CapitaLand

OCBC on 22 Feb 2012


Major new wires reported today that non-local residents in Shanghai can now purchase second homes after holding residence permits for three years, citing the city’s housing regulator through Shanghai Securities News. While too early to tell, we believe this development shifts the odds marginally towards a scenario of fine-tuning and decentralization from centrally-imposed buyer restrictions, given that Shanghai is a touchstone for major policy shifts. In our view, while Chinese monetary easing has gradually reduced the likelihood of a hard-landing scenario, persistent property curbs and slowing residential sales remains the main drag on CAPL’s earnings outlook. With visibility already mostly present for CMA’s strong execution on its mall pipeline and an expected positive launch at Sky Habitat (Bedok) in 2Q12, shifts in market expectations regarding Chinese residential sales would likely be a key price catalyst over the near to mid-term. We raise our fair value estimate to S$3.40 (unchanged RNAV discount of 25%) versus S$3.11 previously, after updating our model for higher valuations of listed holdings and less bearish estimates of Chinese residential ASPs. Maintain BUY.

Higher odds for fine-tuning and decentralization
Major new wires reported today that non-local residents in Shanghai can now purchase second homes after holding residence permits for three years, citing the city’s housing regulator through Shanghai Securities News. Previously, residence permit holders were not allowed to buy second homes in the city. While too early to tell, we believe this development shifts the odds marginally towards a scenario of fine-tuning and decentralization from centrally-imposed buyer restrictions, given that Shanghai is a touchstone for major policy shifts.

It’s about Chinese residential sales
A majority of CAPL’s assets is in China - 38% of assets, ex. cash, as of end 4Q11. Of its Chinese exposure, 38% is in residential projects. In our view, while Chinese monetary easing has gradually reduced the likelihood of a hard-landing scenario, persistent property curbs and slowing sales remains the main drag on earnings outlook. CAPL sold ~1,500 Chinese residential units in FY11 versus 2,920 units in FY10. QoQ sales also slowed (409 units sold 3Q11; 161 units 4Q11). Management had indicated there are 2.4k launched and unsold Chinese units, which is a fairly large inventory to work through. With visibility already mostly present for CMA’s strong execution on its mall pipeline and an expected positive launch at Sky Habitat (Bedok) in 2Q12, shifts in market expectations regarding Chinese residential sales would likely be a key share price catalyst over the near to mid-term.

Maintain BUY at higher fair value estimate of S$3.40
We had highlighted Chinese macro drivers as a likely positive catalyst in an earlier paper “China – wild card” dated 15 Dec 2011 with a Buy call, and note that the CAPL’s share price has appreciated 40% since then. We reiterate our investment thesis and raise our fair value estimate to S$3.40 (unchanged RNAV discount of 25%) versus S$3.11 previously, after updating our model for higher valuations of listed holdings and less bearish estimates of Chinese ASPs. Maintain BUY
.

CapitaLand

OCBC on 15 Feb 2012

CAPL reported 4Q11 PATMI of S$476.6m, down 20% YoY. Adjusting for one-time items, we estimate 4Q11 PATMI at S$221.9m - in line with our expectations. About 1,500 residential units were sold in China over FY11 and we see anemic Chinese sales in FY12 as buyer restrictions are likely to stay. In Singapore, 844 units were sold in FY11. A key launch ahead is Sky Habitat at Bishan which we believe would perform well. Major Shanghai malls, Minhang and Hongkou, opened for operations in FY11 and we forecast CMA’s recurring earnings to increase 84% from S$120m in FY11 to S$221m in FY12, partially offsetting slowing residential sales. We maintain our BUY rating and adjust our fair value to S$3.11 from S$2.76 previously, mostly due to higher valuations for listed entities.

4Q results within our expectations.

CapitaLand Ltd (CAPL) reported 4Q11 PATMI of S$476.6m, down 20% YoY. Adjusting for one-time items, we estimate 4Q11 PATMI at S$221.9m, which is in line with our expectations. 4Q11 topline came in at S$1,059m - 17% higher YoY. This cumulates to S$3,020m for the full year which is about 16% above our forecast mostly due to faster than expected recognition at development projects. The group proposed a dividend of 8 S-cents (versus 6 S-cents last year).

