DBS Group Research analysts Geraldine Wong and Derek Tan have maintained their “buy” call for CapitaLand China Trust (CLCT) with a lower target price (TP) of $1.45 from $1.55 previously.
Their new TP factors in higher interest rates and a higher risk free rate of 3.5%, and implies a 43% upside.
As China leaves the worst of its lockdowns behind, the analysts believe the markets have not seen the benefit of CLCT’s new economy exposure, which now comprises close to one-third of its portfolio exposure and has boosted its resilience in portfolio earnings in recent quarters.
Wong and Tan note that CLCT’s FY2023 and FY2024 yields are “compelling” at 9.1% and 9.5% on lower distribution per unit (DPU) estimates post China sell-down.
In CLCT’s 3QFY2022 operational update, it reported that 9MFY2022 gross revenue was up 7.0% y-o-y to RMB1.43 billion ($277 million), while 9MFY2022 net property income (NPI) rose 7.5% y-o-y to RMB970.8 million. The analysts attribute this increase to incremental contributions from the business park and logistics park segments acquired earlier in 1HFY2021. They note that DPU in 1HFY2022 at 4.32 cents, and including income retained of $3.6 million, is in line with their full year estimates.
According to them, the worst of China’s lockdowns should be over. “ On a portfolio basis, CLCT’s retail malls were closed for a total of 200 trading days in 2QFY2022, the quarter that saw the most impact to retail operations since the pandemic but have since fully reopened at the beginning of June,” say Wong and Lai. They add that retail sales and footfall saw a similar uptick, recovering 34% and 38% q-o-q respectively.
The way the analysts see it, value extraction will come from the asset enhancement initiative (AEI) completion at Wangjing this quarter, which has seen strong reversions of 140%, and an over 20% increase in passing rents based on their calculations/
Meanwhile, Yuhuating should also help boost reversionary rents within the retail portfolio in the coming quarters, which Wong and Lai estimate to come as a double-digit boost in passing rents for both assets post completion.
Positive reversionary rents within the new economy segment, which has maintained at 5.6%, should also help to compensate rebates and marginally higher vacancies registered within the retail portfolio year-to-date (ytd), they add.
Wong and Lai also deem CLCT’s new economy exposure “overlooked” by the markets. “We
continue to set our eyes on the horizon past China’s current macro headwinds, as CLCT’s asset rejuvenation continues to unfold, expanding its new economy resilience from the current 30% portfolio exposure,” they say.
The analysts add that the dissipation of the current macroeconomic headwinds should help re-rate CLCT’s current price-to-net asset value ratio (P/NAV) of 0.65x to trade closer to its historical mean of 0.98x.
Wong and Lai note that a key risk to their valuation remains the possibility of CLCT’s key exposure cities seeing lockdowns again.
As at 11.20am, units in CLCT were trading 3.5 cents or 3.55% down today, representing a dividend yield of 9.05%.