Shenyang is a city of 5.7 million residents and ranks as the 11th most populous “urban area” in China (“urban area” being the term most analogous to the western concept of “city”.)
What this means is that Shenyang has increased retail space at a more rapid pace than most other large Chinese cities, which are themselves no slackers in building malls. Yet GDP per capita (the predominantly used statistic since household incomes are not measured) is less than half that of Shanghai. I have not heard the story yet on why Shenyang should have significantly higher hopes than other Chinese cities.
I have visited and focused previously on Shenyang because of it contains the only operating assets in the portfolio of Perennial China Retail Trust. Shenyang seems particularly at risk of retail overdevelopment, particularly the Dadong district containing the Shenyang Longemont Asia Pacific City development. The 2011 Market Study suggested a quadrupling of shopping center space in this area. Moreover, PCRT is designed to enrich its sponsors regardless of the success of its properties (such as compensation based on valuations performed according to blatantly unrealistic "extraordinary assumptions" dictated to the valuers), and the normal feasibility study process was thus compromised.
The PCRT share price began sinking in February, possibly as a result of unfavorable news of a 39% decline in occupancy at the Red Star Macalline Mall as of December 11 (which had opened at 91.8% occupancy but was down to 56% as of December). The report to shareholders acknowledges that Chinese government initiatives to cool down the housing market have had an adverse impact on the sale of home furnishings, thereby hurting the tenants of Red Star Macalline Mall. PCRT has reported that they have relocated remaining tenants into one half of the mall, while the other half of the mall will be re-tenanted with conventional retail tenants, thus competing with their own Longemont Mall next door.
One surprising claim, though, was that the slow leasing performance of the Longemont Mall was due to a 3-month delay in the opening of the mall until October due to fire department regulations. My visit occurred in September and was instigated by the news that the mall had opened on July 1st. Furthermore, DBS (one of the IPO underwriters) published a favorable report on PCRT on November 14, 2011, with the title "Perennial China Retail Trust - Execution on Track", also informing the readers that the mall had opened in July. They set a 12-month price target of 83 cents. I noticed that their cameras carefully avoided photographing any vacant space, though.
It should be understood that the property inspectors and independent valuers are the paid advocates of PCRT management, hence explaining the wildly optimistic price targets and valuations.
Last week, the share price popped from 49.5 cents to 52 cents on news of Kuok Khoon Hong, the founder of Wilmar, a palm oil company, raising his stake in PCRT to 16.9%, seen as a vote of confidence. The purchase was at a price of only 44.6 cents per share, though, by a purchasing consortium 49.5% owned by Wilmar and 20% owned by CEO Pua Seck Guan. There is no buy that happens without a sell, however, and it should very concerning that the seller was Shanghai Summit, the local development partner in the Shenyang PCRT properties, effectively reducing their ownership stake from 14.9% to 0. When the developer in charge of the project bails out like this, shouldn't investors be concerned, particularly at a price of 44.6 cents per share? When the co-owner with the most local knowledge bails out, that is never a good sign.
PCRT is currently at 52.5 cents per share, creating a 17.7% two-week gain for buyers Kuok and CEO Pua Seck Guan.
Meanwhile, the latest "independent valuation" valuation still valued the entire PCRT portfolio as of the end of 2011 as completed and leased to 95% occupancy. I don't know why such fiction is permitted in Singapore, but if such a valuation report had been published in the USA, this would invite a class action lawsuit from disgruntled investors.
Disclosures: None. I have no short or long position in this stock and have no plans to initiate such a position.
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