DBS Group Research’s Geraldine Wong and Derek Tan and OCBC Investment Research’s (OIR) analyst Ada Lim have maintained their “buy” calls on CapitaLand China Trust AU8U (CLCT) while both lowering their target prices to 95 cents and 86 cents respectively. This is following a diverging performance between retail and new economy assets, with new economy assets offering a weaker performance as compared to the retail sector.
Despite Lim’s confidence in CLCT benefiting from China’s reopening and pro-growth policies in the longer term, the analyst anticipates this recovery to play out over multiple years.
With the “weaker” performance from its new economy assets coupled with the lack of income contribution from the divested Shuangjing and CapitaMall Qibao, CLCT’s 1QFY2024 gross revenue and NPI dropped by 1.6% and 7.7% y-o-y to RMB468.1 million (87.86 million) and RMB313.1 million (58.77 million) respectively.
In contrast, CLCT’s retail sector has remained “the shining star” in its portfolio, as noted by Wong and Tan. Excluding the contribution of the divested malls, gross revenue has risen to 5.7% y-o-y with shopper traffic and tenant sales in 1QFY2024 rising to 17.4% and 12.6% y-o-y respectively.
Despite a slight decrease in retail occupancies from 98.2% to 97.7% q-o-q following frictional vacancies, retail occupancies remain considerably “healthy”.
However, the underperformance of new economy assets will likely be sustained, with both the business parks and logistics segments continuing to see a downward momentum in occupancies, dropping to 90.2% and 67.6%, respectively.
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OIR’s Lim notes that while Shanghai Fengxian is currently vacant due to the business closure of former tenants, management anticipates that the asset will continue to be vacant for three to six months which is reliant on capex requirements of new tenants.
Additionally, the analysts from DBS Group Research forecasts that divestment will remain a “key strategy” for CLCT to rejuvenate their portfolio.
"Divestment will continue to feature strongly within the retail segment, with a focus on older, non-core retail assets,” notes Wong and Tan.
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In their opinion, divestment makes “financial sense” as contributions can be utilised in debt repayment or potential share buybacks.
Given the contributions from the divested malls, this helped to pare down more expensive SGD-denominated debt and improved CLCT’s gearing from 41.5% to 40.8%.
Together with the increase in CNT-denominated loans which landed at 23% this quarter, the average cost of debt has decreased by 10 basis points to 3.47%, with 75% of debt on fixed rates.
“We turn more conservative on our estimates given persistent weakness and significant negative rental reversions for the new economy assets, as well as uncertainty surrounding Shanghai Fengxian,” explains Lim.
As at 2.45pm, shares in CLCT are trading at an unchanged 67 cents.
