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Treasury China Trust: Riding Growth Momentum In China’s Commercial Landscape
Corporate Digest | 09 September 2011
By: Xavier Lim
Articles (51) Profile

Quality proactive asset management and unwavering long term commitment in China are two distinguishing traits that define Treasury China Trust (TCT). At the helm stands Richard David, Chief Executive Officer of TCT, who has a clear direction to uphold the company’s success in engaging the flourishing commercial landscape in China.

Listed in Singapore in June 2010, the business trust, trading under the code of LG2U, has returned more than 45% to its unitholders for the 12 month period ended 1 August 2011 through capital gain and dividend income.

At a recent interview with Shares Investment (Singapore), David highlighted that “the Chinese government’s agenda is to stabilize residential housing prices, and that has absolutely no impact on our business at all.” David’s words reaffirmed TCT’s business focus which is exclusively in commercial real estate.

On a year-on-year basis during the first seven months of 2011, the floor space of commercial buildings sold in China grew 13.6% to 520.37 million square meters (sqm), of which office buildings climbed 9.9% and buildings for commercial business increased 19.3%.

“I think that the (Chinese) government is recalibrating itself against the number of benchmarks and it doesn’t seem to be producing a hard landing. We’re certainly not seeing it in the cash register of our retailers or from our office tenants looking to expand their businesses. It is certainly a different feel on the ground than what you might see reported outside,” added David.

Rounding up TCT’s latest first half performance, its net profit jumped more than three-fold to $145.26 million contributing to a 3.5 times growth in its earnings per unit. Notably, the company’s net asset value rose 13.6% to $4.17 per unit as at 30 June 2011, up from $3.67 three months ago.

With an aggregated market capitalization of $466.9 million as at the close on 2 September, there is significant growth potential in TCT’s market value in excess of $1 billion should TCT’s units trade closer to its net asset backing, which David is confident of achieving.

Notably, the company’s core stabilized portfolio, which includes City Center, Central Plaza and Treasury Building, has reached a robust committed occupancy rate of 95.9% as at 30 June 2011, up from 90.9% six months ago.

Central Plaza is strategically located in the heart of Shanghai central business district

Resilient Business Model
“We are replicating Europe’s success in China with the local know-how,” said David, referring to the achievement of TCT’s sponsor company, Treasury Holdings, in Europe. The uniqueness of TCT’s business model lies in its total return strategy in buying, owning, developing and managing commercial real estate in China, offering unitholders full exposure to income sources and diversification of risks across the real estate continuum.

The company’s distinctive business structure allows it to produce a well-balanced portfolio comprising high quality income-producing and development assets, offering both steady income and growth potential in asset value.

With a business emphasis on China’s tier one cities, David underlined that “Shanghai is the number one city in China and is becoming an important business hub in Asia, particularly in finance.” As at 30 June 2011, TCT’s properties in Shanghai represent 83.3% of its total portfolio value.

TCT’s Portfolio

Strategic Partnerships
In August 2010, TCT announced the signing of a strategic partnership agreement with TRIO Group in a bid to expand its footprint into China’s central coast province of Shandong. The alliance proved to be a prudent move when later in the year, TCT secured its first investment under the TRIO Group cooperation, acquiring a 55% interest in Central Avenue Mall, a large scale retail property in the new central business district of Qingdao.

TCT has also joined hands with Ginwa Group to explore opportunities in the growing commercial real estate market in central and western China. With an initial focus on Xi’an, the capital city of Shaanxi province, TCT will leverage on Ginwa Group’s strong establishment in the city to gain direct access to the retail sector.

Value Hunting And Portfolio Enhancement
The veteran team at TCT has a knack in identifying commercial properties with growth opportunity. This can be noted in the acquisition of the 7,620 sqm Huai Hai Mall Shanghai, which was completed in May 2011. The four storey building features direct street-front access to Huai Hai Road, one of Shanghai’s highest profile luxury retail goods precincts, boasting major luxury brands such as Chanel, Gucci, Tiffany & Co, Hermes and Cartier.

“We have been approached by many international luxury groups, recognizing that there is precious little opportunity to get a foothold in what is now a very concentrated area of luxury retail, looking to commit their leases now even though we might not complete the refurbishment until 2013,” David proudly said. The redevelopment could see the doubling of the mall’s current rental value of Rmb18 per sqm per day, moving in line with the current rental value of the nearby buildings, which range from Rmb 40 to Rmb 50 per sqm.

Not resting on its laurels, TCT’s current development projects include the 88,000 sqm office and retail extension of its flagship building City Center located in Shanghai. Upon its completion, Parkson will be vacating the property in 2012 while British retailer Marks & Spencer will come in as an anchor tenant on a 10 year lease for 3,768 sqm of retail space.

Capitalizing on the growth momentum of China’s commercial property market coupled with the expertise of the management team and its ability to generate rental uplift, TCT is slated for growth in this promising emerging nation.

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Total return of TCT’s portfolio in the past 12 months (assuming 1,000 units of TCT shares bought)

Armed with an arsenal of investment knowledge, Xavier is the Senior Research Editor at Shares Investment.

Please click here for more information about this author.

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