CapitaLand (CAPL SP) - Maybank Kim Eng 2016-11-23: Visit notes from Guangzhou, Shenzhen and Vietnam

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CAPITALAND LIMITED C31.SI

CapitaLand (CAPL SP) - Visit notes from Guangzhou, Shenzhen and Vietnam

• Site visit to China, Vietnam; maintain BUY Takeaways from a recent CAPL-organised China and Vietnam visit are: 
  1. geographical diversity implies that deals can be sought at the global level; 
  2. it is pursuing asset-lighter growth; 
  3. Vietnam potential; 
  4. a still-unfavourable Singapore residential market; and 
  5. malls still relevant despite online threats. 
• We also believe CAPL may review its capital requirements and return surpluses to shareholders if return thresholds for new projects are not met. 
• Maintain BUY and SGD4.06 TP, implying a 21% discount to RNAV. 
• Catalysts from achieving ROE target.

Five takeaways 

• First, geographical diversification implies that opportunities can be sought at the global level and CAPL need not be pressurised into bidding for land at unfavourable prices. Its China pipeline of 3-5 years remains healthy. 
• Second, it will go asset-lighter for growth. 
• Third, it sees potential in Vietnam and likens the country to China 10-15 years ago. It has a SGD100m net-profit target for Vietnam by 2020. 
• Fourth, with cooling measures not budging in Singapore, the risk-reward remains unattractive in its residential market. 
• Fifth, retail malls remain relevant despite online threats as online retailers pursue offline footprints.

Returning surplus capital could boost appeal 

• With asset-lighter growth and the impending completion of several projects, we think that CAPL could review its capital requirements over the next two years. 
• We believe it should return surplus capital to shareholders through higher payouts if expected returns for new projects do not meet risk-adjusted thresholds. This could bump up its appeal as a recurring-income and dividend stock. Holding less cash would also reduce the drag on its ROE.

8% ROE target for 2018 

• We expect recognition of its pre-sold homes and fair-value gains on the completion of its three Raffles City projects in China to lift ROEs over the next two years, although its recent ROE target of 8% in 2018 and beyond suggests this may only be reached towards the end of our forecast years. Risks include overpaying for land and a precipitous fall in property prices in China and Singapore.

Management’s Presentation

Evolving business, fund management as strategic advantages. 

• Management is moving towards an asset-lighter growth strategy by signing management contracts that generate recurring income. 
• For one, Ascott to manage 80,000 units by 2020, a leap from over 52,000 today. The bulk of its growth is expected to stem from third-party contracts. This would allow CAPL to scale up without spending too much. 
• It believes that fund management is another competitive advantage, allowing it to recycle capital, acquire third-party assets, lighten its balance sheet and improve ROEs.

China. 

• Management expects recent cooling measures to affect its sales volume, but does not expect material price decline. By bringing forward launches before the measures were implemented, 3Q16 sales was stronger YoY. It expects sales values to be maintained in 2017. Its recently set up Raffles City China Investment Partners III has committed capital of USD1.5b.
• Assuming 50% gearing, the fund could potentially snap up USD3b of assets.
• Raffles City Shenzhen and Raffles City Chongqing could be injected into it when completed. With a pipeline of 3-5 years, CAPL is under no pressure to bid for land at unfavourable prices. Instead, it plans to explore urban-renewal projects, partnerships and portfolio acquisitions to acquire development land.

Vietnam. 

• Management sees growth potential in Vietnam as it likens it to China 10-15 years ago. Demographics are favourable with a median working age of just 29 years. It has sold over 9,100 homes in Ho Chi Minh City and Hanoi and will continue to beef up its presence. 
• At the moment, it only has hospitality and residential operations. It plans to add other property classes over time. It aims to establish a USD500m commercial fund next year as it believes that Vietnam’s office market is ready to take off. Vietnam is still a small market at 2% of its assets with immaterial profit contribution.
• Management eyes net-profit contributions of SGD100m by 2020.

Malls. 

• Management thinks that shopping malls remain relevant despite the fierce onslaught of online retailing. This is because Chinese retailers are adopting O2O. It thinks its Pan-Asian footprint with 103 malls in five countries is a critical market differentiator. However, as it also believes that scale is important, it will be rationalising its malls in the smaller Chinese cities.

Swing Factors

Upside

• Strong rebound in China and Singapore home sales.
• Monetisation of assets via a sale to its funds under management or third parties.
• Higher market value of its listed REITs.

Downside

• Overpaying for assets or land.
• Poor execution of development projects.
• Sharp increase in interest rates could hit demand for properties and drive down asset prices.

Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-11-23

Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 4.060 Same 4.060