On 31 October 2022, CapitaLand China Trust (“CLCT”) have announced their business updates for the third quarter of FY2022. The results have shown slight deteriorations, as interest coverage starting to decrease with the effects of their high gearing. As it is a relatively low profile stock, the share price have not changed significantly since the announcement date. The share price have continued to trade 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
Website: General Announcement::Business Updates For The Third Quarter Ended 30 September 2022
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 31 October 2022, DPU was not included in the business update for the third quarter of 2022.
Occupancy
CLCT has 3 different types of properties and their occupancy is as above. The average occupancy rate weighted by portfolio Gross Rental Income (“GRI”) income as at 30 September 2022 stands at 96.1%. This metric is Favorable as significant of their assets are above my expected healthy occupancy rate of 95%.
Gearing ratio
Gearing ratio stands at 39.3% as at 30 September 2022 . This to me is Neutral, as while it is still a distance away from the MAS limit of 50%, their high gearing results in significant interest and less room to navigate.
Interest coverage
The interest coverage stands at 4.4 times as at 30 September 2022. The metric is Unfavorable as the interest coverage is lower than my preference of 5.0 times and seems to be worsening. Furthermore 77% of their loans are offshore which are subjected to global interest rates. This is a concern as interest rates continue to rise as the world looks to tackle inflation, and the Federal Reserve has hiked interest rates to 4.0% recently and is looking to hike to at least 4.75% by end of 2022.
Website: Fed to lift rates by 50 basis points, but peak policy rate may be higher
As the interest rate may potentially increase further, CLCT may be subjected to significant change in their cost of debt in the near future. In their presentation they have mentioned that 71% of their debt is also on fixed rates.
I have thus performed a sensitivity analysis using the information as at 30 September 2022:
Interest rate sensitivity analysis as below:
Do note the above is my estimation which may be different from management’s estimation. Nonetheless, if the interest rates were to increase by the basis points above, CLCT may experience a fall in DPU accordingly.
Debt maturity profile
Weighted average term to maturity of their debt stands at 3.5 years as at 30 September 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 0.69. This is computed using the closing share price of SGD1.04 on 25 November 2022 and the net asset value per share of SGD1.51 as at 30 June 2022. No net asset value per share was disclosed as at 30 September 2022. The metric is Favorable.
Dividend yield
At 25 November 2022, with a closing share price of SGD1.04 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 6.0% to 7.0% in the current environment.
However, interest rates have been continuously increasing the last few months. This have prompted for multiple safer assets to increase their bond and interest rates to more than 3%, causing the previous yields of CLCT to become unfavorable. CLCT saw a decrease in their share price from SGD1.10 in my last article on 29 August 2022 to SGD1.04 on 25 November 2022 to provide higher dividend yields.
Website: Reasonable Dividend Yield Changes
If using dividend yield of 7% as a benchmark, based on the dividend of SGD0.059 there is potential for CLCT to see its share price drop by another 19.0% to SGD0.84. Investors will thus need to be mentally prepared that the share price might further fall if interest rates for safe assets in Singapore approaches to cross 4%.
The dividend yield is Neutral.
Key Things to Note
China Property Market
At the first half of 2022, 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
To tackle these issues, the Chinese government, which until now has stayed largely on the sidelines of the country’s housing crash, has taken its most forceful steps so far to try to minimize the damage from the turmoil that has enveloped China Evergrande Group, the world’s most heavily indebted developer, and many of its competitors.
This is done through China’s cabinet, where they called for banks, most of which are state-owned, to lend more money for the completion of unfinished apartments, following a similar directive by regulators put out hours earlier. China’s central bank, the People’s Bank of China, and the main bank regulator codified 16 measures on the same day to make sure that developers can borrow enough money from banks and bond investors, and can defer repayment when necessary.
The central bank reduced by USD70 billion the money that the country’s commercial banks are together required to hold for emergencies, freeing them to lend that money instead.
Website: China Is Finally Trying to Fix Its Housing Crisis
Whether these measures are sufficient remain to be seen, an CLCT existing assets will definitely be affected if that happens. However, CapitaLand is a strong manager and may be able to capitalize on opportunities if a market crash occurs.
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: China expands COVID-19 lockdowns as infections hit daily record
Summary
Overall, the metrics indicate that it is favorable to invest in CLCT. Despite the drop in share price over the last few months, the fundamentals of CLCT did not worsen significantly during this financial year. This suggests that the current share price is due to overall market sentiment, especially as safe assets have seen their yield rise considerably with rising interest rates.
In view of this, CLCT is a good investment that investors could consider for stable dividend yield as the current share price will be seen as undervalued with a strong support as it is trading below its net asset value.
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.
Disclaimer: Not financial advice. All data and information provided on this site is for informational purposes only.
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