Pre-leasing activities for Qingyang Mall has started, with a leasing commitment of 33.0% as at 31 Dec The shopping mall has secured anchor tenants such as Yonghui Superstore (supermarket), Jinyi Media (cineplex), fashion retailers such as Zara, Pull & Bear, Bershka, Massimo Dutti as well as F&B tenants including Starbucks. Given the strong tenants secured and a relatively established neighborhood, we expect a healthy 80% occupancy rate on commencement date. As for Dongzhan Mall, whose leasing is yet to start, we hold a relatively conservative view on its later leasing activities due to its much larger size and a relatively less established neighborhood (as compared to Qingyang mall). Despite saying that, we are optimistic on the operation of Dongzhan Mall in a longer horizon, considering the gradually increasing population catchment in the area surrounding High Speed Railway Station, which is designated as Chengdu s future central business district. 4 of 16

5 10% stake in Beijing Tongzhou Integrated Development Fig 10. Artist s Impression of Tongzhou integrated development An iconic landmark mixed use development, comprising retail, offices and residences. Estimated total development cost (including land) is RMB 15,800 psm GFA (excluding car park), compared with recent transaction (land only) in close vicinity at RMB 12, psm, therefore translating to significant development gain. Located in Tongzhou district, Beijing s new Central Business District; Excellent transport connectivity to Beijing city, neighboring cities and the airport; Directly connected to future subway interchange station and future bus interchange. PCRT is currently holding 10.0% interest ($S50.32 mil equity investment), but meanwhile has right of first refusal over part of the retail component, a potential pipeline of over 180,000 sqm. Expected to commence operations in Earn-out Deed: Along with the acquisition of the Shenyang properties at IPO, the trustee-manager negotiated an earn-out arrangement ( Amended & Restated Earn-Out Deed ) of RMB mil from the strategic partner who sold the underlying properties. According to the earn-out deed, payment made to an escrow account as part of the acquisition consideration would be returned to PCRT, subject to a cap of the above specified amount, if the net property income from the underlying Shenyang properties failed to meet some threshold amount. As time progressed, the trustee-manager also managed to negotiate another two earn-out deeds (namely New Earn-out Deed and Additional Earn-out Deed ) of RMB mil and RMB mil. The RMB mil of Amended & Restated Earn-Out Deed had been fully drawn due to the weaker than expected leasing activities of Shenyang properties in 2011 and And another RMB mil has been drawn from New Earn-Out Deed. The RMB mil leftover earn-out would be used to support property income distribution in FY2013 and FY2014. Table 2 Summary of PCRT s Earn-Out Deed (RMB'mil) FY2011A FY2012A FY2013F FY2014F Total E-O Period 1H 2H 1H 2H 1H 2H 1H 2H Amount Amended & Restated E-O Deed New E-O Deed Additional E-O Deed Total E-O fund left for drawdown Fig 11. Targeted distribution fully covered by Earn-Out amount Distribution Policy and Earn-out Deed Distribution Policy: According to the distribution policy included in PCRT s prospectus, the trustee-manager would make distributions of at least 90% of PCRT s distributable income to unitholders in FY2011 and FY2012, and from FY2013 onwards, the trustee-manager shall make distributions of at least 50% of PCRT s income from its completed and stabilized assets to unitholders. PCRT made a total distribution of RMB mil (SGD 26.4 mil) in FY2011 and RMB mil (SGD 43.6 mil) in FY2012, translating to DPU of 2.35 cents and 3.86 cents respectively. Distribution yields are 5.30% (annualized based on IPO price) for FY2011, and 6.83% (based on 31 Dec 2012 price) for FY2012. Despite the 50.0% minimum payout specified in the prospectus, the trustee-manager targets to pay the same annual amount of RMB mil in FY2013 and FY2014, as paid out in The targeted amount is somewhat warranted as the payments are fully covered by the earn-out amount negotiated with the Summit Group (Details on earn-out deed are provided below). It is worth pointing out at this juncture that the drawdown from earn-out, rather than income from property operation, made up a very significant portion of the amount distributed in the past two financial years. The earn-out arrangement effectively buys time for the management to ramp up occupancy in properties. Failing to do so would subject the PCRT s distributable amount to a decline after FY2014 when earn-out arrangement expires. Therefore leasing performance in the next two years is the single most important factor to evaluate PCRT s operation and fair price. Given the recent healthy lease performance in Jihua and Qingyang Shopping Malls, as well as that the management has strategies in mind to improve occupancies of Shenyang properties (master lease agreements in Macalline Mall and provision of rent free period in Longemont Offices), a shortfall in distributable amount as compared to FY2014 is still likely, but the gap would not be a significant one. 5 of 16

