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SINGAPORE

SINGAPORE Company Update


Company Results
Report MITA
MITA No.
No. 010/06/2009
022/06/2011

2 June 2011

Treasury China Trust


Not Rated
Diversification into China's tier-2 cities

Current Price: S$2.10 Betting on China. We recently visited TCT's commercial


assets in Shanghai and Qingdao, including the newly acquired
Central Avenue Mall and pending Huai Hai Mall (midst of
acquisition with settlement no later than 30 Jun). We observe
that TCT has over time evolved its strategy in China, which
3500 2.5
STI used to focus on commercial assets and development projects
3000 2.0 in tier-1 cities such as Beijing and Shanghai . Recently, it has
2500 1.5 concentrated on regional expansion into tier-2 cities, including
developing a large-scale retail property at the Laoshan district
2000 1.0
Treasury China Trust
of Qingdao with the Trio group. TCT is also actively looking at
1500 0.5 deals in Xi'an in Shangxi province, forming a strategic
1000 0.0 partnership with the Ginwa Group to tap the emerging retail
market in central and west China.
May-11
Aug-10

Nov-10

Mar-11
Apr-11
Oct-10

Feb-11
Jun-10
Jul-10

Sep-10

Dec-10
Jan-11

Three key advantages. We observed that TCT has three


key advantages in China. First, TCT is listed as a business
Reuters Code TRCT.SI
trust instead of a REIT, with the more flexible structure of 30%
development cap and 45% gearing limit, as stipulated in its
ISIN Code LG2U
trust deed. The development component sets TCT apart from
Bloomberg Code TCT SP REITs which have little development exposure (10% deposited
Issued Capital (m) 255 property max). TCT is thus better positioned to achieve
Mkt Cap (S$m/US$m) 536 / 434 accretive-yields due to cost savings from vertical integration.
It is also not bounded by investment constraints, such as at
Major Shareholders
least 75% of assets must be invested in income-producing
Ronan John (12.26%) properties. Secondly, TCT is upscaling its tenant mix from
Treasury Asian Investment (10.46%) mostly low-mid tier to mid-high end retailers, which provide
income uplift. Presently, some of its existing leases are well
below prevailing market rates. For example, the anchor tenant
Free Float (%) 65.2%
Parkson, at City Centre, is paying only RMB1.73 psqm/day
Daily Vol 3-mth (‘000) 126 (average rate is RMB6 psqm/day). With the completion of the
52 Wk Range 1.420 - 2.250 City Centre extension, Parkson will be vacating the property
in 2012, while Marks and Spencer was roped in as the
replacing tenant on a 10+5 years lease. On TCT's debt portfolio,
85% is USD-denominated but 100% of its revenue is in RMB.
(S$ m) FY10 TCT's Forecast TCT thus enjoys low borrowing costs, while the likely RMB
Revenue 39.5 41.2 appreciation in the mid to long term provides further forex
NPI 17.0 17.7 upside.
Distributions 12.4 -6.0
PER (x) 12.8 Supply overhang remains. According to DTZ, there is an
P/NAV (x) 0.6 anticipated supply of new office space in Shanghai, amounting
to about 100% of existing stock in 2011-2014. Likewise, high-
Ong Kian Lin
end retail space is expected to increase by another 50% from
(65) 6531 9810 2011 to 2013. The large new supply is expected to drag down
e-mail: OngKianLin@ocbc-research.com overall occupancy rates and intensify the "winners/losers"
divide among the Shanghai properties. Oversupply and inflation
risks (dampening demand) remain our top concerns for the
trust and we expect management to consciously address these
as the trust grows in asset size. We do NOT have a rating for
TCT presently.

Please refer to the important disclosures at the back of this document.


Treasury China Trust

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:

1) Minimum of 80% of net distributable income to be distributed in the first


three years
2) Maximum gearing cap of 45% (based on total assets)
3) Maximum development cap of 30% of total assets

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.

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Treasury China Trust

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

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Treasury China Trust

Exhibit 1: TCT China Asset Tour (May 2011)

Source: OIR

Exhibit 2: TCT's income-producing and development assets

Source: Treasury China Trust (TCT)

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Treasury China Trust

Exhibit 3: Shanghai Grade A Office Space 1Q11 - Central District Office Comparison

Source: DTZ Research

Exhibit 4: Shanghai Grade A Office Space 1Q11 - New Supply

Source: DTZ Research

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Treasury China Trust

Exhibit 5: Shanghai Grade A Office Space 1Q11 - Rental

Source: DTZ Research

Exhibit 6: Shanghai High End Retail 1Q11 - New Supply

Source: DTZ Research

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Treasury China Trust

Exhibit 7: Shanghai High End Retail 1Q11 - Rental

Source: DTZ Research

TCT's Key Financial Data

EARNINGS FORECAST BALANCE SHEET


Year Ended 31 Dec (S$m) FY10 TCT's Forecast As at 31 Dec (S$m) FY10

Gross Rental Income 39.5 41.2 Investment properties 1874.2


Gross Revenue 39.6 41.2 Total non-current assets 1875.5
Property Operating Expenses 17.0 17.7 Cash 103.9
Net Property Income 22.6 23.5 Total current assets 127.9
Trustee-Manager’s fees 6.4 6.4 Total assets 2003.4
Administrative expenses 10.0 6.5 Non-Current liabilities ex debt 323.0
Finance Costs 15.7 16.4 Debt 656.5
Profit before tax 52.6 4.0 Total liabilities 1046.0
Total Profit after tax 39.6 2.5 Unitholders' funds 957.4
Amount for distribution to Unitholders 12.4 -6.0 Total equity and liabilities 2003.4

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

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Treasury China Trust

SHAREHOLDING DECLARATION:
The analyst/analysts who wrote this report holds NIL shares in the above security.

RATINGS AND RECOMMENDATIONS:


OCBC Investment Research’s (OIR) technical comments and recommendations are short-term and trading
oriented.
- However, OIR’s fundamental views and ratings (Buy, Hold, Sell) are medium-term calls within a 12-month
investment horizon. OIR’s Buy = More than 10% upside from the current price; Hold = Trade within +/-10%
from the current price; Sell = More than 10% downside from the current price.
- For companies with less than S$150m market capitalization, OIR’s Buy = More than 30% upside from the
current price; Hold = Trade within +/- 30% from the current price; Sell = More than 30% downside from the
current price.

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Carmen Lee
Published by OCBC Investment Research Pte Ltd Head of Research

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