City Developments (CIT SP) - UOB Kay Hian 2016-11-11: 3Q16 Result Of Novel Strategies

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CITY DEVELOPMENTS LIMITED C09.SI

City Developments (CIT SP) - 3Q16 Result Of Novel Strategies

• Quarterly profit was up 60% yoy on healthy property sales, although the hospitality segment remained tepid. The Nouvel 18 securitisation resulted in CDL achieving AUM of S$3.5b, leaving the group on track to achieve its targeted S$5b in AUM.
• Management intends to accelerate diversification geographically through its fund management platform. 
• Maintain BUY and target price of S$10.36.

RESULTS

Results in line with expectation, with 9M16 core net profit accounting for 74% of our full- year forecast. 

• 3Q16 net profit of S$170.3m was up 60.1% yoy, on healthy property sales and divestment of City Developments’ (CDL) 52.5% stake in City e-Solutions. 
• Gross revenue saw an increase of 14.0% yoy, driven by maiden contributions from Singapore's Gramercy Park and Hanover House (fully sold) in the UK. 
• 3Q16 property development PBT was up 47.9% yoy, mainly due to contributions from CocoPalms, D'Nest, Jewel@ Buangkok, The Venue Residences and Shoppes UP@Robertson Quay, Lush Acres, Gramercy Park and Hanover House in the UK. 
• 3Q16 saw Hotel PBT decline 6.7% yoy, mainly from weakness in New York and Singapore due to a stronger US dollar and disruptive refurbishments. 
• 3Q16 rental property PBT fell 16.9% yoy, post securitisation of investment properties last December.

Monetisation of Nouvel 18 via Profit Participation Securities platform (PPS), which valued Nouvel 18 at S$965.4m or S$2,750 psf (in line with built in RNAV estimates). 

• This came after CDL’s S$410.96m acquisition of Wing Tai Holdings’ 50% stake in the 156-unit project earlier in July. We understand CDL’s carrying cost for the project to be S$2,700 psf, that would result in a small gain of S$27m. The Nouvel 18 securitisation resulted in CDL achieving AUM of S$3.5b leaving the group on track to achieve its targeted S$5b in AUM.

STOCK IMPACT

Win-win from Nouvel 18 securitisation. 

• Towards high net worth investors, the price is at a discount to the recent market transactions and the yield at 5% for five years is double that of similar properties, with the 2.5% differential between them further subsidising the purchase price. 
• From CDL’s perspective, it allows them to avoid hefty extension charges and yet retain scope for upside participation through the incentive fees arrangement while collecting some asset management fees.

Healthy response for recent launches. 

• Singapore projects have seen a fairly healthy take-up. Jewel@ Buangkok is now fully sold, while about 22% of 174-unit Gramercy Park was sold during its soft launch. Take-up at the 638-unit The Brownstone (launched Jul 15) was about 80%. 
• The other JV project Coco Palms is now about 91% sold. Oct 16's launch of 519-unit Forest Woods saw 65% sales over the weekend (currently 71% sold).

Cautiously optimistic guidance towards Singapore residential outlook.

• Management noted that projects that were launched during and before 2015 made up ~70% of ytd unit sales, as new launches see a slump. 
• While developers have been introducing novel payment schemes, the TDSR measures continue to be drag on sales volume. However, management also struck a more upbeat tone, noting that projects with appealing locational attributes will still enjoy better prospects.

Overseas projects update. 

• In China, Phase 1 of Hong Leong City Center (1,374 units from Tower 1 & 3) in Suzhou saw 3Q16 sales of 50 units (about S$27m), bringing total sales to 995 units (72% sold) for about S$436m to-date. Phase 2’s residential tower (430 units) sold 156 units for about S$88m during its launch. Maiden contribution from HLCC is expected to be booked in 4Q16. 
• In Shanghai, the 120-unit Hongqiao Royal Lake (relaunched in Nov 15) sold 14 villas (about S$61m), bringing total sales to 32 villas (about S$130m) to-date. 126-unit Eling Residences in Chongqing was launched in October, selling 5 units for about S$10m. Management maintains a positive long-term view towards the three cities despite multiple tightening measures for the property market across China. 
• In the UK, the 82-unit Hanover House was fully sold at an ASP of about S$1,199 psf. Planning is underway for CDL’s £200m 34-unit luxury care home development, with demolition to commence in 2Q17. The Shoreditch site’s planning application will be submitted in 2Q17 for the 90,000sf office redevelopment (currently 28,266sf).

Tepid hospitality markets in New York, Singapore and Rest of Europe. 

• Global hotel RevPAR declined 1.7% yoy in 3Q16 as occupancy uplift (+1.1ppt yoy) was offset by a 3.1% yoy decline in average room rates. Weaker geographies (in RevPAR terms) included New York (-13.2% yoy), Singapore (-8.4% yoy) and Rest of Europe (-4.2% yoy).
• This was somewhat cushioned by higher occupancy in London, higher returns from newly refurbished hotels in the US (ex-New York) and improved performance in Millennium Seoul Hilton (rest of Asia). 
• Management attributed dismal performance in New York to increased room supply, a stronger US dollar and the ongoing refurbishments at ONE UN New York. Excluding the AEI disruption (completed Sep 16), US and New York RevPAR would have declined a respective 2.0% and 7.8% yoy.

Lukewarm hospitality outlook. 

• We expect Singapore operations to continue seeing weak corporate demand coupled with supply indigestion (+6.1% in room supply expected in 2017). However, London could continue to be a beneficiary of the weaker GBP in the wake of 23 June’s Brexit referendum, seeing higher in-bound tourists. Management had highlighted that its strategy is one of cost containment to improve margins, even floating the prospects of hiring consultants to minimise operating costs.
• As group RevPAR fell 8.6% for first three weeks of October, in constant currency terms, as London (-15%), New York (-14.2%) and Singapore (-14.0%) saw RevPAR declines. This was partially offset by Australasia RevPAR growth of 17.3%.

South Beach to see final TOP by end-16. 

• Both South Beach Office Tower and the retail component are 100% leased. 70% of the retail outlets have commenced business. 
• The rebranded The JW Marriot Hotel Singapore South Beach is slated to open in Jan 17.

VALUATION/RECOMMENDATION

• Maintain BUY and target price of S$10.36, pegged at a 20% discount to our RNAV of S$12.95/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/ 2016-11-11

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 10.360 Same 10.360