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Taking Advantage of China’s Retail Growth

Flag_of_the_People's_Republic_of_China.svg The Financial Times recently reported that China’s economy seems to have rebounded after initially posting data in the first half of the year that suggested a slowdown in its growth.

The report stated that China’s retail sales for the month of August grew by 13.4% year-on-year, while other economic data like industrial output and fixed-asset investment all grew by double digits from the corresponding period a year ago. This suggests that fears of a slowdown in China’s growth might be premature at worst or utterly overblown at best.

In any case, my fellow Fool David Kuo has also written that the Chinese government is looking to transition its economy from being export-driven to one being led by domestic consumer spending.

If the transition is successful and China’s economy continues galloping forward, companies with a significant exposure to the country’s retail spending can likely benefit from a massive tailwind brought about by Chinese shoppers.

Here are some shares that do have that significant exposure to retail-spending trends in China:

Share Price* P/NAV*
Forterra Trust (SGX: LG2U) S$2.27 0.47
CapitaRetail China Trust (SGX: AU8U) S$1.36 0.96
Fortune REIT (SGX: F25U) HK$5.96 0.63**
Mapletree Greater China Commercial Trust (SGX: RW0U) S$0.84 0.89
*Price as of 10 Sep 2013. P/NAV = Price to Net Asset Value**Fortune REIT’s NAV is based on its Pro-Forma financials stated in its recent announcement for a proposed purchase of a property.

Forterra Trust

Forterra Trust is a business trust that owns a total of seven properties in China. According to a recent presentation (link opens a PDF) it prepared, these properties are located in three cities – Shanghai, Beijing and Qingdao – and are used for offices, retail activity and logistics.

The trust has imposed a gearing limit of 45% on itself and currently adopts a policy of distributing 50% of its distributable income to unitholders. Its latest results, for its second quarter, saw a 12% year-on-year decline in net property income for the half-year to S$29m while its earnings per unit (EPU) fell 71% to 2.8 cents.

CapitaRetail China Trust

CRCT is a real estate investment trust (REIT) that owns a total of nine retail malls spread out across six different cities in China, namely: Beijing, Huhhot, Zhengzhou, Shanghai, Wuhu, and Wuhan.

The REIT’s malls’ tenants experienced a 9.5% year-on-year growth in sales, in addition to a 4.2% increase in shopper traffic, for the second quarter of 2013. The growth in traffic and spending helped push CRCT’s second quarter net property income 6.0% higher to S$26.4m compared to a year ago.

The increase in the REIT’s net property income trickled down to its bottom line such that its distributable income grew by 7.5% to S$17.9m. However, an increase in the number of outstanding units in the REIT meant that its distribution per unit (DPU) for its second quarter slipped by 1.2% to 2.38 Singapore cents.

Fortune REIT

Listed in both Hong Kong and Singapore’s stock exchanges, Fortune REIT owns a portfolio of 16 retail properties located throughout Hong Kong – the 16 properties does not include a proposed purchase of the Kingswood Ginza property located in Hong Kong that was announced about two weeks ago.

Based on the REIT’s pro-forma financials for the first six months of 2013 regarding the purchase of Kingswood Ginza, the table below shows how its numbers would compare against the corresponding period a year ago:

1st Half 2012 1st Half 2013 (Pro-Forma) % Change
Net Property Income HK$382m HK$545m 43%
Distributable Income H$268m HK$350m 31%
Distribution Per Unit HK$0.1582 HK$0.1884 19%
Net Asset Value Per Unit HK$8.81 HK$9.60 9%

MapleTree Greater China Commercial Trust

MGCCT is a relatively new REIT on the scene given that it got its debut in the Mainboard exchange only in early March this year. It owns two properties: Festival Walk in Hong Kong and Gateway Plaza in Beijing, and both are office and retail developments.

Its recent first quarter results saw very healthy double-digit growth in rentals (21% for Festival Walk and 86% for Gateway Plaza) across both its properties. In addition, the REIT had brought in net property income of S$60m for the quarter, which is 7.4% better than forecasted during its IPO.

Distributable income and DPU stood at S$46m and 1.73 Singapore cents respectively, and were both 8.3% higher than predicted.

Foolish Bottom Line

There’s always the possibility that these trusts can deliver nice rewards should the Chinese growth story continue. But, investors should also be mindful of the risks involved, chief among those being their highly leveraged balance sheets.

If interest rates rise and stay high for prolonged periods of time, they might find their operations severely hampered.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.