UOB Kay Hian 2015-08-06: Capitaland - 2Q15; Fair Value Gains, Fair Game. Maintain BUY.

CAPITALAND LIMITED C31.SI

2Q15: Fair Value Gains, Fair Game 

  • The conservative asset reclassification of Paragon Tower 5 and 6 valued at over a 30% discount to prevailing prices leaves room for future upside. 
  • CapitaLand is deepening its footprint in China and Singapore while its interest remains in Southeast Asia. 
  • The Qatar Investment Authority tie-up brings a host of relationships and deal referrals. 
  • CapitaLand is tapping into the online market to expand the serviced residence segment in China. 
  • Maintain BUY with an unchanged target price of S$4.08, pegged at a 20% discount to our RNAV of S$5.11/share. 


RESULTS 

  • Results marginally below expectations. CapitaLand reported 2Q15 net profit of S$464m, up 5.8% yoy bringing the overall 1H15 PATMI from continuing operations to S$625.3m, up 6.7% yoy. Excluding exceptional items, core operating PATMI of S$301m was slightly below with our expectations, accounting for 44.6% of our full-year forecast. 
  • Net gearing stood at 0.57x (1Q15: 0.58x), with average debt maturity at 3.3 years in the quarter. The group’s NTA per share stood at S$3.83. 

STOCK IMPACT 

  • Fairly valuing the accounting gains. The steep 41% increase in operating 1H15 PATMI was largely contributed by the change in use of development properties for sale to investment properties of three development projects in China, namely The Paragon Tower 5 and 6 (S$110.3m) and Raffles City Changning Tower 3 ($15.6m) as well as Ascott Heng Shan Shanghai (S$44.7m) in 2Q15. Management was emphatic that the one-time conversion was prompted by economic reasons, primarily the unlocking of larger recurring income streams and synergistic proximity of the asset to The Capital Tower. Paragon Tower 5 and 6 valued at Rmb82,000 psm, represents an over 30% discount vs prevailing prices, implying significant future upside. 
  • Buoyant sales in China supports relatively rosy outlook, as 1H15 sales value of Rmb7,843m ballooned about 300% yoy, as units sold expanded about 200% yoy to 4,070 units. However, only Rmb5,283m worth of units were handed over, down 61% yoy, with 1,811 units delivered to buyers. Our China property team notes that despite some turbulence in the stock market, the housing market would face minimal impact in the near term, thanks to strong end-user and first-time upgrading homebuyer demand as well as asset reallocation from the stock market to the property market. They expect a postive outlook in the long run, reiterating the sectors’ relatively rosy outlook in the face of lower lending costs, loosening policies and more intensive new launches. CapitaLand expects a steady pipeline with about 5,800 launch-ready units. 
  • Deepening footprint in China and Singapore; interest remains in Southeast Asia. Management continues to identify China (45% by GAV) and Singapore (39% by GAV) which account for the lion’s share of real estate assets (84%) as core markets. We note that Singapore’s share of assets slipped 2.8% yoy (1.2% qoq) from the previous quarter, as Chinese assets expanded 26.2% yoy (13.1% qoq). CapitaLand continued to express their comfort with up to 5-10% exposure in various markets in Southeast Asia and pointed to historically large capex outflow (exceeding S$1b a year) as a gauge to future spending. 
  • US$600m tie-up with QIA brings a host of relationships and deal referrals. The fund will be invested in serviced residences or rental housing properties with an initial focus on the Asia Pacific and Europe regions, for a term of 10 years with an investment period of three years. The 50:50 JV with Qatar Investment Authority (QIA) for the US$600m serviced residence fund could boost fee income annually by about S$7m and provide the financial backing to accelerate Ascott’s growth to meet the target of nearly doubling the apartment units to 80,000 units by 2020. 
  • Shrugging off the subdued outlook in Singapore’s residential market, as domestic residential inventory (S$2.7b) represents less than 7.6% of CapitaLand’s total assets. 1H15 saw residential sales reach S$106m in Singapore, representing a 46% yoy drop from S$194m in 1H14, with 303 units sold (down 11% yoy from 340 units in 1H14). Exposure to Singapore residential sector with residential inventory valued at S$2.7b representing less than 7.6% of CapitaLand’s total assets. Sky Habitat and Bedok Residences attained Temporary Occupation Permit (TOP) in 2Q15, while The Nassim should see completion in 2H15. CapitaLand plans to adopt a selective landbank acquisition strategy in Singapore. 
  • Tapping into the online market to expand the Serviced Residence segment in China. CapitaLand’s announcement on 3 August of a S$122m investment in China’s answer to Airbnb, Tujia (valued at more than US$1b), was another step towards catalysing the group’s serviced residence presence in China to 20,000 units by 2020. As the largest international serviced residence owner-operator in China, the group intends to marry its offline prowess in the serviced residences with Tujia’s reach across China (over 310,000 listings mainly in China, Bangkok, Singapore and Tokyo). 

VALUATION/RECOMMENDATION 

  • Maintain BUY with an unchanged target price of S$4.08, pegged at a 20% discount to our RNAV of S$5.11/share. 

EARNINGS REVISION 

  • We retain our earnings estimates in expectations of a better 2H15 performance. 

SHARE PRICE CATALYSTS 

  • Improving sentiment in core markets Singapore and China. 
  • Relaxation of property measures.


Vikrant Pandey | Derek Chang | http://research.uobkayhian.com/ UOB Kay Hian 2015-08-06
BUY Maintain BUY 4.08 Same 4.08


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