UOB Kay Hian 2015-08-14: City Developments - 2QFY15; Upgrade CDL to BUY.


2QFY15: Upgrade CDL to BUY; 

  • We upgrade City Developments (CDL) to BUY with an unchanged target price of S$10.84 post a 21% share price correction from the high this year. 
  • Results were below expectations mainly on timing differences. 
  • Overseas expansion will drive growth while domestic market outlook remains subdued. 
  • CDL announced a special interim dividend of 4 S cents per ordinary share. 


• Upgrade to BUY with an unchanged target of S$10.84; results below expectations on timing differences. 

  • City Developments (CDL) reported 2Q15 net profit of S$133.5.m, down 3.2% yoy (+8.5% qoq). The quarter saw property development PBT decline 8.5% yoy due to absence of income from Buckley Classique (TOP 3Q14) in addition to reduced contributions from H20 Residences (TOP 2Q15) and The Palette. 
  • 1H15 results were slightly below expectations (41% of full-year forecast) due to timing differences in property development activities. 
  • We retain our estimates expecting a better 2H15 and upgrade CDL to BUY with an unchanged target of S$10.84 pegged at a 20% discount to our RNAV of S$13.55/share post the 21% retracement in share price from its recent high in April this year. 

• Overseas expansion key catalyst to future growth. 

  • Revenue from target markets in China, Japan and the UK made up 28% of CDL’s total revenue, inclusive of Australasia. In China, Tower 1 (462 residential units) of CDL’s Suzhou mixed-use project has seen sales of about 61%. The group also plans to launch both their 126- unit Chongqing project and 85 units in Shanghai come 4Q15. Management remains bullish on China, highlighting growing interest in further development activity there. In the UK, the planned S$184.8m acquisition of Teddington Studios in London should see completion by 4Q15, with 213 residential units targeted for launch in 2Q16. In Japan, flagship hotel Millennium Mitsui Garden Hotel Tokyo has delivered a strong performance since opening in Dec 14 with 80% occupancy levels and rising room rates. 

• Global hotel RevPAR saw growth of 2.8% yoy in 2Q15, 1H15 (4.0% up yoy). 

  • 1H15’s operating performance was buoyed by exuberance in the US (7.1%), as well as Australia and New Zealand (15.9%). This was despite weakness in Asia which witnessed a decline of 10.3% in RevPar attributable to the MERS outbreak in South Korea in 1H15. PBT saw growth of 13.2% yoy in the quarter, though the buoyancy was mainly attributable to contributions from associate First Sponsor Group’s lower legal settlement (£3m). 

• Leasing pre-commitments at 90% for 34-storey South Beach North Tower, which obtained TOP on Feb 15 with 6% of the remaining space confirmed (pending documentation). 

  • The consortium is now in advanced negotiations for take-up of the remaining 4%. Tenants at South Beach include multi-national companies such as Facebook, Sanofi, Rabobank, TMF Group, Bain & Company and Boeing. 
  • The opening of the 45-storey 654-room hotel, The South Beach, was pushed to Sep 15, from Apr 15 (in phases), due to labour shortages and the mega scale of the project. With bridge connections linking South Tower to Suntec City Convention Centre, South Tower is likely to benefit from meetings, incentives, conferencing, exhibitions (MICE) activities. 

• Reinstating position on the FSTE Index on the agenda. 

  • In June this year, CDL was removed from the FTSE EPRA/NAREIT index as it was deemed to derive less than 75% of its EBITDA from relevant real estate activities (property development and rental properties). 
  • Management guided that reinstatement would first require audited financials for the current financial year, and is still in talks with FTSE. 

• Outlook on Singapore’s property landscape is less than rosy. 

  • Outlook on Singapore’s property landscape is less than rosy, as private property prices extended their downward trajectory for a seventh consecutive quarter in 2Q15 (- 0.9%), the longest streak in 13 years, to about 6.7% fall from its peak in 3Q13, while unsold inventory fell 6% qoq to 18,261 units (-5%yoy). 
  • High-end projects have seen up to 20% fall in prices. 

• Looking to sparkle in murky times. 

  • Despite the bleak outlook for the domestic market, management remains confident that projects with strong locational attributes and quality will continue to attract discerning buyers. CDL’s New York-themed EC project, The Brownstone, ignited buying interest with strong sales of 195 units, or about 31% of its 638 units, during its weekend launch end-July. it is also adjacent to the upcoming Canberra MRT station with both due for completion in 2019. 
  • Despite being due for launch by this year, Gramercy Park has received en bloc enquiries, which the group is not averse to.

Vikrant Pandey | Derek Chang | http://research.uobkayhian.com/ UOB KH 2015-08-14
BUY Upgrade HOLD 10.84 Same 10.84