FY23 results – Performance dragged down by interest and logistics assets

• CLCT reported full-year FY23 revenue of RMB1,912.5m (+3.3% y-o-y) and NPI of RMB1,293.7m (+5.3% y-o-y).
• Distributable income for the year declined 9.4% y-o-y to S$113.8m due to the impact of higher interest cost and forex translation.
• Correspondingly, FY23 DPU of 6.74Scts (-10% y-o-y) was below our estimates of 7.14Scts.
• Retail segment performance: Occupancy rose 0.7ppt q-o-q to 98.2%, with flat reversions of +0.2%, supported by a 42% y-o-y increase in same-store tenant sales and 46% y-o-y increase in traffic flow.
• Business park performance was stable with a 0.2ppt improvement q-o-q to 91.0% with positive reversions of +1.6%.
• The logistics segment (c.7% of AUM exposure) saw increasing weakness with reversions of -20.5% with occupancy ending the year at 67.8%.
• Valuation: Portfolio valuation is down 0.9% in local currency terms, primarily led by logistics assets, which saw a y-o-y decline of 4.3%, as opposed to retail (-0.7% y-o-y) and business parks (-0.3% y-o-y).
• Capital management: Gearing ended the year at 41.5% (to see further reduction to c.40% through the recycling of divestment proceeds), and average cost of debt rose 2bps q-o-q to 3.57% with the ICR ratio healthy at 3.3x.

Long-term directive unchanged despite short-term pains in logistics segment. The divestment of Shuangjing mall has successfully de-risked a supermarket tenant within the portfolio, which was also one of CLCT’s top tenants in terms of GRI contribution. While we were wary of tenant default risk in the portfolio, CLCT had shared that tenant default risk has improved over the past year, in comparison to the pandemic years. Short-term pains within the logistics segment may continue to see negative reversions (-15% to -20% reversions) in upcoming renewals within CLCT’s Shanghai and Chengdu logistics assets, heightened by supply-side risk and a general decline in market rents for logistics properties. Fortunately, the logistics segment’s risk is shielded by its relatively small footprint in CLCT’s overall portfolio, at c.7% of AUM, balanced by relatively stable performance of retail and business parks. The long-term directive is still in place despite short-term pain points from the logistics segment. CLCT's long-term goal of an asset class exposure of 40:30:30 within integrated development: retail: new economy is set with the aim of aligning with the overall performance of China.

Right time to explore potential share buyback. Divestment proceeds from Shuangjing mall will be partly used to pay debt to bring gearing down to c.40%. The remaining divestment proceeds can be rechannelled accretive acquisitions or potential share buybacks, which we see as the right move to maintain share price NAV at below book levels (0.6x price-to-book). CLCT’s existing share buyback mandate allows the company to buy back up to 2.5% of total issued units in a single year, or slightly above 41m units and c.S$34m in quantum based on CLCT’s last traded price. 

Maintain BUY with lower TP of S$1.05. We maintain our BUY call on CLCT with revised TP of S$1.05 as we roll forward valuations into the new year. Our numbers reflect the divestment of Shuangjing mall in 1Q24, negative reversions for logistics assets, and lower reversionary assumptions for CLCT’s business park assets in the coming year. Our SGD:RMB exchange rate is maintained at 5.25 for the full year of 2024 and beyond.

Our revised TP for FY24/FY25 comes in at 6.7Scts/6.9Scts, representing a forward yield of 8.0%/8.2% at the current share price levels. We maintain our BUY call with a lower TP of S$1.05, representing a high yield of c.6.5%.