CapitaLand - UOB Kay Hian 2016-08-05: 2Q16 Eyeing Panda Bond Market

CapitaLand - UOB Kay Hian 2016-08-05: 2Q16 Eyeing Panda Bond Market CAPITALAND LIMITED C31.SI 

CapitaLand (CAPL SP) - 2Q16: Eyeing Panda Bond Market

  • Despite noting domestic headwinds, the group plans to maintain focus on core markets Singapore and China, growth markets Vietnam and Indonesia, as well as its serviced residence global platform. 
  • Aside from private equity, management is considering issuance of panda bonds to better manage China’s forex risk. 
  • Maintain BUY and target price of S$4.05, pegged at a 20% discount to our RNAV of S$5.06/share.



RESULTS


Results in line with expectations. 

  • 2Q16 net profit of S$294m was down 36.6% yoy despite top-line growth of 9.7% yoy, due to lower revaluation gains. Also recall that in 2Q15, CapitaLand (CAPL) announced a change in the use of development properties for sale to investment properties - The Paragon Tower 5 and 6 (S$110.3m), Raffles City Changning Tower 3 (S$15.6m) and Ascott Heng Shan Shanghai.
  • Excluding gains from the reclassification, underlying net profit increased 31.8% yoy in 2Q16 on the back of higher contributions from shopping malls and development projects in China and the divestment of CapitaGreen. 
  • The results are in line with expectations, with 1H16 core net profit of S$324.4m coming in at 45% of our 2016 forecast.

Net gearing inched up to 0.49x (1Q16: 0.47x) with average debt maturity at 3.7 years (1Q16: 3.9 years). 

  • Assuming a comfortable gearing threshold of 0.5x, we opine that CAPL’s debt headroom stands at about S$520m. 
  • The group’s NTA per share was S$3.84 as at end-Jun 16 (1Q16: S$4.02).

ROE target of 8-12% (from 6.1% annualised currently) achievable through potential asset recycling to its REITs. 

  • In Singapore, these assets could include Star Vista (yield on valuation: 6.3%, cap rate: 5.75%) and to a certain extent, Ion Orchard (yield on valuation: 5.7%, cap rate: 4.9%). 
  • In China, potential divestments could include the Raffles City portfolio of four assets - Shanghai, Beijing (yield on valuation: 7%), Chengdu, Ningbo (yield on valuation: 3-4%). 
  • Note that our 2016F ROE is based on core net profit while the above ROE of 6.1% is based on 1H16 net profit of S$512.3m (annualised).


STOCK IMPACT


Natural hedging potentially through panda bond issuance. 

  • While management has actively tapped on private equity, it intends to better manage forex exposure on the debt side by taking on more renminbi borrowings. Management also floated the likelihood of issuing panda bonds. 
  • Based on management’s internal estimates, a 1% depreciation of the renminbi against the S$ will lead to a 0.9% decline in net asset value. Comparatively, a 1% depreciation would only lower net profit by 0.2%.

Lower sales value in China, while Singapore and Vietnam still witness brisk residential interest. 

  • Development projects in China saw a nearly 22% yoy decline in sales value despite an about 5% increase in units sold (2,896 units) in 2Q16. Total sales in Singapore soared 122% yoy with 82 units sold in 2Q16 and a 98% yoy growth in sales value. 
  • The group saw healthy interest for Cairnhill Nine in Singapore, with 78% of the 268- unit project sold as of 2Q16. 
  • In addition, CAPL also achieved notable sales in Vietnam, with Seasons Avenue (39% sold), Kris Vue ((94% sold) and Vista Verde (80%) achieving brisk sales.

Tepid outlook for Singapore. 

  • While management remains upbeat on the long-term prospects for Singapore, it expects the property cooling measures to remain a drag on the market in the near term. Some S$7.9m in extension charges were paid in 2Q16, attributable to 1,040-unit The Interlace (88% sold as of end-June) and 1,715-unit d'Leedon (90% unsold as of end-June). 
  • We note CAPL has rolled out the creative “stay then pay” initiatives, which saw decent response. Victoria Park Villas has seen its soft launch (indicative prices from S$4.4m each), with the public launch expected in 2H16. Meanwhile, the recent launch of The Nassim (55 units) saw five units sold. 
  • Despite the gloomy outlook from management, we note the Singapore residential segment accounts for only 5% of group assets. Management expects office rentals in Singapore to remain depressed.

Remains focused on core markets Singapore and China. 

  • Despite noting domestic headwinds, the group plans to maintain focus on core markets Singapore and China, growth markets Vietnam and Indonesia, as well as its serviced residence global platform. It expects 3,350 launch-ready units in China over the course of this year. 
  • Management had previously guided for a comfort level of up to 5-10% exposure in Southeast Asia, with capex guidance of $1.5b-2b, excluding new acquisitions. However, it continues to stress the paramount importance of core markets China (46% by GAV), particularly in Beijing, Shanghai Wuhan, Chengdu and Chongqing, as well as Singapore (36% by GAV).


VALUATION/RECOMMENDATION

  • Maintain BUY and target price of S$4.05, pegged at a 20% discount to our revised RNAV of S$5.06/share.


EARNINGS REVISION

  • None.


SHARE PRICE CATALYST

  • 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/ 2016-08-05
BUY Maintain BUY 4.05 Same 4.05


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