Sunday, 9 August 2020

CapitaLand Retail China Trust (CRCT) – Why it is a Dividend and Growth Gem & Why It Is Greatly Undervalued Compared to the Rest of SGX REITs and Trusts?

CapitaLand Retail China Trust (CRCT) – Stock Code: AU8U



CRCT just posted their quarterly result recently with a DPU of 3.02 Singapore cents for half year ended 30 June. Due to Covid-19, the DPU for the first half of the year reported is down ~40 per cent from a year ago -DPU of 5.13 cents (after divestment gain) and 5.03 cents (before divestment gain). Revenue fell 7.8 per cent in 1H 2020 compared to last year. The decline is due mostly to a rental relief that was extended to tenants due to Covid-19 situation, and the absence of contribution from CapitaMall Erqi, following the pre-termination of lease from its anchor tenant in Q4 2019 and the completion of divestment in May 2020.

ALL TIME LOW SHARE PRICE

CRCT’s share price is currently at all-time low of SGD1.14. Previous lows recorded are only during the 2009 GFC and March Covid-19 Crash. The 52 weeks high is SGD1.7, and the low is SGD0.92 during March.

In my opinion, CRCT current share price greatly under-valued. The explanation as follow.  

ATTRACTIVE P/BV COMPARISONS

Thanks to blogger, Vince of REIT-TIREMENT blog, who created a dashboard (click here) for SG REITs or Trusts, I have a much easier time finding and comparing CRCT’s financial metric to others.

CRCT’s Price to Book value is very attractive at 0.7.

Many will argue that there are also many REITs or Trusts in SGX that is trading at a lower P/BV. Ok, let’s take a look at all of them.

Those with lower P/BV are:
  • Hospitality – ARAHT 0.45, ART 0.7, CDLHT 0.65, EHT 0.16, FEHT 0.58, FHT 0.61, OUECT 0.61
  • Healthcare, mainly Indonesia and Singapore – FIRST 0.6
  • Commercial or Industrial, mainly Singapore – OUECT 0.61, SBREIT 0.68
  • Commercial, mainly Japan - MNACT 0.62
  • Retail Indonesia – LMIRT 0.43
  • Retail, China mainly – DRT 0.56
  • Retail, mainly Singapore and Australia – SGREIT 0.56, SUNTEC REIT 0.64


It is evident that the REITs or Trusts with much attractive P/BV compare to CRCT are mostly from Hospitality (Hotel) sector. If you think travel will return to pre-Covid level in a very short time, then go ahead with your bet. Personally, I think it will take a few years to return to pre-Covid levels.

Next, Lippo and FIRST are with businesses concentrated in Indonesia. The country is struggling to contain the Covid pandemic and I doubt businesses in Indonesia will return to usual in a short time.

Then there are REITs or Trusts of Retail, Commercial and Industrial with assets mainly concentrated in Singapore, Australia, Japan etc.  Comparing to China, I feel that Singapore, Australia and Japan will see slower growth potential due to the developed status of these three countries. Furthermore, I feel that Covid-19 crisis is handing a longer-lasting harsher punishment to the economies of Singapore, Australia and Japan, as compared to China.

Lastly, there is DRT, or Dasin Retail REIT. If you have more trust in Zhongshan Dasin as a sponsor compared to CapitaLand, then you can go ahead to buy DRT over CRCT.

ATTRACTIVE YIELD

Based on 1H 2020 DPU of 3.02 cents, dividend is 5.3 per cent (i.e. [ (3.02 x 2) / 114 ] * 100 per cent)
2019 FY DPU is 9.8 cents, giving a dividend of 8.6 per cent.

China has been greatest hit by Covid-19 in the 1Q of 2020. Since then, traffic and sales in the China retail space has improved, thanks to the vigilant handling of the pandemic by the Chinese government to curb the spread of the virus.   Nonetheless, I doubt business will return to pre-Covid levels in the short time. That said, I am very optimistic that 2H2020 results will definitely better 1H2020.

