Treasury China Trust

Treasury China Trust (TCT): decent 2Q11 results. Note there are no comparative statements for 2Q10 as TCT was only constituted on 19 May 2010.

Net property income +13.9% qoq to Rmb 73m, supported contributions from the newly acquired Central Avenue Mall Qingdao (55% stake) and Huai Hai Mall Shanghai (100% owned) on 1 Apr, and 10 May rptvly.

Committed occupancy for the core Shanghai portfolio comprising City Center, Central Plaza and Treasury Building came in at 95.9%, well ahead of earlier guidance of 87.9%.
The properties also saw positive rental reversion of 10.7% in 2Q, maintaining 1Q’s momentum of 12.8% uplift.

Mgt notes the continuing improvement in market sentiment for office and retail properties in Shanghai, evidenced by declining vacant office space (11.5% at end ’09, 8.5% at end ’10, 7.3% at end Jun ’11), as well as higher avg mkt rents (+4.6% yoy for 2Q11 to Rmb 8.3 sm/day).

Trust to distribute 5cts for 1H11. Mgt reiterates guidance for 10cts distribution for the entire FY11, which translates to a forecast yield of 5%.

Co remains well within debt covenant guidelines, i) Gearing, actual 35.4% vs max 45%, ii) devt assets to total assets, actual 17.3% vs max 30%, iii) payout of distributable income, actual 100% vs min 80%.
TCT’s avg interest rate for 1H11 is 3.97% for the Core Portfolio, vs PRC interest rates of 6.56% pa.

DTZ values the current property portfolio at Rmb 11.7b, +9.3% for the half yr.
NAV rises 13.6% to $4.17 (or $3.90 if the convertible bonds due Sep ’14 are converted), which translates to valuation of 0.5x P/B.

Mgt guides for 18.7% increase in gross revenues for 2H11 vs 1H11. Draws attention to the recently approved Unit Buyback Program, says the Board is committed to proactively consider all measures at its disposal to close the gap btwn unit trading price and NAV, as it views this disparity as unacceptable.

In view of corporate governance concerns relating to China companies, we note that the significant shareholders, Chairman and CEO are Caucasians. The trust was also recently awarded the “Best Asian Real Estate Fund” of 2011 by Asian Investor and “Outstanding China Property Trust” for 2011 by Capital Magazine. We note that its quarterly financial disclosure is one of the most extensive amongst the SGX-listed counters, not just among the S-chips.

Pre-results, all 3 brokers had Overweight ratings on the trust, with TP ranging btwn $2.15-2.30.