Investment Analysis of Mapletree Greater China Commercial Trust [RW0U]

***Please note that this does not constitute a stock recommendation for buy or sell. This is purely my own analysis and is to be taken as my own personal opinion and not to be taken as correct. Kindly do your own diligence in purchasing stocks.

Before I delve further into my investment analysis of Mapletree Greater China Commercial Trust, I’ve got a disclaimer to make, that I have recently initiated a small position in this and my analysis of this stock is the fastest one I’ve done compared to my previous ones. Basically I kind of came up with this just within an afternoon in office and pretty much plunk money into it the next day. I’ve slowed down in investing for the long term since I began to focus more on trading to build a bigger base to do longer term investing as it really takes a long time for investing to pay off and with a small base, the returns are quite minimal.
This is a stock i consider holding long term for dividend yield and slight capital appreciation. In my personal opinion, it is slightly undervalued, and if price drops further, I would accumulate more shares provided I have sufficient funds and the proportion fits into my portfolio.

Mapletree Greater China Commercial Trust is a relatively small REIT. It is listed on the SGX since 2013. Currently it only have 3 real estate properties, they are:

Festival Walk – located at Hong Kong, Kowloon Tong, comprising of a 7-storey retail mall, 4-storey office tower and 3 underground carpark levels

Gateway Plaza – located at China, Beijing, comprising of 2 25-storey office towers connected by 3-storey retail atrium and underground floors

Sandhill Plaza – located at China, Shanghai, a business park development comprising of 1 20-storey tower, 7 blocks of 3-storey buildings and 2 basement levels of car park


I have simplified my share price valuation to the below:

Since inception, it has been distributing >6cents per year, and being conservative, I will assume the dividend to be 6cents, with current share price bought at $1.035,

my return on equity = (0.06/1.035) ~ approx 5.8%

Gearing ratio ~ 40%,

WACC ~ 4.42%

NAV = $1.213

Using dividend model without growth, share price = dividend/rate of return = (0.06/0.058) = $1.035

It would seem that calculation for dividend model is circular, However, the rate of return I expect can be adjusted. If I expect a lower rate of return, the expected share price would be higher and vice versa. For now, I think that it is actually good to have a yield of >5%, and I can accept the circular logic of my calculation.


So why did I buy this?

Value

Not a very convincing reason since this is the only reason I’m buying it. It is a fair value based on Gordon Dividend model and the share price is at an approximate 15% discount to the NAV. I am going to use the NAV as a reference as to when to liquidate the position and will probably need to do more research and analysis to this. Waiting for the Q4 and FY 16/17 earnings release tomorrow.


What are some of my concerns?

Not very diversified

With a vision to be a Greater China-focused commercial REIT and an investment mandate in HK and first and second-tier cities in China, it only has 3 properties. This is something to look out for as I can only guess what is the management’s strategy going forward and trust in their management skills. Also, assuming that they follow through on their 3rd key strategy of value-creating acquisition growth, I am not  very sure about how easy it would be to find yield-accretive properties for it to buy. Management strategy is definitely something to look out for.

High Gearing Ratio

With a gearing ratio at slightly >40%, this is a highly leveraged REIT. Especially since with the above reason it is not very diversified and only has 3 properties, it has to buy more properties to grow, and I do not think management will fund the growth using additional debt. As such, funding channel should theoretically be limited to rights issuance or further equity placement which would depress share price. The flip side is that I can buy on dips assuming that the new properties bought are yield accretive.


Conclusion

In closing, I think it is a fair price for its value and since this is a REIT and similar to my holdings in Religare Health Trust, I plan to hold this share for a long long time. I could have bought this share few months ago when it was significantly cheaper, but this is based on hindsight bias and the 2016 was marked with significant volatility. If the share price starts to drop, I will accumulate more of it and if it rises to $1.20, I will consider liquidating it. I do not doubt the profitability of the REIT as it holds retail and office spaces, and it will generate income for sure. Any thoughts or comments? Let me know what do you think or if I am wrong in any area.

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