• CLCT announced the divestment of Shuangjing mall for c.S$159m (NAV of S$143m), representing a c.37% upside to the assets latest valuation
• Master lease tenant at Shuangjing mall has fallen into arrears in the last quarter, contributing c.2% to total GRI, the deal will mean the exit of this tenant from within the portfolio and a de-risk of retail tenant profile
• Proceeds will be recycled to pare down debt (~5% cost) or buy back shares upon completion in 1Q24, which we believe to be overall supportive to share price
• Maintain BUY with current TP of S$1.20, Opportunity window opens for investors looking to re-enter or double down ahead of potential share buy backs (if instituted)

What’s new

• CapitaLand China Trust announced the divestment of CapitaMall Shuangjing for RMB849.2m or S$159.2m.
• The divestment proceeds accrued to CLCT of  S$143.2m will take into account the existing debt on the target SPV level of c.S$14m.
• Agreed transaction price represents a 37% upside to the latest valuation of the mall.
• Divestment cap at 2.8% below in place valuer cap rates for the submarket. 
• Completion of the deal is estimated to be in 1Q24.

Our thoughts

Another IPO asset to leave the portfolio. CLCT continue to deliver ahead of expectations to divest another non-core retail asset within its portfolio. The transaction deal bears close resemblence to some of the older deals executed by the managers, where the divestment of structurally weaker malls were executed at above portfolio valuations. This included Erqi mall (divested at c.21% above latest valuation) and Minzhongleyuan mall (4% above valuation). CapitaLand Shuang Jing mall is one of CLCT’s initial IPO retail malls and one of the older assets in the portfolio having been in operations for more than 19 years, with a shorter land lease tenure remaining of 19 years as compared to newer retail malls injected into the portfolio at 29 years (typical new China retail land lease at 40 years).  

Tenant default de-risked with the divestment of Shuangjing mall. Divestment of Shuangjing mall will also mitigate tenant default risk on an asset level. It was shared that the master lease tenant at Shuangjing mall has fallen into arreas in the latest 3Q operational update. The supermarket tenant in question is one of two master lease anchor tenants at Shuangjing, taking up c.60% of mall NLA, and one of CLCT’s top retail tenant by GRI contribution, contributing c.2% of total gross rental income back in FY2022. The sale of the asset will mean the exit of the master lease tenants within the asset, and de-risk retail tenant profile within the portfolio. 

Proceeds recycled into share buy back come 1Q24. Post the completion of the deal, cash proceeds from the divestment will be recycled into either debt repayment of higher costing debt within the portfolio which is priced in the range of high 4% to 5% or for shares buy back. Current share price level. CLCT’s share price has seen a reversal from the bottom last month, in line with the broader sector. The timing of share buy back will likely follow the completion of the deal in 1Q24. We see an opportunity window for re-entry before the start of share buy backs for investors who are taking a longer-term recovery view for China to ride on the upside from share buy backs. Current share price stands at c.0.6x price-to-book while giving forward yields close to c.9% on our estimates, one of the retail S-REITs that are now represents deep value.

ANALYST CERTIFICATION

The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate[1] does not serve as an officer of the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or his associate does not have financial interests[2]  in relation to an issuer or a new listing applicant that the analyst reviews.  DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports.  The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately.  There is no direct link of DBS Group's compensation to any specific investment banking function of the DBS Group.

COMPANY-SPECIFIC / REGULATORY DISCLOSURES

1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd ("DBSVS"), DBSVUSA, or their subsidiaries and/or other affiliates have a proprietary position in CapitaLand China Trust recommended in this report as of 31 Oct 2023.
2. DBS Bank Ltd, DBS HK, DBSVS, DBSVUSA, or their subsidiaries and/or other affiliates have a net long position exceeding 0.5% of the total issued share capital in CapitaLand China Trust recommended in this report as of 31 Oct 2023.
3. DBS Bank Ltd, DBS HK, DBSVS, DBSVUSA, or their subsidiaries and/or other affiliates beneficially own a total of 1% or more of any class of common equity securities of CapitaLand China Trust as of 31 Oct 2023.

Compensation for investment banking services:

4. DBS Bank Ltd, DBS HK, DBSVS their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past 12 months for investment banking services from CapitaLand China Trust as of 31 Oct 2023.
5. DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have managed or co-managed a public offering of securities for CapitaLand China Trust in the past 12 months, as of 31 Oct 2023.
6. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

Disclosure of previous investment recommendation produced:

7. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed on page 1 of this report to view previous investment recommendations published by DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.

 [1] An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst. 

[2] Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis.  This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.