CapitaLand - UOB Kay Hian 2015-11-05: 3Q15 ~ A Strong Quarter Fuelled By China’s Residential Market

CapitaLand - UOB Kay Hian 2015-11-05: 3Q15 ~ A Strong Quarter Fuelled By China’s Residential Market CAPITALAND LIMITED C31.SI 

CapitaLand (CAPL SP) 3Q15: A Strong Quarter Fuelled By China’s Residential Market 

  • There was a strong performance in China, underpinned by sizzling property sales Talks over a potential S$3.5b bid for Asia Square have been called off. 
  • Management remains cautious on the outlook for the Singapore market with extension charges incurred this quarter, although the resilient balance sheet should well absorb future penalties. 
  • 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 within expectations. 

  • CapitaLand saw 3Q15 PATMI of S$192.7m leapfrog 48.3% yoy underpinned by higher project sales and realised forex gains from China, including divestment gains in Japan. Top-line growth saw a 17.1% yoy jump while EBIT climbed 31.0% yoy. Stripping out exceptional and revaluation gains, 9M15 core PATMI of S$574.3m is within our expectations at 79.7% of full-year forecast. 
  • Net gearing stood at 0.51x in 3Q15 (2Q15: 0.53x), with average debt maturity at 3.3 years in the quarter. The group’s NTA per share stood at S$4.03. 


STOCK IMPACT 


• Potential Asia Square acquisition talks taper off. 

  • Capitaland has stated that negotiations on the potential acquisition have ceased. The company had announced last month that it had entered the final round of negotiations, alongside the Government Pension Fund of Norway. Earlier speculation from market watchers had placed BlackRock’s likely price tag at nearly S$3b or S$3,200 psf, eclipsing previous transactions this year of S$1,733-2,802 psf. Management has continued to state that it will not detract from exploring acquisition opportunities in line with its strategy. 

• Sizzling sales in China

  • Sizzling sales in China, with 3Q15 seeing sales of new units spike 129.1% yoy to 2,422 units for Rmb3.75b (+135.2%yoy). 9M15 saw 6,492 units moved (97.4% yoy) for a total of Rmb11.6b (171.6% yoy). Our Greater China property analysts anticipate home sales recovery to take place in China, in line with market expectations. This is in the face of lower lending costs, easing government policies and more intensive new launches. CapitaLand anticipates a steady pipeline for 4Q15 with about 2,235 launch-ready units (The Metropolis, Vista Garden and Parc Botanica). 

• Shrugging off bleak outlook in Singapore’s residential market… 

  • Domestic residential inventory (S$2.6b) represents less than 7.3% of CapitaLand’s total assets. 3Q15 saw 45 units moved at S$109m (+4.8% yoy). 9M15 saw residential sales reach S$412m in Singapore, representing a 7.3% yoy drop, with 151 units sold (-36.3% yoy). 

• … as extension charges start to nibble at resilient balance sheet. 

  • The Interlace and Urban Resort (sell-by date: Sep 15) saw the first tranche of extension charges hit, incurring S$3.5m for 2H15. Recall extension charges are paid on a six-month rolling basis. Our burn-down scenario assuming no future sales occur envisions a total of S$147.8m in extension penalties. Ostensibly significant, this represents a mere 0.8% of Capitaland’s book value and 3.8% on its cash balances. 

• Deepening footprint in China and Singapore while interest remains for Southeast Asia. 

  • Management continues to stress the paramount importance of Core markets China (46% by GAV) and Singapore (37% by GAV). These two markets also jointly accounted for 75.2% of total EBIT in 3Q15, with Singapore making up 41.1% and China at 34.1%. This October saw CapitaLand announce their eighth residential project JV in Vietnam, fresh off June’s S$200m JV. We reckon Vietnam presently accounts for just about 1.3% in gross assets, with management guiding for a comfort level of up to 5-10% exposure in Southeast Asia, pointing to historical capex outflow (> S$1b a year) as a gauge of future spending. 

• Cautious on residential outlook in Singapore. 

  • URA data in 3Q15 reflects anaemic performance across the residential market, with the high-end and mass-market price indices registering drops of 3.1% and 4.6% yoy. Despite the challenges posed by cooling measures and interest rate hike uncertainty, management is set to roll out the sites at Cairnhill Road (268 units) and Victoria Park Villas (109 units) come early-16. 

• US$600m tie-up with Qatar Investment Authority (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 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 and scaling AUM up to S$10b by 2020. 

• Tapping into online instruments to expand the Serviced Residence segment in China. 

  • CapitaLand’s 3 August announcement of a S$122m investment in China’s answer to Airbnb, Tujia (valued >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 have fine-tuned our 2015-17 earnings estimates by -1.5% to -2.3%, mainly deferring the recognition of China residential projects to subsequent years. 


SHARE PRICE CATALYSTS 

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


Vikrant Pandey UOB Kay Hian | Derek Chang UOB Kay Hian | http://research.uobkayhian.com/ 2015-11-05
BUY Maintain BUY 4.08 Same 4.08


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