As online shopping continues to drive up retail revenue, it has led to the rise of many click and bricks businesses attempting to maximise their revenue from both online and offline shoppers.
On the other hand, physical stores that has yet to tap on the power of e-Commerce remain vulnerable to increased competition, with some struggling to remain relevant in an increasingly digitised world.
UBS recently analysed the demographics of more than 3,000 shopping centres and malls in Asia Pacific (APAC) and US and found that shopping malls in China had the “highest catchment spending power” compared to malls in US, Japan and Australia.
Despite having lower disposable income, China’s population density is significantly higher than the other countries and thus contributed to higher spending power collectively. Furthermore, despite China’s slowing economy, its spending power is estimated to grow by 10 percent in 2017.
With such a lucrative market to tap on, UBS highlighted Capitaland Retail China Trust (CRCT) as one of the key portfolios to focus on, citing its high exposure to China’s retail market. CRCT is a China-focused retail REIT that was listed on SGX in 2006.
How does its exposure to China’s retail scene help CRCT in improving its business operations? Let’s dive deeper to unearth some of its strengths.
Choosing to invest mostly in Tier 1 cities like Shanghai and Beijing, CRCT has specifically chosen its location to be near major transport systems and have designed their malls to be “family-oriented shopping destinations”.
According to the report, there is high population density and purchasing power per capita in the area within 30-minutes drive from CRCT’s malls. Its demographic also consisted of more spenders than savers. Location being one of the key ingredients to the success of a mall, CRCT has certainly picked its locations well to maximise its source of potential revenue.
To combat the threat of e-Commerce from driving down revenue of physical stores, CRCT has been actively changing its tenant mix to include more sectors that are “less vulnerable to e-commerce”. F&B for example, took up 23 percent of its tenant mix in 2016 as compared to 16 percent in 2010. In contrast, department stores came down to 15 percent from 25 percent in 2010.
Poised to benefit from China’s growth
Overall, with China’s GDP growth of 6.9 percent (reported last quarter) exceeding expectations and retail sales continue to increase, CRCT is likely to benefit from increased domestic consumption levels, which will drive up store revenue and improve its bottomline.
Overall rosy outlook
UBS maintains a Buy position as it forecasted a DPU CAGR of four percent from 2016 to 2019. Growth rate is expected to be driven by the new Xinnan mall in Chengdu and increased earnings from Minzhongleyuan in Wuhan.
However, according to 1Q17 financial statements, CapitaMall Wuhu mall experienced weaker sales due to difficulties faced with regards to tenancy adjustments. Therefore it will still take time before we can see if the issue can be resolved.
Regardless, when compared to other retail SREITs with DPU CAGR of 1.4 percent, UBS expects its share price to increase to $1.74 after factoring in the growth rate. This corresponds with the latest financial figures reported by CRCT where gross revenue in SGD increased by 8.2 percent in 1Q17 and return to unitholders increased by 3.5 percent from 1Q16.
Given its current share price of $1.56, there seems to be plenty of room for growth for CRCT before it reaches the target price set by UBS, and investors should certainly keep this retail trust on their radar.