CDL Developments - RHB Invest 2019-05-16: Taking A Big Leap Into China


CDL Developments - Taking A Big Leap Into China

  • Stay NEUTRAL with a SGD9.20 Target Price, 8% upside. CITY DEVELOPMENTS LIMITED (SGX:C09)'s 1Q19 net profit (excluding divestment gains) broadly met.
  • Amid challenging local market conditions, City Developments has been actively expanding its overseas presence – acquiring stakes in Sincere and IREIT GLOBAL (SGX:UD1U) recently, which we see as a long-term positive.
  • Near-term City Developments share price performance, however, is likely to remain range-bound, due to headwinds in the Singapore and UK residential markets, and weak hotel segment performance.

Building up scale in China.

  • CITY DEVELOPMENTS LIMITED (SGX:C09) announced an acquisition of a c.24% stake in China’s Sincere for CNY5.5bn (SGD1.1bn) via share subscription and loan. The acquisition price translates to ~1.4x FY18 P/BV.
  • City Developments noted that the acquisition was done at discount to its conservative SOP valuation of Sincere without disclosing the exact figures. We also note that the transaction is slightly dilutive (-4%) to pro-forma (FY18) EPS, although management guided that this was mainly due to accounting adjustments.
  • Separately, it also announced the acquisition of a 70% stake in Shanghai Hongqiao Sincere Centre (Phase2) for CNY1.2bn (SGD247m).
  • Both transactions are expected to be completed by 2H19. Post transaction, China will become the second-largest market for City Developments at 15% of its assets under management (AUM) – overtaking the UK (14%) – with Singapore still accounting for the bulk (46%).

An opportunistic move.

  • Sincere’s current asset mix is 70:30 of development and investment properties located across 20 Chinese cities vs City Developments’ three cities currently. Its development landbank is mainly in Tier-2 cities (85%) and the company has an estimated GDV of CNY130bn, with gross margins typically at 20%.
  • There is also potential for City Developments to inject Sincere’s investment properties into a REIT/private fund, thereby growing its fund management platform. The move comes amid City Developments’ slow progress in building up its China portfolio and depleting landbank.
  • Moving ahead, Sincere should be the platform for City Developments to expand its China operations. We see the acquisition as an opportunity to deepen its presence in China, amid tighter financing conditions faced by local developers.
  • Overall, we are neutral on deal, as positives are balanced by the current tight market regulations and escalating trade tensions.

Expanding REIT platform with IREIT Global acquisition.

  • The latest acquisition comes closely on the heels of City Developments’ acquisition of a 50% stake in IREIT GLOBAL (SGX:UD1U)’s manager and 12.4% holding in the REIT for SGD77.8m.
  • IREIT Global has five freehold office assets across key German cities. The expansion comes as part of City Developments’s plans to grow its fund management AUM to USD5bn by 2023. We also see the possibility of the firm divesting its recently-acquired UK office assets into IREIT Global, thereby recycling capital.

Results And Operations Update

Commendable sales in SG new launches.

  • In 1Q19, City Developments launched two high-end projects: Boulevard 88 and Amber Park.
  • Both projects saw an above average take-up rate compared to the market, which we believe is due to its strong brand recognition, good location, and freehold status. To date, about 47 of 154 units in Boulevard 88 have been sold at more than SGD3,700psf, while 145 of 595 units at Amber Park were sold at SGD2,425psf.

Net gearing to increase to 41%.

  • Net gearing to increase to 41% (FY18: 31%), post completion of Sincere’s acquisition, which we believe is still in the comfortable range.
  • The weighted average cost of debt slightly increased in 1Q19 to 2.4% (FY18: 2.3%), with c.45% of debt at a fixed rate.

1Q19 PATMI was lifted by divestment gains,

  • while 1Q19 revenue declined 30% due to lower development property contributions. Gross profit only declined 5% due to higher margins for a project sold last year. Looking ahead, we expect gross margins (Singapore) to be squeezed on the back of stagnating property price outlook.
  • City Developments also booked divestment gains of SGD144.3m in 1Q19 from the divestment of Manulife Centre, which boosted its PATMI to SGD199.6m (+144% y-o-y). Excluding divestment gains, 1Q results came broadly in line with our expectations.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-05-16
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 9.200 SAME 9.200