6 Financials Operating Metrics: we expected yield on cost to experience a staircase-like increase in the next 3 years, as Jihua, Qingyang and Dongzhan Malls come into operation. Leasing activities are expected to improve for the 3 Shenyang properties, given the trustee-manager s strategies of negotiating master leases for Macalline and providing rent free period for Longemont Offices. Per sqm rent in Longemont Mall would likely undergo a period of fast growth as turnover rent income picks up along with the expected increasing shopper traffic. The overall portfolio is expected to achieve a yield on cost of 8.4% in FY2016, when all the current existing 6 properties have stabilized. * The significantly lower spot rent for Red Star Macalline in table 4 is attributable to the negotiated and planned master lease agreements, under which almost all operating expenses such as maintenance and utilities would have been burdened by the master lease tenants. PCRT would only bear expenses relating to its legal ownership, such as property tax and business tax. * Note that the actual net property income figures for FY2013 and FY2014 might subject to significant variations from our estimates as the management has the flexibility to provide rent free period in an effort to ramp up occupancies. Nevertheless, the distributable amount in these two years would be safeguarded by remaining amount in the earn-out arrangement negotiated. Table 3 Projected Occupancy Rates % Occupancy Rate - % FY2012A FY2013F FY2014F FY2015F FY2016F LM Mall - 50% LM Offices - 50% Red Star Macalline - 50% Jihua Mall - 100% Qingyang Mall - 100% Dongzhan Mall - 80% Table 4 Projected Spot Rent RMB/sqm/month Spot Rent - RMB/sqm/m FY2013F FY2014F FY2015F FY2016F LM Mall - 50% LM Offices - 50% Red Star Macalline - 50% Jihua Mall - 100% Qingyang Mall - 100% Dongzhan Mall - 80% Source: PSR estimates Table 5 Projected Annual Net Property Income RMB mil NPI - RMB'mil FY2013F FY2014F FY2015F FY2016F LM Mall - 50% LM Offices - 50% Red Star Macalline - 50% Jihua Mall - 100% Qingyang Mall - 100% Dongzhan Mall - 80% SUM Source: PSR estimates Table 6 Projected yield on cost Yield On Cost FY2013F FY2014F FY2015F FY2016F LM Mall - 50% 4.4% 5.7% 6.5% 7.0% LM Offices - 50% 3.0% 5.0% 6.4% 7.5% Red Star Macalline - 50% 3.8% 4.6% 5.1% 5.4% Jihua Mall - 100% 6.3% 10.9% 11.6% 12.0% Qingyang Mall - 100% 0.0% 8.3% 11.2% 12.1% Dongzhan Mall - 80% 0.0% 2.5% 7.9% 9.6% Overall 2.5% 5.1% 7.5% Source: PSR estimates 8.5% Fig. 12 Projected net property income # Net Property Income - RMB'mil # FY2013F FY2014F FY2015F FY2016F Dongzhan Mall - 80% Qingyang Mall - 100% Jihua Mall - 100% Red Star Macalline - 50% LM Offices - 50% LM Mall - 50% # for illustration purpose only as the management has flexibility to provide rental exemption period in SY properties to ramp up occupancy. Source: PSR estimates Debt information: As of Dec 2012, PCRT has drawn down S$ 143 mil from a total of S$ 325 mil credit facilities with floating interest cost of SOR+2.7% and expiration at the end of FY2014. S$ 260 mil out of the total S$ 325 mil amount would be used for development projects of Jihua and Qingyang Malls; the rest S$ 65 mil would be used to fund interest expenses and dividend distributions. Besides the credit facilities, PCRT has also issued S$130.0 mil 6.75% Fixed Rate Notes due 2015, under the S$500 mil Multicurrency Medium Term Note ( MTN ) Program established on 20 Jan Fig. 13 Debt information 6 of 16

