Hey there, fellow investors! Welcome back to ‘The Dividend Uncle’, where we break down the latest in REITs and investments. Today, we’re diving deep into CapitaLand China Trust, a REIT that has sparked a lot of interest among our viewers. In fact, I’ve received at least four requests to review this REIT. CapitaLand China Trust is also a significant player in my own portfolio, contributing substantially to my passive income, as highlighted in my previous post.

In this post, we’ll be assessing CapitaLand China Trust using two approaches: first, an outlook on its 3 key business segments, and second, an assessment of the attractiveness of the current market valuation of CapitaLand China Trust.

Before we dive in, I must let you know that this content is for informational and educational purposes only and does not constitute financial advice. The opinions expressed are based on publicly available information and personal analysis, and they are not tailored to your specific financial situation. The REITs and institutions mentioned are cited purely as examples. While I have no affiliations, sponsorships, or financial relationships with any of them, I may personally hold positions in some of the investments discussed. Before making any investment decisions, you are strongly encouraged to consult a licensed financial adviser.

So, let’s get started!

Retail Resilience, Business Parks Stability, and Logistics Challenges

CapitaLand China Trust operates across three key segments: retail, business parks, and logistics parks. Let’s dive into each segment to understand their performance and future outlook.

Retail Malls: Retail makes up a substantial 70% of CapitaLand China Trust’s assets. This segment is performing well, showing recovery with more than 10% tenant sales growth and positive rental reversions. Shopper traffic and tenant sales have grown by 17.4% and 12.6% year-on-year, respectively, indicating strong consumer activity in their malls.

Business Parks: This segment is stable but neutral. Occupancy rates for business parks are at 90.2%, reflecting a steady performance without significant growth or decline.

Logistics Parks: Accounting for about 7% of CapitaLand China Trust’s assets, are struggling. Occupancy rates are low at 67.6%, with negative rental reversions. This segment faces significant challenges due to oversupply and weakened demand, leading to high vacancy rates in logistics properties across China.

Economic Challenges and Market Sentiment

Reports suggest that consumer sentiment in China is weakening, influenced by a sluggish property market and overall economic challenges. However, the retail segment’s focus on essential spending gives me confidence that it will continue to perform well, despite these headwinds. For logistics, the oversupply and weak demand are well-documented. Even the CEO of Mapletree Logistics Trust admitted that these problems will persist for a while. This acknowledgment from a key industry player underscores the persistent challenges facing the logistics sector.

Despite these broader economic challenges, I believe the operational performance of CapitaLand China Trust will remain stable with slight positive movement. This is because retail is the dominant segment of its portfolio and continues to perform well, while the logistics segment is struggling but accounts for only 7% of CapitaLand China Trust’s assets. Therefore, the overall impact on CapitaLand China Trust’s performance is somewhat mitigated by the strength and stability of its retail assets.

Current Valuation and Dividend Yield: Examining Market Projections

To assess whether the current valuation of CapitaLand China Trust has declined to attractive levels, we will look at two methods.

Method 1: Price to Net Asset Value Ratio

The first method involves calculating the price to net asset value ratio while assuming that the valuation of logistics properties is zero. Under this conservative assumption, the Price to Net Asset Value ratio becomes 0.65. This is still significantly lower than the five-year average Price to Net Asset Value ratio of 0.8. Even if we consider that the five-year average Price to Net Asset Value ratio of 0.8 might be too optimistic given the current economic outlook in China, the disparity suggests that the market could be assigning overly negative projections due to the minor contribution of logistics properties to CapitaLand China Trust’s overall portfolio.

Method 2: Dividend Yield Analysis

The second method is to calculate the dividend yield assuming that the logistics properties contribute zero to the distributable income of the REIT. Under this assumption, the dividend yield drops from 9.8% currently to 8.8%. This is still much higher than most of the blue-chip REITs and significantly above the five-year average dividend yield of CapitaLand China Trust, which stands at 6.9%. This suggests that, even with a more conservative view on the logistics segment, CapitaLand China Trust’s dividend yield remains compellingly high, reflecting its attractive income-generating potential compared to its peers.

The Dividend Uncle’s Take

Our analysis suggests that the market might be overly conservative on CapitaLand China Trust. In addition, there are a couple of positive factors that need to be considered.

First, the exchange rate risk has shown signs of improvement. The RMB has been relatively stable compared to the SGD over the past one year, which means that the decline in net property income due to adverse exchange rate movements may lessen in the Q2 2024 financial reporting.

Second, the interest rate risk is also becoming more favorable. As management continues to refinance their more expensive SGD debt into RMB onshore debt which has lower interest rates, the average interest rates may decline, which can help boost distributions. Breaking news while I was creating this video. China has further cut it’s interest rates to support the real economy. We have already seen a decline in average interest rate in Q4 2023 from 3.57% to 3.47% in Q1 2024. This trend may continue as the year progresses. 

However, we must also acknowledge that the risks and poor sentiments surrounding the Chinese economy may persist for a while. The sluggish economic performance, especially in the property market, can continue to impact investor confidence and market performance, even as the REITs market celebrates cuts in interest rates in the US which is expected in September. This is because the key driver for CLCT’s share price decline so far is more China-specific risks rather than interest expenses. 

I don’t see any quick fixes for CapitaLand China Trust’s share price, but will be playing the long game and not selling my holdings. The existing dividend yield, even without the logistics properties, is attractive and is likely to be stable.

That wraps up our deep dive into CapitaLand China Trust. If you found this post helpful, please give it a thumbs up, share it with fellow investors, and don’t forget to keep a lookout for the latest posts on this website and subscribe to my YouTube channel for more insights. Let me know in the comments what you think about CapitaLand China Trust’s prospects. Until next time, happy investing!