Capitaland China Trust (SGX: AU8U) has seen its share price tumble by over 30% over the past 12 months despite its new investment mandate set in FY2021. FY2022 was a weak year for Capitaland China Trust as its DPU fell by 14% and its overall portfolio seems to be weakening over time. Let’s take a look at how Capitaland China Trust (CCT) has done in FY2023 and whether is there any hope for recovery for investors.
1. Mixed Growth in Gross Revenue and NPI
|Year on Year Difference
|S$364.746 million (-4.8%)
|Net Property Income (NPI)
|S$246.739 million (-2.9%)
Capitaland China Trust (CCT) saw a slight drop in its Gross Revenue and NPI on an SGD basis by 4.8% and 2.9% respectively. Despite this, if we were to compare on an RMB basis, we would actually see a net increase in its Gross Revenue and NPI by 3.3% and 5.3% respectively. It’s good to note that the foreign exchange rate differed significantly from FY2022 to FY2023, increasing from 4.832 to 5.243 (SGD/RMB). This resulted in a weaker SGD basis performance but if we were to look at CCT on an RMB basis since its assets are in RMB, we can still see decent growth for FY2023.
A deeper dive into the results shows us that the key laggards are the logistic park assets. As we can see, 2 of the 4 logistic parks have occupancies in the 60s while we have the other 2 in the high 90s. Fortunately, the business parks and retail assets are performing well which resulted in the Gross Revenue and NPI being up overall in FY2023. Would be great if CCT could resolve this issue or further increase its portfolio assets in the other 2 segments to diversify away from the weak logistic parks.
2. Weaker Distributable Income and DPU
|Year on Year Difference
|S$113.863 million (-9.4%)
|Distribution Per Unit (DPU)
|6.74 cents (-10.1%)
Similarly, the Distributable Income and DPU took a hit as a result of the Gross Revenue and NPI being down on an SGD basis. On top of the weaker foreign exchange rate, CCT saw a net decrease in its Distributable Income and DPU due to higher net finance costs which come from a higher cost of debt. CCT’s net finance costs increased from S$56.23m to S$66.671m, representing an 18.6% increase.
3. Stabilizing but Deteoriating Balance Sheet
|As at 31 Dec 2023
|As at 31 Dec 2022
|Average Cost of Debt
When we dive into CCT’s balance sheet, we can see that its aggregate leverage has increased further from 39.6% to 41.5%. The high leverage will hinder growth opportunities for CCT as this limits the debt headroom available. This also means that if CCT does make any large acquisitions, it will likely be funded through a mixture of debt and Equity Fundraising (EFR).
We can also see that the interest coverage ratio fell from 3.6x to 3.1x, which is bad but it is still above the minimum of 2.5x should a REIT choose to leverage up to 50%. CCT has also increased its cost of debt drastically from 2.97% to 3.57% as it rebalances its % of fixed-rate debts from 71% to 82%. As a result of this allocation, CCT’s Distributable Income stands to see a net increase of S$1.2m or a reduction of S$1.5m p.a. from the impact on interest expense, assuming a 0.5% increase/decrease in the variable rate. It is good to note that there is a variance in the net gain/reduction as there is a mixture of SGD and RMB debt (80% – 20%) in CCT’s portfolio.
4. Growth Potential
As mentioned above, the logistics park segment is a burden on CCT’s overall portfolio. It would be beneficial if the management handled this either by placing more emphasis on business parks and retail assets or by improving the tenancy and occupancy rate in the logistic parks. On top of this, with the updated investment mandate since FY2021, they can acquire not just retail malls but also, office and industrial properties. Not to mention, they can also acquire across Hong Kong and Macau as well, not restricted to just China assets. This huge change widens CCT’s range of possible acquisitions, especially from their sponsor, Capitaland.
Capitaland China Trust can leverage a much bigger pipeline from its Sponsor, with more than 80 assets that could be pipelined into CCT just in China alone, not adding in assets that are in Macau and Hong Kong. This definitely presents a huge upside for CCT but given its current high aggregate leverage, investors might need to get their pockets ready in the case of an EFR
As we can see from the FY2023 Results of Capitaland China Trust, it was a very mixed set of results. Even though the Gross Revenue and NPI improved on an RMB basis, the net Distributable Income and DPU still fell significantly. Although factors such as foreign exchange rates or interest rates cannot be controlled by the REIT, it is important that the management proactively improves the REIT. One good note is that the REIT has a high % of fixed-rate debts which means that moving forward, the finance expense will be more predictable.
Based on its last close of S$0.835, Capitaland China Trust is currently valued at a 0.708 Price/Book ratio with a Trailing Twelve Month (TTM) yield of 8.07%. This is pretty attractive and the yield does offer a big margin of safety for investors while waiting for the REIT to recover.
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