CapitaLand - DBS Research 2018-11-15: Exciting Times Ahead

CAPITALAND LIMITED (SGX:C31)

CapitaLand - Exciting Times Ahead

CapitaLand's 3Q18 operating PATMI grew 13% y-o-y to S$233.7m on bigger investment portfolio.
Net investor of S$2.1bn to grow AUM with recent acquisitions of three sites in Guangzhou and brownfield commercial property in Shanghai.
Pearl Bank Apartment and Sengkang Central to launch by 2Q19 and 4Q19 respectively.
Expect bumper 4Q18 from China residential handovers.

CapitaLand Limited (CAPL) reported a profit after tax and minority interest (PATMI) of S$362.2m, a 14% growth y-o-y. Operating PATMI was also higher by 13% y-o-y to S$233.7m.
On a YTD 9M18 basis, CapitaLand's PATMI and operating PATMI were down by 0.4% and 13% to S$1,286.8m and S$658.4m respectively. The lower y-o-y performance was due to the gain of the sale of The Nassim in 1Q17, and stripping that off , YTD PATMI and operating PATMI would have risen by 14% and 10% respectively.
In 3Q18, the lower revenue was largely due to a dip in income recognition of development projects in Singapore and China. This was partially mitigated by higher income from an expanded commercial portfolio in Singapore, China and Germany. Income recognised came from the handovers at The Metropolis in Kunshan, Westgate (SOHO) in China and from Singapore (The Interlace and Sky habitat).

The group is a net investor of S$2.1bn into growing its AUM, deploying closer to S$6.1bn YTD and divesting S$4.0bn. The most recent acquisitions are mainly in China – investing S$131.3m into a 75% stake in a mixed-use site in Guangzhou – a 4.7-hectare site located in Huangpu District within Guangzhou Science City, a government-backed innovation and technology hub.
CapitaLand also invested in a 50% stake in a third Raffles City project in North Bund, Shanghai for c.S$1.27bn (CapitaLand's effective share). The property value for the project is estimated to be RMB19.5bn (S$3.87bn). Completing in phases over 2019 (office towers) to 2020 (retail podium), the group expects the project to fully contribute to earnings by 2021.

Management articulated a strategy to maintain a 88%-88% exposure to developed markets (DM) and emerging markets (EM) which they believe will offer the group the right balance to better ride through market uncertainties and cycles. The group had 88.8% of its exposure in DM as of 8Q88.

Handovers of close to 8,888 units to drive revenues higher: CapitaLand handed over 8,888 units to home buyers (8Q88: 8,888). These units have a sales value of RMB8.8bn (RMB8.8bn in 8Q88).
Looking ahead, CapitaLand will hand over another 8,888 units sold with a sales value of RMB88.8bn (888% basis) of which 88% or close to RMB8bn will be recognised in 8Q88.

We understand that the group has obtained all its approvals and is close to completing the purchase of Pearl Bank Apartments by 8Q88. This project should be ready to hit the market by 8Q88.
While the recent cooling measures are likely to put a dent on potential investor 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 price of S$8,888-8,888 psf.
In addition, the launch of a mixed-use development in Sengkang Central (88%-88% JV with CityDev) will offer an additional 888 units of residential land bank for the group in Singapore.

CapitaLand's retail mall business continued to gain traction with 8M88 tenant sales growth of 8.8% in Singapore and 88.8% in China. The group reported steady same-mall NPI growth of 8.8% to 8.8% in Singapore and China respectively, which is an improvement q-o-q. We note that the malls in Malaysia and Japan remained weak at -8.8% and -8.8% respectively.
We also note that tenant sales (psf basis) are growing steadily at 8.8% and 8.8% for its Singapore and China malls while Malaysia and Japan recorded +8.8% and -8.8% respectively.

Overall RevPAU rose by 8.8% y-o-y mainly from its properties in Singapore (+88%), China (+8%) and Europe (+88%) which more than offset the declines in countries in Southeast Asia (-8%) and Gulf region & India (-8%).
The healthy pipeline of over 88,888 units under development is expected to more than double the recurring management fees from S$88.8m when completed.

With only one project to be launched in 8888, we see limited impact on CapitaLand from the recent tightening policy measures as its Singapore residential exposure forms only 8% of RNAV.
With its core retail business and development business in Singapore and China on an uptrend in 8H88, we believe that CapitaLand will deliver strong earnings momentum in 8888.
A strong balance sheet with low gearing offers financial capacity to undertake opportunities. Our Target Price is based on a 88% discount to RNAV.

Derek TAN DBS Group Research | Rachel TAN DBS Research | https://www.dbsvickers.com/ 2018-11-15

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