City Developments - UOB Kay Hian 2016-05-12: 1Q16 Diversification Strategy Looking More Prominent

City Developments - UOB Kay Hian 2016-05-12: 1Q16 Diversification Strategy Looking More Prominent CITY DEVELOPMENTS LIMITED C09.SI 

City Developments (CIT SP) - 1Q16: Diversification Strategy Looking More Prominent

  • CDL’s diversification strategy – underpinned by the twin pillars of overseas growth and fund management – is looking more prominent, with management citing cooling measures and exorbitantly high land costs in Singapore. 
  • CDL’s overseas exposure accounted for 33% and 44% of 1Q16 EBITDA and total assets respectively. 
  • Management re-iterated its conviction in expanding its overseas footprint, especially in the UK, Japan, China, Australia and the US. 
  • Maintain BUY. Target price: S$10.86.



RESULTS


Results below expectations. 

  • City Developments (CDL) reported 1Q16 net profit of S$105.3m, down 14.4% yoy. 
  • Results were below expectations, accounting for about 16.1% of our full-year estimates, on weaker property development and hotel contributions. 
  • Property development saw PBT decline 21.7% yoy mainly due to lower contribution from Bartley Ridge and The Inflora as well as the higher base last year from the full recognition of contributions from The Rainforest. 
  • Hotel operations saw PBT decline by a sharp 68% yoy, with lower RevPAR in key gateway cities, impact from ongoing AEIs, impact from terrorist attacks in Brussels and Paris and pre-operating expenses of The South Beach Hotel. 
  • Rental property PBT rose 11.9% yoy from higher contribution from associate First Sponsor Group. 
  • Net gearing remained stable at 0.26x in 1Q16 (4Q15: 0.26x).

Diversification strategy looking more prominent, with management citing cooling measures and exorbitantly high land costs in Singapore. 

  • CDL’s overseas exposure accounts for 33% and 44% of 1Q16 EBITDA and total assets respectively. 
  • Management has identified China, Japan, the UK, Australia and the US as key markets. China, in particular, saw stellar growth, with CEO Grant amenable to funnelling additional expansionary funds (initial S$800m earmarked nearly depleted). 
  • In 2014, CDL set a lofty target of managing S$5b in funds over the span of five years. Through both PPS platforms, over half that amount (S$2.6b) has been achieved within a short span of two years. 
  • We understand that management will potentially continue its current momentum, with another PPS transaction likely to be forthcoming this year.

Not letting up on re-entry into FTSE index. 

  • Management is continuing to lobby for re- inclusion, even taking steps to break down its EBITDA segments in its results presentation, and clearly demarcating that in its latest annual report.



STOCK IMPACT


• Overseas activity update. 

  • In China, Tower 1 and 3 (1,374 units) of CDL’s Hong Leong City Center in Suzhou mixed-use project has seen combined sales of 894 units (65% sold) for about S$392m. Handover of both projects is expected in 4Q16. Tower 2 is slated for launch later in the year. In Shanghai, CDL’s 120-unit Hongqiao Royal Lake sold 15 villas for about S$61m.126-unit Eling Residences in Chongqing is set to launch in 2Q16, with expected completion in 2Q17. Profits from launched projects in China will be booked from 2H16 onwards.
  • In the UK, CDL acquired its first commercial project for £37.4m, with plans for redevelopment into a 90,000sf office (currently 28,266 sf). 
  • This marks CDL’s 14th overseas development projects in Australia China, Japan and the UK. Hanover House in Reading has been fully sold, with expected completion in 3Q16. Management re-iterated that they will look selectively at transactions across major UK centres to leverage on its deeper knowledge of the UK market. Pipeline projects include 233-unit Teddington Studios and Stag Brewery. 
  • We note that the bulk of the S$550m earmarked for UK expansion has been expended. The Shirokane site in Japan is expected to launch in 4Q17, with the group still in the midst of securing permits.

• Property cooling measures continue weighing on domestic market, with management citing the series of measures imposed since 2009. 

  • Kwek Leng Beng had previously postulated the possibility of easing property cooling measures this year, likely the Additional Buyer’s Stamp Duty. In our own opinion, correction of 15-20% in overall property prices from the peak could likely trigger the unwinding of property cooling measures. 
  • 1Q16 saw the overall price index extending its slump to 9.1% over nine consecutive quarters from 3Q13’s peak. The quarter also witnessed a 11% yoy decline in private homes (excluding executive condominiums (EC)) to 1,419 units. CDL as the most liquid residential play on Singapore property would be a key beneficiary of policy easing.
  • However, guarded optimism remains, with healthy interest observed at Jul 15’s launch of 638-unit The Brownstone, (67% sold to date). This in part prompted the launch of 505- unit Criterion (17% sold to date). 
  • We note that the group’s other projects are relatively well sold ie, 616-unit Jewel @ Buangkok (96% sold), 944-unit Coco Palms (88% sold) and 845-unit Commonwealth Towers (48% sold). CDL also successfully bid for the Lorong Lew Lian site (S$710 psf ppr). Watch out for the upcoming launch of 174-unit Gramercy Park (expected TOP 2Q16).

• Damper on hospitality in New York, London and Singapore, though Australasia provides some cheer. 

  • Global hotel RevPAR declined 4.7% yoy in 1Q16 as both occupancy and average room rates clocked respective declines of 2.0ppt and 1.9% yoy. This was underpinned by lower RevPar performance in New York (14.3% yoy decline), Singapore (9.7% decline yoy, London (down 6.4% yoy). Europe and the Rest of Asia clocked in RevPAR upticks of 0.9% and 1.0% yoy respectively. 
  • Management attributed the dismal performance in New York to the ongoing refurbishment of ONE UN New York east tower. Excluding that, New York RevPAR would have declined 6.4% yoy. 
  • Singapore saw weakness in corporate demand, coupled with supply-side pressure and higher share of pre-operating expenses of The South Beach Hotel that soft opened in Sep 15. London hotel saw adverse impact from the recent terror attacks in Brussels and Paris, as bookings were cancelled. 
  • RevPar declined 4.6% yoy as Paris hotels saw a 7.4 ppt drop in occupancy following last year’s attacks. The bright spot in 1Q16 came from Australasia, which registered an encouraging 15.0% yoy increase in RevPar, on the back of higher occupancy and daily rates. Management also cited the 18% yoy increase in New Zealand visitor arrivals spurring 1Q16 performance.



EARNINGS REVISION/RSK

  • We adjust our 2016-18 earnings by -6% to 2% mainly factoring in lower hotel RevPAR and deferring development recognitions to subsequent years.



VALUATION/RECOMMENDATION

  • Maintain BUY and target price of S$10.86, pegged at a 20% discount to our RNAV of S$13.57/share.



SHARE PRICE CATALYST

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




Vikrant Pandey UOB Kay Hian | Derek Chang UOB Kay Hian | http://research.uobkayhian.com/ 2016-05-12
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 10.86 Same 10.86


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