DBS Vickers 2015-08-06: Capitaland Limited - 2Q15 results. Steady progress at half time. Maintain BUY.

Steady progress at half time

2Q15 results in line; operating PATMI of S$256.1m is 86% higher y-o-y.
Positive take-up for residential projects in China; mall business seeing growing leasing demand.
Maintain BUY, TP S$4.11 based on 20% discount to RNAV.

Capitaland's 2Q15 PATMI of S$464m (+6 y-o-y) was in line with expectations with continued positive signs from China residential sales, better performance for its retail malls in China and serviced residence business.
Operating PATMI rose 86% y-o-y to S$256.1m. This was driven mainly from gains from The Paragon (Tower 5 and 6) and Raffles City Changning (Tower 3) due to a change in acccount treatment to investment properties.
Capitaland also recorded an impairment loss of S$63.6m due to expected lower seling prices for a development project at International Trade Centre in Tianjin.

Group’s debt-to-equity ratio remains steady at 0.6x with healthy interest cover of 5.3x.
Average cost of debt remains steady at 3.5%.
With the recent re-financing of its convertible bonds, we expect the group to extract interest savings going forward.
As of 1H15, 70% of its debt have been hedged into fixed rates.

Capitaland saw an improvement in volume and value of units sold in 1H15.
In China, the group moved 4,070 units (RMB7.8bn in value) which is 3x that of 1H14.
Sales were mainly from their projects in Shanghai (The Paragon and Lotus Mansion), Guangzhou (Dolce Vita), Hangzhou (Riverfront), Kunshan (The Metropolis) and its township project in Xian (La Botanica).
The group also handed over 702 units to home buyers, lower y-o-y but we note that the handover timeframe is mainly skewed towards 2H15 (estimated 1,666 units which are substantially sold) we should see a lift in contributions then.
In terms of new launches, the group has close to 5,800 new units to be launched, of which more than one-third are in Tier 1 cities of Beijing, Guangzhou and Shenzhen where the outlook for residential sales remain positive.

The group’s malls in Singapore (SG) and China continue to deliver steady cashflows. Tenant sales for SG and China rose 1.0% and 11.9% respectively on the back of a positive 5.5% and 4.5% growth in traffic.
Same-store net property income (NPI) growth remained steady at 2.8% (SG) and 9.1% (China).
Capitaland is expected to open two malls in China in 2H15- CapitaMall 1818 and CapitaMall SKY+. Both properties have achieved positive pre-leasing of 60% and 70% respectively.

Pipeline of close to 1,200 units to be opened in 2H15 implies incremental and steady growth for the business unit.
In the medium term, we see growth accelerating on the back of close to doubling of its inventory to 80,000 units by 2020, underpinned by a new strategic relationship in Quest (20% stake, to invest A$500m in Quest’s pipeline in Australia over five years).
New tie-up with Tujia, an online “Airbnb” concept in China which aims to expand its coverage and boost its marketing efforts and reach through online arena which is gaining popularity due to changing consumer trends.

We see re-rating catalysts coming from the potential capital recycling of mature assets (malls/service residences in Singapore/China) in its portfolio to its REITs.

We have a BUY call with a target price of S$4.11 based on a 20% discount to our RNAV.
The stock trades at an attractive 0.8x P/Bk and we see the gap closing on the back of the group reporting strong results due to locked-in sales across its development projects in Singapore and China and potential gains when executing on strategic asset recycling of mature assets into its listed REITs/funds.

The risk to our view is if there is a slowdown in Asian economies which could dampen demand for housing and private consumption expenditure and retail sales.
This in turn could result in slower-than expected projections.

Analyst: Derek TAN; Rachael TAN

Source: http://www.dbsvickers.com/