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Perennial China Retail Trust: 1H 2013 DPU 1.9c.

Saturday, August 10, 2013

Here are some numbers I pulled out:

NAV/unit: 74c
Gearing: 23.74%
Debt Service Ratio: 3.2x

So, what do I think? I did a rather detailed blog post back in February and my view of the Trust has not changed.

Buying into PCRT is really buying into the story that Chinese domestic consumption, at only a third of GDP, will grow and that the Chinese economy will stay strong. We are buying into the Trust's potential to deliver in future.

Right now, I would say that investing in PCRT is still relatively risky although the level of risk is much reduced compared to the time of its IPO.

People who invest for income must realise that much of the distributable income is made up of money from earn-out deeds. It is not cash flow generated from operations of the buildings per se. It is money that is being paid out from guarantees while we wait for the buildings to generate more cash flow.

Based on the earn-out deeds currently available, the Trust is able to continue distributing income to unit holders for another 18 months. Translated, it means that its properties must pick up the slack by end of 2014, everything else remaining equal. Of course, it is unlikely that things will not see any progress and just stand at where they are now.

A more pertinent question is how much improvement can we see? This is really something we cannot say for sure and this comes with the territory when we invest in start ups which is also why I insisted that the distribution yield must be higher for PCRT compared to CRCT for it to be attractive to anyone investing for income. Investing in PCRT arguably is not mainly for income but for growth.

Investors will want see stronger occupancy and evidence of improved cash flow from operations over the next few quarters. The management has to show better results and fast.

See slides presentation: here.

Related post:
Perennial China Retail Trust: DPU 1.96c.


ZHANG Zheng said...

Thank you for sharing your views on PCRT.

The shops in Shenyang Longemont Shopping Mall in PCRT has already opened for some time. I dont understand why there is no gross revenue for 1H2013 (page 21 of the presentation slides), as the shops are supposed to pay rental. Do you have any ideas?

Thank you.

AK71 said...

Hi Zhang Zheng,

I am sure that there is cash flow generated from operating activities.

In FY 2012, a total of S$ 43.6 million was distributed to unit holders. However, cash flow from operating activities was only S$ 16.3 million. This demonstrates the importance of the earn-out deeds.

I would have liked to see the cash flow statement this time too but it is not available. I wonder why. Perhaps, we will see it when the Trust closes FY 2013.

Solace said...

Hi Ak,

i am a shareholder of PCRT, with average price of 50cents invested in this stock. i have done my own analysis and this how i see it

key advantages
1. Ride on China’s long term consumption and urbanization trend, with key properties located in faster growth major 2nd tier cities
2. Strategically sited on cities’ expanding edges with easy accessibility by subway lines (operational or planned)
3. Leasing activities expected to improve in the completed properties
4. Experienced management team – Mr. Pua Seck Guan

1. Longer than expected gestation period
2. Difficulty in debt refinancing
3. China’s economic growth slows down

AK71 said...

Hi Solace,

Thanks for the point by point analysis. Succinct. :)

I am more concerned with whether the Trust is able get most of its properties up and running by end 2014. Of course, it will have to improve on occupancy rates as well. I need to see it being able to support the income distribution to unit holders with its cash flow from operations alone.

However, if we remember, the Trust did state that pay out to unit holders will half at some stage of development. Now, if this should happen, then, based on 2012's numbers, I think cash flow from operations was almost enough.

As for risk of refinancing, I am not really concerned because the gearing level is relatively low. Also, the Trust could always do a rights issue and if that should happen, it would be at a discount to the last traded price. Of course, I will have to see how the rights are priced if it should happen.

The Chinese economy is huge and even if it should slow down, it will not go into a recession. In the GFC, only 3 economies in Asia did not suffer a recession and China's was one of them. So, a slower pace of growth might affect the Trust's growth but it shouldn't derail it.

Anyway, at 50c a share, I believe you have a nice margin of safety, a 32.5% discount to NAV and a 7.6% yield (which could potentially half to 3.8%). I am in the same boat. :)

Solace said...

Hi AK,

PCRT chart looks nice today. :)

I am making a partial divestment if it hits close 62 cents. I am cautious about the trust moving forward in the future.

I have collected dividends for couple of years alr, plus if I make a partial divestment this time, any remaining shares will be just profit from PCRT.

AK71 said...

Hi Solace,

That seems prudent. I sold about 30% of my long position at 61.5c when its unit price ran up earlier this year. I could possibly sell half of my remaining long position if that level should be tested again. :)

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