On 27 October 2023, CapitaLand China Trust (“CLCT”) have announced their third quarter business update of 2023. Their gearing ratio have seen a notable increase and is close to the MAS limit of 50%. This is something investors should take note of given the RMB denomination. With the end of the financial year around the corner, there may also be revisions to the valuations of the properties which may further affect the gearing. Investors will need to assess their risk appetite accordingly.
Website: General Announcement::3Q 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 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 | No Info | -8.8% |
Based on the announcement on 27 October 2023, DPU was not included in the business update for the third quarter of 2023.
This metric was Unfavorable as at 30 June 2023 as 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%.
Occupancy
| Metrics | Current | Previous |
|---|---|---|
| Occupancy (Management) | 93.1% | 93.1% |
Occupancy rate remains unchanged at 93.1% as at 30 September 2023. This metric is Neutral as it is below my expected healthy occupancy rate of 95%.
Gearing ratio
| Metrics | Current | Previous |
|---|---|---|
| Gearing Ratio | 42.4% | 40.2% |
Gearing ratio stands at 42.4% as at 30 September 2023. This to me is Unfavorable as their high gearing results in significant interest and less room to navigate.
Interest coverage
| Metrics | Current | Previous |
|---|---|---|
| Interest Coverage | 3.0x | 3.2x |
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 3.0 times as at 30 September 2023. The metric is Unfavorable as the interest coverage is lower than my preference of 5.0 times. This metric is likely to improve however as the Federal Reserve on 13 December 2023 held its key interest rate steady for the third straight time and set the table for multiple cuts to come in 2024 and beyond. The interest rates are therefore maintained at a range between 5.25% and 5.50%, which was increased on 26 July 2023, the highest level in 22 years.
Website: Fed holds rates steady, indicates three cuts coming in 2024
Should the interest rate may 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 30 September 2023:
| Description | Amount (SGD’000) |
|---|---|
| Total Debt | $2,015,700 |
| Debt Not Hedged (%) | 25.0% |
| Debt at Floating Rate Exposed | $503,925 |
| 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 | -$2,520 | -2.0% |
| + 100 bps | -$5,039 | -4.0% |
| + 150 bps | -$7,559 | -6.0% |
| + 200 bps | -$10,079 | -8.0% |
| + 250 bps | -$12,598 | -10.0% |
| + 300 bps | -$15,118 | -12.0% |
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 | 3.5 years | 3.8 years |
Weighted average term to maturity of their debt stands at 3.5 years as at 30 September 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 | 0.68 |
Based on the announcement on 27 October 2023, Net Asset Value (“NAV”) was not included in the business update for the third quarter of 2023.
The Price to Book (“P/B”) ratio currently stands at 0.68. This is computed using the closing share price of SGD0.900 on 26 December 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 | 7.93% | SGD 0.071 |
| 2022 | 6.56% | SGD 0.059 |
| 2021 | 8.34% | SGD 0.075 |
| 2020 | 6.41% | SGD 0.058 |
With a dividend payout of SGD0.071 per share for the calendar year 2023 and closing share price of SGD0.900 as at 26 December 2023, this translates to a dividend yield of 7.93%. For my benchmark, a general reasonable range would be around an average of 6.0% to 7.0% in the current environment.
Website: Reasonable Dividend Yield 2023Q4
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.
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.
In the previous 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 | No Info | Unfavorable |
| Occupancy | 93.1% | Neutral |
| Gearing Ratio | 42.4% | Unfavorable |
| Interest Coverage | 3.0x | Unfavorable |
| Debt Maturity Profile | 3.5 years | Favorable |
| Price to Book Ratio | 0.68 | Favorable |
| Overall | | Neutral |
Overall, the metrics indicate that it is currently neutral to invest in CLCT. It is still currently trading below its net asset value, reflective of the risks of a REIT that is RMB denominated. Nonetheless, CLCT is a good investment that investors could consider for stable dividend yield. 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.
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Website: CapitaLand China Trust (SGX: AU8U): 2023 Half Year Result
