City Developments - DBS Research 2018-08-10: Majulah City Dev

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CITY DEVELOPMENTS LIMITED SGX:C09

City Developments - Majulah City Dev

• City Developments’ strong 1H18 results led by property development earnings from New Futura, Gramercy Park, China, and Japan. 
• Ten-year target to achieve S$900m recurring EBITDA, partly from fund management’s 10-year AUM target of US$12bn. 
• S$300m office asset acquisition to be announced soon. 
• Higher special interim DPS of 6 Scts vs 4 Scts in 2Q17. 

Upgrade to HOLD; Target Price at S$10.00.

• We upgrade our rating on City Developments to HOLD from FULLY VALUED at an unchanged Target Price of S$10.00. 
• With current share price at S$9.89 with potential upside of 1%, we believe the potential downside risks from the recent implementation of new cooling measures is reflected in its valuation.

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Where we differ: Negative sentiment to hit Singapore’s developer with the largest unsold inventory.

• Given the heightened uncertainty on property sales in the coming quarters coupled with the group having the largest inventory of new units for launch, City Developments’ share price is likely to be weak in the immediate term. 
• In addition, margins of units from the landbank acquired in late 2017 - 2018 could be impacted given that the ability to raise property prices may be limited following a turn in sentiment.

Potential catalyst:

• Property sales remain strong despite the change in sentiment; successful launch of its fund management platform.
• Strong 1H18 results led by property development earnings from Singapore, China, and Japan. 1H18 net profit jumped 36% y-o-y to S$285m largely due to higher contributions from property development (PBT close to doubled y-o-y) and divestment gains, partially offset by lower contributions from hotel operations (PBT fell 23% y-o-y). 
• Key highlights:
  1. 10-year target to achieve S$900m recurring EBITDA, partly contributed by its fund management platform with a 10-year AUM target of US$12bn,
  2. launch pipeline on track except South Beach Residences and Boulevard 88, and
  3. upcoming acquisition of a S$300m office asset to be announced soon.

Valuation:

• We upgrade the stock to HOLD (from FULLY VALUED) with Target Price unchanged at S$10, based on 35% discount to RNAV, which implies 0.9x 2018F P/NAV.
• With current share price at S$9.89 with potential upside of 1%, we believe the current valuation reflects the potential downside risks from the recent implementation of new cooling measures.

Key Risks to Our View:

• Non-completion of privatisation. The inability to complete the privatisation exercise on M&C could limit potential upside to RNAV.

WHAT’S NEW - Majulah City Dev

1H18 net profit jumped 36% y-o-y largely from property development earnings in Singapore, Japan and China.

• City Developments’ 1H18 net profit jumped 36% y-o-y to S$285m largely due to higher contributions from property development (PBT close to doubled y-o-y) and divestment gains of S$29m from CDL Hospitality Trust (CDLHT) in 1Q18, partially offset by lower contributions from hotel operations (PBT fell 23% y-o-y).
• 2Q18 net profit soared 86% y-o-y to S$205m largely from higher contributions from property development with lump sum recognition from projects completed and sold, and aided by the writeback of allowance for foreseeable losses for The Venue Residences of S$15.4m made in 2Q17.
• Property division: 1H18 revenue more than doubled mainly due the lump sum recognition from New Futura (74% sold as at 5 Aug18), Gramercy Park (fully sold; completed), The Criterion EC (completed in 1Q18), and its overseas properties - Hong Leong City Centre (HLCC) Suzhou phase 2 (65% sold; 58% of sold units handed over) and the group’s 20% stake in the development of Park Court Aoyama The Tower, Tokyo. Similarly, PBT close to doubled y-o-y, mainly from the lump sum recognition from the abovementioned development projects. PBT margin improved to 31% vs 14% in 1Q18 (mainly from The Criterion EC with lower margins) and 28% in 2Q17.
• Hotel operations: 1H18 revenue was flat y-o-y with better performance seen in M&C’s hotels in North Asia (mainly Korea) and New Zealand, and JW Marriott Hotel Singapore South Beach (JV), offset by lower performance from its London hotels which was partially impacted by the closure of Millennium Hotel London Mayfair for refurbishment (expected completion by 1Q19) and some forex losses. However, PBT fell 23% y-o-y, largely due to one-off items recorded in 2Q17 including write-back of S$22m on loans granted to Fena, offset by S$7m impairment of goodwill from CDL HT’s acquisition of The Lowry Hotel. Excluding one-off items, PBT remained fairly flat.
• Rental properties: 1H18 revenue declined marginally by 2% y-o-y but PBT grew 53% y-o-y largely due to S$29m gain from divestment of Mercure and Ibis Brisbane in Jan18 by CDL HT.
• Declared higher interim DPS of 6 Scts vs 4 Scts in 2Q17, following the strong results achieved. We believe this could potentially imply management’s confidence on the outlook of City Developments despite potential headwinds.

