C-REIT Participation And Retail Upgrades Will Unlock Future Value

Key Takeaways

• Strategic participation in C-REIT and retail upgrades could unlock asset value, boost foot traffic, and enhance revenue growth.
  
• Renminbi loans and low-interest bonds improve financial flexibility, reduce Forex risk and financing costs, supporting net margins.
  
• Declining revenues, increased gearing ratio, and currency volatility raise financial stability concerns, with pressures on occupancy and rental growth affecting future earnings.

Catalysts

CapitaLand China Trust (CLCT) is Singapore’s largest China-focused real estate investment trust (REIT).

• Participation in the CapitaLand Commercial C-REIT is seen as a strategic opportunity to unlock value from merchant assets and provide potential equity upside, likely impacting future earnings positively.
  
• The transition to a higher percentage of renminbi-denominated loans aims to improve the company's financial flexibility and reduce foreign exchange risk, potentially leading to better net margins.
  
• The upgrading of supermarkets and introduction of new retail concepts, such as 7Fresh and the DT-X concept, are expected to drive foot traffic and sales, enhancing revenue growth in the retail segment.
  
• The successful issuance of a CNY 600 million bond at a lower interest rate of 2.88% compared to previous bonds will reduce financing costs and support earnings growth.
  
• High occupancy rates and positive rental reversions in logistics parks, driven by robust domestic distribution, are expected to support future revenue increases.

CapitaLand China Trust Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming CapitaLand China Trust's revenue will decrease by 1.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from -5.3% today to 27.0% in 3 years time.
• Analysts expect earnings to reach SGD 89.1 million (and earnings per share of SGD 0.05) by about May 2028, up from SGD -18.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.1x on those 2028 earnings, up from -66.5x today. This future PE is greater than the current PE for the SG Retail REITs industry at 16.9x.
• Analysts expect the number of shares outstanding to grow by 0.94% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.78%, as per the Simply Wall St company report.

CapitaLand China Trust Future Earnings Per Share Growth

Risks

• Gross revenue and net property income have both declined compared to the previous year, with specific weaknesses in the retail and business park segments, potentially affecting earnings.
  
• There's a notable drop in occupancy rates and revenues in some segments, particularly business parks, due to tenant pre-terminations and market oversupply, which could pressure net margins.
  
• The company's gearing ratio has increased to 42.6%, driven by weaker revenue and currency fluctuations, potentially impacting financial stability and increasing interest expenses.
  
• The financial performance is exposed to volatility in the RMB exchange rate, which could further affect reported earnings and cash flow.
  
• While retail occupancy remains high, rental reversions excluding AEI leases were slightly negative, suggesting underlying weaknesses in rent growth across key segments, which could pressure future revenue growth.

Valuation

• The analysts have a consensus price target of SGD0.817 for CapitaLand China Trust based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SGD330.6 million, earnings will come to SGD89.1 million, and it would be trading on a PE ratio of 21.1x, assuming you use a discount rate of 8.8%.
  
• Given the current share price of SGD0.69, the analyst price target of SGD0.82 is 15.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.