CapitaLand - CIMB Research 2017-07-03: Robust Showing In China

Capitaland - CIMB Research 2017-07-03: Robust Showing In China CAPITALAND LIMITED C31.SI

CapitaLand - Robust Showing In China

  • We found robust leasing activities amid high take-up rates for the newly-opened CapitaLand (CAPL) properties in China.
  • The company’s China properties have strong recurrent income generation with good longer-term visibility, in our view.
  • CapitaLand is gaining traction in its asset light retail management contract activities.
  • Maintain Add with an unchanged Target Price of S$4.19.

Ground checks in China 

  • Our recent visit to some of CapitaLand’s newly-opened properties in the Chinese cities of Wuhan, Shenzhen, Hangzhou and Shanghai showed that leasing activities has continued to be robust amid high take-up rates. 
  • With 77% of its asset based made up of investment properties and generating a recurrent income stream, there is strong income visibility going forward, in our view.

Boost to recurrent income, extending visibility 

  • Four of the 8 integrated projects scheduled for completion across the region this year are operational amid high pre-commitment levels, in excess of 95%. Not only are these projects larger in size than previously, they also incorporate richer offerings, with more than 20% of the space leased to new-to-market flagship and concept stores. This will deepen the group’s integrated development branding and competitive edge. 
  • Earnings impact from these new properties are expected to be felt from FY18F onwards.

Numerous benefits from management contracts 

  • In addition to development and leasing activities, the group is also growing its retail operating network through its asset-light platforms. It has secured 6 retail management contracts with more than 200,000 sqm of GFA in China and Singapore. Not only will this enable the group to demonstrate its retail management expertise, it will also generate more fee income and build a potential pipeline of acquisition assets through a first right of refusal to purchase these properties.

Visit to Capitaland’s China projects 

  • During our recent visit to CAPL’s newly-completed properties in the Chinese cities of Wuhan, Shenzhen, Hangzhou and Shanghai, we found that they were all well pre-leased or occupied, and this should bolster its recurrent income base when stabilised. This reaffirms our view that recurring income, capital recycling and redeployment, as well as inorganic growth via potential new investments, will continue to underpin ROE expansion in the medium term.

Pan–Asian platform 

  • As at 1Q17, Capitaland had 44% of its total assets base in China and another 35% in Singapore. The remaining 21% are located in Europe, the rest of Asia and in other countries. Given its current pipeline in China and Singapore, we expect the group to continue to deepen its presence in these two countries, although China is likely to improve at a faster clip. 
  • In addition, recent moves to heighten its presence in Vietnam and target to grow assets under management in Japan to S$5bn, as well as expand Ascott’s global network, may likely mean these other locations are also expected to grow over time. Within the China portfolio, Tier 1 and Tier 1.5-2 cities are expected to continue to account for the bulk of the exposure.

ROE target supported by rising recurring income 

  • More importantly, 77% of Capitaland’s total asset base are investment properties and generates recurring income sources. 
  • Furthermore, organic income growth can be derived from 
    1. rising income from existing properties as they become more mature and stable, as well as 
    2. new development projects are completed and become operational. 
  • This will underpin the group’s strategy of improving its ROE toward its stated 8% target over time.
  • CapitaLand expects 8 malls in China, India and Malaysia, with over 1m sqm of retail GFA, to be opened in 2017. Of this, 4 malls in China have become operational year-to-date. Our visit to some of these newly-completed properties in Shanghai, Wuhan, Shenzhen and Hangzhou showed that both the retail and commercial properties are being well pre-leased or occupied. We reckon the impact of the additional income from these properties to be largely felt from FY18F onwards, after factoring in pre-opening expenses.


  • Raffles City Changning is strategically located at the centre of the Zhongshan Park business district and serves a population catchment of > 1m within a 3km radius, mostly middle-to-high income earners. In addition, the mall is linked to Metro Lines 2, 3 and 4 via Zhongshan Park Station, which serves more than 100,000 commuters daily.
  • Raffles City Changning comprises 3 office towers, two retail podiums and 5 blocks of heritage buildings, spread over 260,479 sqm of GFA. The retail component makes up 48% of GFA and the office the remaining 52%.
  • The retail mall was opened in Apr 2017 and has a committed occupancy of 97%.
  • Major tenants include Palace Cinema, City Super gourmet supermarket, and international fashion labels, such as Calvin Klein, Forever 21 and H&M.
  • Office lease commitments at Tower 3 is at 93% and Tower 2 is at 82% while Tower 1 is currently under active pre-leasing activities. When fully occupied, we believe the additional working population would continue to add to traffic within the mall.


  • Raffles City Hangzhou is Capitaland’s first integrated project in Hangzhou and is the largest operational Raffles City development to-date. It is located in the heart of Qianjiang New Town, Hangzhou’s new CBD, and is near the Qiantang River. The 298,276 sqm GFA development comprises a shopping mall (40%), Grade A offices (13%), a serviced residence and hotel (24%), while SOHO units and high-end apartments make up the remainder 23% of floor space for strata sale.
  • The mall is 99% committed, with 35% of the space taken by F&B tenants and another 35-40% by fashion retailers. Key tenants include Heytea, Yanjiyou, Orange Sky Golden Harvest and Will’s Yoga. Opened in Apr 2017, daily shopper footfalls average 30,000 on weekdays and 40,000-50,000 on weekends. The office component is 52% pre-leased currently, with the target of reaching 80% take-up by year-end.
  • Meanwhile, the 102-unit strata SOHO apartments (Sky Habitat) is 90% sold at an average price of RMB32,500psm of GFA, while the strata office space in Tower 1 is 90-95% sold. The high-end apartments have not been marketed as yet.


