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Perennial China Retail Trust: DPU 1.96c.

Thursday, February 14, 2013

PCRT declared a DPU of 1.96c that will go XD on 21 February 2013. It is payable on 18 March 2013. My long position initiated at 47.5c a share about half a year ago is very much in the black.

I have readers asking me whether this REIT is a good investment for income but this is not a REIT. It is a business trust that acquires, develops, owns and manages mostly shopping malls in China.


So, is investing in PCRT risky? Why am I invested in PCRT?

From a top down perspective, with domestic consumption only a third of GDP in China, there is much room for it to grow and China will need more malls. This is especially so with the government's determination to make domestic consumption another engine of growth for the economy.

From a bottom up perspective, PCRT's numbers have improved and so have its prospects. Regular readers might remember how I did not think PCRT attractive at IPO. It was offered at 70c a unit at IPO with a distribution yield of 5.3% which I thought was too low for the level of risk investors were being asked to take on. This was in the middle of 2011, if I remember correctly.

Anyway, we know what then happened to the unit price of PCRT in the following months.

I initiated a long position in PCRT at 47.5c because the distribution yield of 8+% at that price offered a more acceptable level of compensation for the risk I would be asked to assume.

I also took comfort from the fact that the Trust saw Pua Seck Guan increasing his stake and Kuok Khoon Hong and Martua Sitorus becoming substantial shareholders. They have a very strong incentive for the Trust to do well.

To invest in PCRT is to believe that it will generate stronger cash flow in the next few years. We will need a longer time horizon as by 2015, we could see 4 more malls operational. 

Now, the management has to work hard to increase the occupancy of the malls which are already operational. With occupancy at about 70%, there is much room for improvement.

What are the negatives, currently? Much of the profit declared comes from fair value gains at the moment. Much of the distributable income comes from earned out deeds at the moment. These are probably points of contention.

However, when we invest in growth stocks, if we have looked at the probable downside and find the numbers acceptable and we have to be a bit more adventurous in certain instances, we just have to be patient. If we have taken care of the downside, the upside should take care of itself.

In PCRT's case, gearing is at a comfortable 19.9%. Interest cover ratio is more than adequate at 6.9x. Weighted average interest rate is 4.62% with no debt due till 2014 and 2015. NAV per unit is at 70c and a case has been made that it should be at least 6c higher.

The management, in the presentation slides, states that the development risk present during the Trust's IPO in 2011 has been largely reduced as more than 90% of its IPO assets are now operational. This is a fact. Two more malls will be operational this year and they are working hard to secure tenants. This is also a fact.

I like the story and I like how investing in PCRT is less risky now than back in 2011.

Would I buy more at the current price? I don't think so. Why? Because I am corrupted by TA and the negative divergences I see suggest a possible pull back sometime in the future. 59.5c at XD? Could happen. If I wasn't already invested, I could initiate a smallish long position as a hedge which I sometimes do.

See presentation slides: here.

Related post:
Perennial China Retail Trust: Weak debut?

14 comments:

B said...

Hi AK

I am saddened that I missed this while the price was in the 47-48 cents range :(

I knew the downside was limited but i didn't expect it to go beyond 60 cents so quickly with most malls still not fully operational.

B

AK71 said...

Hi B,

I guess there is some truth to the saying that Mr. Market is 6 to 9 months forward looking although I don't have any evidence to back this.

Anyway, there could be a pull back in PCRT's unit price in the near future. Could be an opportunity to load up if it should happen. :)

AK71 said...

PCRT recorded S$84.6 million in net profit for the full year, largely attributed to a fair value gain of S$60.3 million and from earn-out of S$21.9 million.

Looking ahead, the trust manager expects China's economy to slow to a more moderate pace.

It added that it could look at the strata-sale of non-block retail and other components in integrated developments to generate cash flow and development profits.

Pua Seck Guan, executive director and CEO at PCRT said: "Shopping malls are no longer a new thing in China, compared to ten years ago. So in the market there are people who know how to do it, there are some good operators in the marketplace. We have to be very disciplined. The sort of ramp-up is not as quick as compared to the past, so we need to have a balanced strategy. While we feel that the assets will have tremendous value in coming, we also need to balance it with certain short term gains to the investors."


Source:
http://www.channelnewsasia.com/stories/singaporebusinessnews/view/1254282/1/.html

Unknown said...

