China retail market has seen a huge decline, and CLCT is not spared. The hope that China’s Covid zero policy will ease after Shanghai’s lockdown did not happen, and now Chengdu is going into another lockdown. CLCT has a shopping mall, CapitaMall Xinnan, in Chengdu and it’s expected to be badly hit with occupancy already dropping from 96.7% in Jun 2021 to 89.7% in Jun 2022 before the lockdown. Lockdown aside, with a weakening GDP growth, offline retail spending in China will definitely slow down and the retail malls in CLCT portfolio will definitely get hit. While I agree some form of pent-up demand will be there after the Covid lockdown, but I foresee many small retailers will not be able to survive until then and close down, which may result in bad debts for CLCT. Investors may need to monitor its trade receivables, especially its aging profile.
Business Park is also not as resilient as CLCT portray. Both business park in Xi’an saw its occupancy dropped from 98% in December to 91-93%. Surprisingly, even the Chengdu Logistic occupancy dropped by 2% from last quarter!
As China continues its aggressive Covid lockdown, share price will be under a lot of pressure.
CapitaLand Investment Group CFO hinted that CLCT will be active in acquisition in the 2H22 during its 1H22 Financial Result Briefing. The past 2 years CLCT has raised equity at a very discounted price, so there is a big risk that CLCT will do dilutive acquisition under the pressure of its parent. (CapitaLand highlighted only CLCT did not do any acquisition in 1H22).
Hence, its best not to be blinded by its high dividend yield; CLCT is trading cheaply for a good reason and I believe there are more downside than upside at the current price.
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