  • Raffles City Shenzhen (RCS) is located in the technology and industrial hub of Shenzhen, in Nanshan District. The property is well-served by the Metro line 9 and future Line 12. When fully completed, the property will also be uniquely integrated with the adjacent 100,000 sqm Nanshan Park.
  • The integrated development consists of 121,831 sqm of GFA, of which retail takes up 51% of the floor area, office 26% and serviced residence 22%. The shopping mall was opened in Apr 2017 and has a committed occupancy of 99%.
  • Key tenants include Palace Cinema, Taste supermarket, Putien, and Blue Frog.
  • The office space is completed and 38% is pre-leased at present, while Ascott Raffles City Shenzhen is not operational as yet.


  • Wuhan currently makes up 1% of Capitaland’s asset exposure in China, with a total of 9 projects in this region. We saw CapitaMall Westgate (CM Westgate) and CapitaMall 1818 (CM 1818).
  • CM Westgate is an integrated project with a total GFA of 246,434sqm spanning across a shopping mall (65%), 2 office towers (24%), and a SOHO tower (11%) and 2,965 car park bays. It is strategically located at the centre of Hanjiang Bay regional business district. The property is linked to Gutian Second Rd Metro Station on Metro Line 1 and is served by 18 bus routes. The mall was opened on 28 Apr 2017 and is a one-stop family, entertainment and lifestyle destination mall. It is anchored by CGV cinema, a AEON supermarket, an Olympic-sized ice skating rink and a fitness club. Other tenants include GUESS, Adidas, Wonderplace and Gymboree. F&B offerings make up c.35% of the mall’s space.
  • Since opening, the mall has attracted average daily footfalls of 30,000-40,000 on weekdays an CM 1818 is the retail component of an integrated development that includes residential and office segments, with a total GFA of 112,789 sqm. It is located along Zhongbei Rd in Wuchang CBD. The mall is seamlessly connected to Chunhe Han St Metro Station of Metro Lone 4 and is also served by 18 bus routes. The mall with 79,894 of gross retail area is anchored by Lumiere Pavilions cinema and Vogue fitness centre and is positioned as a destination mall for urban professionals and young families. The mall enjoys daily shopper traffic of 30,000-40,000 on weekdays and more than 60,000 on the weekends.
  • The mall was opened in Sep 2015 and is 87% pre-committed at present.

Healthy pipeline of integrated projects 

  • Another 3 properties in China are schedule to open in the remainder of this year including LuOne and Capital Square in Shanghai and Suzhou Centre Mall. Once completed, recurring income from these properties are expected to add to the group’s stable income pool.
  • Beyond this, Raffles City Chongqing and Funan in Singapore also form the pipeline of new completions beyond 2017. Capitaland acquired a land parcel in Jiangbei District Ningbo with a potential GFA of 25,124 sqm in 4Q16. Plans are underway to build an integrated development comprising retail and office components connected to the existing Raffles City Ningbo. Construction is expected to start in 3Q17.
  • Not only do these projects add to the group’s income base in the longer run, building up scale in integrated developments also extends the group’s branding value and competitive advantage in this segment.
  • The US$1.5bn Raffles City China Investment Partners III (RCCIP III), in which Capitaland owns a 41.7% stake, was established to invest in prime integrated developments in gateway cities in China. The fund still has a capacity of investing in another US$2bn worth of assets, assuming a gearing of 50%. This puts the group in a strong position to continue to leverage on its competitive advantage to expand this segment of its business.

Growing operating network through asset light platforms 

  • To grow its retail operating network through asset light platforms, the group has secured 6 management contracts with > 200,000 sqm of retail GFA. Not only will they enable the group to demonstrate its expertise in retail mall management, these management contracts will also enable the group to grow its fee income and expand its pipeline of properties that could be eventually be acquired.

Portfolio reconstitution enables capital recycling 

  • Capitaland’s balance sheet is strong, with a debt-to-equity ratio of 0.44x and gross cash hoard of S$4.3bn as at 1Q17. Year to date, Capitaland had sold about S$1.57bn worth of assets and acquired S$1.28bn worth of new properties in Japan, US and China. Some of the capital recycling activities include the sale of Innov Tower for S$316m and netting a divestment gain of S$85m. The group in turn purchased the Guozheng Center (renamed as Innov Centre) for S$425m.
  • This has enabled the group to recycle capital into newer and higher-yielding assets. Other portfolio reconstitution strategies also deepened the group’s exposure to the US and Japan.

Valuations and Recommendation 

  • We continue to like Capitaland for its capital recycling and redeployment activities that would boost RNAV over time. 
  • With 72% of its asset base made up of stabilised properties, we think the group is well placed to benefit from income enhancement, which will have a positive knock-on impact on its ROE. 
  • Maintain Add with an unchanged Target Price of S$4.19, premised on a 20% discount to RNAV.

LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2017-07-03
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 4.190 Same 4.190