On 25 April 2023, CapitaLand China Trust (“CLCT”) have announced their first quarter business update for 2023. There were no significant changes in its portfolio, and the recent decrease in share price from my previous article could be a combination of the increasing macro risks and also due to post-dividend effects. The share price is now trading at a larger discount from its net asset value.
Keep in mind that the recent news narative revolves around economy woes of China. There is a possibility of a further fall in share price should the upcoming half year result announcement shows unfavorable impacts. Investors will need to take note of their risk profile and adjust accordingly.
Website: General Announcement::1Q 2023 Business Updates
Photo source: https://www.clct.com.sg/
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”)
| Metrics | Current | Previous |
|---|---|---|
| Distribution Per Unit | No Info | -14.1% |
Based on the announcement on 25 April 2023, DPU was not included in the business update for the first quarter of 2023.
This metric is Unfavorable as at 31 December 2022 as it has decreased by 14.1% to SGD0.0750 in FY2022 from SGD0.0873 in FY2021. The decrease in DPU is more than proportionate compared to the fall is distributable amount due to the increase in number of units as at 31 December 2022. The fall in distributable income is mainly attributable to the increase in finance costs by SGD12 million, which is reflective of the current macro-environment of rising interest rates.
Occupancy
| Metrics | Current | Previous |
|---|---|---|
| Occupancy (Retail) | 96.4% | 95.4% |
| Occupancy (Business Park) | 89.8% | 91.4% |
| Occupancy (Logistics Park) | 95.6% | 96.4% |
| Overall Occupancy Average | 94.6% | 94.4% |
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 31 March 2023 stands at 94.6%. This metric is below my expected healthy occupancy rate of 95% by a small margin as is thus Neutral. It is not unexpected given that China have experienced lockdowns in 2022, and only started to ease in 2023. The metric may improve moving forward.
Gearing ratio
| Metrics | Current | Previous |
|---|---|---|
| Gearing Ratio | 40.0% | 39.6% |
Gearing ratio stands at 40.0% as at 31 March 2023 . 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
| Metrics | Current | Previous |
|---|---|---|
| Interest Coverage | 3.4x | 3.6x |
The analysis of the interest coverage uses the adjusted interest coverage provided by management. The reason is because it includes the amount reserved for distribution to Perpetual Securities holders. Although Perpetual Securities holders are a form of equity, there is a higher priority to pay them their interest due before it is distributed to the common shareholders. Thus we have to ensure there is sufficient interest coverage to satisfy their needs as well.
The adjusted interest coverage stands at 3.4 times as at 31 March 2023. The metric is Unfavorable as the interest coverage is lower than my preference of 5.0 times and seems to be worsening. Furthermore 79% of their loans are offshore which are subjected to global interest rates, and we can see their DPU is affected by the increased finance costs. This is a concern as interest rates continue to rise as the world looks to tackle inflation. The Federal Reserve on 22 June 2023 have hinted to continue hiking interest rates, after their last rate hike in 3 May 2023 have brough the interest rates to a range between 5.00% and 5.25%.
Website: US Fed official says more rate hikes necessary
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 75% of their debt is also on fixed rates.
I have thus performed a sensitivity analysis using the information as at 31 March 2023:
| Description | Amount (SGD’000) |
|---|---|
| Total Debt | $1,978,100 |
| Debt Not Hedged (%) | 25.0% |
| Debt at Floating Rate Exposed | $494,525 |
| Distributable Income FY2022 | $125,615 |
Interest rate sensitivity analysis as below:
| Change in Interest Rates | Decrease in Distributable Income (SGD’000) | Change as % of FY2022 Distribution |
|---|---|---|
| + 50 bps | -$2,473 | -2.0% |
| + 100 bps | -$4,945 | -3.9% |
| + 150 bps | -$7,418 | -5.9% |
| + 200 bps | -$9,891 | -7.9% |
| + 250 bps | -$12,363 | -9.8% |
| + 300 bps | -$14,836 | -11.8% |
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
| Metrics | Current | Previous |
|---|---|---|
| Debt Maturity Profile | 3.7 years | 3.4 years |
Weighted average term to maturity of their debt stands at 3.7 years as at 31 March 2023. This is Favorable and it allows them sufficient time to refinance their debts as they fall due.
Price to Book Ratio
| Metrics | Current | Previous |
|---|---|---|
| Price to Book Ratio | 0.74 | 0.86 |
Based on the announcement on 25 April 2023, Net Asset Value (“NAV”) was not included in the business update for the first quarter of 2023.
The Price to Book (“P/B”) ratio currently stands at 0.74. This is computed using the closing share price of SGD1.02 on 30 June 2023 and the net asset value per share of SGD1.38 as at 31 December 2022. The metric is Favorable as you are paying at a discount to their book value.
Dividend yield
| Year | Yield | Total |
|---|---|---|
| 2023 | 3.33% | SGD 0.034 |
| 2022 | 5.78% | SGD 0.059 |
| 2021 | 7.36% | SGD 0.075 |
| 2020 | 5.66% | SGD 0.058 |
With China re-opening up, my assumption is that the dividend payout in 2023 will likely be consistent with its first payout and overall be higher than 2022. The extrapolated expected dividend payout will be SGD0.068 for the calendar year 2023. With a closing share price of SGD1.02 as at 30 June 2023, this translates to a dividend yield of 6.66%. For my benchmark, a general reasonable range would be around an average of 5.5% to 6.5% in the current environment.
Website: Reasonable Dividend Yield 2023Q3
The dividend yield is Favorable. Given that it is a China REIT listed in SGD on SGX, investors may require a higher return to compensate the higher risks such as decrease in valuation due to depreciation of RMB against SGD. The share price have fallen 14% since my last article on 10 February 2023, which is not unexpected given the correct environment to a more reasonable range.
Summary
| Metrics | Financials | Rating |
|---|---|---|
| Distribution Per Unit | -14.1% | Unfavorable |
| Occupancy | 94.6% | Neutral |
| Gearing Ratio | 40.0% | Neutral |
| Interest Coverage | 3.4x | Unfavorable |
| Debt Maturity Profile | 3.7 years | Favorable |
| Price to Book Ratio | 0.74 | Favorable |
| Overall | | Neutral |
Overall, the metrics indicate that it is neutral to invest in CLCT. After the run up in share price in 2023Q1 due to the dividend payout, the price have fallen back to a more reasonable range. However the key macro risks still exists and investors should take note.
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. We may see further stability as China have lifted their Covid-19 restrictions, in turn improving the overall business climate.
Disclaimer: Not financial advice. All data and information provided on this site is for informational purposes only.
Previous Post
Website: CapitaLand China Trust (SGX: AU8U): 2022 Full Year Result
One thought on “CapitaLand China Trust (SGX: AU8U): 2023 First Quarter Business Update”
Comments are closed.