City Developments (CIT SP) - UOB Kay Hian 2017-05-12: 1Q17 Downgrade To HOLD Post Strong Share Price Performance

City Developments (CIT SP) - UOB Kay Hian 2017-05-12: 1Q17 Downgrade To HOLD Post Strong Share Price Performance CITY DEVELOPMENTS LIMITED C09.SI

City Developments (CIT SP) - 1Q17 Downgrade To HOLD Post Strong Share Price Performance

  • Downgrade to HOLD on valuation grounds post 31% ytd jump in share price with an unchanged target price of S$11.40 (pegged to 12% discount to RNAV). 
  • Management struck a more upbeat tone on the Singapore residential segment, even joining in the recent GLS bidding fray on the back of a strong pick-up in homebuying activity (89% yoy in 1Q17) despite the 14th consecutive quarterly decline in home prices. 
  • Entry price is S$9.12.


Results below our and consensus expectations. 

  • 1Q17 net profit of S$243.8m was down 40.6% yoy, due to an absence of profits from completed JV projects Bartley Ridge and Echelon, lacklustre hospitality division, as well as forex losses, 1Q17 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 below our and consensus expectations, with 1Q17 net profit accounting for 15% of our full-year forecast, on lower-than-expected earnings contribution from the hospitality and rental property business segments.

Segmental performance. 

  • 1Q17 property development PBT was up 14.9% yoy mainly due to maiden contributions from the abovementioned HLCC and sales of Gramercy Park, CocoPalms, and The Venue Residences. 
  • 1Q17 saw hotel operations PBT decline 55.6% yoy, mainly from weakness in New York and Singapore and the rest of Asia (supply-side pressure and tepid corporate demand), combined with a weaker GBP (main contributor Millennium and Copthorne reports in GBP). 
  • During the quarter, rental property PBT declined 31.3% yoy, largely attributable to the loss of contribution from the divestment of Exchange Tower (announced in 4Q16).


  • Singapore projects saw fairly healthy takeup, with 293 units sold in 1Q17, bolstered by chart topper Forest Woods (82% units sold to date). Management expects earnings contributions from this project over the course of 2017. 
  • About 52% of 174-unit Gramercy Park was sold as of 7 May, as well as ~87% in take-up of 638-unit The Brownstone (launched Jul 15).

Upbeat tone on Singapore residential outlook, even joining in the recent GLS bidding fray. 

  • CDL noted that despite the 14th consecutive decline in the URA price index, 1Q17 saw increased momentum, with home sales volume up 83% yoy. Spurred by the improved home-buying sentiment, it intends to launch 124-unit New Futura in 2H17. 
  • We also note that CDL recently put in a winning bid of S$370.1m (S$565 psf ppr) at Tampines Ave 10 (Government Land Sales site) in May, with an 800-unit project intended for the site. The bid price was 17.2% higher than neighbouring land parcel acquired by MCC Land in May 15 (S$483 psf ppr). We reckon the bid was marginally aggressive, as estimated selling prices (~S$1,100psf) come above ASPs at neighbouring projects The Alps Residences (S$1,073 psf) and The Santorini (S$1,035 psf).

Asset enhancement initiatives. 

  • CDL is reviewing AEI opportunities for its office portfolio (Republic Plaza), as the office leasing market currently still favours tenants. 
  • On the residential front, CDL intends to sink in S$30m to refurbish Le Grove Serviced Apartments, increasing the number of units from 97 to 137 (expected completion: 2Q18).

Overseas projects update. 

  • China contributions were bolstered by income recognition from recently completed Phase 1 of Suzhou Hong Leong City Center (1,374 units from Tower 1 & 3), which is now 77% sold for about Rmb2.3 to date. Phase 2 is expected to complete by 2Q18. Recently launched 126-unit Eling Residences in Chongqing did not sell any units in 1Q17, with management previously flagging cooling measures as a key drag. Management maintains a positive long-term view on these cities despite multiple tightening measures for the property market across China. 
  • In the UK, the initial launch of 57 units at 220-unit Teddington Riverside will be delayed till 3Q17 (after UK elections). Planning consent was obtained for CDL’s £200m 34-unit luxury care home development, with demolition to commence in 3Q17. The recently-announced GBP58m acquisition of the Ransomes Wharf site (estimated GDV of GBP222m) will begin demolition in 3Q17.

Lukewarm hospitality outlook. 

  • We expect Singapore operations to continue seeing weak corporate demand coupled with supply indigestion (+5.9% 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 (which will be partially offset by weaker corporate demand). Management had previously asserted that it would implement strategy revision with interim CEO Tan Kian Seng.
  • Group RevPAR grew 4.7% for the first 3 weeks of Apr 17, in constant currency terms, bolstered by Australasia (+24.1%), New York (+19.9%) and London (+17.1%). This was partially offset by Singapore, which saw RevPAR decline 10.8%. Management attributed the dismal performance in Singapore to the confluence of supply-side pressure on room rates and lower corporate demand. 
  • In addition to its focus on under-performing Singapore and Rest of Asia portfolio, the US management structure will also be reviewed.

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 Mar 17, with business activity picking up. South Beach Residences has not yet been launched, with management considering rental options.

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.


  • Downgrade to HOLD with an unchanged target price of S$11.40 pegged at a 12% discount to our RNAV of S$12.95/share. 
  • We downgrade the stock on valuation grounds post the 31% ytd jump in the share price.


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

Vikrant Pandey UOB Kay Hian | Derek Chang UOB Kay Hian | http://research.uobkayhian.com/ 2017-05-12
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