China World Trade Center's overall profitability has been steadily increasing, with only minor performance fluctuations due to the pandemic. Thanks to its scarce and high-quality core assets, the occupancy rate and rental prices have even maintained an upward trend. Under the premise of stable operations, the company has maintained a high dividend payout ratio annually, which is the core logic behind its stock price reaching historical highs.

At the beginning of 2024, when the real estate sector's stock prices were adjusted, China World Trade Center's (600007.SH) stock price also hit a phase low. However, after that, the stock price has been on the rise, increasing from the previous 15.61 yuan per share to the highest of 25.93 yuan per share, with a period increase of 66.11%. Currently, the company's stock price has set a historical record. Compared to other real estate targets, China World Trade Center has shown an independent trend mainly because, unlike the poor performance of real estate development business, China World Trade Center's main property leasing and management business has shown stable profitability. Its core assets are scarce and high-quality, with occupancy rates and rents even maintaining an upward trend. Under the premise of stable operations, the company has maintained a high dividend payout ratio annually, making it a rare high-quality target in the real estate sector.

Profitability is robust

As a leading national high-end commercial complex developer and service provider, China World Trade Center operates the main building complex of the China World Trade Center located in the core area of Beijing's Central Business District, with a strong commercial atmosphere and obvious location advantages. The China World Trade Center covers an area of 17 hectares, with a total construction scale of 1.1 million square meters, composed of office buildings, shopping malls, hotels, apartments, convention and exhibition centers, and other commercial service facilities. As of the end of 2023, the China World Trade Center includes 5 office buildings, 3 hotels, 2 apartments, shopping malls, convention and exhibition facilities, 3 underground parking lots, and 3 ground parking lots.

Advertisement

China World Trade Center's revenue comes from two types of businesses: property leasing and management, and hotel operations, which have always had stable revenue growth. From 2019 to 2023, China World Trade Center achieved operating income of 3.53 billion yuan, 3.098 billion yuan, 3.586 billion yuan, 3.442 billion yuan, and 3.954 billion yuan, with year-on-year changes of 11.33%, -12.25%, 15.76%, -4.01%, and 14.86%, respectively. The net profits were 972 million yuan, 825 million yuan, 1024 million yuan, 1116 million yuan, and 1259 million yuan, with year-on-year changes of 25.53%, -15.12%, 24.03%, 8.99%, and 12.84%, respectively.

In terms of performance, China World Trade Center only saw a certain decline in revenue in 2020 and 2022. In 2020, it was mainly due to the impact of the pandemic that led to a decline in performance. In 2022, it was mainly due to the hotel operation business being affected by the pandemic and other factors, with a year-on-year revenue decline of 41.5%. At the same time, the company actively responded to the government's call to reduce or exempt enterprise rents and implemented certain rent reductions for some enterprises, leading to a 4.0% decline in the company's revenue. However, after the elimination of these sudden factors, China World Trade Center's revenue in 2023 has returned to positive growth, and the positive growth trend continued in the first half of 2024.

In the first half of 2024, China World Trade Center achieved operating income of 1.965 billion yuan, a year-on-year increase of 1.39%, and achieved a net profit of 688 million yuan, a year-on-year increase of 5.18%.

Overall, except for the impact of the pandemic in 2020 and 2022, for more than 10 years since 2013, China World Trade Center's total revenue has maintained a year-on-year positive growth.

With the growth of operating income, China World Trade Center's operating costs have been reduced, and profitability has been improved. According to Caitong Securities, depreciation and amortization are the most important operating costs in the company's costs, with a proportion maintained at around 30% since 2017. Since 2019, the year-on-year growth rate of China World Trade Center's depreciation and amortization expenses has continued to slow down, from 11.1% in 2018 to -3.9% in 2023. This is because the construction of the China World Trade Center project has been completed one after another. Among them, the main tower of the Phase B project of China World Trade Center Phase III was completed and accepted on April 20, 2017, and the renovation project of the East Tower of China World Trade Center was completed and accepted on July 23, 2018. The apartments were completed and renovated in August 2020 and were re-put into operation in September 2020. The company's main construction and renovation work has been completed. Caitong Securities believes that the company currently has no new construction plans, so it can be considered that the operating costs will not rise sharply.

China World Trade Center's overall gross margin has been increasing year by year from 51.6% in 2018 to 58.0% in 2023. Among them, the gross margin of the property leasing and management business is relatively stable, with a gross margin of 66.4% in 2023; the hotel operation business is more affected by the pandemic, with a larger fluctuation in gross margin, -33.6% and -59% in 2020 and 2022, respectively. However, due to the lower proportion of this business in revenue, its impact on the overall gross margin is small. With the elimination of the impact of the pandemic and the hotel returning to normal operation, the gross margin has been restored to the pre-pandemic level, with the hotel business gross margin increasing to 8.1% in 2023.Furthermore, the overhead rate of China World Trade Center (CWTC) has been continuously decreasing, dropping from 9.1% in 2020 to 6.3% in 2023, reflecting the continuous improvement of the company's operational efficiency. Correspondingly, the return on equity (ROE) of CWTC has been steadily increasing. The company's net profit margin and gross margin have generally moved in the same direction. From 2015 to 2023, CWTC's gross margin increased from 51.33% to 58.01%, the net profit margin improved from 27.66% to 31.87%, and the ROE rose from 11.54% to 13.36%.

Core assets are of high quality and scarcity. Office building and shopping mall operations are the main sources of the company's revenue, followed by apartments and hotels. The commonality among these businesses is that both occupancy rates and rents have generally maintained growth.

