DBS lowers target price to $1.20 for CapitaLand China Trust amid new economy assets showing slower progress

DBS analysts say that CLCT’s new economy segment may now be a portfolio drag; noting the depreciating RMB against SGD.

DBS Group Research analysts have lowered their target price for CapitaLand China Trust Au8u (CLCT) to $1.20 from $1.40 previously, following the REIT’s 3QFY2023 ended Sept 30 results.

This is on the basis that CLCT’s new economy assets are showing slower progress, and a depreciating renminbi (RMB) against the Singapore dollar (SGD), say analysts Geraldine Wong and Derek Tan. That said, Wong and Tan have maintained their “buy” call.

CLCT’s performance continues to be led by its retail segment, as expected, say the analysts. They note that the gross revenue reported for this quarter saw a 1.9% y-o-y decline to RMB478 million ($90.4 million), and higher net property income (NPI) of 1.2% y-o-y to RMB316 million.

In Singapore dollar terms, NPI declined by 8.4% y-o-y, with 9MFY2023 NPI stacking up to about $188 million, behind the analysts’ FY2023 estimates.

“The flat NPI in RMB terms was supported by the stronger performing retail malls which saw portfolio contributions grow 15% y-o-y, partially offsetting the decline in revenue from impending closure of Qibao mall and lower occupancy from the business park segment,” say Wong and Tan.

The analysts note that underlying retail drivers continue to show momentum from 1HFY2023 numbers, which has seen a V-shaped recovery in both traffic footfall and tenant sales. For 3QFY2023, shopper traffic rose 35% y-o-y (led by CLCT’s Beijing malls) and tenant sales recovered to about 107% of its comparable levels in FY2019.

Wong and Tan estimate that retail reversions signed for the quarter were flat and boosted by asset enhancement initiatives (AEIs) completions for the period, especially Rock Square mall and Grand Canyon mall, as occupancy rose 1 percentage point (ppt) q-o-q to 97.8%.

CLCT has secured about 70% of lease expiries in 4QFY2023 by net lettable area (NLA), and operational numbers continue to reflect sluggish sentiment within the new economy asset space, which is similar to other logistics Singapore REITs (S-REITs) with China exposure.

“Hence portfolio vacancies within the new economy and logistics segments may not improve at this juncture, in our view,” the analysts say. “New economy segment which has been a pillar of support through the pandemic years, may now be a portfolio drag with NPI for the period flat y-o-y from a low base in FY2022.”

In addition, one of CLCT’s top retail tenants within the supermarket category has fallen into rental arrears in the past quarter. While CLCT is currently drawing down on rental deposits by the tenants, it will need to find more concrete plans for the lease, say Wong and Tan.

As such, the analysts have cut their distribution per unit (DPU) forecasts for this year, on the basis of a weaker than expected 3QFY2023, whereby most of the topline recovery for this year will be offset by translation losses.

“We have reduced our FY2023 and FY2024 DPUs by 5%-9% to 7.54/8.07 cents to 7.14/7.32 cents. CLCT trades at a forward yields of 8.8%/9.0% on FY2023/FY2024 assumptions,” they say.

As at 2.29pm, units in CLCT are trading 0.5 cents lower or 0.63% down at 78 cents.

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