CapitaLand - CIMB Research 2016-12-05: Multi-pronged earnings drivers

CAPITALAND LIMITED C31.SI

CapitaLand - Multi-pronged earnings drivers

Four strategic thrusts to drive earnings growth and underpin management’s medium-term ROE target.
China residential handover and new mall completions would underpin earnings growth over the next two years.
Maintain Add with an unchanged RNAV-based target price of S$4.17.

CAPL has a resilient income profile with 70-80% of its net profit derived from recurring investment property sources.
The group’s four-pronged strategy – strengthen its core businesses, evolve its business model to real estate investment and operating platforms, expand AUM by using investment management as a competitive advantage, as well as stay relevant in the future real estate market – is likely to underpin its medium-term ROE target.

CAPL has locked in strong residential sales of 9,800 units valued at Rmb14bn as at 3Q16. An estimated 40% of this is expected to be handed over in 4Q16F. Another 1,840 units are launch-ready and in the pipeline.
We do not expect the government’s recent residential cooling measures to have significant impact on its profile of first time and upgrade buyers.
It also intends to build a sustainable development pipeline through private negotiation and urban renewal sources to improve returns.

CAPL is scheduled to complete the inclusion of eight retail malls in its portfolio by end-2017 – six in China, one each in Malaysia and India. We expect additional rental contributions to kick in and boost ROEs in FY18F onwards.
Meanwhile, its existing portfolio of malls is enjoying high occupancy of 90-98% and rising tenant sales (1.5- 20.0% yoy) and shopper traffic (1.2-13.5% yoy) in 9M16.

The group is on track to reach its S$10bn AUM target by 2020. Over the past 1-2 years, it has established a US$600m serviced residence and rental housing fund with Qatar investment Authority and set up the US$1.5bn Raffles City China Investment Partners III fund.
It is also looking to finalise a US$500m Vietnam commercial property fund. This is in addition to the rising management fee income from expanding the portfolio of serviced residences under management by Ascott.

We like CAPL for its capital recycling model. With gearing of only 0.47x at end-3Q16, it is well placed to capitalise on new investment opportunities, especially through its funds.
In addition to a steadily-expanding recurring income base, its asset-light strategy should boost ROE in the longer run.
Maintain Add with an unchanged target price of S$4.71, pegged at a 20% discount to RNAV.
Downside risks include slower than expected deployment of capital into new investments.

LOCK Mun Yee CIMB Research | Yeo Zhi Bin CIMB Research | http://research.itradecimb.com/ 2016-12-05

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