City Developments (CIT SP) - UOB Kay Hian 2017-02-24: 4Q16 Limited Upside Post Strong Run-Up, Downgrade To HOLD

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CITY DEVELOPMENTS LIMITED C09.SI

City Developments (CIT SP) - 4Q16 Limited Upside Post Strong Run-Up; Downgrade To HOLD

• Downgrade to HOLD on valuation grounds post a 34% yoy jump in share price.
• Target price remains unchanged at S$10.36, pegged at a 20% discount to our RNAV of S$12.95/share. 
• Management intends to accelerate diversification geographically through its fund management platform. 
• City Developments (CDL) is on track to reach the target of S$5b in AUM from the Profit Participation Securities (PPS) programme by 2018 (currently S$3.5b). Entry price is S$8.80.

RESULTS

Results slightly above expectations. 

• 4Q16 net profit of S$243.8m was down 40.6% yoy, due to one-off contributions in 4Q15 from CDL’s second Profit Participation Securities (PPS2). 4Q16 gross revenue was up 36.5% yoy, driven by maiden contributions from Suzhou Hong Leong City Centre (HLCC) in China, and steady sales of Singapore projects.
• The results came in ahead of expectations, with 2016 core net profit accounting for 107% of our full-year forecast, on higher-than-expected earnings contribution from development property in China.

Segmental performance. 

• 4Q16 property development PBT was up 109.5% yoy mainly due to maiden contributions from the above mentioned HLCC and sales of Gramercy Park, CocoPalms, D'Nest, The Venue Residences and Shoppes. 
• 4Q16 saw hotel operations register negative PBT, mainly from weakness in New York and Singapore, as disruptive refurbishments continue to adversely impact trading performance, combined with a weaker GBP. The hotel segment also saw an impairment loss of S$38.3m in 4Q16. 
• During the quarter, rental property PBT declined 71.1% yoy, largely attributable to the loss of contribution from the sale of three investment properties via the Profit Participation Securities Platform 2 announced in Dec 15.
• Dividend of 16 S cents/share announced, including a special final dividend of 8.0 S cents per share. This translates to dividend yield of 1.7% and payout ratio of 23%.

STOCK IMPACT

• Singapore projects have seen fairly healthy takeup, with 490 units sold in 4Q16, bolstered by chart topper Forest Woods (382 units sold in 4Q16). 75% of Forest Woods 519 units have been sold to date. Management expects earnings contributions from this project over the course of 2017. 
• About 26% of 174-unit Gramercy Park was sold as of 4Q16, as well as ~84% in take-up of 638-unit The Brownstone (launched Jul 15). 
• The other JV project Coco Palms is now ~92% sold as of 4Q16.

Tempered optimism on Singapore residential outlook. 

• While developers have been introducing novel marketing schemes, property cooling measures continue to be a drag on sales volume. 
• Chairman Kwek observed that high-end projects had witnessed price declines of up to 35%. However, management also struck a more upbeat tone, noting that projects with appealing locational attributes will still enjoyed better prospects.

With potential new launches in 2H17. 

• CDL has highlighted the possibility of launching the freehold 124-unit New Futura and 190-unit South Beach Residences later in the year, given encouraging sales of Gramercy Park.

Overseas projects update. 

• China contributions were bolstered by maiden contributions from recently completed Phase 1 of Suzhou Hong Leong City Center (1,374 units from Tower 1 & 3) with 814 units handed over (59% of overall). Phase 1 has been 76% sold for about Rmb2.2b to date. 
• In Shanghai, the 120-unit Hongqiao Royal Lake (relaunched in Nov 15) has been taken off the market. 
• Recently launched 126-unit Eling Residences in Chongqing has sold eight units to date, with management flagging cooling measures as a key drag. The Chongqing Huang Huayan project, which was stalled for a year, will only launch in 2019, with management attributing the delay to project reconfiguration (downsizing most units to a more digestible quantum of  < 100 sqm, removing office components to retail). 
• Management maintains a positive long-term view on the three cities despite multiple tightening measures for the property market across China. 
• In the UK, 220-unit Teddington Riverside is slated to launch 57 units in 2Q17. Planning consent was obtained for CDL’s £200m 34-unit luxury care home development, with demolition to commence in 2Q17. The recently-announced GBP58m acquisition of the Ransomes Wharf site (estimated GDV of GBP222m) will commence demolition in 3Q17. 

Lukewarm hospitality outlook. 

• We expect Singapore operations to continue seeing weak corporate demand coupled with supply indigestion (+5.7% expansion in room supply expected for 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 (though partially offset by weaker corporate demand). Management had highlighted that it will be formulating a new strategy with newly-appointed interim CEO Tan Kian Seng. 
• Group RevPAR grew 4.5% for the first 31 days of 2017, in constant currency terms, bolstered by London (+19.5%), Australasia (+12.3%) and New York (+8.9%). This was partially offset by Singapore, which saw RevPAR decline 5.2%. Management attributed the dismal performance in Singapore to a room rate strategy that was incompatible with Singapore market conditions, as well as the confluence of lower corporate demand and supply side pressure on room rates. 

South Beach updates. 

• The entire mixed project obtained final TOP in Dec 16. Both the office and retail components are 100% leased. Rebranded JW Marriot Hotel Singapore South Beach soft opened in mid-Dec 16. 

Diversification objectives. 

• CDL has earmarked S$5b in acquisitions by 2018, with about S$2.5b achieved thus far. These include venture capital investments in online apartment rental platform mamahome (Rmb100m) and co-working space provider Distrii (Rmb72m) as well as acquisitions of investment property in Japan and the UK. 
• CDL is also on track to reach the target S$5b in AUM from the PPS programme by 2018 (currently S$3.5b). 
• Management has not ruled out a fourth PPS later this year.

VALUATION/RECOMMENDATION

• Downgrade to HOLD with an unchanged target price of S$10.36 pegged at a 20% discount to our RNAV of S$12.95/share. 
• We downgrade the stock on valuation grounds post the 34% yoy jump in the share price. 

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/ 2017-02-24

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