CapitaLand (CAPL SP) - DBS Research 2017-08-04: Setting The Stage For A Banner Year

CAPITALAND LIMITED C31.SI

CapitaLand (CAPL SP) - Setting The Stage For A Banner Year

Robust 2Q17 net earnings boosted by portfolio gains from divestments and revaluations.
Recurring income stable; China malls seeing improved operational performance.
Turning aggressive in land-banking in Singapore but disciplined in order to not overpay.

CapitaLand Limited (CAPL) achieved net profit of S$579.3m for 2Q17, ahead of consensus expectations. This is a whopping 97% increase y-o-y.
The strong performance was led by an increase in operating performance, higher revaluation gains from investment properties in Singapore and China, as well as higher portfolio gains largely from the divestments of Innov Tower in China and 18 rental housing properties in Japan.
Operating income at the net profit level for 2Q17 was 20.5% y-o-y higher at S$206.8m, mainly due to higher contributions from development projects in China, and newly acquired properties in Japan, and the U.S.

CAPL divested or is in the process of divesting close to S$2.4bn of assets and will be redeploying the proceeds into S$2.0bn worth of income producing properties, and has committed another S$1.6bn to the redevelopment of Golden Shoe carpark.
We believe that the group’s strategy of optimising portfolio returns through active management of its portfolio will help to boost ROE towards the management’s longer term target of c.8%.

The group sold S$281m worth of properties (102 units) in 2Q17 or S$778m (185 units) in 1H17 as the recent improvement in buying sentiment filtered through to projects that were already launched.
We note that Cairnhill Nine and Sky Vue (projects that could have incurred ABSD charges) are fully sold as of 1H17 while sales progress at its other projects are progressing well. Victoria Park Villas (99 unit, leasehold) landed development also saw brisk sales and has now sold 64 units ( out of 109 units), a slight improvement compared to last quarter.
Inventory now stands at S$1.0bn or roughly 1% of the group’s portfolio.
In the medium term, CAPL remains keen to deploy capital in Singapore and is looking to land-bank to restock its residential inventories. However, given the competitive market, the group will turn aggressive when fundamentals are more supportive.

CAPL sold RMB 4.6bn of new homes (3,084 units) in 2Q17; YTD sales was RMB 8.4bn (5,146 units), a marginal drop from last year largely due to having launched lesser units in 2017. We note that 94% of launched projects have been sold.
The group has a further 3,000 units to be launched for sale in 2H17.
CAPL has another RMB 11.7bn of pre-sales to be recognised from 3Q17 onwards; 20% is expected to recognised in 2H17 and the rest from 2018 onwards.

Tenant sales in 1H17 is doing well in Singapore (+0.9%) and China (+16.8%), implying that the group’s strategy of rejigging its tenant mix and offerings at its malls is well received by consumers.
We are seeing positive operational performance throughout its retail portfolio.
Same-mall net property income (NPI) is also improving, ranging from +6% in China to as high as north of 20% for India. Singapore malls continue to see flattish growth.

1H17 RevPAR of S$115/night for the group was flattish (-1% y-o-y) as performance across various countries remain mixed. RevPAR was generally weaker across most countries (Europe, SE Asia) but China was higher at +5%.
CAPL continues to build scale and expand its reach in Australia through the acquisition of a majority stake in Quest. The acquisition of Synergy Global Housing in the US expands the group’s reach from 1k units to 3k units.

Price Target 12-mth: S$4.35 (16% upside)
Rating: BUY

Derek TAN DBS Vickers | Rachel TAN DBS Vickers | http://www.dbsvickers.com/ 2017-08-04

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 4.350 Up 4.330