City Developments - UOB Kay Hian 2015-11-13: 3Q15 ~ Key Beneficiary Of Residential Policy Easing

City Developments - DBS Research 2015-11-13: Diversification to pay dividends CITY DEVELOPMENTS LIMITED C09.SI 

City Developments (CIT SP) - 3Q15: Key Beneficiary Of Residential Policy Easing 

  • 3Q15 results were below expectations as key segments - property development and hospitality - saw a softening in Singapore and the rest of Asia. 
  • South Beach North Tower reported a 96% pre-commitment, with South Beach Hotel commencing operations in phases. 
  • Management looks set to expanding overseas footprint in the UK, Japan and China. 
  • CDL remains the key beneficiary of residential policy easing as price correction breaches a 10-15% threshold by 2H16. 
  • Maintain BUY with a lower target price of S$10.75. 


RESULTS 


 Results below expectations. 

  • City Developments (CDL) reported 3Q15 net profit of S$106.4m, down 26.4% yoy and 2.6% qoq. Results were below our and consensus expectations, with 9M15 core net profit accounting for about 58% of full-year estimates, due to weaker hotel performance and lower contribution from property development. 
  • Property development (41.5% of total PBT), declined 35.8% yoy due to the absence of income recognition from completed executive condominiums (3Q14: Blossom Residences was completed). 
  • Higher operating costs and lacklustre contributions from Singapore and the rest of Asia saw 3Q15 hotel PBT drop 32.4% yoy. The hotel segment accounted for 38.3% of total PBT. 
  • Net gearing stood at 0.29x in 3Q15 (2Q15: 0.27x). 

 South Beach update. 

  • Leasing pre-committments reached 96% in 3Q15 for the 34- storey South Beach North Tower (TOP in Feb 15) with advanced negotiations for the remaining 4%. Tenants have begun to occupy abouty 70% of available space, with tenants including Facebook, Sanofi, Rabobank, TMF Group, Bain & Company and Boeing. 
  • Daily operations have commenced at the 654-room The South Beach hotel post Sep 15’s soft launch, albeit in phases (estimated 200 rooms currently in the market). 
  • With a bridge linking South Tower to Suntec City Convention Centre, South Tower is likely to benefit from meetings, incentives, conferencing, exhibitions (MICE) activities. The 190-unit South Beach is slated for completion come 2Q16. 


STOCK IMPACT 


 Stoic optimism remains, propped up by healthy interest observed at Jun 15’s launch of 638-unit The Brownstone (45% sold to-date). 

  • This in part prompted the launch of 505- unit Criterion (9% sold to-date). We note the group’s other projects were relatively well sold, ie 616-unit Jewel @ Buangkok (91% sold), 944-unit Coco Palms (87% sold) and 845-unit Commonwealth Towers (46% sold). Management remains confident that projects with strong locational attributes and quality will continue to attract discerning buyers. 
  • We note that CDL recently put in the winning bid of S$710psf ppr at Lorong Lew Lian, with JV partners Hong Leong Holdings and TID, to replenish its landbank. 

 Asia putting a damper on hospitality although Europe provides some cheer. 

  • Global hotel RevPAR dipped 1.4% yoy in 3Q15 as higher daily rates (2.6% yoy) was mitigated by lower occupancy (-3.0ppt yoy). This was underpinned by Singapore, which saw RevPar decline 6.6% yoy and the rest of Asia (11.7% yoy decline in RevPar). Management attribtuted this to the loss of contribution from the W Singapore (securitised Dec 2014), supply-side pressure, lower visitor numbers and the stronger S$ vs several other Asian countries. The bright spot in this quarter came from Europe (excluding London), which registered an encouraging 14.4% yoy increase in RevPar on the back of higher occupancy and daily rates. 

 Overseas activity remained healthy. 

  • In China, Tower 1 (462 residential units) of CDL’s Suzhou mixed-use project saw sales of about 82% (2Q15: 61%). The group also plans to launch its 126-unit Chongqing project and 85 bungalows in Shanghai later this year. Management remains bullish on China, highlighting growing interest in further development activities 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. Management reiterated it will look selectively at transactions across major UK centres, particularly in London, with more deals coming on-stream in the real estate marketplace, to leverage on its deeper knowledge of the UK market. 

 Key beneficiary of residential policy easing. 

  • We believe a correction of 10-15% in property prices from the peak would be a pre-cursor for a serious evaluation by the government on demand side policy easing. 
  • From their respective peaks in 2013, the high-end market, mid-market and mass market posted declines of 8.6%, 9.4% and 6.7%, with the price index extending its slump to 8% over eight consecutive quarters from 3Q13’s peak. This could mean a possible policy easing trigger around 2H16. 
  • As the most liquid residential play on Singapore property, CDL would be a key beneficiary of policy easing. 
  • We reckon the government would target relaxing the transaction charges (additional buyers stamp duty, sellers stamp duty) first. 


EARNINGS REVISION/RISK 

  • We reduce our 2015 net profit forecast by 15%, mainly due to lower contribution assumption from the hotel segment. 

VALUATION/RECOMMENDATION 

  • Maintain BUY with a lower target price of S$10.75 (previously S$10.84), pegged at a 20% discount to our revised RNAV of S$13.44/share (from S$13.55). 
  • The reduction in RNAV is mainly due to lower hotel valuations as we factor in lower hotel contribution. 

SHARE PRICE CATALYST 


  • Relaxation of property measures in Singapore and substantial acquisitions in Singapore or overseas.



Vikrant Pandey UOB Kay Hian | Derek Chang UOB Kay Hian | http://research.uobkayhian.com/ 2015-11-13
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 10.75 Down 10.84


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