City Developments - UOB Kay Hian 2021-03-01: 2020 Paying A Big Price For A Major Misstep In China

CITY DEVELOPMENTS LIMITED (SGX:C09)

City Developments - 2020 Paying A Big Price For A Major Misstep In China

In a Sincere and COVID-19 affected year, City Developments reported a record loss of S$1.9b with 93% of its investment in the Chinese property company written off.
The potential to acquire inexpensive assets, such as the recent Shenzhen tech park, may be a silver lining in time to come.
We reduce our earnings forecasts slightly and maintain our BUY recommendation on City Developments with a lower target price of S$8.50.

City Developments (SGX:C09) reported its first loss since the 1970s and it was a large one at nearly S$1.9b for 2020. This was attributable to S$1.78b in impairments related to its investment in Sincere Property Group (Sincere) as well as S$99.5m in impairment losses for its hotels and investment properties. Excluding these extraordinary items, City Developments would have made a pre-tax profit of S$120.8m.

The S$1.78b impairment has wiped out 93% of City Developments’s total investment and appears to be a tacit acknowledgement that this China entry was a major misstep, and one that the company is keen to work to put behind it. With the impairment, City Developments’s balance sheet exposure to Sincere was only S$126m as at end-20.
With potential liquidity challenges over the next 6- 12 months, Sincere may yet remain a drag on City Developments's share price for now.
On the bright side, City Developments’s recent acquisition of Sincere’s Shenzhen tech park at inexpensive valuations, and potentially other such acquisitions, may prove to be positive in time to come.

Like other Singapore property developers, City Developments’s sales of 1,318 residential units (2019: 1,554) was stronger than expected in a COVID-19 affected year. City Developments’s sales of S$1.8b was materially lower than the S$3.3b achieved in 2019 due to a differing product mix, with less high-end projects and more mass and mid-segment projects in 2020.
At the results briefing, City Developments's management affirmed that it will look to build up its landbank in the near to medium term.
City Developments has a decent growth pipeline in Singapore with:
1. the 540-unit Irwell Hill Residences in prime District 9 to be launched in 2Q21;
2. the residential component of the Liang Court JV redevelopment slated for 2H21; and
3. the redevelopment of the Fuji Xerox Towers into a mixed-use integrated development with 286 residential units planned, and importantly a potential GFA uplift of 25%.
In total, City Developments has more than 1,200 units in its launch pipeline.

While only 8% of City Developments’s hotels are closed at present, it acknowledged that many that are open are still not doing well. However City Developments’s management was adamant at the results briefing that hotels would surprise on the upside and likely see the fastest rebound to profitability, potentially by end 3Q21.
Divestment will also be likely, with around 1-2 assets per region that could be sold over the next 12 months.

Despite a tough year, City Developments’s office assets saw positive rental reversion with its office and retail segments registering over 92% occupancy and was the second strongest business unit based on pre-tax profit contribution.
Going forward, growth in this segment could come from new investments in purpose-built rental assets in the in UK, Japan and Australia.

Despite the outsized loss in 2020, City Developments’s financial health remains robust in our view – as at end-20, cash and available undrawn committed bank facilities total S$5.2b and net gearing was 62%.
Its debt maturity profile does not appear onerous with S$312m, S$100m and S$400m of bonds maturing over 2021, 2022 and 2023 respectively. Bank loans of S$2.5b and S$4.1b due in 2021 and 2022 appear larger but City Developments should be able to be refinance these in our view.

We have mildly lowered our City Developments's 2021 and 2022 net profit forecasts by 3% and 1% respectively on the back of lower sales expectations for the company’s current Singapore residential offerings. However we highlight that we have yet to factor in potential new launches such as those mentioned above.

We retain our BUY rating on City Developments but lower our target price to S$8.50 (previously $9.20).
Our valuation has declined as a result of a fall in our RNAV to S$13.50/share (previously S$14.40/share). Our RNAV discount remains at 40% which we view as fair given potential negative news that may be forthcoming from Sincere over the near to medium term.
See City Developments Share Price; City Developments Target Price; City Developments Analyst Reports; City Developments Dividend History; City Developments Announcements; City Developments Latest News.
We note City Developments’s disclosure that while its RNAV was S$14.26/share at end-20, this number would be more than S$2.62/share, or 18% higher, if it had included revaluation surpluses from its hotel portfolio.
Valuations appear inexpensive on P/B basis as City Developments is trading at roughly 1.5SD below its 5-year P/B average of 0.91x. However its 2021F P/E of 14.8x is a 17% premium to the company past five-year average of 12.7x.
At our target price of $8.50, City Developments would trade at a 2021F P/B of 0.9x which we view as fair.

Continued economic recovery from COVID-19, especially resumption of travel.
Announcement of monetisation strategies such as the IPO of its UK commercial assets.

Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-03-01

SGX Stock Analyst Report BUY MAINTAIN BUY 8.50 DOWN 9.200