Outlook

Residential – sales value increased 12% y-o-y while sales volume fell 6% y-o-y; launch pipeline remains on track except for South Beach Residence and Boulevard 88 which are on review.

• Despite 6% y-o-y lower sales volume of 651 units, the sales value sold was 12% y-o-y higher at S$1.3bn (average ASP of S$2k psf) largely contributed by new launches - New Futura (74% sold) and The Tapestry (57%).
• Approximately 80% of the buyers at New Futura were foreign buyers and despite the additional cooling measures, New Futura sold another 5 units post the latest tightening measures. The buyers at The Tapestry however were 80% Singaporeans, mainly first-time buyers.
• Post the implementation of the tightening measures, management has turned cautious on the sector and expects property prices to decline by some 5-7% and sales volume to slow down. However, given that 58% of its launch pipeline is in the EC and mass market, management believes demand (targeting first-time buyers and HDB upgraders) for these properties could remain resilient.
• Upcoming launches:
  1. Whistler Grand at West Coast Vale in 4Q18, and
  2. projects at Handy Road, Sumang Walk EC, and Amber Park will be launched in 1H2019.
• The launches of South Beach Residences and Boulevard 88 are put on review again following the implementation of the cooling measures though management is reviewing to launch a preview on South Beach Residences in 2H18.
• In the international markets, the group sold more than 40 units in HLCC, Suzhou (phase 1&2), and 24 units (19%) from the relaunched Eling Palace in May18.
• Upcoming launches from overseas projects:
  1. Chongqing Huang Huayuan (30% stake) is targeted to be launched in 4Q18, and
  2. relaunch of Teddington Riverside, UK in Sep18.

Commercial properties

• As residential properties are impacted by the tightening measures, the group is looking at improving its recurring income stream with potential acquisitions.
• The group acquired an office block (4k sqm GFA) in Shanghai’s North Bund Business District for RMB148m (S$30m). Distrii, a co-working company, has signed a long master lease agreement for the building.
• There is an upcoming S$300m office asset in one of the target markets which is expected to be announced soon.
• The AEI on Republic Plaza has commenced and is expected to complete by 2H19 while Le Grove Serviced Residences re-opened in Jul18, ahead of schedule.
• Overseas, the group opened its first mall in China at HLCC, Suzhou in Jun18. The HLCC mall achieved 90% pre-lease commitment pre-opening. Leasing activities for HLCC’s office tower (phase2) will commence from 3Q18 while the 5-star M Hotel is expected to open by 3Q19.

Hotel – better performance in NZ and North Asia was offset by weaker performance in UK

• The group’s RevPAR fell 4.3%. On constant currency basis, the group’s RevPAR increased 0.5% y-o-y.
• On a constant currency basis, while hotels in Asia saw positive RevPAR (+2.8% y-o-y) mainly from New Zealand and Korea, this was offset by the European hotels especially in the UK (RevPAR -15% y-o-y). Despite the US recording a 2.5% y-o-y increase in RevPAR, the US hotels have yet to breakeven.
• The UK hotels performance were partially impacted by the closure of Millennium Hotel London Mayfair for refurbishment (expected completion by 1Q19).

PPS structure – potential divestment of Manulife Centre and 7&9 Tampines Grande

• Under PPS2, Manulife Centre and 7&9 Tampines Grande (part of PPS2) have received interests from potential buyers. Advanced talks with a buyer are ongoing for Manulife Centre while the group is evaluating the bids for Tampines Grande.
• Management expects good gains from a potential divestment of these properties.
• For PPS1, the group and its partner (Blackstone) will review its plans while PPS3 will likely be put on hold for a more opportune time to relaunch the residential projects.

Recurring Income / Fund management – targets recurring income to grow to S$900m EBITDA in 10 years with contributions from its fund management platform target of AUM of US$12bn in 10 years,

• The group has set a 10-year target to increase its recurring EBITDA from approximately S$600m currently to S$900m.
• This will be partially contributed by the fund management platform with a target to reach AUM of US$5bn in 5 years and US$12bn in 10 years. This platform could potentially contribute approximately one-third of the increase in its target recurring EBITDA.

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

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