Mapletree Commercial Trust (MCT SP): Initiate at Buy: Rising up the ranks

Disclosures & Disclaimer This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it. MCI (P) 094/06/2016 MCI (P) 085/06/2016 MICA (P) 021/01/2016 Issuer of report: The Hong Kong and Shanghai Banking Corporation Limited, Singapore Branch View HSBC Global Research at: https://www.research.hsbc.com   Portfolio of premium quality assets in Singapore  Organic growth from built-in rent escalation; accretive acquisitions offer an additional source of growth  Initiate at Buy; recent acquisition puts MCT in premier league Portfolio of premium quality assets in Singapore MCT is a Singapore-listed REIT with a portfolio comprising five properties in Singapore across retail, office and business park segments of the property market. Two of the assets, VivoCity and Mapletree Business City – Phase I (MBC Phase I), are amongst the best in Singapore in their respective sub-sectors of retail and suburban office/business parks and cumulatively make up 74% of our estimated valuation. Despite lacklustre growth prospects in Singapore, we like MCT’s pure Singapore exposure as we see it as more defensive at a time when some other Singapore REITs are taking on incremental risk exploring overseas opportunities in search of growth. Also, we think Singapore-only exposure keeps the REIT simple and easy to understand and reduces currency mismatch risks around debt and assets. Organic growth from rent escalation; acquisitions can be added positive While the demand-supply outlook for various property sub-segments in Singapore remains lacklustre, we see organic growth prospects for MCT given a large proportion of leases have built-in rent escalation clauses. Notably, for VivoCity, more than 90% of the leases have rent escalation of 2-3% p.a., while for MBC (Phase I), 97.5% of leases have built-in rent escalation of 3.0% p.a. In addition to organic growth, we see possible acquisitions as an added positive, noting that the recent acquisition of MBC Phase I was both DPU and NAV accretive. In this regard, the sponsor has granted MCT a Right of First Refusal (ROFR) over several commercial assets in Singapore – these include Mapletree Business City Phase II (MBC Phase II), which we estimate could be worth in excess of SGD1bn. Our projected 2-year DPU CAGR (FY2016/17-2018/19) is 3.7% p.a. from organic growth and MBC Phase I acquisition. Initiate at Buy (TP: SGD1.75); recent acquisition puts MCT in premier league We value MCT on RNAV as well as DDM with our target price derived as an equally weighted average of the two. Our RNAV for MCT is SGD1.59, while our DDM-based valuation is SGD1.87 – thus we set our TP at SGD1.75. This TP suggests an upside of 11.1%, and we initiate with a Buy rating. Post recent acquisition, MCT is one of the five largest and most liquid SREITs, putting it in a premier league – this, together with MCT’s 2-year DPU CAGR of 3.7% (stronger than peers), explains MCT’s lower than historical average DPU yield of 5.3%, in our view. We note MCT screens as attractive relative to peers on DPU yield plus the projected 2-year DPU CAGR. Key company-specific risks include overpaying for acquisitions and risks around changes to portfolio mix (given sponsor pipeline is skewed towards business park/office assets), while macro shocks and higher interest rates are generic risks for the REIT sector. 8 September 2016 INITIATE AT BUY TARGET PRICE (SGD) PREVIOUS TARGET (SGD) 1.75 N/A SHARE PRICE (SGD) UPSIDE/DOWNSIDE 1.575 +11.1% (as of 02 Sep 2016) MARKET DATA Market cap (SGDm) 4,490 Free float 66% Market cap (USDm) 3,302 BBG MCT SP 3m ADTV (USDm) 5 RIC MACT.SI FINANCIALS AND RATIOS (SGD) Year to 03/2016a 03/2017e 03/2018e 03/2019e HSBC DPU 0.081 0.083 0.088 0.089 HSBC DPU (prev) - - - - Change (%) - - - - Consensus DPU 0.081 0.082 0.086 0.089 Dividend yield (%) 5.2 5.3 5.6 5.7 Price to NAV 1.2 1.2 1.2 1.2 52-WEEK PRICE (SGD) Source: Thomson Reuters IBES, HSBC estimates Pratik Burman Ray*, CFA Senior Property Analyst The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch pratikray@hsbc.com.sg +65 6658 0611 Utkarsh Rastogi* Associate Bangalore * Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations Mapletree Commercial Trust (MCT SP) EQUITIES REAL ESTATE Singapore 1.1 01.5 01.9 0Sep 15Ma r 1 6Aug 16Targ et price: 1.7 5H igh : 1.5 6 Lo w: 1 .23 Curre nt: 1 .56Initiate at Buy: Rising up the ranks  EQUITIES  REAL ESTATE 8 September 2016 2 Key charts and tables P/RNAV for SREITs under HSBC coverage* Dividend yield and two-year DPU CAGR for SREITs under HSBC coverage* Source: Bloomberg, HSBC estimates Source: Bloomberg, HSBC estimates *For comparison purposes, we exclude Mapletree Greater China Commercial Trust (MAGIC SP, CMP: SGD1.11, Buy), which despite being Singapore-listed has all of its assets outside of Singapore. *For compari