Mapletree Greater China Commercial Trust - FY17: Marginal boost from reversal of VAT payable

One-off boost from reversal of VAT payable 
MAGIC reported a 7.9% yoy rise in 4QFY17 revenue to S$94.8m on the back of higher rental across all three properties and reversal of VAT payable for Gateway Plaza (GW). 4QFY17 DPU of 1.959 Scts was 1.9% higher yoy, accounting for 26% of FY17 forecast. Full-year DPU of 7.32 Scts (+1% yoy) was slightly below expectation at c.98% of our forecast. The trust revalued its properties up by 5.1% yoy, translating to a book NAV of S$1.30/unit.   
  
High portfolio occupancy maintained 
Portfolio occupancy was unchanged at 98.6% as at end-4QFY17, with Festival Walk (FW) and Sandhill Plaza (SP) remaining fully occupied. FW enjoyed a 12% average rental reversion despite lower tenant sales. We believe management would continue to conduct asset enhancement initiatives (AEIs) to drive tenant sales and shopper traffic to enable it to enjoy continued positive rental reversions going forward.   
  
Excluding forex impact, GW revenue delivered growth yoy 
4QFY17 revenue was boosted by a one-off reversal of VAT payable (estimated at S$1.2m per quarter). Although on a full-year basis, GW revenue saw a 3.9% yoy decline to S$79.1m; excluding forex impact in Rmb terms, revenue is a little higher yoy. GW's occupancy was stable at 96.9% with lease reversions re-contracted at 10% higher than preceding levels, the demand coming largely from domestic companies. Sandhill Plaza continues to trade well, with a 16% rental uplift for its expiring leases.   
  
More than one-third of FY18 expiries already locked-in 
Looking ahead, MAGIC has 38% of gross rental income to be renewed in FY18 and a further 23.4% in FY19. An estimated 14% pts of FY18 expiries have already been renewed and extended to FY21/FY22. We expect forward rental uplift to moderate from the present double-digit quantums given the more challenging economic climate. Gearing is healthy at 39.3% as at end-4QFY17. As such, we believe MAGIC continues to explore inorganic growth prospects, largely in China. 
  
Maintain Add 
We lower our FY18F/19F DPU by 2.8/5.1% and introduce our FY20 estimates as we moderate our rental assumption growth for HK and China. We continue to like MAGIC for its largely resilient portfolio, backed by FW. c.65% of its 1HFY18 distribution income has been hedged to S$. Our DDM-based target price rises slightly to S$1.14 as we roll forward our valuation. Maintain Add given the potential total return of 16%. Downside risks include weaker-than-expected Beijing office market, which could affect earnings.