City Developments - DBS Research 2017-11-10: Gearing Up For New Launches

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CITY DEVELOPMENTS LIMITED C09.SI

City Developments - Gearing Up For New Launches

• City Developments' 3Q17 earnings in line.
• Strong take-up in existing residential projects in Singapore and China.
• Gearing up to launch 4 projects in Singapore over 2018/1Q19; successful take-up will lift valuations higher.
• TP raised to S$14.03.

Maintain BUY; TP at S$14.03. 

• We maintain our BUY call on City Dev with TP of S$14.03 mainly on re-pegging the valuation on M&C to NAV. 
• With the Singapore property market in the nascent stages of an upturn, City Dev is largely seen as a key proxy to upward trends in the Singapore residential market and has historically traded up to 1.2x-1.3x P/NAV, which our TP implies.

Where we differ. Amongst the highest TP in the street. 

• We believe that catalysts abound for the group after its successful land-banking activities. With a robust pipeline of 4 residential projects for launch in 2018/1Q19, a better than projected sell-through rates at these new launches will be a re-rating price catalyst. 
• In addition, strong sales momentum at its existing unsold inventories (in Singapore and China) offer strong earnings visibility in the medium term.

Catalyst: 

• Strong pre-sales at launch projects/land-banking activities.
• Completion of the privatisation of Millennium & Copthorne. City Dev announced a possible cash offer to acquire all the outstanding Millennium & Copthorne Hotels (M&C) shares for 552.5 pence per share (cash + special dividend). The offer price is currently below the last traded price of 610 pence, which is a potential hurdle to a marriage of this deal.

Valuation

• We maintain our BUY call, TP of S$14.03, based on a parity to RNAV, which implies 1.2x P/NAV.

Key Risks to Our View

• Non-completion of privatisation. The inability to complete the privatisation exercise could limit potential upside to RNAV.

WHAT’S NEW - Gearing up for new launches

Net earnings down 8.3%: 

• City Developments Limited (CDL) has reported a 8.3% drop in earnings to S$156.1m. Revenues were 6.5% lower y-o-y at S$863.1m. CDL reported 9M17 net profit of S$351m, a 14% drop y-o-y. This was due to
  1. lower revenue (-9% y-o-y), mainly from lower revenue recognition from property development,
  2. lower other operating income (-44%) where gains from disposal of an office building in Osaka in 3Q17 were lower than the gains recognised in 1H16,
  3. lower share of profit from JVs (S$1.4m in 9M17 vs S$27m profit in 9M16) due to absence in contribution from Echolon and Bartley Ridge which had TOP in FY16, and
  4. lower net finance costs (-17% y-o-y) from lower borrowing costs.
• The lower revenue was mainly due to lower recognition from property development (-22% y-o-y) as Lush Acres EC and Jewel@Buangkok had received TOP in 2Q16 and 3Q16 respectively. 9M17 revenue from property development was mainly from Gramercy Park (88% sold), Coco Palms (98%) and The Venue Residences (100%) in Singapore, and progressive handover of units at Phase 1 Suzhou Hong Leong City Center (HLCC), Hongqiao Royal Lake, Shanghai.
• Hotel revenue and PBT grew 5% y-o-y and 18% y-oy respectively, supported by contribution from Grand Millennium Auckland and M Social Hotel which were added to the portfolio, and increased contribution from ONE UN New York whose East Tower was closed for refurbishment in 1H16. The higher PBT was mainly due to write-back of impairment loss of S$22m in 2Q17. 
• Rental Properties revenue fell 6% y-o-y while PBT increased 21% y-o-y. The fall in revenue was largely due to the absence of rental income following the disposal of equity interest in Exchange Tower Limited which owned a commercial building in Oct16, and closure of Le Grove Serviced Apartments for a major revamp but this was partially offset by maiden contribution from Pullman Hotel Munich, acquired by CDLHT in Jul17. The higher PBT was mainly due to gains on disposal of the office building in Osaka, partially offset by higher exchange losses (CDLHT) following a repayment of an NZD inter-company loan. 
• 3Q17 net profit fell 8% y-o-y to S$156m on lower revenue (-7% y-o-y) following the absence of recognition from Jewel@Buangkok (TOP in 3Q16), Hanover House in Reading, UK, and lower contributions from D’Nest and Coco Palms, lower other operating income (-22%) offset by lower net finance costs (-32%) and higher share of profits of associates and JVs (+10%).

Outlook: Singapore – strong pipeline of projects

Good sales momentum in Singapore residential projects: 

• YTD Sept 2017, CDL and its associates have sold close to 1,056 units (including Executive Condominiums (ECs) amounting to S$$1.8bn, which is almost triple that when compared to a year ago (YTD 9M16 sold 482 units with a sales value of S$622m).
• Demand for the group’s projects in China remained healthy with CDL booking in sales 32 villas with a total sales value of RMB 1.03bn. HLCC, in Suzhou continued to see strong sales momentum. Phase 1 saw 83% sold of 1,374 units with a sales value of RMB2.5bn while Phase 2 saw 49% of the 212 units sold at RMB 671m.

Healthy interest in recently launched projects in Singapore. 

• Gramercy Park along Grange Road is now 88% sold (153 units) while the 513-unit Forest Woods is over 90% sold while Coco Palms is now close to 98% sold. The 845-unit Commonwealth Towers is also fully sold. 
• The group’s ECs are substantially sold (638-unit The Brownstone, 99% sold while The Criterion is c. 90% sold).

Four project launches planned in 2018/1Q19. 

• Looking ahead, CDL has a robust line-up of projects to be launched in 1H18. First to hit the market will be New Futura (124-unit freehold development at Leonie Hill, District 9) in 1Q18 and 861-unit suburban condominium in Tampines Avenue 10.
• CDL is also preparing the soft launch of South Beach Residence (190 units) in 1H18.
• The recent acquisition of Amber Park condominium is expected to complete by 1H18, and launched in 1Q19.

Overseas – forming strategic collaborations. JV to enter luxury senior housing sector. 

• In 3Q17, the group entered into a collaboration with Waterbrook Lifestyle Resorts to develop a retirement village in Bowral, New South Wales. The group will be participating through debt financing of A$22m.
• In 3Q17, the group completed the divestment of a noncore office asset in Osaka, Japan for S$38m.

JV with Vanke in China. 

• Expected to complete by Dec’17, CDL and Vanke will work-together to jointly manage the sale of two properties in Chongqing – Chongqing Huang Huayuan (30% stake held by CDL) and Eling Residences (50% stake held by CDL). The paring down of the stake will see CDL reap lose to RMB 986m in capital and de-risk their exposure in the city.
• Working with Vanke, CDL is able to tap on the former’s local expertise and networks to enhance positioning and marketability of the projects.

TP increased to S$14.03. 

• Our TP is adjusted upwards to S$14.03 as we marked to market the group’s listed associate (CDLHT) and assumed NAV for its existing c.65.2% stake in Millennium & Copthorne. 
• Maintain our BUY call.

Rachel TAN DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2017-11-10

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 14.03 Up 12.630