2020 CapitaLand Retail China Trust (SGX: AU8U) AGM Highlights

CapitaLand Retail China Trust or CRCT (SGX: AU8U) is a pure-play retail REIT with its properties located entirely in China spread over nine cities.

It derives about 95% of its net property income (NPI) from its properties located in Tier 1 and 2 Chinese cities.

CRCT also has a well-diversified tenant base across more than 14 trade sectors.

CRCT’s shareholders are naturally concerned about the REIT’s outlook given that the COVID-19 pandemic originated in Wuhan, China before spreading throughout the country.

This sent the entire country into lockdown and ghost towns emerged.

However, as restrictions are being gradually lifted in China, I was interested to see if CRCT has recovered as well and how they are dealing with the slowdown in retail traffic.

Having attended the AGM, I am personally quite bullish about CRCT’s medium-term prospects and believe they are well-placed to tide through this crisis.

So here are 5 things I learned from CRCT’s 2020 AGM.

1. CRCT Gross Revenue and Net Property Income Growth

In FY2019, CRCT’s gross revenue and NPI increased by 10.1% Year on Year (YoY) to RMB1.2 billion and 15.5% YoY to RMB835.0 million respectively.

The increase was mainly due to stronger property performance and strong rental growth of the core multi-tenanted malls and new contributions from CapitaMall Xuefu, CapitaMall Yuhuating and CapitaMall Aidemengdun, which were acquired last year in August.

2. CRCT’s Prudent Management of Its Finances

CRCT’s gearing ratio stands at a healthy 36.7%.

Though relatively high compared to other SGX-listed retail REITs, this is well below the regulatory gearing ratio limit of 50%.

This gives CRCT sufficient debt headroom (S$1.2 billion) to acquire properties and conduct asset enhancement initiatives to grow the REIT.

In line with its hedging policy, CRCT hedges about 80% of its total debt on fixed rates.

This ensures CRCT’s debt amount does not balloon in case interest rates rise. However, as we foresee a low-interest-rate environment over the next few years due to COVID-19; I’m not sure if CRCT has ‘over-hedged’ its debt.

CRCT also has a well-distributed debt maturity profile with about 12-21% of its debt maturing each financial year from 2020 to 2025.

Taking advantage of low-interest rates, CRCT refinanced S$150 million (or 64%) of its loans maturing in 2020 that will now be due in 2026.

3. CRCT Might Benefit From Stimulus Packages From the Chinese Government

In China’s annual political event Two Sessions held in May 2020, Chinese premier Li Keqiang announced a fiscal stimulus package of around RMB3.6 trillion (S$720 billion) to lead China’s economic recovery following the COVID-19 pandemic.

Tax cuts are also expected to lower the business tax burden by 2.5 trillion yuan (S$500 billion).

The pro-business, pro-consumption stimulus together with the issuance of digital coupons to encourage consumption would probably see the improvement of CRCT’s retail performance.

4. CRCT’s Malls Gradual Recovery After Easing of COVID-19 Restrictions in China

CRCT’s malls are gradually recovering following the easing of COVID-19 restriction measures in China.

CRCT CEO Tan Tze Wooi mentioned that all of CRCT’s malls have reopened from 2 April 2020 and that its malls have reverted to normal operating hours, barring regulatory requirements.

Ninety-four per cent of CRCT’s stores have resumed operations — the remaining 6% of stores that belong to the education, entertainment and leisure sectors remained closed as mandated by the government.

As seen from the charts below, CRCT malls’ shopper traffic and tenant sales have gradually picked up since travel restrictions have eased in China in February.

However, as at May 2020, shopper traffic and tenant sales at CRCT’s malls have yet to return to pre-pandemic levels.

5. CRCT Is Leveraging on Digital Capabilities to Attract More Retailers to Its Platform

CapitaStar is CRCT’s e-commerce platform with more than 1,100 Chinese retailers onboard the platform, with another 3,000 retailers in the pipeline.

Digital platforms would allow the collection and analysis of consumer data through data analytics, allowing CapitaStar to provide more targeted suggestions to its consumers.

Through CapitaStar, CRCT can also ride on the trend of e-commerce growth in China, which has accelerated due to the COVID-19 pandemic.

The Fifth Perspective

From its pre-pandemic high of S$1.69, CRCT’s share price has partly recovered to S$1.28 (as at 18 July 2020).

Based on its share price, its dividend yield currently stands at 7.73 per cent.

While the yield is attractive, investors must keep abreast with the COVID-19 situation in China and its impact on the retail sector there.

As long as CRCT is able to keep its malls open and see a gradual improvement in shopper traffic to pre-pandemic levels, CRCT’s NPI and distribution per unit (DPU) is likely to remain sustainable in the near term.

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