CapitaLand - DBS Research 2018-01-08: Focus On Staying Dominant In Core Cities

CapitaLand - DBS Vickers 2018-01-08: Focus On Staying Dominant In Core Cities CAPITALAND LIMITED C31.SI

CapitaLand - Focus On Staying Dominant In Core Cities

  • Sale of 20 malls for RMB8.4bn (S$1.7bn) a positive strategic move.
  • Target divested portfolio are located in Tier 2/3 cities with limited scope for expansion.
  • Gain of S$75m; proceeds of S$66m could be redeployed to higher-yielding opportunities.

What's New

Proposed sale of 20 malls in China to consortium led by China Vanke 

  • CapitaLand (CAPL) announced the proposed divestment of 20 China retail malls for an agreed property value of RMB8,365bn (S$1,705.9m). The malls are spread across 19 cities, of which 14 are in non-core cities which has a single mall in each.
  • The 20 malls are mainly from the CapitaLand Mall China Income Funds 1 & 2 and also from CapitaMalls Asia.
  • The buyer is understood to be a joint venture between China Vanke, Vanke’s subsidiary SCPG Commercial Property and Triwater, an affiliate of the fund.
  • CapitaLand is expected to generate net proceeds of S$660m and a net gain of c.S$75m, based on its effective stake in the properties, which range from c.45-73% for individual assets.
  • Loss of income from this mall is limited as the 20 malls account for 4% and 7% of total and China retail mall portfolio respectively.
  • The transaction is expected to complete in 2Q18.

Our thoughts:

Target portfolios are largely located in Tier 2/3 cities with limited scope for expansion. 

  • We are positive on this deal as a majority of the 20 malls are mainly located in Tier 2/3 cities where CAPL does not have geographical scale, which makes it tough to manage with synergies and/or scale up operationally. We note that close to 15 out of the 20 malls are in cities that CAPL currently has only one operating mall. In addition, these malls are mainly covering c.40,000 sqm, which in management’s view is sub-scale in today’s operating environment in China. 
  • In our view, this means that the malls’ smaller operational scale limits their product offering to investors. In addition, we note that a number of malls targeted to be divested have anchor tenants (i.e. Walmart) which take up a substantial space, limiting CAPL’s ability to drive value through active management or repositioning of these assets. 
  • In addition, we understand that lease tenures for these anchors are usually fairly long, and therefore limits upside to capital values and operational performance in the medium term.

Asset reconstitution to drive value creation for shareholders. 

  • This round of divestment comes on the back of the group’s recent sale of CapitaLand Kunshan and acquisition of Rock Square in Guangzhou (JV with CapitaLand Retail China Trust). 
  • In addition, the recent opening of 1m sqm of retail space across eight developments in Singapore, China Malaysia, of which six of these properties are integrated developments, will drive NAV and earnings going forward. 
  • Earnings contribution from the sizeable newly completed properties are expected to more than compensate for the income loss from the sale from these 20 retail malls.

Exit yield estimated at close to 3.0%. 

  • While not disclosed by management, we understand that portfolio yields on cost for malls in Tier 2/3 cities are close to 6.3%. 
  • Given the fair value gains recorded over the years since investment close to ten years ago, based on the agreed price of S$1.7bn, we estimate that the exit yield could be about 3.0%.

Sharpening focus in core cities. 

  • The transaction will sharpen the group’s geographical focus into cities where CAPL possesses a dominant advantage vs peers through having large-scale operational synergies. 
  • Post sale, CAPL's network will be concentrated in 22 cities vs 36 cities before and the group can then build meaningful scale in identified core city clusters.

A positive catalyst. 

  • We believe that investors should take this news positively as this will empower the group with additional capital to invest in higher-yield properties with a longer growth runway. 
  • We believe that gains of c.S$75m could be a stronger cause for potential higher dividends in FY18. 
  • Strategy-wise, it appears that the group has chosen to stay out of the current euphoria in the Singapore residential market and focus on investing in its core competencies and recycling its portfolio assets.

Maintain BUY and TP of S$4.35. 

  • We continue to see value in CapitaLand Limited (CAPL) as we anticipate strong catalysts in the medium term to drive its share price higher. 
  • We believe that market has not factored in potential higher dividend payouts given the group’s upward trajectory in recurring earnings. 
  • Stock remains cheap at 0.8x P/NAV compared to sector’s average of 0.9x. BUY! 

Where we differ: TP ahead of consensus average; potential for higher dividends which will surprise investors. 

  • We believe that our above consensus-average target price of close to 1x forward P/NAV is achievable given expectations that the group will deliver a robust set of results on the back of strong revaluation gains for its commercial portfolio, and locked-in sales for its residential portfolio. 
  • Most importantly, with recurring income projected to grow strongly from FY17F onwards, we see increasing potential that CAPL may raise dividends (payout ratio of 50%) progressively over the next few years on the back of a firmer footing, a non-consensus view at this moment. This will send a strong signal to investors of management’s confidence in the group’s financial position and earnings outlook.

Sale of 20 malls in China a positive catalyst. 

  • The proposed sale of 20 malls in China will empower the group with additional capital to deploy into other opportunities with a longer runway of growth. The target divested portfolio, in our view, will remain a drag on performance given that individually, the properties have limited scope for repositioning. Therefore, we believe that the divestment is a good opportunity.


  • Our target price of S$4.35 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.

Derek TAN DBS Vickers | Rachel TAN DBS Vickers | http://www.dbsvickers.com/ 2018-01-08
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 4.350 Same 4.350