CapitaLand - DBS Research 2017-07-07: Upward March

CapitaLand - DBS Vickers 2017-07-07: Upward March CAPITALAND LIMITED C31.SI

CapitaLand - Upward March

  • Robust pre-leasing activities at recently completed properties in China.
  • Increased confidence in the group’s ability to deliver sustained growth in recurring income.
  • Ready to pounce on new opportunities; asset recycling to drive returns.

Maintain BUY, Target Price maintained at S$4.33. 

  • There is reason to remain vested in CapitaLand Limited (CAPL) as we see strong catalysts in the medium term to drive its share price higher. We have raised our target price to S$4.33 on the back of a 10% discount to RNAV ( since 27 Apr).
  • We believe that CAPL will see higher valuations on the back of improved property market sentiment, leading to strong sales. 
  • In addition, continued asset recycling activities could translate to higher gains and boost ROEs going forward.

Robust activities at its newly completed properties. 

  • During our visit of a selected number of newly completed properties in Wuhan, Shenzhen, Hangzhou and Shanghai, we were pleasantly surprised to see robust foot traffic at the malls, underpinned by CapitaMalls Asia (CMA)’s ability to bring in new-to-market brands, to consistently refresh offerings to consumers. 
  • A majority of the recently completed properties have been substantially pre-leased ahead of completion, supporting higher recurring income going forward.

Ready to pounce on opportunities. 

  • We believe that it is opportune for the group to turn more active in terms of merger & acquisitions (M&A) to grow inorganically.
  • Acknowledging strong competition for land, management is looking at opportunities to acquire land through JVs and remains keen to invest in value-added opportunities where the group can drive higher returns through active management. In addition, CAPL is also looking towards potentially recycling its capital to achieve higher returns.


  • Our target price of S$4.33 is based on a 10% discount to our adjusted RNAV of S$4.81/share.

Key Risks to Our View

  • Slowdown in Asian economies. The risk to our view is if there is a slowdown in Asian economies, especially China, which could dampen demand for housing and private consumption.

Key Management Meeting Highlights.

CapitaLand turning more active in acquisitions; value-add real estate opportunities most interesting. 

  • 2017 will be a banner year for the group, with the completion of a number of integrated developments and retail malls. The group’s focus is to grow its recurring income to 72% of assets (vs 68% previously), with another 15% of its portfolio to deliver a stronger performance going forward after stabilisation.
  • With the opening and stabilisation of close to 8 major properties in 2017, we project earnings to grow strongly and we believe that management can start to turn more active in terms of merger & acquisitions (M&A) to grow inorganically.
  • Management is seeing interesting opportunities in China and new developed markets and remains keen to execute on them going forward. We understand that group is most keen to invest in value-add real estate opportunities where the group is able to turn around asset performance either through re-leasing the property, asset repositioning or physical upgrades in order to deliver higher returns. Such investments typically offer higher returns than core-plus investing and execution of such deals will underpin a strong earnings potential going forward.
  • Given its retail network and expertise, CapitaMalls Asia (CMA) has been gaining traction with asset owners and signed over 6 property management contracts in Singapore and China, comprising over 200,000 sqm of retail GFA. We understand that CMA has a rights of first refusal (ROFR) to acquire those assets if the owners intend to sell in the future.

Asset reconstitution strategy in place. 

  • While CAPL has ample cash resources with over S$4bn cash that can be deployed, asset re-cycling remains a key strategy in the aim to optimise portfolio returns. An example of such an asset recycling initiative is the recent sale of Innov Toer (RMB 38,000 sqm, exit yield of c.4.2%) in Shanghai and the subsequent reinvestment into Guozheng (renamed as Innov Centre) at a lower entry price (RM 32,700 psm) and potentially higher yield (c.4.5%-4.6%).
  • This strategy is also consistently employed by its managed REITs with CapitaLand Commercial Trust (CCT) and Ascott REIT (ART) who have been actively selling assets which management deemed to have achieved optimal maturity level. Going forward, it is expected that CAPL and its REITs will continue to actively manage their portfolio with the aim to achieve stable returns over time.

Key visit highlights.

Retail is not dead, in our view. 

  • The group’s efforts to combat against the rising threat of e-commerce is making headway, and we believe that CMA is taking steps in the right direction.
  • The overall aim for the group is to continue to gain mindshare with consumers through active management of malls in the portfolio, introducing new concepts in fashion and F&B to their malls, which seems to be gaining traction with consumers.

