Perennial China Retail Trust

Today i added 10,000 shares of Perennial China Retail Trust ("PCRT" or the "Company") to my SRS portfolio at $0.50 each.

I have been contemplating adding either CapitaRetail China Trust ("CRCT") or ("PCRT") for the last few days. At one time yesterday, i was thinking, why not add both instead. hahaha.

Anyway, back to the story of why i pick this sector and eventually chose PCRT.

Despite what people say about slowdown in China, my personal view is that China is still attractive in the medium to long term. The country may not be exporting as much as it want to but it has a very buoyant domestic economy that is likely to be sustained by the increasing middle class segment. They are going to spend money and the malls are probably going to be crowded in the foreseeable future. In addition, i have 'less forex' worries for RMB vis-a-vis most currencies.

CRCT is part of Capitaland and its website is here. Actually i quite like CRCT and its portfolio of shopping malls. The yield is about 6.7%. The portfolio consists of assets in key China cities and most importantly it is a REIT, which means the payout is almost 'guaranteed'. It is trading at 1.0x price to book and the occupancy rate is at a high of 98.1%. Perhaps i should also add this stock to my SRS portfolio at some point in time. While i like CRCT, i felt that it is trading at fair value at current prices, which is what held me back. If it was trading at discount to its book value, i would have probably chosen this instead of PCRT.

Back to PCRT and the reasons for buying it.

Perennial China Retail Trust is a business trust (not REIT) as it undertakes and develops  new projects. As such, investors will be subject to development risks from its portfolio. The fact that it is not a REIT also mean that the manager can choose not to pay out regular dividends should it have a better use of the cash. As such, to make me buy this stock, there must be other "attractive" reasons. Let me share with you some of my thoughts behind the purchase.

1. Dividend is 'guaranteed' through the earnout arrangement.

The yield at $0.50 is approximately 7.7% and the sponsor is billionaire Mr. Kuok Khoon Hong, the Chairman of Wilmar. Mr Kuok has about 17% stake in PCRT. This arrangement will ensure unitholders that there is a visibility of dividend streams to unit holders. Purist may not like this arrangement as this is somewhat sounds and smells like 'financial engineering'. hahaha. (actually i don't really like this as well) but nevertheless, it provides me with some assurance that i will receive my dividend while waiting for the sites to be fully developed.

You can access SCB's report on the above here issued in April. SCB's analyst has a target price of $0.51 and put its RNAV for FY2012 at S$0.93 per unit.

2. Interesting pipeline

The picture below shows you the initial pipeline, the approved acquisitions and the pipleline assets.

Actually what made me took a second look at this company is the pipeline of projects that is going to be completed in 2013 and 2014 and the company has the right to acquire some very interesting development sites beside the high speed railway stations in Xian and Changsha. (Sounds like how the JR stations in Japan integrates with the big shopping malls).

You can access DBSV report dated 10 Aug here. DBSV has a 12 month target price of $0.83 and a NAV per share forecast of 71.1c for FY2012. CIMB expected the company to turnaround in Q12013 and the report is here.

3. Proven Management

The CEO, Mr Pua Seck Guan, used to be the CEO of Capitaland Retail Limited. You can access Kim Eng's report dated 4 April 2012 here. There is probably more "upside potential" if you are a developer than if you buy a mall when it is fully developed. I think that is where the 'meat' is. In CRCT's case, the development risk is undertaken by CapMallsAsia (if i remember correct) and CRCT will have the first right of refusal should CapMallsAsia wants to sell its developed malls in China. Kim Eng believed the RNAV could be as high as $1.19 per share!.

For completeness, i attached the GS report dated 9 Aug 2012 for your study.

4. The company seems to be at an 'inflexion point".

In my personal opinion, the Company seems to be at the right inflexion point whereby it will be re-rated once the projects are completed and tenants fill the mall. If the projects proceed as plan, it is unlikely i can get back in at this price (unless there is delay to the projects).

The above is a weekly chart of PCRT. My gut feel is that downside is probably limited and backed by its NAV of at least $0.71 while it looks poised to break on the upside once the projects come on board (and provided the Chinese economy doesn't go down the drain).

In conclusion, i hope to have the cake (regular dividends) and eat it (the project pipelines coming into the portfolio as planned).

Happy SRSing.