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Perennial China Retail Trust: Weak debut?

Thursday, June 9, 2011

On 19 May, I did a relatively lengthy blog post on why I found Perennial China Retail Trust (PCRT) unattractive as an investment.


At that time, they were going to price it between 70c to 76c per unit. Ultimately, the trust was offered at 70c per unit, the lowest price in the range, and it was only 1.6x subscribed. The suggestion that the market is not enthusiastic about the IPO is not far off the mark.

Today, it closed at 61c or 12.86% lower than its IPO price of 70c. A weak debut? That would be an understatement.

Would I be interested in PCRT if its price were to weaken further? Yes, I would be interested if its distribution yield for 2011 were to be much higher than the 5.3% at its IPO price of 70c.

At today's closing price of 61c, its distribution yield has improved to 6.08% for the year 2011. However, it is still not attractive enough for me to invest for income. In my last blog post on this, I compared the distribution yield to CapitaRetail China Trust which was offering a distribution yield of 6.83%.

So, unless PCRT trades at a much higher distribution yield and this is really to compensate for the rather risky investment that it is, I would not be tempted. At 54c per unit, PCRT would trade at a distribution yield of 6.87% and, perhaps, I would be interested then.

Read article here.

Related post:
Perennial China Retail Trust.

28 comments:

Isaac said...

Hey AK,

the joker who was allotted 2,250,000 shares would just faint were PRCT to reach 54c :P

AK71 said...

Hi Isaac,

He just might. ;)

I wonder why the relevant parties did not act to stabilise the unit price of the trust after seeing its sharp fall. Perhaps, they would step in tomorrow.

Paul said...

Hi AK71

Personally I wont compare CapitaRChina with PRCT. One is a REIT, the other one a Business Trust. I'm sure you know the difference.

I share Nick (from VB) view that a comparable peer would be TCT.

I am wary of Business Trust in general and avoid them as a rule of thumb.

As for price stabilisation, I dun think a stabilising manager was appointed or announced. The shortist is going to have a field day!

AK71 said...

Hi Paul,

Yes, I know they are different and I have discussed with Nick earlier my motivation for making the comparison the way I did but thanks for the reminder. :)

From the perspective of investing for income, a primary consideration is distribution yield which is why I made a liberal comparison with CapitaRetail China Trust.

Of course, we want to bear in mind the greater potential for growth as well as the greater risk involved investing in PCRT. Most of their properties are not even ready and would take time to mature when they are ready.

Although they have zero gearing at the moment, this would change quite quickly in the next few years.

For a comprehensive analysis, looking at distribution yield alone would, naturally, be myopic and incomplete. :)

Meng said...

the biggest risk to PRCT right now is that 2 of the properties mentioned in its prospectus have yet to obtain the necessary permits to for land rights use, planning and construction.

Now do bear in mind this is against the back drop of tightening credit and a central govt getting increasingly aggressive in reining in runaway property prices

Though one would expect such measures to be more directed at residential, its is unlikely retail malls which is still part of the real estate market will escape unscathed

the only positive that still remains is that Chinese govt hasnt said any about reversing its policies on stimulating consumption

So there is still something positive, believe prices should allow yields above CRCT. As CRCT is best positioned to benefit from the only positive mentioned above

AK71 said...

Hi Meng,

Thank you for sharing your point of view. I agree that investing in PCRT is a high risk proposition. This is why I would demand a higher distribution yield (which would mean a lower unit price at this point in time) before I would consider investing in it. :)

AK71 said...

Maintain Buy with RNAV-backed TP of S$0.83. We see FY13 as the earnings inflexion point with new contributions from the Foshan development. As operational ramp up improves, we expect the stock to close the gap between share price and RNAV. The stock is trading close to implied replacement cost for its initial portfolio.


DBS Group Research: Perennial China Retail Trust. BUY. 10 Aug 2012.

AK71 said...

Perennial China Retail Trust's roadshow on 23 August 2012:
Slides presentation.

coven said...

Hi AK

are u current vested in PRCT ?

Looks like the price is getting low enough for u to get a reasonable yield :)

AK71 said...

Hi coven,

I initiated a smallish long position at 47.5c last week. :)

Current distribution yield is about 8%. This is acceptable especially when the Trust could reduce its income distribution by half in 2013 which means a reduced yield of 4%.

coven said...

Thanks AK for the reply

at 8% yield for Perennial, wouldn't that be similar to AscendasHospTrust?

With the chinese economy slowing and no large stimulus seen yet, it seems u are still bullish on china retail :)

My guess is that china has a growing middle class, hence retail spending would still be able to sustain. 7-8% GDP growth is still a healthy number

cheers!

AK71 said...

Hi coven,

China will grow and domestic consumption will grow. Compared to Indonesia which sees domestic consumption making up 60% of its GDP, China has a long way to go. If we think that Indonesia is underserved by shopping centres, so is China.

I didn't invest in PCRT last year because its unit price was too high. Now, at 33% lower, there is a margin of safety which I am comfortable with.

With a possibly lower distribution yield of 4% in the new year, it will still provide some income to investors who are staying invested for the next 2 to 3 years.

