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Background
About TCT. Operational in China since 2005 and listed on the SGX in June
2010, Treasury China Trust (TCT) is the first Singapore listed business
trust focusing on commercial real estate in China, with AUM in excess of
RMB 11.5b (S$2.2b) and a quality of portfolio of more than 800,000 sqm of
office and retail properties comprising four income producing assets and
three development assets, administered by a team of 80 professionals.
TCT aims to position itself as a "total return vehicle", with a combination of
recurring income from existing portfolio as well as potential upside from
selected development properties. Shareholders' value can emanate from
both organic growth as well as capital appreciation. Embedded in TCT's
Trust Deed are the following corporate structures to impose various
disciplines:
The trust also has the option of distributing income from net distributable
income and realized and unrealized gains from asset enhancement - allowing
the entity to share gains from development appreciation or sale and/or
reinvest the returns into higher growth potential assets. TCT has undertaken
to pay out minimum 80% of its net rental income for the first three years
and 50% thereafter. The looser financial disciplines allow TCT to be more
flexible, which is the key to its "Total Return Vehicle" strategy.
SWOT Analysis
Strengths:
- Experience as owner, manager and developer of commercial real estate
in China. TCT has successfully carried out various asset enhancement
initiatives, improved tenant profiles and achieved positive rental reversions,
especially from legacy leases in its existing assets.
- Flexible corporate structure as a listed business trust (vis-à-vis a REIT)
- Strong corporate governance
- Exposure to RMB which provides 100% of TCT's revenue base and the
associated benefits of its likely appreciation in the mid to long term.
- Connected advisory board (senior executives of China's SOE), who can
assist with navigating and resolving any governmental and regulatory issues
that may arise.
Weakness:
- Over-reliance on the Shanghai property market
- "Diffused" positioning in the market (involves in Office, Retail and Industrial
Real Estate)
- Concentration risk on the City Centre asset (accounts for 71% of 1Q11
NPI)
- TCT's stock is thinly traded, which inherently increases share price
volatility (partly because TCT was listed on SGX by introduction, with not
many analysts covering it).
Opportunities:
- Ride on China's robust economic growth
- Exposure to appreciating RMB (revenue) and depreciating USD
(borrowings)
- Success in Shanghai provides jumping off points to other central and
western markets in China
- ROFR to acquire any income producing commercial real estate or
development land in Greater China sourced by sponsor (Treasury Holdings
Group)
Threats:
- Supply overhang in Shanghai - Increased competition
- Inflation risk
- Regulatory risk - More tightening measures from the Chinese government
- Further credit tightening in China which will increase RMB borrowing costs
Source: OIR
Exhibit 3: Shanghai Grade A Office Space 1Q11 - Central District Office Comparison
CASH FLOW
Year Ended 31 Dec (S$m) FY10 KEY RATES & RATIOS FY10
Operating income b/f wc change 6.6 Distribution per unit (S-cents) 5.0
Change in working capital 5.9 NAV per unit (S-cents) 374
Cash generated from operations 12.5 Earnings per unit (S-cents) 16.4
Tax paid -0.8 PER (x) 12.8
Cashflow from operating actiivities 11.8 P/NAV (x) 0.6
Cashflow from investing activities 76.5 NPI margin (%) 57.0
Cashflow from financing activities -29.6 Distribution/Gross Revenue (%) 31.4
Change in cash 58.7 Gearing (%) 32.8
Cash at beginning of period 0.0 ROE (%) 4.1
Cash at end of period 103.9 ROA (%) 1.1
*FY10 comprises the period from listing date 21 Jun till 31 Dec.
Source: Company data, TCT's forecast
SHAREHOLDING DECLARATION:
The analyst/analysts who wrote this report holds NIL shares in the above security.
Carmen Lee
Published by OCBC Investment Research Pte Ltd Head of Research