Is CapitaLand Retail China Trust (SGX: AU8U) Share Price at S$1.50 Considered a Steal?
 
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Is CapitaLand Retail China Trust (SGX: AU8U) Share Price at S$1.50 Considered a Steal?

Sudhan P
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CapitaLand Retail China Trust‘s (SGX: AU8U) share price (technically known as unit price for REITs) fell around 11% since hitting a 2020-peak of $1.69. At the time of writing, its units are selling at S$1.50 each. 

With the fall in unit price, does CapitaLand Retail China Trust present an investment opportunity for those with a long-term view?

Let’s explore using my 10-step guide to pick the best Singapore REITs.

How to pick the best REITs

As a summary, here are the 10 steps I use to pick the best Singapore REITs:

  1. Growth in Gross Revenue and Net Property Income
  2. Growth in Distribution Per Unit
  3. Property Yield of Between 5% and 9%
  4. Gearing Ratio of Below 40%
  5. Interest Coverage Ratio of Above 5x
  6. Healthy Portfolio Occupancy Rate
  7. Positive Rental Reversions
  8. Presence of Growth Prospects
  9. Acceptable Price-to-Book Ratio
  10. Distribution Yield of Above 5%

Business Background

Before we analyse CapitaLand Retail China Trust, let’s explore what its business is about.

CapitaLand Retail China Trust is Singapore’s first and largest China shopping mall REIT with a portfolio of 14 retail malls. The REIT’s sponsored by property giant CapitaLand Limited (SGX: C31)

CapitaLand Retail China Trust portfolio
Source: CapitaLand Retail China Trust earnings presentation

According to the REIT, its properties are located in densely populated areas that are well-connected to public transport nodes.

The shopping centres are also positioned as one-stop family-oriented destinations having a wide range of lifestyle offerings that cater to varied consumer preferences.

CapitaLand Retail China Trust’s portfolio consists of a diverse mix of more than 2,400 leases, including brands such as UNIQLO, Xiaomi, ZARA, Nike, Sephora, and Starbucks.

1. Gross Revenue and Net Property Income (NPI) Check

Check for: Increasing gross revenue and NPI

First off, let’s take a look at how CapitaLand Retail China Trust’s gross revenue and NPI have performed over the years. The REIT has a 31 December year-end.

From FY2015 to FY2019, the REIT’s key metrics have grown overall, as seen from the table below:

 FY2015FY2016FY2017FY2018FY2019Compound Annual Growth Rate (CAGR)
Gross revenue
(S$' million)
220.3214.4229.2222.7238.22.0%
Net property income
(S$' million)
141.1139.7149.2147.4165.44.1%

CapitaLand Retail China Trust’s gross revenue grew by 2% per annum while its NPI improved by 4% annually in the past five financial years.

For FY2019, gross revenue increased by 6.9% year-on-year largely due to maiden contributions from newly-acquired CapitaMall Xuefu, CapitaMall Yuhuating and CapitaMall Aidemengdun, and rental growth from the REIT’s multi-tenanted malls. The three malls were acquired on 30 August 2019.

Verdict: Pass

2. Distribution Per Unit (DPU) Check

Check for: Increasing DPU

Despite the overall increase in gross revenue and NPI, DPU has failed to step up from FY2015 to FY2019.

 FY2015FY2016FY2017FY2018FY2019CAGR
Distribution per unit (Singapore cents)
10.6010.0510.1010.229.90-1.7%

FY2019 DPU decline could specifically be due to timing differences.

For the year, CapitaLand Retail China Trust undertook equity fundraising to acquire CapitaMall Xuefu, CapitaMall Yuhuating and CapitaMall Aidemengdun. That contributed to a higher number of outstanding units as compared to FY2018. This, coupled with the full effect of the new acquisitions’ contributions not kicking in yet, could have dragged down DPU. 

Verdict: Fail

3. Property Yield Check 

Check for: Property yield of between 5% and 9%

For FY2019, CapitaLand Retail China Trust had an NPI of S$165.4 million and a portfolio value of S$3.2 billion. This gives a property yield of 5.2%.

Verdict: Pass

4. Gearing Ratio Check

Check for: Gearing ratio below 40%

CapitaLand Retail China Trust’s gearing ratio, as of 31 December 2019, was below 40%; it stood at 36.7% to be exact.

At the end of September 2019, CapitaLand Retail China Trust’s gearing ratio was higher at 37.2%. So, the REIT’s balance sheet strengthened even further during the latest period.

Verdict: Pass

5. Interest Coverage Ratio Check

Check for: Interest coverage ratio above 5 times

CapitaLand Retail China Trust’s interest cover was exactly 5 times, at the end of 2019. The latest figure is an improvement from that of 30 September 2019, which stood at 4.9x.

Verdict: Pass

6. Portfolio Occupancy Rate Check

Check for: Healthy portfolio occupancy rate

CapitaLand Retail China Trust’s portfolio occupancy rate remained stable at 96.7%, as of 31 December 2019.