For instance, if we consider a 20 per cent DPU drop in 2H20 yoy, rather than the 40 per cent in 1H20, then yield is forecasted to be approx. 7 per cent i.e. [ (8 / 114 ] * 100 per cent.

Hence, I am very confident that CRCT will see a yield of 6-7 per cent at SGD1.14 in 2H2020 and beyond, unless there is a major second wave outbreak in China.

Furthermore, CRCT in their latest announcement, had committed to distribute at least 90% of distributable income in financial year, barring unforeseen circumstances. This is unlike many other SG REITs or Trusts who had already decided to cut their distribution.

CONCLUSION

Every now and then, I will always try to keep up to speed with my China friends. Most of them claimed that China is now the one of the safest countries as far as Covid spread is concerned. See also my earlier blog.


Last month, there is a sudden outbreak at Beijing Xinfadi wholesale market, but the Chinese government reacted quickly and the possible second-wave outbreak soon abated. It is evident that the citizens hold high level of satisfaction and trust to their government. And this will definitely make tackling the second-wave (if there is) much easier, because mutual trust enhances citizen-government co-operation.

On the contrary, I seriously doubt the economies of Singapore, Indonesia or Japan will return to pre-Covid growth faster than China.

The low share price now is probably due to the US-China trade tension. I agree that US-China tension is a concern. However, CRCT business are all local retail malls with local consumption as the greatest source of revenue. The assets are also strategically located in in densely populated areas with good connectivity to public transport i.e. >90% of our assets are in Tier 1 and 2 cites.

Hence, I am convinced that business will return to normal, faster than other sectors such as Hospitality, Commercial and Industrial.

In addition, CRCT also has low leverage of 35.8 per cent (as of End 2019), giving it headroom to take on more debts (i.e. up to 50%) for growth. Portfolio occupancy is resilient at 95.4 per cent as of End of 1Q 2020 and WALE is 3.7 years NLA, on the basis of committed leases as at 31 Mar 2020 and excludes CapitaMall Saihan as the mall will be divested in 2H 2020, and CapitaMall Erqi as the anchor tenant has exited. CRCT also have access to strong pipeline of high quality assets held under CapitaLand Group.

I see CRCT as both a growth and dividend gem. With the current price, I will definitely add more of the stocks to what I already own.



This section is added after a very good question from reader “B”. See 1st comment below. 

The leasehold status of CRCT is a common question asked during several AGM over the years. The latest Q and A is on 24 June 2020. See below. You can refer to AGM here.

Annual General Meeting to be held on 24 June 2020 Responses to Substantial and Relevant Questions

Q16 from AGM: Can you explain more about the leasehold terms in China and how CRCT is mitigating this risk?

Answers from CRCT: The tenure of land use rights (LUR tenure) ranges from 40/50 years for commercial use (including use for shopping malls) to 70 years for residential use in China. Valuers in China factor this lease tenure into their valuations of all assets.

As this is part of the business landscape of China, to actively manage this risk, we have been continuously reconstituting and rejuvenating our portfolio by recycling aged assets for newer and quality assets. These can be seen from the divestment of our oldest assets CapitaMall Anzhen, CapitaMall Wuhu, CapitaMall Erqi as well as entering into the bundle deal to divest CapitaMall Saihan and acquire Yuquan Mall (which has a longer balance lease tenure).

At this juncture, the regulatory framework to handle expiring leases for commercial properties is not clearly spelled out and there are not many precedent cases to take reference from. We do note that the government specified that the right to use residential land will be automatically renewed upon the expiration of the contract in the 2007 Property Rights Law. We will continue to monitor this space and respond accordingly when new developments arise.

ROLF’S INPUT ON CRCT LEASEHOLD PROPERTIES IN CHINA

Frankly, it is not just CRCT that has leasehold (LH) properties. In fact, many REITs in SGX has properties that are LH. Most industrial REITs are also LH with 30 or 60 years. Also, for e.g., when we buy a condo, of course Freehold is better, but it often comes with a heavier price tag. Consider that there are so many LH condos in Singapore, but why are there still buyers? 

End of the day, you just have to factor the valuation versus the remaining lease.

