CapitaLand China Trust (“CLCT”) share price have been trading at a significant discount from its net asset value. This comes with little surprise due to the uncertainty of the China market, not just with lockdowns but also their financial regulations. However, they have strong financial standing and the backing of a good manager, which may be a good opportunity for investors to tap into the China market.
Background
CLCT is Singapore’s largest China-focused real estate investment trust (“REIT”). CLCT’s portfolio constitutes 11 shopping malls, five business parks and four logistics parks. The geographically diversified portfolio has a total gross floor area of approximately 2.0 million square metre, located across 12 leading Chinese cities. CLCT was listed on the Singapore Exchange Securities Trading Limited (SGX-ST) on 8 December 2006. The REIT’s objective is to invest on a long-term basis, in a diversified portfolio of income-producing real estate and real estate-related assets in mainland China, Hong Kong and Macau that are used primarily for retail, office and industrial purposes (including business parks, logistics facilities, data centres and integrated developments).
The portfolio of five business parks is situated in high-growth economic zones, with high quality and reputable domestic and multinational corporations operating in new economy sectors such as biomedical, electronics, engineering, e-commerce, information and communications technology and financial services. The business parks and industrial properties exhibit excellent connectivity to transportation hubs, and are easily accessible via various modes of transportation. The properties are Ascendas Xinsu Portfolio in Suzhou, Ascendas Innovation Towers and Ascendas Innovation Hub in Xi’an and Singapore- Hangzhou Science & Technology Park Phase I and Phase II in Hangzhou.
The portfolio of four high-quality modern logistics parks are located in key logistics hubs near transportation nodes such as seaports, airports and railways to serve the growing domestic logistic needs of China’s Eastern, Central and Southwest regions. Fitted with high-tech and modern features to meet a wide range of e-commerce and logistics requirements, the properties are anchored by strong domestic tenants, including China’s leading technology-driven supply chain solutions and logistics services providers. The tenants cater to a variety of sectors from logistics and warehouse, pharmaceuticals, manufacturing to e-commerce. The properties are Shanghai Fengxian Logistics Park in Shanghai, Kunshan Bacheng Logistics Park in Kunshan, Wuhan Yangluo Logistics Park in Wuhan and Chengdu Shuangliu Logistics Park in Chengdu.
CLCT is managed by CapitaLand China Trust Management Limited (“CLCTML”), a wholly owned subsidiary of Singapore-listed CapitaLand Investment Limited (“CLI”), a leading global real estate investment manager with a strong Asia foothold.
Key Metrics
Distribution Per Unit (“DPU”)
Based on the announcement on 26 July 2022, DPU increased by 2.1% before retained and revenue have increased by 12.7% as compared to the first half of 2021. However, if taking into consideration the DPU after retained, it has decreased by 3.1%. This was done in view of the operating uncertainty associated with recent COVID 19 outbreaks and lockdown in China resulted in mandatory closures of affected assets. The retention represents 5.0% of the amount available for distribution to Unitholders. Overall, although the DPU is retained, it can be further used to fund acquisitions in the future if unused. This metric is Favorable as CLCT has been able to grow their DPU.
Occupancy
Occupancy rate as at 30 June 2022 stands at the following:
- Retail: 95.5%
- Business Park: 94.7%
- Logistics Park: 97.0%
This metric is Favorable as significant of their assets are above my expected healthy occupancy rate of 95%.
Gearing ratio
Gearing ratio stands at 38.6% as at 30 June 2022 . This to me is Favorable, as it is still a distance away from the MAS limit of 50% and also provides adequate headroom for CLCT to leverage on debt should there be an accretive acquisition in the short term.
Interest coverage
The interest coverage stands at 4.7 times as at 30 June 2022 respectively. The lower interest coverage is not unexpected as unlike the other countries such as the US, the interest rates of China are much higher, although there are recent trends of China cutting interest rates to improve consumer demand. This is Neutral in my opinion.
Website: China trims lending rates again, one week after surprise cuts in key rates
Debt maturity profile
Weighted average term to maturity of their debt stands at 3.1 years as at 30 June 2022. This is Favorable and it allows them sufficient time to refinance their debts as they fall due.
Price to Book Ratio
The Price to Book (“P/B”) ratio currently stands at 0.73. This is computed using the closing share price of SGD1.10 on 26 August 2022 and the net asset value per share of SGD1.51 as at 30 June 2022. The metric is Favorable.
Dividend yield
At 26 August 2022, with a closing share price of SGD1.10 and dividend payout of SGD0.059 for the full calendar year 2022, this translates to a dividend yield of 5.36%. For my REIT’s benchmark, a general reasonable range would be around an average of 4.5%. The dividend yield is thus Favorable.
Key Things to Note
China Property Market
Over the last few months, there have been rumors over the China property market. The Evergrande Group crisis has sparked a large liquidity crisis and there are other property developers who are facing similar issues.
Website: Evergrande has failed to deliver the debt restructuring plan it promised
There have also been rumors and unofficial tallies that show a rapid increase in Chinese homebuyers refusing to pay their mortgages across a few hundred uncompleted projects until the developers finish construction on the apartments. This worsens the current liquidity crisis as well, although the Chinese policymakers have encouraged banks to support developers and emphasized the need to finish apartment construction.
Website: China’s property sales are set to plunge 30% — worse than in 2008, S&P says
CapitaLand is a strong manager and may be able to capitalize on opportunities if a market crash occurs. However their existing assets will definitely be affected if that happens.
Covid-19 Lockdown
The country continues to adopt a zero tolerance approach to Covid-19, saying inactivity from “lying flat” would be disastrous, as outbreaks in its tourism hotspots abate. This is despite the rest of the world moving to living with Covid-19, and may prove costly to operations in China as the lockdowns continues to disrupt supply chains.
This has a direct impact of operations for CLCT given the assets are located in China. In expectation of costs incurred from the disruptions, CLCT have thus retained a portion of their distribution in case funds are required for their operations. This is good for existing shareholders as compared to taking on unnecessary debt or issuing rights to raise funds to support the operations.
Website: Chinese province bordering Beijing expands Covid-19 lockdown
Summary
Overall, the metrics indicate that it is favorable to invest in CLCT. When investing in the China market, it is worth noting that there tend to be heavy censorships as China controls the media. Thus it is difficult to ascertain the actual economic conditions on the ground and investors need to take the media with a pinch of salt and extra caution. With a global recession on the horizon, the share price may continue to face downward pressure and provide better opportunities for entry.
2 thoughts on “CapitaLand China Trust (SGX: AU8U): 2022 Half Year Result”
Comments are closed.