CapitaLand China Trust (CLCT) AU8U is a proxy for China’s reopening, but a depreciating renminbi (RMB) is throwing salt on recovering wounds, write DBS Group Research analysts Geraldine Wong and Derek Tan.
CLCT’s 1HFY2023 ended June top-line gross revenue was up 0.8% y-o-y to RMB947.8 million ($177.28 million), while net property income (NPI) inched up 0.8% y-o-y to RMB663.7 million.
However, distribution per unit (DPU) of 3.74 Singapore cents represents a 8.8% y-o-y decline, primarily from foreign exchange losses and higher cost of debt.
In a July 28 note, Wong and Tan maintain “buy” on CLCT but with a lower target price of $1.40 from $1.45 previously. The new target price represents a 35% upside to CLCT’s last closed price of $1.04 on July 27.
Foreign exchange (forex) is a bigger concern to the DBS analysts as opposed to capital management. “In our view, forex exchange has poured salt on CLCT’s recovering wounds this year. In the past year, the Singapore dollar (SGD) has strengthened 11% against the RMB, which has reflected strongly on DPU, albeit with flat revenue and top-line recovery in RMB terms.”
Forex will continue to hurt DPU going forward, which will tip the playing field for DPU recovery in 2HFY2023 on a y-o-y basis, write Wong and Tan.
See also: CLCT reports 1HFY2023 DPU of 3.74 cents, eyes better 2H
On the capital management front, CLCT’s high offshore funding sources of around 80%, albeit at a high fixed-cost ratio of 74%, will still see moderate exposure to hawkish offshore rates, they add.
CLCT’s average cost of debt lands at 3.54%, up 6 basis points (bps) q-o-q and 90 bps y-o-y.
All refinancing requirements for FY2023 have been secured, and CLCT is in early negotiations for FY2024 expiries, which stand at 15% for FY2024.
See also: CLCT's timely pivot in China
The floating portion of loans, primarily within offshore fundings, will continue to see escalations in FY2024.
Has sentiment turned?
CLCT’s pure-play China exposure is split between retail (70%) and business parks and logistics (30%).
Consumer sentiment looks to be ahead of business sentiment, note Wong and Tan.
1HFY2023 shopper traffic and tenant sales rose 32% y-o-y, with approximately half of portfolio malls seeing 2QFY2023 tenant sales exceeding 2QFY2019 levels.
“We suspect that 1HFY2023 reversions of 4.1% is partially boosted by completed asset enhancement initiatives (AEI) at Yuhuating mall in Changsha and we continue to expect AEI completions in 2HFY2023 at both Grand Canyon and Rock Square, in the curation of higher-yielding specialty spaces, to boost retail reversions towards the year-end,” note Wong and Tan.
For the business park segment, supply within the Hangzhou submarket continues to be an ongoing headwind as opposed to the Suzhou submarket. This is in lieu of slower new leases within both the info comm and e-commerce segments, as these were the same trade sectors that saw comparably larger business continuity risk among smaller players across the lockdown.
See also: This is why refinancing of Chinese S-REITs and trusts takes longer
That said, leasing momentum saw significant pick up in 2QFY2023 as opposed to 1QFY2023 in terms of lease finalisation, with a decent pick up in occupancy for the quarter, write the DBS analysts.
Portfolio rejuvenation continues to be underway as CLCT’s looks to achieve its mid-to-long-term target of 40:30:30 asset exposure for the mixed development, retail and new economy segments.
Wong and Tan say divestment will continue to feature strongly within CLCT’s retail segment among older non-core retail assets. “As CLCT is currently at an optimal debt ratio of 40%, equity fundraising can be reconsidered selectively, as share price recovers and trades closer to 1.0x price-to-book (currently 0.76x price-to-book).”
Forex priced in
The onset of a sharper depreciation in the RMB against the SGD has neutralised the q-o-q recovery seen in CLCT’s operational numbers, led by its retail segment, say Wong and Tan.
As the SGD reaches a five-year high against the RMB, the DBS analysts have adjusted their currency conversion assumptions for FY2023/FY2024 to 1 SGD: 5.25 RMB. up from 5.00 RMB.
This serves to reflect the heightened forex risk on DPU in the near term, while normalising back to the five-year mean exchange rate after FY2024.
“Our interest cost assumptions are reflective of the latest rates, at 3.54% as at end-1HFY2023, with a 25 bps y-o-y increase factored into our FY2024 numbers,” add the analysts. “Our adjusted DPU for FY2023/2024 is at 7.54 cents/8.07 cents, down from 8.16 cents/8.73 cents previously, implying a forward yield of 7.2%/7.7% respectively on CLCT’s last close share price of $1.05.”
As at 9.49am, units in CapitaLand China Trust are trading 1 cent lower, or 0.96% down, at $1.03.
