CapitaLand - UOB Kay Hian 2018-12-03: Extending Its Wings

CAPITALAND LIMITED (SGX:C31) | SGinvestors.io CAPITALAND LIMITED (SGX:C31)

CapitaLand - Extending Its Wings

  • We update our model to incorporate the latest data points on Jewel Changi, overseas acquisitions and earlier recognition of China residential sales.
  • New acquisitions include the 16 US multi-family properties, as well as an effective stake of 20.85% in Shanghai’s tallest twin towers.
  • We maintain BUY with a raised target price of S$4.40, pegged to a 20% discount to our revised RNAV.



WHAT’S NEW


Overseas acquisitions.

  • To recap, CapitaLand made its first foray into US multi-family properties via the acquisition of 16 freehold properties for US$835m (S$1.14b) which was completed on 18 Oct 18.
  • CapitaLand also expanded its exposure to China, via its effective stake of 20.85% in the Rmb12.8b (S$2.54b) acquisition of Shanghai’s tallest twin towers.

Strong pre-commitment levels of c.90% for retail spaces at Jewel Changi.

  • According to media reports, c.90% of retail space at the Jewel Changi Airport has been pre-committed.


STOCK IMPACT


Expanding into US multi-family properties.

  • CapitaLand acquired the portfolio of 16 Class B multi-family properties (comprising 3,787 units) across Seattle, Portland, Greater LA and Denver in the US, which have yields of 5.0-5.5%.
  • The total acquisition cost amounts to US$845m (S$1.16b), which will include the purchase consideration of US$835m (S$1.14b) and transaction expenses of US$10m (S$14m). Since the acquisition will be fully funded by fixed-rate debt (ie 4%+), we expect only mild earnings accretion of about 0-1.6% between 2018-20.

Updates on Jewel Changi.

  • Scheduled to open in early-19, the mixed-use 10-storey development sits on a 3.5ha site area. The cumulative total 137,100sqm GFA is spread across airport operations facilities (19,500sqm/14.2%), indoor gardens and attractions (22,000sqm/16.0%), retail (90,000sqm/65.6%) and a hotel (5,600sqm/4.1%).
  • No details have been provided on contributions/expenses on the airport facilities and indoor gardens (and attractions), hence they are not included for potential value creation in our RNAV and profit estimates.

Jewel Changi’s retail and hotel components.

  • For the retail component, our channel checks suggest that the tenant mix will be geared towards affordable/accessible luxury segments to prevent repetition of tenants from other terminals. Average signing rents are estimated at around S$20-35psf/pm, with close to 90% of the retail spaces having been pre-committed. Jewel will have over 280 tenants (of which over 30% are F&B operators), such as artisanal chocolatier Laderach, Pokemon Centre, Nike, Naiise (design retailer), Supermama (gallery store) and Tiger Beer.
  • The hotel component will comprise 5,600 GFA (130 rooms), managed by Yotel which is also their second project in Singapore. We are conservatively estimating room rates of c.S$190+/night, in line with their Orchard operations’ S$180-250/night.

Acquisition of Shanghai’s tallest twin towers for Rmb12.8b (S$2.54b).

  • CapitaLand, through its 41.7% stake in Raffles City China Investment Partners III (RCCIP III), partnered with GIC via a 50:50 JV to acquire Shanghai’s tallest twin tower. Their effective stake is equivalent to 20.85%. The mixed-use development will comprise two-storey premium Grade A office towers and a seven-story shopping mall situated on a 4.05 ha site in North Bund CBD, totalling 185,800 sqm in office GFA (51%) and 126,917 sqm in retail GFA (41%).
  • Management expects physical completion and office space to be introduced (ie with pre-leasing before that) in 2Q19, and the launch of retail space between 2Q-3Q19. The development will see a standard ramp-up phase from 2H19 to 2020, and complete leasing in 2021.
  • We estimate an NPI yield of 2-3% during the ramp up phase from 2H19 to 2020 onwards, before trending to c.4%+ from 2021 (ie in-line with other stabilised Raffles City China portfolio assets which are yielding c.4-5%).

Bumper 4Q18 recognition from China residential handover.

  • The group is expected to be handing over 7,000 units (valued at Rmb15.9b) from 4Q18 onwards. Of these, the group expects to recognise c.40%, equivalent to Rmb6.4b in 4Q18 (vs Rmb6.2b handed-over in 9M18).
  • Our estimates have also been updated, to reflect earlier recognition of China residential sales in 4Q18.

Management remains confident on China residential sales going forward,

  • Management remains confident on China residential sales going forward, with guidance of more than c.Rmb10b of China residential sales in 4Q18 (ie +264% y-o-y).
  • During the “Golden September, Silver October” season (ie China’s traditionally high season for new home sales) alone, the group saw c.Rmb2b in residential sales. The sales included Parc Botanica in Chengdu (100% sold of 388 units) for Rmb332m, Lakeside in Wuhan (90% sold of 372 units) for Rmb322m, La Botanica in Xi’an (97% sold of 535 units) for Rmb585m and The Metropolis in Kunshan ( > 90% of 324 units for Rmb758m).
  • Some of the group’s launches have been deferred, due to tighter government measures. In 4Q18, the group has plans for c.3,500 units which are ready for launch.


VALUATION/RECOMMENDATION

  • Maintain BUY with a target price of S$4.40, based on a 20% discount to our revised RNAV of S$5.05. 
  • CapitaLand remains our preferred large-cap property pick given its diversified asset base and contributions from recurrent earnings.


EARNINGS REVISION

  • We fine-tuned our net profit estimates by -4% to 19% for 2018-20, factoring in latest data points on Changi Jewel, overseas acquisitions and recognition of China residential sales.


SHARE PRICE CATALYSTS

  • Improving sentiment in core markets Singapore and China.
  • Accretive M&A in building up AUM, and recurrent earnings.





Andrew Chow CFA UOB Kay Hian Research | Loke Peihao UOB Kay Hian | https://research.uobkayhian.com/ 2018-12-03
SGX Stock Analyst Report BUY MAINTAIN BUY 4.40 UP 3.780



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