Would The Rise of E-Commerce In China Topple CapitaRetail China Trust?

Ser Jing - Retail Sales Are Falling, But Should Investors Be Worried(pic)China is home to the largest e-commerce company in the world, Alibaba Group Holding. According to Bloomberg, the company’s main online retail platforms, Taobao and Tmall, “topped 35 billion yuan ([US]$5.75 billion) in the 24-hour period, surpassing last year’s sales of 19.1 billion yuan.” That happened in November 2013, during China’s version of Valentine’s Day.

To put into perspective how much retail spending US$5.75 billion in a single day actually is, consider this: For the month of May 2014, total retail sales in Singapore – with a population of 5.4 million in 2013 – actually came in at only S$3.1 billion.

With e-commerce taking place at such a grand scale in China, it might make investors feel that traditional brick-and-mortar retailing would have a hard time battling against such a mighty competitor.

However, the financial results of CapitaRetail China Trust (SGX: AU8U) for the second quarter of 2014 seem to show that brick and mortar retailing is still alive and well. In fact, both shopper traffic and tenants’ sales in the trust’s malls had shown year-on-year growth in the quarter; the trust’s portfolio occupancy rate also remains impressive at 98%.

The real estate investment trust, which owns 10 retail malls in different parts of China, recorded revenue of RMB481.6 million for the first half of 2014. That is an improvement of 20.2% compared to a year ago. Much of the growth had come from new contributions from its new mall, CapitaMall Grand Canyon, which was acquired last December. However, even if we disregard the contribution from CapitaMall Grand Canyon, revenue from its multi-tenanted malls still grew 4.6% year-on-year.

CapitaRetail China Trust’s net property income improved at a faster rate of 22.4% year-on-year to RMB323.23 million as the REIT was able to keep its property expenses under control.

Most importantly for unit-holders, the REIT’s distribution per unit (DPU) for the first half of 2014 grew 6.4% to 4.99 Singapore cents compared to a year ago. Based on the REIT’s current unit price of S$1.635, it translates to an annualised distribution yield of 6.1%.

On its financial strength, CapitaRetail China Trust managed to reduce its gearing to 29.8% from 31.8% in the last sequential quarter. The trust has a distribution reinvestment scheme that allows its unit-holders to receive their dividends in units of the REIT instead of cash. This can help the company in preserving its much-needed cash and still reward unit-holders effectively.

Foolish Summary

E-commerce is almost certainly growing really quickly. However, e-commerce and brick-and-mortar retailing do not have to be mutually exclusive. There is a possibility that both sectors can continue to grow healthily along with the general economy of China; that’s especially so considering that the Chinese government wants to transform the country’s economy into one that’s led by domestic consumption.

The progress of CapitaRetail China will provide an interesting snapshot of how brick-and-mortar retailing is faring against the rise of e-commerce.

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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 Stanley Lim doesn't own any shares of companies mention above.