Also one cannot compare China’s LH of 30-40 years duration to Singapore typical 99 years LH status. We need to compare China versus China property which is more accurate. Most commercial leases in China are 40 years, and for most of CRCT bigger assets, the remaining lease is averaging 25 years and above, which in this regard, is considered relatively new assets, and it a good sign for investors. 

Whether the assets will become worthless at the end of the lease, there has been no official announcement made by the Chinese government. However for the residential properties, the government had already signalled the possible renewal in 2007, but the details are not still not clearly spelled out. Most likely the same will be for commercial renewal, with a payment for lease extension. But nobody knows for sure. 

Anyway, I did a table below to compare CRCT and CapitaLand Mall Trust (CMT) ’s assets' market valuation in terms of Price Per Square Feet per annum.


Sources: 2019 Annual Reports of CRCT and CMT


From table above, “Green” highlights are assets from CRCT and “Red” are from CMT. 

The average Market Value SGD per square feet, per annum, whether it is in terms of NLA or GFA does compare closely between CRCT and CMT.

Of course there are many other factors, such as location, traffic volume, ability to convert GFA to more NLA etc, that will affect the Market Value SGD PSF p.a. (NLA). 

Therefore the above table should only be used as reference, and not to be used as an accurate comparisons used for investment returns analysis. 

Moreover, CRCT and CMT are having assets from different countries, which don’t really compare. 





11 comments:

  1. Hi Rolf

    Thanks for sharing.

    What about most of the leasehold assets for Crct (typically Chinese properties) which will run until 2043ish, which is just about 25 years from now? Is that something that they can easily extend and do you know how much if any, the extension will cost them? I'm comparing to see if local properties say, with a longer leasehold number of years but with lower yield compensates better IRR for the Reits.

    ReplyDelete
    Replies
    1. Hi B, thanks for the fantastic question.

      I have updated an additional section to the original article to explain / answer your question.

      Wish you happy holiday.

      Delete
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  2. Thanks for mentioning my blog, I too agree that retail in China has been on the recovery path. For china retail REIT, I rather buy CRCT than Dasin. Dasin distribution is highly financial engineered where strategic investors doesn't receive distribution and slowly decrease.

    ReplyDelete
    Replies
    1. Hi Vince, your effort in your blog and the very useful REIT dashboard definitely worth mentioning to more readers.

      I haven't even heard from Dasin, until I went through your blog dashboard.

      Delete
  3. All capitaland reit are at lower price compare to peak, cmt also a good choice

    ReplyDelete
  4. Hi Vitamincqa, yes, Capitaland or Mapletree are all good reits. Of course, backed by the muscles of Temasek.

    I mentioned CRCT because its P/BV is 0.7, and is very low for non-hospitality reit, non-Indo etc. I explained in my article.

    CMT P/BV is 0.93 which is higher. I must admit that CMT is also attractive, but only if SGP economy will recover faster than China.

    In my article, I did explain why CRCT is more attractive than SGP retail REITs based on:

    1) I think China economy will recover faster than SGP from Covid crisis.

    2) I think China has more growth opportunities due to urbanisation than SGP.

    Of course there CMT is attractive in the sense that assets in SGP is safer than China, as Temasek is in better control.

    The only thing I hate as a Singaporean, is that all our Shopping malls have exorbitant high rental that only profit investors and not doing good to promote SME in SGP.

    In a truly first world country, SMEs need to form the backbone, other than government supported listed company.

    But in SGP, our SMEs are seriously weak, not fault of themselves.

    ReplyDelete
  5. Very interesting, I share the same view as you Rolf, though I made a sizable move towards both CRCT and CMT. Agree with you as well that China will make a strong comeback and recover faster (as compared to the rest of the world) in terms of recovery in the retail sector.

    https://toc.net/2020/08/09/portfolio-refocus-towards-retail-and-hospitality-sector/

    ReplyDelete
    Replies
    1. Hi LyndonM, tks for dropping by. I visited your blog as well and its nice to see so many useful information from your Theory of Constraints blog.

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