7 Excluding the non-recurring income support from earn-out, debt ratios are generally weak because debt are drawn to facilitate the under developed projects while most of the completed income generating properties are yet to stabilize. The net gearing ratio is below 20% as at 31 Dec 2012, but expected to rise significantly to around 60% by early 2014 as the credit facilities would be gradually drawn up to make payments to project developments. Late FY14 and Early FY15 is deemed as a financing inflexion point, as expiration of debt facilities, expiration of earn-out deed, and peak of interest cost all fall within the period. The management has expressed intention to refinance the debt at the expiration. And based on our current projection, the recurring net property income would have been enough to cover the interest expenditure by then, therefore containing the risk of insolvency. Table 7 Debt Ratio RMB mil Debt Ratio FY2011 FY2012 FY2013F FY2014F FY2015F Interest Coverage (X) (1.1) (0.5) Total debt to EBIT (X) (57.6) (140.5) Liability/Asset 13.9% 39.2% 46.0% 47.0% 45.6% Net Debt to Equity -8.7% 17.8% 59.8% 61.4% 57.6% Source: PSR estimates NAV and Dividend Yield Outlook: The following two figures show our projected NAV and dividend yield, assuming a 100% dividend payout for consistent comparison across years (do note that the management s commitment is to pay out at least 50% distributable income from FY2015 onwards). With the 100% payout, we still have the NAV continuously accrue, which is mainly attributable to the uplifts from revaluation gain of development completion in FY2013 and FY2014, as well as the organic fair value growth of stabilized properties thereafter. The total distributable amount is expected to experience a short lived pullback in FY2015, because the earn-out arrangement, as a source of income support, expires, and the newly completed Chengdu Dongzhan mall would not have stabilized. Assuming an 80% occupancy rate achieved by Dongzhan Mall at the end of FY2015, the FY13/14 level of distributable amount could be re-achieved at early FY2016. Fig. 15 DPU and dividend yield using 100% payout DPU - cents FY2012A FY2013F FY2014F FY2015F FY2016F Source: PSR estimates Valuation Fig 16: PCRT RNAV estimates RNAV Break Down Dividend Yield RNAV (S$'mil) unit S$0.63 FY2013E Per unit (S$) 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% % to GAV Core Properties Shenyang Longemont Offices % Shenyang Red Star Macalline % Shenyang Longemont Shopping Mall % Foshan Jihua Shopping Mall % Chengdu Qingyang Shopping Mall % Chengdu Dongzhan Mall % Other Investment 10% stake in Tongzhou Development % Expected Drawdown from Earn-Out % GAV % Fig. 14 Net Asset Value - S$ 1.00 NAV Less: Net Debt (incl. off b/s debt) (570) Additional Capex (130) RNAV per share (S$) discount to RNAV 35% FY2012A FY2013F FY2014F FY2015F FY2016F Source: PSR estimates Target Price 0.67 Source: PSR estimates We value PCRT s share price by RNAV method and arrive at the FY2013 target price of S$0.67 using a relatively conservative 35% discount to RNAV to reflect its less diversified property portfolio as well as the fact that most of the properties are currently under development or not yet stabilized. Shopping mall properties are valued at cap rates ranging from 6.5% to 6.8% (depending on the size and location of the properties) and 7 of 16

