Mapletree Greater China Commercial Trust - Impacted by margin erosion at GW

2QFY17 results summary 
MAGIC reported a 2% yoy dip in 2QFY17 revenue to S$83m while distributable income ticked down 1% yoy to S$49.1m. 2Q/1HFY17 DPU of 1.77/3.62 Scts remain broadly in line with expectations at 23%/48% of our full-year forecast. The dip in topline was due to the depreciation of the HK$ and Rmb vs. S$, and additional property tax payable for Gateway Plaza (GW), partly offset by higher rental income from Festival Walk (FW). 
 
FW continues to outperform 
FW continued to enjoy full occupancy and rental uplift of 15%/7% over preceding levels for its retail and office spaces. Whilst shopper traffic fell 8.4% yoy in 2Q, tenant sales remained relatively stable. To date, 86% of its expiring leases have been renewed/ leased. FW has a remaining 10.6% of its leases due to be re-leased in 2HFY17 and another 21% in FY18. Whilst rental growth momentum is likely to moderate due to the overall weaker HK retail scene, we think it would still remain in positive territory. 
 
Margin erosion at GW from higher taxes 
2QFY17 revenue and NPI from GW fell 10.9%/16.3% yoy to S$36.4m/S$30.7m due to 1) higher property taxes wef Jul 16, and 2) transition from business tax to value added tax from May 16. GW was also impacted by frictional vacancy; occupancy slipped to 90.5% while renewals were done at 8% above previous levels. Take up rate has since improved. 
 
Expect modest uplift from office reversions 
Sandhill Plaza (SP) continued to perform well, with 99.6% of its space occupied and positive rental reversions of 23% over previous rates. Looking ahead, the weaker economic climate and higher incoming supply are likely to weigh on office rental trend and we anticipate the remaining office lease expiries at GW of 2.6% in 2HFY17 and 12.4% in FY18 to be re-contracted at modest uplifts, while SP should see higher positive reversions due to the under-rented average passing rates vs. market levels. 
 
80% of FY17F distributable income hedged 
In terms of capital management, MAGIC has extended its debt maturity to 3.1 years with 85% of its debt in fixed rate loans. All-in cost of debt remained low at 2.89%. Income visibility is sustained with about 80% of its FY17F distributable income hedged.   
 
Maintain Add 
We cut our FY17-19F DPU by 0.6-0.7% to factor in a higher property tax assumption for GW. Our DDM-based TP is tweaked slightly to S$1.13. We continue to like MAGIC for its largely resilient portfolio, backed by FW which makes up 71% of revenue. With gearing at 39.9%, we think there could be scope for new acquisitions in the medium term to lift earnings. Downside risks include a weaker-than-expected Beijing office leasing market, which could affect earnings and capital values of this property segment.