CapitaLand Retail China Trust portfolio occupancy rate
Source: CapitaLand Retail China Trust earnings presentation

CapitaLand Retail China Trust’s healthy occupancy rate, despite the proliferation of e-commerce in China, is a testament to its strong business. 

Verdict: Pass

7. Rental Reversion Check

Check for: Positive rental reversions

In terms of rental reversion, CapitaLand Retail China Trust’s portfolio rental for FY2019 rose 6.4% as compared to the previous rental rate.

CapitaLand Retail China Trust rental reversion
Source: CapitaLand Retail China Trust earnings presentation

Even though the overall rental reversion is positive, CapitaMall Minzhongleyuan posted a rental reversion of -14.9%. This figure is lower than that in FY2018, which stood at -9.9%.

Coupled with the falling occupancy rate at the mall (seen under point 6), CapitaMall Minzhongleyuan’s performance is concerning.

CapitaMall Minzhongleyuan is located in Wuhan, which is the epicentre of the novel coronavirus outbreak (more on that later).

Having said that, the mall only contributed around 1.5% of FY2019 gross revenue, so its impact on the overall portfolio should be minimal.

Verdict: Pass

8. Growth Prospects Check

In light of the novel coronavirus situation in China, CapitaLand Retail China Trust’s manager said the following in its FY2019 earnings release (emphasis is mine):

“With the developing Novel Coronavirus condition in China, we are actively taking measures to manage the situation with guidance from the local authorities. To date, we are encouraged by the series of measures taken by the government to decisively contain the spread of the virus and increased efforts to stabilise the economy. While we expect some short-term impact, we remain positive on China’s long-term fundamentals.”

CapitaMall Minzhongleyuan in Wuhan is closed and will re-open when the local conditions allow.

The other 12 operational malls located in various Chinese cities are operating shorter hours, in line with local government guidelines.

CapitaLand Retail China Trust’s manager expects a short-term impact on shopper traffic and tenants’ sales due to the novel coronavirus outbreak.

However, over the long-term, it’s positive on the country’s growth. 

China’s rising middle class provides clear tailwinds for CapitaLand Retail China Trust.

From 2008 to 2018, China’s total retail sales grew 12.7% per annum while per capita disposable income rose 9.5% on an annualised basis.

I feel the rise in disposable income will continue in the years to come, benefitting CapitaLand Retail China Trust as a result. 

China growth - CapitaLand Retail China Trust
Source: CapitaLand Retail China Trust presentation

The following shows CapitaLand Retail China Trust’s growth strategy over the long-term:

CapitaLand Retail China Trust growth plans
Source: CapitaLand Retail China Trust earnings presentation

In line with its growth strategy, CapitaLand Retail China Trust is creating value by acquiring new malls.

The latest acquisition was Yuquan Mall bought in December 2019. The mall is expected to start operations by the end of 2020.

On top of inorganic growth for CapitaLand Retail China Trust, there’s organic growth as well — majority of CapitaLand Retail China Trust’s leases for anchor and mini anchor tenants have an annual step-up in the base rent. 

Overall, I’m optimistic about CapitaLand Retail China Trust’s growth prospects.

Verdict: Pass

9. Price-to-Book Ratio Check

Check for: Acceptable price-to-book ratio 

At CapitaLand Retail China Trust’s unit price of S$1.50, it is valued at a PB ratio of 0.97x.

Over the past five years, its average PB ratio stood at 0.96x. 

Therefore, CapitaLand Retail China Trust is fairly valued at its current unit price of S$1.50, and that’s acceptable in my opinion.

Verdict: Pass 

10. Distribution Yield Check

Check for: Distribution yield to be above 5% 

At CapitaLand Retail China Trust’s unit price of S$1.50, it has a distribution yield of 6.6%, which is above 5%. 

Verdict: Pass

The Final Verdict

CapitaLand Retail China Trust has a final score of 9/10.

CapitaLand Retail China Trust has strong fundamentals, and that is shown by its near-full score. I especially like its strong portfolio occupancy rate and the tailwinds in China’s retail industry. 

However, even though CapitaLand Retail China Trust passes most of the criteria, the falling DPU puts me on the sidelines for now.

I’ll be closely monitoring the REIT to see if the DPU-situation improves. 

Therefore, I’m placing CapitaLand Retail China Trust on my watchlist for now. 

Want To Leave Your Thoughts on CapitaLand Retail China Trust?

Why not check our Seedly Community and drop your question or analysis on CapitaLand Retail China Trust there.

Stock Discussion on CapitaLand Retail China Trust

Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. ​Readers should always do their own due diligence and consider their financial goals before investing in any stock. 

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About Sudhan P
It isn't fair competition when only one company in the world makes Monopoly. But I love investing in monopolies. Before joining the Seedly hood, I had the chance to co-author a Singapore-themed investment book – "Invest Lah! The Average Joe's Guide To Investing" – and work at The Motley Fool Singapore as an analyst.
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