8 Shenyang Offices at 5.75%. All the currency translations are based on a SGD:CNY exchange rate of 5.0. According to our estimation, fair value of Red Star Macalline Shopping Mall is expected to receive a major fall from its FY12 booked value due to the expected lower rent income under master lease agreements. Fair value of Shenyang Longemont Mall would also be adjusted lower to close to its purchase price due to a higher take-up by anchor tenants, who help to enhance the shopper traffic stability but weigh on psm rental. Property income support from earn-out arrangement is included in our valuation as a separate item from investment property valuation, with an estimated drawdown of S$ 29 mil in FY2014. Our valuation does not included possible pipeline acquisitions, considering PCRT s current debt structure. 4. Translation Risk - Though we expect it to be relatively stable, a possible deprecation of CNY against SGD would shrink the portfolio value and haircut dividend income from a Singapore investor s perspective. We also note that Chengdu Dongzhan Mall, which is currently under development and expected to commence operation in 3q14, comprises a significant 33.0% in the overall GAV of the portfolio, and therefore would have a significant impact on our valuation. Our target price is S$ for FY2013, a 6.3% upside potential from the S$ close price on 3 May. Considering an additional above 6% dividend yield in FY2013 and FY2014, we initiate our coverage on PCRT with an ACCUMULATE rating. Risk 1. Longer than expected gestation period - As discussed earlier, most of the properties are yet stabilized or still under development. FY2013 and FY2014 is a critical period for the management to ramp up the occupancy rates in the completed malls, as income support from earn-out deed would expire by the end of Moreover, Interest cost would reach a maximum at early 2015 as a significant portion of debt facilities would have been drawn by that time to make progress payments to development projects. A failure to stabilize the 3 Shenyang properties, Jihua Mall and Qingyang Mall would subject the distributable amount to a further decline than our earlier projection and decrease investor confidence. 2. Difficulty in debt refinancing - The Trust s existing S$ 325 mil credit facility will expire at the end of FY2014 and the issued S$ 130 mil 6.75% fixed rate notes one year later. Possible fair value loss in the property portfolio due to weak leasing activities could subject PCRT to a tougher term in refinancing, such as a higher interest cost. 3. China s economic growth slows down - China s economic growth bottomed in 1H2012, and a mild recovery is on going since then. The most recent China economic data in 1q13 indicated that the recovery could be weaker than the market has earlier expected. If economic recovery loses momentum, a weak macro picture and slower disposable income growth would weigh on the nation s consumption growth. In the worst case scenario, the nation s urbanization trend could slow down significantly. PCRT, who has all properties all residing in China and hence lack of diversification, would be fully vulnerable. 8 of 16

9 FYE MDec ar FY11 FY12 FY13F FY14F FY15F V aluation Ratios P/E (X), adj. (188.1) (26.1) (10.1) (73.5) 29.4 P/B (X) EV /EBITDA (X), adj. (184.3) (127.9) (780.2) Dividend Y ield (% ) 3.7% 6.1% 6.3% 6.2% 5.3% Pe r s hare data (SGD) EPU reported, cents EPU excl. fair value gain & earnout cents (0.33) (2.42) (6.25) (0.86) 2.14 DPU, cents BV PS Grow th & M argins (%) Revenue N.M. N.M. N.M % 92.4% EBITDA N.M. N.M. N.M. N.M % EBIT N.M. N.M. N.M. N.M % Net Income, adj. N.M. N.M. N.M. N.M. N.M. M argins EBITDA margin N.M. N.M % 48.1% 55.1% EBIT margin N.M. N.M % 48.0% 55.0% Net Profit Margin N.M. N.M % 314.1% 89.2% Ke y Ratios ROE (% ) 0.8% 10.4% 9.1% 15.5% 7.5% ROA (% ) 0.6% 7.4% 5.2% 8.3% 4.0% Net Debt/(Cash) (69) Net Gearing (X) Net Cash 17.1% 54.7% 54.8% 51.6% Incom e State m e nt (SGD m n) Re ve nue EBITDA (5) (7) (1) Depreciation & A mortisation EBIT (5) (7) (1) Net Finance (Expense)/Income (1) 2 (20) (36) (40) Other items A ssociates & JV s 12 1 (70) Profit Be fore Tax Taxation (0) (23) (51) (46) (31) Profit Afte r Tax Non-controlling Interest Ne t Incom e, re porte d Ne t Incom e e xcl. fair value gain & e ar nout (2) (27) (71) (10) 25 Source: PSR 9 of 16

