CapitaLand - DBS Research 2018-08-10: Rebalancing Strategy Bearing Fruit

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CAPITALAND LIMITED SGX:C31

CapitaLand - Rebalancing Strategy Bearing Fruit

• CapitaLand’s 2Q18 PATMI ahead on strong revaluation gains. 
• Targeting a balance of 50%-50% exposure in developed and emerging markets to ride through market cycles better. 
• Strong pipeline of pre-sold residential projects in China to underpin near-term returns. 
• Retail malls showing resilient operational performance. 

Rebalancing strategy bearing fruit

• Maintain BUY, Target Price S$3.62. With only one project to be launched in 2019, we see limited impact on CapitaLand Limited (CAPL) from the recent tightening policy measures given its Singapore residential exposure forms only 5% of RNAV.
• With its core retail business and development business in Singapore and China on an uptrend in 1H18, we believe that CapitaLand will deliver strong earnings momentum in 2018. A strong balance sheet with low gearing offers financial capacity to undertake opportunities.
• Our Target Price is based on a 25% discount to RNAV.

~ SGinvestors.io ~ Where SG investors share

Where we differ: Further potential for higher dividends which will surprise investors.

• The 20% increase in dividend payment in FY17, which is sustainable, has provided investors with confidence that all business units are on an uptrend.
• We believe that CapitaLand’s consistent recycling activities to boost ROEs and returns have set the stage for a further uplift in dividends come 2018. The group has also obtained a share buyback mandate (2% of shares) from its shareholders which should support prices.

Rebalancing its portfolio.

• Management has articulated a strategy to maintain a 50%-50% exposure to developed markets (DM) and emerging markets (EM) which they believe will offer the group the right balance to ride through market uncertainties and cycles better.
• Supported by a c.56% exposure to DM markets in 2Q18 offering steady returns (capital upside and income visibility), we believe that CapitaLand can look for projects in EM exposures to generate alpha and returns over time.

Valuation:

• Our target price of S$3.62 is based on a 25% discount to our adjusted RNAV of S$4.83/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.

WHAT’S NEW - A Fruitful Strategy

2Q18 PATMI ahead on revaluation gains:

• CapitaLand Limited (CAPL) reported a profit after tax and minority interest (PATMI) of S$605.5m, a 4.4% growth y-o-y. Operating PATMI was down 6.0% y-o-y to S$196.0m. On a 1H18 basis, CapitaLand’s PATMI and operating PATMI were down by 5% and 23% to S$924.6m and S$424.7m respectively.
• In 2Q18, the stronger performance was largely driven by its core markets China and Singapore which collectively contributed c.74.8% of revenue (2Q17: 74.5%). This was on the back of higher recognition in China and higher handovers (Century Park in Chengdu, New Horizon in Shanghai) in the quarter followed by stronger recurring revenue streams from newly acquired properties in Singapore, China and new office properties in Germany.

Uplift in fair values from properties in China, Singapore and Europe.

• CapitaLand’s 2Q18 EBIT rose 36.6% largely on the back of higher contribution from an expanded portfolio and the consolidations of three REITs from August 2017 and boosted by the revaluations of its investment properties.
• CapitaLand reported a revaluation gain of S$620.1m (S$383.7m from its subsidiaries and S$236.4m from its share of associates and JVs) which mainly arose from CapitaLand’s assets in Singapore, China and Europe.

Capital recycling strategy ahead of initial expectations.

• CapitaLand sold S$3.1bn of projects in 1H18, across its REITs -- CapitaLand Commercial Trust (CCT) and CapitaLand Mall Trust and selected projects on the balance sheet and funds, which freed up capital to be invested into other opportunities with higher potential returns.
• As of 1H18, CapitaLand had reinvested c.S$1.8bn largely into development projects, namely Pearl Bank Apartments (S$728m), mixed-use site in Chongqing (S$459m) and into Vietnam (S$40.4m) and also added new recurring income streams in Germany (S$569.6m into Galileo through CCT).

Targeting a balance between EM and DM exposures.

• Management has articulated a strategy to maintain a 50%- 50% exposure to developed markets (DM) and emerging markets (EM) which it believes will offer the group the right balance to ride through market uncertainties and cycles better.
• CapitaLand had 56.9% of its exposure to DM as of 2Q18, which implies that the group should be looking to add more EM exposures (higher risk and potential returns) in its capital allocation in the coming months.

Handovers of close to 8,000 units to drive revenues higher:

• CapitaLand handed over 1,486 units to home buyers (2Q18: 1,108) mainly from Century Park in Chengdu, New Horizon in Shanghai and Citta Di Mare in Guangzhou. These units have a sales value of Rmb2.2bn.
• The group has another 8,000 units sold worth Rmb16.2bn which will be handed over progressively of which more than 50% of the units will be recognised in the coming six months.

Selected China residential launches delayed and continues to grow with new acquisitions.

• CapitaLand launched 746 units in 2Q18 with a sales value of Rmb3,231m. About 97% of the launched units had been sold as of 30 June 2018. The group has a further launch pipeline of 4,000 units which will be timed according to market conditions. 
• CapitaLand has also replenished its land bank recently with the acquisition of a 32-hectare site in Chongqing for S$459m. The site, when completed by 2022, is expected to yield 2,100 units with office and retail space.

Strong pipeline in Vietnam.

• In Vietnam, the group secured S$209m in sales in 1H18 (sold 619 units). About 93% of the projects in Vietnam have another S$811m (2,680 units) to be handed over of which 30% of the units will be handed over in 2018.

Pearl Bank Apartment (Singapore) en-bloc purchase on track.

• We understand that the group is close to completing the en- bloc purchase of Pearl Bank Apartments by 4Q18 of which the project should be ready to hit the market by 2Q19. While the recent cooling measures are likely to put a dent on potential investors' demand, the unique attributes of the project coupled with its location close to the central business district (CBD) might attract buyers if priced well. 
• We estimate a breakeven of S$2,200-2,300 psf.

Steady net property income (NPI) growth for its retail mall business.

• Retail Mall business continued to gain traction with 1H18 tenant sales growing by 2.0% in Singapore and 20.2% in China. The group reported steady same-mall NPI growth of 1.7% and 7.2% in Singapore and China respectively, while Malaysia and Japan fell by 5.0% and 5.3% respectively.
• CapitaLand continues to add to the growth from this business through the addition of new third-party contracts in China (Chengdu and Guangzhou) and Cambodia (Phnom Penh).

Ascott to grow steadily.

• Overall RevPAU rose by 4.0% y-o-y mainly from its properties in Singapore (+12%), China (+8%) and Europe (+13%) which more than offset the declines in countries in Southeast Asia (-6%) and Gulf region & India (- 9%). The healthy pipeline of over 29,400 units under development is expected to more than double the recurring management fees from S$86.4m to c.S$150m when completed.

Derek TAN DBS Group Research | Rachel TAN DBS Research | https://www.dbsvickers.com/ 2018-08-10

SGX Stock Analyst Report BUY Maintain BUY 3.620 Same 3.620