Hi AK

Thanks for sharing, I have learned a lot from your blog post. Keep them coming :)

I read from PCRT financial reports that said unlike 2011 and 2012 where the company kept to 90% payout ratio, in 2013 onward they will only commit to at least 50% payout, unless they are significant earning upside this year, dividend yield will be lower. What is your take on this?

App

AK71 said...

Hi App,

At IPO, distribution yield had to be higher to compensate for the much higher risk investors were asked to bear.

Now, with risk significantly reduced, it is reasonable to have a lower distribution yield.

I got in when I did because it was a rather compelling mix of lower risk and a very much higher distribution yield on cost.

For anyone getting in now, they would still benefit from relatively less risk investing in the Trust but distribution yield would of course be much lower.

Buying into PCRT is to buy into China's growth story in domestic consumption but I like to do so with an increased margin of safety.

Evilbdboi said...

Hi AK,

First and formost I would like to thank you for opening this door of opportunity for me.

I initiaed a long position at 48 cents. After reading a post on PCRT on your blog, I did my due dilligence amd read through its IPO prospectus and all other data, coming to a conclusion that the risk required at 48cents is low. The trigger point was the appalling rate at which both Pua Seck Guan and Kuok Khoon Hong were increasing their stake via open market purchase. It was done over a consecutive number of days.

At current price would I add additional posiiton? Why would I add additional positon when its riskier now than when I initially bought it.

AK71 said...

Hi Evilbdboi,

Interesting name. I checked it twice to make sure I spelled it correctly. :)

Indeed, when insiders are buying and buying at very low prices, there can be only one reason.

This is why The Little Book of Value Investing says we should "watch the guys in the know". See: Little Book of Value Investing.

I am happy the investment has worked out well for you. Congratulations. :)

coven said...

Thanks AK, I too have a small long position at 0.50 :)

Heehee benefited once again from your posts :)

AK71 said...

Hi coven,

I can sense your happiness. I am happy that you are happy. You read, you researched (I guess) and you took action!

Congratulations! :)

AK71 said...

Based on management’s target
Rmb227m distribution for FY13 and
balance earn-out for FY14, we
estimate 6.3% yield for the next two years in addition to 10-15%
NAV/share growth from FY12’s
S$0.70.

Valuations are still attractive at 25% discount to RNAV and 0.9x P/BV. Maintain Outperform.


Source:
http://www.remisiers.org/cms_images/research/Feb11-Feb15_2013/PCRT15022013cimb.pdf

AK71 said...

Looking ahead, with 90% of the initial portfolio now completed, the group can focus on ramping up occupation of its properties.

We continue to like PCRT for its attractive valuations, at 6% yield and 0.9xP/bk NAV. Earnings visibility has improved as the development assets are completed and generating cashflow.

Maintain Buy with TP of $0.84.


Source:
http://www.remisiers.org/cms_images/research/Feb18-Feb22_2013/pcrt-dbsv_150213-result_Buy.pdf

LoveLocks said...

Hi AK71,

Today PCRT close at 0.595 As you mentioned in this post.
Nav at 0.70.
I hope it break 0.595 later so I could collect some ")

AK71 said...

Hi Jimmy,

Indeed, if Mr. Market is willing to sell PCRT units at a bigger discount to valuation, we might want to buy some. ;)

AK71 said...

Singapore-listed Perennial China Retail Trust has announced a distribution per unit (DPU) of 0.95 cents for the first quarter ended March 31.

The REIT said the amount available for distribution to unit holders in the quarter rose marginally to S$10.9 million from S$10.6 million in the previous year.

Net profit for the period was S$4.98 million, which is S$3.18 million higher than the profit for the same period last year.

It said in a statement that its Shenyang Red Star Macalline Furniture Mall has secured a second master lease from Guangcai - an antique wholesaler.

This enhances occupancy at the mall to about 93.0 per cent and will provide rental stability.

Meanwhile its other asset, Shenyang Longemont Shopping Mall saw an increase in shopper traffic in the quarter more than doubled to 3.3 million, from 1.4 million in the same period last year.

Its Shenyang Longemont Offices continued to gain traction with leasing commitment reaching about 32.0 per cent.


- CNA/xq
07 May 2013 9:07 PM

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