Should we worry about CapitaLand Investment as the China slowdown starts to bite?

TL;DR

• Capitaland Investment’s share price fell after it reported that profit in the first half of 2022 was significantly lower than the previous year. 
• The decline in profit was due to fewer assets sold so far this year. Divestments in 1H 2022 amounted to S$1.6 billion, sharply lower than S$13.6 billion achieved in 2021. 
• Capitaland Investment also had to provide rental rebates to its retail tenants in China with the Covid-related lockdowns earlier. 
• For concerns on CapitaLand Investment to ease, we’d be looking out for signs of turnaround in the Chinese property market. 

What happened?

The Singapore market is often seen by investors to be one with very few surprises. 

So Capitaland Investment’s sharp share price decline after its 1H22 results definitely caught many people’s attention.

At one point it fell by 7.6% to a low of $3.79, before recovering slightly to close at $3.92.

Clearly, the earnings disappointed investors. 

Its net profit of S$433 million in 1H22 was close to 38% lower than the profit of $702 million in 1H21.  

So, what went wrong?

Takeaways from Capitaland Investment results

#1 – Fewer divestments lead to lower profit

Capitaland Investment is dependent on portfolio divestments to drive gains from selling these assets.

As such, the company has set for itself a target of S$3 billion of divestments annually.

It managed to divest $1.6 billion of assets in the first half of 2022, which would put it on track to achieving its full year target. 

This would include the 79 Robinson Road office building and JCube shopping mall in Singapore.

However, divestments have slowed down very significantly from the $13.6 billion of divestments that it made last year.

Lee Chee Khoon, CEO of Capitaland Investment explained that “We are entering into a very volatile environment. Things are very uncertain and many of the major firms are predicting we are going into a recession.”

This uncertain environment might have led to challenges in CapitaLand Investment being able to divest its assets at an attractive valuation. 

With the sharp decline in divestments, CapitaLand was only above to book $87 million of divestment gains in 1H 2022. 

This was down sharply from the S$438 million of divestment gains booked in 1H 2021, and led to a decline in profit. 

#2 – Slowing growth in Fund under Management (FUM) 

The other area of disappointment was the lack of growth in its funds under management (FUM).

After growing very strongly from S$78bn in FY20 to $86bn in FY2021, FUM  stayed flat at this level in the first half of the year. 

This has raised investor doubts about whether it would be able to achieve its target to grow its FUM by 10% annually, and hit $100 billion of FUM by 2024. 

This could be partly explained by weakening sentiment towards the Chinese real estate market, which has led to cooling interest for global investors to put money into mainland China funds. 

CapitaLand Investment is aiming to address that by launching more onshore funds to tap the domestic market. 

The company established its first Chinese onshore RMB fund in partnership with a domestic asset management company in June this year. 

Through these onshore funds, it is looking to tap into insurance companies, asset management companies supported by banks and state owned enterprises (SOEs), as well as well-funded SOEs. 

#3 – China retail has been a drag on performance

The economic slowdown in China has also led to lower operating profit for Capitaland Investment’s retail assets in China. 

With the Covid-related lockdowns and slowdown in consumer spending, CapitaLand Investment had to extend rental rebates to its retail tenants in China.

This was similar to what we saw in Singapore during our Covid-19 lockdowns in 2020, which thankfully did not last for too long. 

Looking at the operating statistics of its malls in China, tenant sales declined by 17% compared to the previous year. Shopper traffic declined by a more staggering 24%!

These numbers would probably be more significant for its assets in Shanghai, which faced the brunt of the Covid lockdowns. 

On a more positive note, management of Capitaland Investment explained that these rental rebates are “one-off with the economy opening up with the Chinese government taking an enlightened approach around Covid”

What would Beansprout do?

It seems like a lot of the challenges faced by CapitaLand Investment in the first half of the year stem from its exposure to China. 

They are not the only company to be facing headwinds there, as we earlier shared that there are similar concerns for Hongkong Land, Keppel Corp and Yangzijiang Financial Holdings.

The weakness has led to a decline in its operating profit. China contributed 28% of its S$2.5bn of EBITDA in FY2021. That’s almost S$691 million of EBITDA generated in China.

In 1H22, China contributed just S$105 million to Capitaland Investment’s EBITDA. 

Admittedly, some of the challenges such as the rental rebates for retail tenants are short-term in nature. Hopefully, these will not be recurring once the Covid-related lockdowns are removed. 

However, other measures it has taken such as launching new onshore funds to tap new investor pools will probably take longer to see traction.

We’d be looking out closely for signs of improvement in sentiment towards the Chinese real estate sector, to be able to gain more confidence in Capitaland Investment’s ability to see a recovery in profit and achieve its fund under management targets.