Analysts from DBS Group Research and OCBC Investment Research are remaining positive on CapitaLand China Trust (CLCT) for its exposure to new economy assets.
The analysts have also kept their “buy” calls on the REIT after it reported higher gross revenue and net property income (NPI) for the 1QFY2022 ended March.
On April 26, the manager of CLCT posted gross revenue of RMB489.9 million ($103.3 million), up 24% y-o-y for the quarter.
CLCT’s NPI increased by 30.4% y-o-y to RMB344.5 million during the same quarter.
DBS analysts Geraldine Wong and Derek Tan say they like the REIT for its “compelling value”.
“We believe markets have not given CLCT the benefit of their new economy exposure, which now comprises close to one-third of their portfolio exposure and has boosted resilience in portfolio earnings in recent quarters. Forward yields are compelling at 7.6%, based on current trading levels,” the analysts write in their April 27 report.
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They have, however, lowered their target price slightly to $1.55 from $1.60 previously. The revised target price represents a 31% upside to the REIT’s last-traded price of $1.18 as at April 26.
The new target price also factors in the rental rebates and flat reversions across CLCT’s retail portfolio for half a month, given the prolonged lockdowns and sporadic retail mall closures, the analysts add.
In their report, Wong and Tan see the REIT facing short-term weaknesses due to China’s zero-Covid-19 tolerance. The weakness could sustain for the rest of the year, and the lockdown could potentially expand to Beijing, where a bulk of CLCT’s retail exposure is.
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However, all is not lost.
“We believe that CLCT’s retail portfolio was stress tested back in 1HFY2021, coinciding with Beijing’s lockdown, which showed that a retail overhang can dissipate fast with a sharp rebound in occupancy in the matter of a quarter’s time,” the analysts say.
“Moreover, the [estimated] 30% expansion in exposure to new economy assets – that are on [around] 3%-4% rental escalations and registering single digit, positive reversions – incorporate greater income visibility to offset the downside risk from retail,” they add.
Furthermore, the REIT’s exposure to new economy assets, which now makes up 30% of its current portfolio and expanding, should “provide a shelter in the storm”.
“Despite the ongoing macro headwinds, which is as an overhang for China S-REITs, we continue to set our eyes on the horizon, as its asset rejuvenation continues to unfold, expanding its new economy resilience from the current 30% portfolio exposure,” say Wong and Tan.
“The dissipation of the current macroeconomic headwinds should help re-rate CLCT’s current P/NAV of 0.76x to trade closer to its historical mean of 0.98x,” they add.
In their report, the DBS analysts see inorganic growth opportunities for the REIT. This comes in the form of more third-party assets on the table for acquisition as distressed Chinese developers look to divest to beef up their cash positions.
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That said, the expansion of lockdown clusters to include Beijing again could pose a key risk, note the analysts.
OCBC analyst Chu Peng is also positive on CLCT’s prospects as she sees the manager’s diversification strategy paying off.
“Overall, performance of the new economy portfolio remained resilient, benefiting from policy support, growth in local consumption and demand for logistics,” Chu writes in her April 27 report.
However, the leasing environment is likely to remain cautious for the time being.
As such, she has lowered her fair value estimate on the REIT to $1.40 from $1.50 previously after adjustments and increasing her risk-free rate from 1.9% to 2.5%.
Higher-than-expected rental reversions and distribution per unit (DPU) accretive acquisitions are potential catalysts to CLCT’s share price, while a sharp slowdown in retail sales in China as well as a slowdown in macroeconomic conditions are key risks.
Units in CLCT closed flat at $1.17 on May 4.
