New economy exposure a shelter amidst lockdown headwinds for retail

  • 1Q22 NPI rose 30.4% to RMB344.5m, in line with full-year estimates
  • Headwinds for retail portfolio likely as lockdown scenarios could expand in China
  • However, new economy exposure, which is now 30% of current portfolio and expanding, should provide a shelter in the storm
  • Maintain BUY with lower TP of S$1.55 (previously S$1.60); forward yield remains at a compelling 7.6%

Investment Thesis

Compelling value for a morphing China behemoth. We maintain our BUY recommendation on CLCT with a revised TP of S$1.55, implying 31% upside. We believe markets have not given CLCT the benefit of their new economy exposure, which now comprises close to one-third of their portfolio exposure and has boosted resilience in portfolio earnings in recent quarters. Forward yields are compelling at 7.6%, based on current trading levels. 

China’s zero-COVID tolerance stance poses challenges. We acknowledge that short-term weakness could sustain for the rest of the year, and potentially, the current lockdown scenario could expand to include Beijing, where a bulk of CLCT’s retail exposure is. We believe that CLCT’s retail portfolio was stress tested back in 1H21, coinciding with Beijing’s lockdown, which showed that a retail overhang can dissipate fast with a sharp rebound in occupancy in the matter of a quarter’s time. Moreover, the c.30% expansion in exposure to new economy assets – that are on c.3%-4% rental escalations and registering single digit, positive reversions – incorporate greater income visibility to offset the downside risk from retail.

New economy exposure overlooked by the markets. Despite the ongoing macro headwinds, which is as an overhang for China S-REITs, we continue to set our eyes on the horizon, as its asset rejuvenation continues to unfold, expanding its new economy resilience from the current c.30% portfolio exposure. The dissipation of the current macroeconomic headwinds should help re-rate CLCT’s current P/NAV of 0.76x to trade closer to its historical mean of 0.98x. 

Valuation:

Maintain BUY with slightly lower target price of S$1.55. Rental rebates and flat reversions across retail portfolio for half a month priced in for FY22, given prolonged lockdowns and sporadic retail mall closures. 

Where we differ:

Inorganic growth opportunities. More third-party assets on the table for acquisition consideration, as distressed China developers divest to improve cash position. 

Key Risks to Our View:

Expansion of lockdown clusters to include Beijing once again, as the city faces a resurgence in COVID cases.