On 27 July 2023, CapitaLand China Trust (“CLCT”) have announced their first half results of 2023. From the report, it is identifiable that the performance for CLCT is consistent but continues to deteriorate when translating to Singapore Dollars. It is highly likely that this trend will continue given the economic policies of the respective government. This is something investors should take note of before investing in CLCT, especially as it might result in capital loss as seen by the share price downtrend.
As the RMB performance of the REIT is generally stable, CLCT may be able to capitalise on this and improve their financials should there be any changes in the environment and policies. This however is likely to take some time before the effects will be felt.
Website: Financial Statements And Related Announcement::Half Yearly Results
Photo source: https://www.clct.com.sg/
Background
CLCT is Singapore’s largest China-focused real estate investment trust (“REIT”). CLCT’s portfolio constitutes of shopping malls, business parks and logistics parks. 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 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 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 | -8.8% | No Info |
DPU has decreased by 8.8% to SGD0.0374 in the first half of 2023 compared to SGD0.0410 in the same period in the prior year. The decrease in DPU is mainly due to foreign exchange translation, as noted that in their local currency RMB, net property income is relatively consistent with a small increase of 0.8%. However when translated to SGD, new property income decreased by 7.4%.
While the fall in DPU due to RMB translation is not unexpected given Singapore’s exchange rate policy, this metric is Unfavorable as at 30 June 2023.
Occupancy
| Metrics | Current | Previous |
|---|---|---|
| Occupancy (Retail) | 96.8% | 96.4% |
| Occupancy (Business Park) | 91.5% | 89.8% |
| Occupancy (Logistics Park) | 91.2% | 95.6% |
| Overall Occupancy Average | 95.1% | 94.6% |
| Occupancy (Management) | 93.1% | 92.9% |
In this quarter, management has provided their occupancy rate of 93.1% as at 30 June 2023 and a comparative of 92.9% as at 31 March 2023. This is different from the estimation I have made in the previous quarter, and I have included in the table above for comparison. Moving forward, I will use management computation if available.
With an occupancy rate of 93.1%, this metric is below my expected healthy occupancy rate of 95%. This metric is Neutral.
Gearing ratio
| Metrics | Current | Previous |
|---|---|---|
| Gearing Ratio | 40.2% | 40.0% |
Gearing ratio stands at 40.2% as at 30 June 2023. This to me is Unfavorable, 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 | 3.2x | 3.4x |
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 3.2 times as at 30 June 2023. The metric is Unfavorable as the interest coverage is lower than my preference of 5.0 times and seems to be worsening. Furthermore 80% 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 25 August 2023 have announced that they may need to raise interest rates further to cool the still-too-high inflation, despite having increased the interest rates to a range between 5.00% and 5.25% on 26 July 2023, the highest level in 22 years.
Website: Fed’s Powell: higher rates may be needed, will move ‘carefully’
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 74% of their debt is also on fixed rates.
I have thus performed a sensitivity analysis using the information as at 30 June 2023:
| Description | Amount (SGD’000) |
|---|---|
| Total Debt | $1,969,100 |
| Debt Not Hedged (%) | 26.0% |
| Debt at Floating Rate Exposed | $511,966 |
| 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 | -$2,560 | -2.0% |
| + 100 bps | -$5,120 | -3.9% |
| + 150 bps | -$7,679 | -4.1% |
| + 200 bps | -$10,239 | -8.2% |
| + 250 bps | -$12,799 | -10.2% |
| + 300 bps | -$15,359 | -12.2% |
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 | 3.8 years | 3.7 years |
Weighted average term to maturity of their debt stands at 3.8 years as at 30 June 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 | 0.68 | 0.74 |
The Price to Book (“P/B”) ratio currently stands at 0.68. This is computed using the closing share price of SGD0.905 on 31 August 2023 and the net asset value per share of SGD1.33 as at 30 June 2023. The metric is Favorable as you are paying at a discount to their book value. Nonetheless, there is a key thing to note which will be elaborated below.
Dividend yield
| Year | Yield | Total |
|---|---|---|
| 2023 | 7.89% | SGD 0.071 |
| 2022 | 6.52% | SGD 0.059 |
| 2021 | 8.30% | SGD 0.075 |
| 2020 | 6.38% | SGD 0.058 |
As China continue to re-open, we can see that the dividend payout is higher than 2022 and also higher than my estimation of SGD0.068 in the previous article. With a dividend payout of SGD0.071 per share for the calendar year 2023 and closing share price of SGD0.905 as at 31 August 2023, this translates to a dividend yield of 7.89%. 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 11% since my last article on 2 July 2023, which is not unexpected given the correct environment to a more reasonable range.
Key things to note
Singapore Exchange Rate Policy
In view of the current high inflation environment, Singapore adopts an exchange rate policy in order to manage the inflation and ensure price stability as a sound basis for sustainable economic growth. This policy is different from those used by other countries. As a result of this policy, RMB has continued to depreciate against SGD during this quarter.
CLCT’s financials have shown improvement when denominated in RMB, where net property income and valuations of the leasehold properties have increased. However when translated to SGD this cause DPU and asset valuations to decrease. Singapore is likely to continue with their exchange rate policy over the next few years to manage the macro-economic conditions. Investors should therefore take note and assess their risk appetite accordingly.
Summary
| Metrics | Financials | Rating |
|---|---|---|
| Distribution Per Unit | -8.8% | Unfavorable |
| Occupancy | 93.1% | Neutral |
| Gearing Ratio | 40.2% | Unfavorable |
| Interest Coverage | 3.2x | Unfavorable |
| Debt Maturity Profile | 3.8 years | Favorable |
| Price to Book Ratio | 0.68 | Favorable |
| Overall | | Neutral |
Overall, the metrics indicate that it is currently neutral to invest in CLCT. However the key risk in terms of the macro-environment exists that investors should take note of. Especially when the overall performance for the REIT in RMB is performing well but continues to be adversely affected by the exchange rate.
Nonetheless, CLCT is a good investment that investors could consider for stable dividend yield. The current share price will be seen as undervalued with a strong support as it is trading below its net asset value. The overall business climate may improve over the next few years, and CLCT may be well positioned to ride the recovery.
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): 2023 First Quarter Business Update
