SINGAPORE (Feb 1): DBS says CapitaLand Retail China Trust's (CRCT) move to divest Anzhen and acquire the much younger Rock Square in Guangzhou signals a shift in focus from stability from master leases to growth.

In a Thursday report, analyst Derek Tan says although the initial yield of Rock Square is lower in comparison, the asset has greater growth potential and is also an indication of CRCT embarking on a growth path.

DBS has also booked rental reversion in the mid-10% for the new acquisition Rock Square for the next few years.

And as CRCT’s gearing is around 34% after the Rock Square acquisition, this translates into a debt headroom of over $550 million, which provides flexibility for further acquisitions.

"We have booked in an additional $250 million acquisition in FY18," says Tan.

"Our target price of is 6.5% higher than consensus as we believe new acquisitions have higher growth potential," says Tan.

"We have priced in another acquisition of $250 million to kick in from 2Q18 with 4.5% initial yield and 2.5% p.a. NPI growth," he adds.

CRCT's 4Q17 results came within OCBC's expectation.

Revenue fell 4.6% y-o-y to $54.1 million while NPI fell 5.2% to $33.0 million, mainly due to the absence of contribution from CapitaMall Anzhen.

However, 4Q17 DPU ended flat at 2.37 cents as it included a $3.7 million distribution of the gain from the disposal of Anzhen.

Although CRCT’s distributable income will continue to be impacted by the absence of Anzhen, OCBC is projecting a $7.4 million capital distribution of the gain from the disposal.

Meanwhile, the research house says investors should focus on the uplift at CapitaMall Wangjing from the conversion of 4,700 sqm of anchor space into specialty stores.

Tenants, which include YID Cooking School, Sisyphe book café and popular F&B outlets, are on track to open progressively from 2Q18.

Committed occupancy rate stands at over 90%.

Nevertheless, OCBC believes China’s retail story remains robust and increase CRCT's terminal growth rate from 2.2% to 2.5%.

"After adjustments, our fair value increases slightly from $1.63 to $1.66," says lead analyst Deborah Ong in a Thursday report.

Units in CRCT are down 3 cents at $1.66 with DBS forecast distribution yield of 6.4%.