CapitaLand China Trust - DBS Research 2022-11-01: Exiting The Peak Of Lockdowns

• See CapitaLand China Trust's announcement dated 31 Oct 2022 for its 3Q22 operational update:
  • CapitaLand China Trust reported 9M22 gross revenue up 7.0% y-o-y to RMB1,429m. 9M22 net property income rose 7.5% y-o-y to RMB970.8m. This is due to incremental contributions from the business park and logistics park segments acquired earlier in 1H21.
  • We recap that CapitaLand China Trust's 1H22 DPU at 4.32 cents (including income retained of S$3.6m), is in line with our full-year estimates.

Completion of CapitaMall Wangjing’s AEI a boost to reversionary rents this quarter

• 3Q22 shopper traffic rose 38% q-o-q while tenant sales rose a corresponding 34% q-o-q, following the exit of lockdowns in 1H22. On a year-to-date basis, shopper traffic declined 17% y-o-y while tenant sales declined 8.2% y-o-y with the peak impact of lockdowns felt in 1H22.
• Retail occupancy saw a 40bps decline q-o-q to 96.7%. This quarter was the first quarter of positive reversion since the start of the pandemic at +4.9%. We understand that reversionary rents saw an uplift from the completion of CapitaMall Wangjing’s AEI work.
• CapitaLand China Trust recovered ~7,100 sqm of space within CapitaMall Wangjing from an anchor department store tenant, or ~16% of the mall’s total NLA. The space was released to 70 new mini-tenants, of which three-thirds are new-to-market concepts, and saw a sharp increase in shopper interest with a hike in traffic (+26% y-o-y) and tenant sales (+55% y-o-y) in its first week of opening.
• The AEI attained more than a 20% return on investment, with ~140% rental reversion post AEI, and a > ~20% increase in passing rent at the mall, based on our calculation.
• CapitaLand China Trust will be expecting a similarly higher return on investment at Yuhuating, which is undergoing AEI of a similar nature as Wangjing mall, with completion by 1Q23.
• Incremental income from AEI completion at both Wangjing Mall and Yuhuating will pose as upsides to our retail income in the coming quarters – which we have priced in.

New economy segment: Modest reversionary rents maintained

• New economy segment saw a +5.6% reversion, maintaining the reversionary momentum that we saw last quarter (1H22 BP/Logistics reversions: +6.4%/+6.5%). This was driven by strong demand from the engineering, electronics, ICT, and biomedical science sectors.
• New economy occupancy declined 40bps q-o-q for both the business park segment and logistics park segment to 94.3% and 96.6%, respectively.

Increasing proportion of onshore RMB-denominated debt

• CapitaLand China Trust's gearing rose 70bps in the quarter to 39.3% as at 30 Sep 22. Average cost of debt rose 10 bps to 2.81%, while adjusted interest cover stood at 4.1x. Every 10 bps increase in interest expenses will result in a S$0.6m impact to CapitaLand China Trust's bottom line.
• Approximately 71% of CapitaLand China Trust's debt is fixed, with 16% of debt sourced onshore and 77% of debt from off-shore S$-denominated facilities. A long-term goal would be to increase onshore: offshore debt towards 30:70.
• Average debt maturity rose 3.5 years from 3.1 years in 1H22, with 15.4% and 16.2% of CapitaLand China Trust’s loan book up for renewal in FY23/ FY24.

CapitaLand China Trust - Valuation & Recommendation

• Maintain BUY recommendation on CapitaLand China Trust with lower target price of S$1.45 (previously S$1.55).
• We increased our interest rate forecast assumptions for CapitaLand China Trust to factor in an 60bps/80bps hike in the average cost of debt for FY23/FY24, while adjusting our risk-free rate to 3.5%.
• Our DPU forecast for CapitaLand China Trust in FY23/FY24 has been reduced to 8.96/9.33 cents for FY23/FY24 due to higher financial expenses and higher vacancies priced in for smaller underperforming retail malls. Revised DPU translates to FY23/FY24 yield of 9.1%/9.5%.