City Developments (CIT SP) - UOB Kay Hian 2017-08-14: 2Q17 Results Below Expectations; Expect A Better Second Half

City Developments (CIT SP) - UOB Kay Hian 2017-08-14: 2Q17: Results Below Expectations; Expect A Better Second Half CITY DEVELOPMENTS LIMITED C09.SI

City Developments (CIT SP) - 2Q17: Results Below Expectations; Expect A Better Second Half

  • Expect a better second half with the completion of several residential projects in Singapore. Management showed greater optimism on the Singapore residential segment, following the strong reception towards its developments. 
  • Management noted signs of bottoming in the Singapore office sector and announced a S$60m AEI for Republic Plaza. 
  • Although the changing of the guard with Mr Sherman Quek taking over Mr Grant Kelly with effect of 1 Jan 18 was anticipated, it took place slightly earlier than expected. 
  • Maintain HOLD with an unchanged target price of S$11.40.
  • Entry price: S$9.70.


Results below expectations. 

  • City Developments (CDL) reported a 2Q17 PATMI of S$109.9m, down 17.9% yoy, due to the lack of contribution from the Lush Acres Executive Condominium, which was recognised entirely in 2Q16. 
  • The results came in below our and consensus expectations with 1H17 PATMI representing 34% of our full-year estimate, mainly due to lower-than-expected contributions from the development properties in Singapore due to timing of project completions. 
  • We leave our earnings estimates unchanged, expecting better second-half contribution with the completion of D’Nest, New Futura, The Brownstone and Commonwealth Towers projects.

Segmental performance. 

  • 2Q17 property development PBT was down 20.9% yoy, mainly due to the aforementioned lack of contributions from Lush Acres EC. 2Q17 saw hotel operations PBT grow 16.4% yoy, mainly from new contributions from Grand Millennium Auckland and M Social Hotel, which were added to the group’s hotel portfolio last year, together with improved performance from the hotels in New York, particularly increased contribution from ONE UN New York whose East Tower was closed for refurbishment in 1H16. 
  • During the quarter, rental property PBT declined 10.9% yoy, largely attributable to the loss of contribution from the divestment of Exchange Tower (announced in 4Q16) and the closure of Le Grove Serviced Apartments for renovations.


Rising confidence in Singapore residential market on the back of strong sales 

  • Rising confidence in Singapore residential market on the back of strong sales seen with 691 residential units sold in 1H17 with sales value of S$1.15b, tripling that of 1H16. 
  • During the quarter, profits from Gramercy Park and JV projects such as Coco Palms, D’Nest, The Venue Residences and Shoppes and Commonwealth Towers were booked. Phase One and Two of Gramercy Park have been 87% and 82% sold, respectively. Average sale prices have risen from S$2,650 psf for Phase One to over S$2,880 psf for the Phase Two launch. 
  • On the back of the strong sales of Gramercy Park, management will launch the high-end New Futura condominium project in the Orchard Road vicinity in 2H17. 
  • Management will also launch a new condominium at Tampines Avenue 10 in early-18.

Management noted signs of bottoming in the Singapore office sector. 

  • Although tenants are taking advantage of the favourable market conditions to lock in renewals well ahead of their lease expirations, given the decrease in the supply of private office space expected by 2019, management is optimistic of rental growth potential. 
  • Management noted that the office market is showing nascent signs of a bottoming-out as Grade A and B core Central Business District (CBD) office rents were maintained at the same levels as in the previous quarter. 
  • The group's office occupancy rate was at 96.4%, compared to that of the market which was at 87.6%.

S$60m AEI for Republic Plaza. 

  • CDL's flagship asset, Republic Plaza, will undergo an AEI, which will commence in 1Q18 and is expected to be complete by 1H19. The AEI will include renovations of the main lobby, lift lobbies, driveway and frontage. The retail space will be renovated and expanded and parts of the office space will be upgraded and converted to increase efficiency and value. 
  • Management remarked that an ROI of 10% is to be expected.

Slowdown from cooling measures in China. 

  • Management noted that their two developments in Chongqing, Eling Residences and Huang Huayuan have experienced a slow pace of sales. Following the property cooling measures in Shanghai, management noted that home prices have stabilised, such that priority has been given to genuine buyers as opposed to speculators. 
  • The group's Hongqiao Royal Lake property has sold 41 out of the 85 villas to date, but given that villa developments are no longer permitted in China, management believes that this property will have greater upside into the future.

UK update. 

  • The weakened GBP has been supporting international investment in Central London. However, given that the group's reporting is in Singapore dollars, the weaker pound has had a negative effect on 2Q17 and 1H17 performances when consolidated at the group level. The 28,000sq Development House located at 56-64 Leonard Street Shoreditch is fully leased, with vacant possession expected from 2Q18; the decision on the application for redevelopment is expected to be made in 2Q18. 
  • Looking forward, planning consent for a luxury care-home at 28 Pavillion Road in Knightsbridge, is in place and demolition works at the Ransomes Wharf site in Battersea is set to be made in 1Q18.

Looking at further opportunities in Japan. 

  • The group is in discussions with a potential Japanese development partner to commence the construction and development of the Shirokane, Tokyo property. 
  • CDL's JV project, Park Court Aoyama The Tower, is showing promising sales with 65% of units sold ahead of its 1H18 completion.

M&C Hotel Performance. 

  • Millennium & Copthorne RevPAR grew 4.9% to £78.69 in 1H17, driven by increases in occupancies and room rates. RevPAR growth was the strongest in London, which saw a 10.7% increase in 1H17 from higher tourist numbers due to the weak sterling; this was followed by New York, where RevPAR grew by 10% due to increased contribution from ONE UN New York, which was closed in 1H16 for refurbishment. 
  • Looking forward, M&C will commence renovations in Orchard Hotel and soft-open M Social Auckland, formerly known as Copthorne Hotel Auckland Harbourcity.

Management changes. 

  • CEO, Mr Grant Kelley will be stepping down with effect on 31 Dec 17. 
  • Mr Sherman Kwek, currently the Deputy CEO, will be the CEO-designate effective from 11 Aug 17, until he takes over the full responsibilities of CEO on 1 Jan 18.
  • The change was anticipated though it came a bit earlier than expected.


  • Maintain HOLD with an unchanged target price of S$11.40 pegged at a 12% discount to our RNAV of S$12.95/share.

Vikrant Pandey UOB Kay Hian | http://research.uobkayhian.com/ 2017-08-14
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 11.400 Same 11.400