Strong pre-leasing at new properties 

  • A majority of the completed properties have been pre-leased ahead of completion and opened with high occupancies of close to 100%.
  • During our site visit, we found that CAPL has made efforts to put in a higher experiential component in the malls, with 30%-35% of tenants either new in terms of fashion brands, or offering new concepts in F&B.


  • We visited Raffles city Hangzhou (RCH) which was recently opened. Located in Qianjiang New town, Hangzhou’s new central business district (CBD), the 298,276 sqm GFA integrated development is one of the largest Raffles City branded property within CAPL and stands out as a prominent landmark in the area, which has seen a number of new office buildings completed in recent years.
  • Pre-leasing at RCH is progressing exceedingly well. The retail mall (40% of GFA) is substantially leased with a committed occupancy of over 95% as of April 2017 with more than 30% of the tenants are concept, flagship stores that are new to Hangzhou. Some of the notable tenants include the popular Heytea, Yanjiyou lifestyle bookstore and Orange Sky Golden Harvest Cinema.
  • The property’s office component (13% of GFA) is held for income by the group, and has also seen strong pre-leasing with close to c.52% of space leased as of Jun’17. The aim is to achieve 80% by year end while strata offices available for have been substantially sold (c.95% of available space. Strata sales for the SOHO Apartments (Sky Habitat) ( c.88% of 102 units have been sold)


  • We visited the recently opened Raffles City Shenzhen (RCSZ), located in Nanshan district with one of the highest concentration of expats and international schools. The mall saw good traffic and has many new-to-market concepts anchoring the mall. 
  • As is the case with other Raffles City developments, RCSZ is well located and linked to 2 upcoming MRT train lines (lines 9 and 12) which will open in 2019 and 2021 which will mean stronger traffic in the medium term. 
  • The Ascott Serviced apartment offers a good catchment for the mall and is understood to receive robust enquiries from potential corporates. Demand for rooms is generally from local SMEs. 


  • In Shanghai, we went to Raffles City Changning (RCS) which was officially launched recently. The property is a unique property integrated with three historical buildings, with two office towers and two retail podiums (West and East Wing). 
  • Given its location within a residential district with high expat concentration, it has an immediate catchment of more than 1 million residents living within 1 km. We noted that the positioning of the mall is more upper mid-tier with a good mix of international brands. Like its other Raffles City projects, there is a good number of new to-Changning brands (C.20% of tenants), and those offering new concepts. 
  • The retail podium is close to 100% leased while office tower has been substantially taken up with tenants doing their fitouts to start operations soon. 
  • We also visited the recently acquired Innov Tower (formerly known as Guozheng). While one of the key motivations to acquire the property was to recycle its capital into Shanghai, we see potential for the property to increase its occupancy given its location with the WujiaoChang district and is of the four emerging decentralised zones within Shanghai. We understand that there is an emerging demand for firms to relocate there given soaring rents within downtown Shanghai, and the ground team is seeing a growing number of firms in the Technology re-locating to the vicinity. 
  • There are a number of new competing buildings entering the market in the next few years but should be absorbed as the strength of the location is (i) proximity to metro station; and (ii) access to a number of universities (i.e. Fudan) and residential district, implying readily available labour pools. 


  • In Wuhan, we visited two malls – CapitaLand 1818 and CapitaLand Westgate - which are fairly new malls that opened in recent years within the CMA portfolio. These are all within the 3rd ring road, meaning that there is strong resident density and catchment. 
  • CapitaLand Westgate opened in April 2017 and has since seen strong returning foot traffic. The property is located within a business district and is positioned as a family-themed mall with AEON supermarket as an anchor at B1, and a cinema. The integrated development is linked to an office tower (from level 4) and has direct links to metro station in B1 and a residential block from level 2 (built and owned by China Merchants Group). This means that retailers are able to enjoy consistent traffic and patronage throughout the week.
  • CapitaLand 1818, likewise is positioned with more experiential components within the mall, anchored by a cinema and a high concentration of F&B outlets, some of which are new-to-market concepts. The mall does not have a supermarket given its location with the CBD. We understand that the fashion component might be a little weak but generally tenants in the sports and F&B are doing well. 

Derek TAN DBS Vickers | Rachel TAN DBS Vickers | http://www.dbsvickers.com/ 2017-07-07
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 4.330 Same 4.330