Supermarket AEIs And Chinese Policies Will Support Retail Recovery

Key Takeaways

• Asset Enhancement Initiatives and government consumption policies are expected to boost retail sales and improve revenue and net property income.
  
• Strategic tenant replacements and cost optimization measures aim to increase occupancy, stabilize income, and improve earnings and net margins.
  
• Declining revenue, weak occupancy, and oversupply issues across sectors hinder CapitaLand China Trust's financial flexibility, impacting earnings, margins, and future growth.

Catalysts

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

• The implementation of Asset Enhancement Initiatives (AEIs) focused on supermarket spaces has shown strong returns, with an ROI of 14%. Future planned AEIs are expected to unlock additional value, potentially improving revenue and net property income (NPI).
  
• The Chinese government's commitment to stimulating domestic consumption, including policies like trade-in programs, consumption vouchers, and increased salaries for civil servants, is anticipated to boost retail sales, positively affecting revenue.
  
• Strategic tenant replacements, such as securing a long-term lease for the previously vacant Shanghai Fengxian logistics asset, are expected to increase portfolio occupancy and stabilize rental income, potentially enhancing earnings.
  
• Cost reduction measures have led to a 7.1% year-on-year decrease in net finance costs, coupled with the issuance of lower-cost renminbi bonds. Continued focus on finance cost optimization is likely to improve net margins.
  
• The planned increase in natural hedging to 50% in 2025 and utilization of more renminbi-denominated financing can reduce currency risk and lower financial expenses, potentially contributing to improved earnings stability.

CapitaLand China Trust Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming CapitaLand China Trust's revenue will grow by 1.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from -5.3% today to 22.6% in 3 years time.
• Analysts expect earnings to reach SGD 81.1 million (and earnings per share of SGD 0.05) by about March 2028, up from SGD -18.1 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting SGD94.4 million in earnings, and the most bearish expecting SGD67.8 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.6x on those 2028 earnings, up from -66.7x today. This future PE is greater than the current PE for the SG Retail REITs industry at 16.4x.
• 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 9.97%, as per the Simply Wall St company report.

CapitaLand China Trust Future Earnings Per Share Growth

Risks

• The revenue and net property income (NPI) have declined, with the portfolio revenue dropping 3.9% and NPI dropping 5.8% due to lower occupancy and rents in business parks and logistics, as well as the discontinuation of a property tax incentive. This negatively impacts earnings.
  
• Challenges in obtaining rental increases due to subdued consumer sentiment have led to slightly negative retail reversions, impacting retail revenue and net margins.
  
• Weakness in the business park and logistics sectors, with lower occupancy and ample supply, has required offering tenant incentives. Negative reversions in business parks and logistics adversely impact net margins and earnings.
  
• The logistics market faces paused demand and oversupply issues, with negative rental reversions more than 20%, affecting revenue stability and future profitability.
  
• The gearing ratio is relatively high at 41.9%, which could limit financial flexibility for share buybacks or new investments, potentially affecting the company's overall earnings and dividend per unit (DPU) growth.

Valuation

• The analysts have a consensus price target of SGD0.812 for CapitaLand China Trust based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SGD0.85, and the most bearish reporting a price target of just SGD0.7.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SGD358.6 million, earnings will come to SGD81.1 million, and it would be trading on a PE ratio of 23.6x, assuming you use a discount rate of 10.0%.
• Given the current share price of SGD0.7, the analyst price target of SGD0.81 is 13.8% 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.