10 FYE MDec ar FY11 FY12 FY13F FY14F FY15F Balance She e t (SGD m n) PPE Intangibles A ssociates & JV s Investments ,230 1,282 Others Total non-curre nt as s e ts 764 1,248 1,613 1,966 2,058 Inventories A ccounts Receivables Investments Cash Others Total cur re nt as s e ts Total As s e ts 921 1,369 1,747 2,130 2,219 Short term loans A ccounts Payables Others Total curre nt liabilitie s Long term loans Others Total non-curre nt liabilitie s Non-controlling interest Share holde r Equity ,130 1,208 Cas hflow State m e nts (SGD m n) CFO Profit for the year A djustments (8) (70) (50) (127) (47) Cash from ops before WC changes (2) WC changes 6 (2) (3) 0 0 Cas hflow from ops CFI CA PEX, net (19) (132) (428) (159) 0 (de-)investments in JV & associates (660) Dividends from associates & JV s Dividends/Interest from Investments Purchase/sale of other investments 0 (50) Cas hflow from inve s tm e nts (680) (182) (407) (131) 34 CFF Distribution to unit holders 0 (48) (45) (46) (41) Unit issuance Net proceeds from loan and borrow ings Interest paid (0) (3) (23) (36) (40) Others (35) (2) (7) Movement in Restricted Cash (41) Cas hflow from financing (87) Ne t change in cas h 97 (3) (2) Effects of exchange rates 0 (0) Cas h & cas h e quivale nt of the ye ar Re s tricte d Cas h Source: PSR 10 of 16

11 Ratings History Market Price Target Price Source: Bloomberg, PSR Dec-13 Sep-13 Jun-13 Mar-13 Dec-12 Sep-12 Jun-12 Mar-12 Dec-11 Sep-11 Jun PSR Rating System Total Returns Recommendation Rating > +20% Buy 1 +5% to +20% Accumulate 2-5% to +5% Neutral 3-5% to -20% Reduce 4 < -20% Sell 5 Remarks We do not base our recommendations entirely on the above quantitative return bands. We consider qualitative factors like (but not limited to) a stock's risk reward profile, market sentiment, recent rate of share price appreciation, presence or absence of stock price catalysts, and speculative undertones surronding the stock, before making our final recommendation 11 of 16

12 Jan-14 Jan-13 Jan-12 Jan-11 Jan-10 Jan-14 Jan-13 Jan-12 Jan-11 Jan-10 Jan-09 Jan-08 Jan-07 APPENDIX A1. City Economic Metrics Fig. A1 GDP growths in Shenyang, Chengdu, Foshan are typically higher than the nation-wide average growth A2. Property Location Fig. A4 All the properties are easily accessible by operational/planned subway lines 25 GDP growth % y-y China Shenyang Chengdu Foshan Source: PSR, CEIC Fig. A2 Retail sales growth seen moderating, but still staying at relatively high level 23 12m rolling retail sales growth % y-y China Shenyang Chengdu Foshan Source: PSR, CEIC Fig. A3 Disposable income in upward trend disposable income per capita RMB/qtr 11,000 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 Beijing Shenyang Foshan Chengdu Source: PSR, CEIC Source: Company Website 12 of 16

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