For anyone looking for growth and income, PCRT seems like a fair proposition now. :)

As for Ascendas HT, I blogged about its IPO and why I wasn't interested in it. ;)

Ascendas HT: Am I interested?

coven said...

agree AK

with all 4 govt permits and mall constructions in full-steam ahead, it seems the highest risk has been eliminated

coupled with big names of Wilmar CEO and COO, this looks interesting in the mid-long term :)

coven said...

Hi AK

are u familiar with the earn-out funds which is used for its dividend payouts ?

Thanks :)

AK71 said...

Hi coven,

Until the malls are operational and generating income, the risks are higher. So, a higher distribution yield which means a lower unit price is necessary for a bigger margin of safety.

For anyone with an investment horizon of 3 years or more, Perennial China Retail Trust at the current price looks like a promising investment.

The Trust enters into earnout deeds when it buys malls. Earnout funds are deposited into an escrow account to be drawn down for payment to unitholders if the actual net property income of the properties falls below the applicable threshold amount set out in the deed. This is probably similar to rental support.

coven said...

Hi AK

any thoughts on the 6.375% yield notes that was launched for PRCT ?

Isn't it expensive for PRCT to pay such expensive rates for $130 million?

Thanks, Coven

AK71 said...

Hi Coven,

With unit price trading at such a hefty discount to NAV/unit, it is probably cheaper for the trust to tap the debt market for funding.

AK71 said...

Perennial China Retail Trust (PCRT) said said it has entered into a joint venture with a consortium of investors to develop an integrated development in Beijing’s new CBD called Tongzhou District.

Wholly-owned subsidiary Perennial China Retail (PCR), which signed the deal, will invest $50.32 million in the JV for a 10% stake.

The consortium together holds a 70% stake in the development. Beijing Mei Rong Jia Investment holds the remaining 30% interest.


The EDGE, 1 Oct 12.

AK71 said...

China is set to become the world's second biggest market for luxury goods after the United States in five years, overtaking France, Britain, Italy and Japan, an industry report said Tuesday.

AFP

AK71 said...

Perennial China Retail Trust (PCRT) said its distribution per unit (DPU) for the third quarter ended Sept 30, 2012 was at 0.97 cent. On an annualised basis, the available DPU was at 3.86 cents.

Distributable income was $10.68 million, above PCRT’s forecast.

The conversion of Shenyang Red Star Macalline furniture operator to master lease helped enhance its income stability, said PCRT.


The EDGE, 6 Nov 12.

AK71 said...

Underlying operational performance
saw a second quarter of pick-up with profits from operational malls
growing 6% qoq. While 4Q12 could be
slower due to leasing difficulties in winter, we should see further strength in 1Q13. 60% of NLA at Shenyang furniture mall has been converted to a master lease for income stability while further leasing progress has been made at the upcoming Shenyang office, Foshan Jihua mall and Chengdu Qingyang mall.


Read full report from CIMB here: Perennial China Retail Trust, 3QFY12 RESULTS - OUTPERFORM.

AK71 said...

DBS Vickers tips remaining invested in stocks which may benefit from a recovery in China’s economy.

“The Chinese economy has probably bottomed in 3Q12,” it says, with the house forecasting growth to return to 9%. “China’s acceleration in fixed asset investment will certainly be able to help lift global growth, and urbanisation is the new strategy to spearhead investment.”

The house expects Singapore’s growth to remain below potential on structural weakness. DBSV’s China picks remain CapitaMalls Asia (JS8.SG), Midas (5EN.SG), Wilmar (F34.SG), HPH Trust (NS8U.SG) and Sound Global (E6E.SG), as well as adding Perennial China Retail Trust (N9LU.SG) to its list.

Elaine Keh said...

Hi AK

Thank you for all your wise advice!!

I bought a small amout of Perennial after reading your blog, and is happy to see it moving up steadily.

Today is q little more exciting tho - it is up 5%.

current px is now higher than fair value of $0.59 (CIMB).

Time to take profit??

EK (not trying to be funny)

AK71 said...

Hi Elaine (aka EK),

I believe that there is nothing wrong with taking some profit off the table after a nice run up in price. :)

Could we see price going higher? 65c? Possibly. What if it doesn't? Can't go wrong if we hedge, can we? ;)

Elaine K said...

thanks AK, for your super quick response!

I have been reading your blog for a while, and have been building up my portfolio of reits.

I received my 2012 SGX statement yesterday... and was a little sad to see my annual dividend at 10% plus of yours :-(

I aim to double it in 2013!!! Need all the wisdom and advice from you ... so pls pls continue to blog!

AK71 said...

Hi Elaine,

I think anyone who is just starting could be quite pleased to have annual passive income of >$12K. That means an extra $1+K per month in income. That is nothing to snort at. Congratulations. :)

I will have to say again that I am not providing any advice here in my blog. I am not allowed to do so. I am merely sharing my little ideas and, most of the time, I am talking to myself. ;)

Elaine K said...

And I am just eavesdropping....
:-)

AK71 said...

Hi Elaine,

Indeed, they don't make walls like they used to. ;)

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