C-REITS 1Q23 RESULTS REVIEW：RECOVERY ON THE WAY;MORE PATIENCE NEEDED-即时看

What"s new

The 25 listed China real estate investment trusts （C-REITs） have announced their 1Q23 results.

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Comments

Recovery of project fundamentals diverged. Among property rights-based C-REITs, the market focus was on renewal and adjustment of expired contracts. Overall, the operations of logistics & warehousing and affordable housing projects have remained relatively stable. The average operating revenue of the logistics & warehousing projects fell 2.4% YoY but rose 1.7% QoQ in 1Q23, while that of the affordable housing projects rose 0.5% QoQ. However, operating revenue of the industrial park projects declined 14.7% YoY and 5.4% QoQ, as some projects were vacant due to tenants not renewing their leases when they expired amid declining demand.

The fundamentals of expressway projects recovered notably, with average vehicle traffic up 8.5% YoY compared to 2022 based on different project statistics. Operating revenue also improved in 1Q23, up 14.2% YoY on average, with operations of projects with high exposure to passenger vehicles recovering markedly. Environmental protection and energy projects’ operating revenue fell 2.3% YoY and 18.8% QoQ on average due to continued macroeconomic pressure and seasonal factors.

In 1Q23, total FAD of projects accounted for 25.5% of the fund manager’s 2023 forecast. Due to operating conditions, the funds available for distribution （FAD） achievement rate of Penghua Shenzhen Energy REIT was sluggish at 12.0%. The FAD achievement rates of Huatai Zijin Jiangsu Traffic Control Expressway REIT, Huaxia Resources Youchao Rental Housing REIT, and Guojin CRCC Chongqing Suiyu Expressway REIT were relatively high at 34.0%, 32.2%, and 31.6%.

In addition to differences in operating fundamentals in 1Q23 and seasonal factors, we believe that fund managers supplementing the FAD with the cash at the beginning of the establishment of the funds are also an important factor contributing to the high FAD achievement rates. We believe these measures show that fund managers are committed to ensuring dividend yields for investors. In addition, we suggest that investors continue to make investment decisions based on the actual operations of the projects （e.g., EBITDA under normal operations）， as cash replenishment is not sustainable in the early stages of the funds.

Valuation and recommendation

Looking ahead, we believe that project fundamentals will continue to recover in the near future, but not at a particularly rapid rate. It may be crucial to monitor the developments in 2H23. Based on project performance in 1Q23 and previous business operations, we believe logistics & warehousing and affordable housing projects will remain resilient, while the industrial park projects will bottom out in 2Q23, and we suggest keeping an eye on marginal improvement in the occupancy rate. Given the visible recovery in fundamentals and low valuations, we see investment value in expressway projects. In our view, profits of environmental protection and energy projects will still be recovering.

Risks

Disappointing recovery in project operation; disappointing progress and implementation of follow-on offerings; risk appetite deteriorates further.

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