Treasury China Trust Interim Results

Occupancy within the core Shanghai investment portfolio was maintained at close to full occupancy in H1 and gross revenues and net property income were both ahead for the portfolio overall. The development of The HQ retail extension in Shanghai is on track. The scheme was 33% pre-let at end H1, in line with internal targets. Disposal of the Beijing Logistics Park will complete in H2 and news is awaited on the sale of Central Plaza, which is actively being marketed. The combined proceeds of these two assets, at book value, would release sufficient cash to cover completion of The HQ without recourse to debt, and the cost of dividends to end FY13. However, Treasury China Trust (TCT) can fund all development currently underway from cash and facilities already in place.

Interim results: 18.9% growth in RMB gross revenues
18.9% growth in (RMB) revenue for H112, 19.7% in net operating income (NOI) was principally driven by letting of vacant space, although reviews were also above existing levels. TCT’s functional currency is RMB but reported figures in SGD benefited from 4.6% RMB/SGD appreciation in the year to end June 2012, resulting in 22.8% growth in gross revenues in SGD, 23% in NPI.

Policy support for core real estate markets
China’s monetary authorities have responded to recent slowdown in economic growth by reducing interest rates and easing liquidity/easing reserve ratio requirements. The outlook for commercial property is helped by continued expansion of the domestic finance and service sectors, and encouragement for an expanded services sector and higher domestic consumption in the new five-year plan. TCT intends to focus on completion of its current disposal programme in H2 and ensure that the pre-leasing and construction of The HQ extension remains on track.

Valuation: Undervalued relative to asset performance
The shares trade at a material 68% discount to reported mid-year NAV/unit. That is at odds with strong asset performance of a near fully let Shanghai investment portfolio and rising rents in H1. Possible triggers for a rerating to narrow that gap include the potential sale of Central Plaza – held for sale, which would verify external values and see TCT resume dividend payments – and the further pre-letting, completion and launch of The HQ, which we expect to materially boost revenues and valuations from FY13. That asset’s appeal to international retailers is already reflected in commitments from Marks & Spencer as anchor, and global fashion retailer Inditex (Zara).

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