Posted by: donmihaihai | January 13, 2020

Sanity or insanity.

Take CCT as an example. It has about 9.7B of total assets of which majority are investment properties. This 9.7B assets earned about 0.4B income in 2018 on unleveraged basis.

If I pay 9.7B for the whole of CCT, I am paying about 25X FY2018 earning. Ie PE of 25, or capitalisation rate of 4%. PE inversion mean earning yield of 4%.

Add in some leverage, fund 2.8B of the 9.7B assets with debts mean I need to fork out 6.9B of equity(money). The return changed. PE is now 21 and earning yield are at 5%. Cap rate doesn’t change.

The above is true if I buy CCT at BV or unleveraged basis. The market is suggesting otherwise. Currently PE is about 23X, earning yield of just above 4%.

With all the super positives of CCT, CCT DPU CAGR for 2014 to 2018 was just 0.56%. Inflation rate in Singapore for next few years is expected at 1.4%pa. CCT DPU CAGR from 2005 to 2018 was 1.9%. Just a little better.

What is the sanity of paying above 20X stable earning for a property company/REIT that hardly beat inflation? The market says YES.

Take Bund Center Investment Ltd as another example. BCI own the integrated Bund Center in Shanghai and Golden Center in Ningbo. Its NBV is about 0.4B while the properties are valued much higher at 1.9B. My guesstimate is BCI will generate 0.06B a year.

This make the 1.9B valuation at 3% Cap rate and a PE of 32X. The leasehold of the Bund Center will down to Zero in 26 years or so. Something is not right. Of course, I won’t know how much BCI will earn in the next 26 years. Nobody knows anyway. The rule of law in China for property is crap, at the end of the lease, taking back lands on a mass will resulted in all kind of troubles. So existing owners which include BCI might be able to extend the lease with another payment.

The valuer is saying that the 26 years leasehold integrated Bund Center is worth 3% cap rate or PE of 32X. The stock market says NO and give it a valuation of 0.45B. Look like insanity is the valuer and stock market is rather sane.

At 0.45B market capitalisation, earning yield is 13% and PE is 8X base on my guesstimated earnings. Add in information like BCI is sitting on 0.1B cash after netting off all liabilities, and compare to CCT, I am wondering whether I should say the market is insane.

This is stock market.


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