The tenants of the China World Trade Center office buildings consist of financial institutions, banks, energy companies, law firms, and other multinational and well-known domestic and international companies, including 33 Fortune Global 500 enterprises, with a predominance in the financial and energy sectors, indicating strong tenant strength. In terms of new rental demands, the CBD area accounts for 20% of new rental demands, ranking first, with stable rental demand.

The vacancy rate of the China World Trade Center office buildings is low, and the rental level has always been at a high level in the Beijing high-quality office building market, with the rental unit price also increasing. According to CBRE data, the average transaction rent for high-quality office buildings in Beijing in the first quarter of 2024 was 283.3 yuan/square meter/month, with a vacancy rate of 22.0%, while the average rent of China World Trade Center office buildings in the first quarter of 2024 reached 649 yuan/square meter/month, more than twice the average level of Beijing office buildings. In 2020 and 2021, the average rent of China World Trade Center office buildings was not good due to the impact of the epidemic, but the rental level began to recover thereafter. The average rent increased by 1.3% year-on-year in 2022, rose by 1.8% year-on-year in 2023, and increased by 1.6% year-on-year in the first quarter of 2024. In terms of occupancy rates, even during the 2020-2022 epidemic period, the occupancy rate of China World Trade Center office buildings has always been maintained above 90% and has even increased, with 92.1%, 94.5%, and 96.3% in 2020-2022, respectively. In terms of revenue, the revenue of the office building sector slightly declined in 2020-2021, with 1.507 billion yuan and 1.496 billion yuan, respectively. It began to rebound in 2022, with revenue of 1.539 billion yuan, and increased to 1.561 billion yuan in 2023.

The rent and occupancy rate of shopping malls are also increasing. According to the Professional Retail Network, the sales of China World Trade Center Mall in Beijing were 16 billion yuan, 20 billion yuan, and 20.2 billion yuan in 2020-2022, ranking in the top three in the country. From 2019 to 2022, the average rent and occupancy rate rents of China World Trade Center Mall were 982 yuan/square meter/month, 986 yuan/square meter/month, 1175 yuan/square meter/month, and 1159 yuan/square meter/month, respectively, with the occupancy rate increasing from 89% in 2018 to 98.8% in 2022.

After the epidemic, the performance of apartments and hotels began to improve. The construction area of China World Trade Center apartments is about 80,000 square meters. In April 2018, the overall renovation and transformation of China World Trade Center apartments began and was completed in August 2020. After the renovation, the rental level of the apartments increased significantly, with the rental price center rising from 246 yuan/square meter/month in 2018 to 419 yuan/square meter/month in 2020. Due to the impact of the epidemic, the rental level decreased in 2021-2022, and stabilized at 370 yuan/square meter/month in 2023. In addition, the occupancy rate of the apartments continued to climb in 2023, reaching 85.9%, an increase of 12.6 percentage points compared to 2022. The increase in occupancy rates and rents led to an increase in the revenue contribution of apartments. In 2022, the company's apartment revenue was 159 million yuan, a year-on-year increase of 80.7%, and in 2023, the apartment revenue was 183 million yuan, a year-on-year increase of 15.48%.

In 2022, the company's hotel revenue was 274 million yuan, a year-on-year decrease of 41.6%, with a gross margin of -59%, a year-on-year decline of 52.7 percentage points. With the recovery of business travel and social activities, the hotel's operating revenue in 2023 was 569 million yuan, a significant year-on-year increase of 107.41%.

Zheshang Securities pointed out that the assets of China World Trade Center show stronger resilience in Beijing CBD Grade A office buildings and are of higher quality among Grade A office buildings. China World Trade Center Mall is located in the core CBD area, with high customer unit price and strong purchasing power of the surrounding population. In the face of challenges in the retail consumption environment, rents and occupancy rates can still maintain strong stability, fully demonstrating its excellent ability to resist economic cycles.Maintain High Dividends

In recent years, China World Trade Center's debt ratio has continued to decline, and the financing cost is relatively low. With robust operations, the company has sufficient operating cash flow, thus it can maintain a high proportion of dividends each year. The company's debt ratio has dropped from 45% in 2017 to 24.67% in 2022. As of mid-2024, the company's cash reserves amount to 3.612 billion yuan, with a total interest-bearing debt of 1.538 billion yuan, resulting in nearly 2 billion yuan of net operating cash inflow annually. In 2023, the company's overall average financing cost was 3.62%, the lowest in the past five years.

China World Trade Center has always maintained a dividend payout ratio above 50%, which has been continuously increasing in recent years. In 2022, the total cash dividend for the year was 705 million yuan, with a dividend payout ratio reaching 63.2%. For the fiscal year 2023, the company's cash dividend ratio was 64%, and the special cash dividend ratio was 40%, combining for a total cash dividend ratio of 104%.

CITIC Securities believes that China World Trade Center has a high degree of similarity with equity REITs and is comparable. The company has never disposed of assets or blindly expanded through investments in its history. After the renovation and upgrade of China World Trade Center Apartments, the operational stability of China World Trade Center is similar to that of current equity REITs; the company's assets are mainly real estate, with rental income accounting for 80%, similar to equity REITs; the dividend payout ratio in 2023 was 104%, higher than the current cash distribution rate of equity REITs; the company's asset-liability ratio is 25.35%, while the asset-liability ratio of China's publicly offered REITs must not exceed 40%, meeting the requirements of REITs and making it a relatively high-quality investment target.