Residential headwinds in China continue.
In China, we saw about 1,500 units sold in FY11 (3Q11: 409 units, 4Q11: 161 units). The group currently has 2.4k of launched and unsold units in China and would adopt an opportunistic stance with regards to launches. We expect anemic Chinese residential sales in FY12 as buyer restrictions are likely to stay. CAPL sold 844 residential units in Singapore over FY11 (3Q11: 67 units, 4Q11: 506 units) and plans to launch 800-1,000 units per year over the next 2-3 years. The key highlight ahead is the 509-unit Sky Habitat launch at Bishan (expected 2Q12) which we believe would perform well.

CMA to boost core earnings ahead.
CMA recorded earnings of S$456m, down 15.8% YoY mostly due to the lack of development profits from Orchard Residences. Execution of its pipeline remains on track with major Shanghai malls, Minhang and Hongkou, successfully opening for operations in FY11. We see an inflection point in CMA’s recurring earnings, which could increase 84% from S$120m in FY11 to S$221m in FY12, partially offsetting falling Chinese residential sales.

Maintain BUY with increased S$3.11 fair value.
China makes up 38% of total assets (ex. treasury cash) and 51% of pipeline developments. Over the near term, we believe the Chinese macro outlook to be a key driver of the share price which has rallied 31% YTD as China reversed into a loosening stance in 4Q11. CAPL’s balance sheet remains strong (0.3x net debt/equity, S$6.3bn cash). We maintain our BUY rating and adjust our fair value to S$3.11 from S$2.76 previously, mostly due to higher valuations for listed entities.

CapitaLand

Kim Eng on 15 Feb 2012

Another billion-dollar year. CapitaLand reported a FY11 PATMI of $1.06b, 25.8% lower than the previous year. PATMI excluding revaluations would have been $573.5m, largely in line with our expectations. Looking beyond the earnings volatility, the group has demonstrated that its capital recycling model still works. Management is proposing a higher-than-expected total dividend of 8 cents per share, which is a small but pleasant surprise. Maintain Buy.

Monetising asset gains. Other than the revaluation gains, CapitaLand also enjoyed net portfolio gains of $222m in FY11, mainly from the divestment of a residential site in Shanghai, New Minzhong Leyuan Mall, Ascott Beijing and Corporation Place, among others. We see this as a positive sign that the group’s capital recycling model is still very much at work, enabling it to redeploy capital into new investments such as the Chongqing Chaotianmen acquisition.

Still positive on China. In FY11, CapitaLand sold ~1,500 homes in China. Looking ahead, management remains positive on the Chinese market in the long term as urbanisation and strong domestic consumption will continue to underpin demand. CapitaLand will continue to explore opportunities to acquire new sites. As of December last year, its China residential business accounted for only 14.4% of total group assets.

New launches in Singapore imminent. Management believes that a significant price correction in the Singapore residential market is not likely, as interest rates remain low. CapitaLand plans to roll out new phases at The Interlace and d’Leedon, and is also targeting to launch the 509-unit Sky Habitat in Bishan in 2Q12. We think that the timing of its launch is critical, given that the downside risk to ASPs is increasing.

The beauty of diversification. CapitaLand’s diversified business model is likely to see it through the uncertain year ahead. With its cash position of $6.3b and low net gearing of 0.3x, it is well-positioned to pick up attractively-priced assets. We have increased our target price to $3.96, pegged at a 20% discount to RNAV, which incorporates our new valuation for subsidiary CMA. Maintain Buy.

Singapore Property Sector

Kim Eng on 26 Jan 2012

Mass market exuberance still reigns


Few signs of demand letting up. Merely a month after the introduction of the Additional Buyer’s Stamp Duty (ABSD), anecdotal evidence suggests that the sense of caution experienced following the implementation was just temporary as both homebuyers and property developers appear to be resuming their activities. In our opinion, such a phenomenon may not last and we remain neutral on the Singaporebased developers, preferring the diversified property plays instead.

Developers still vying for land. From the three residential Government Land Sales tenders that closed after the introduction of the ABSD, it appears that developers are still looking to acquire welllocated sites. While the Mt. Vernon Road tender suggests that developers are pricing in a potential drop in property prices, the two most recent tenders for the sites at Clementi Ave 6 and Simon Road still attracted healthy interest of 8 and 12 bids respectively. We also noted that foreign developers continue to be actively bidding for land, perhaps less daunted by the medium-term uncertainty.

Emboldened by recent launches. Recent launches of mass market projects and Executive Condominiums (ECs) continue to see healthy demand despite growing concerns over the economy. For example, Far East Organization’s The Hillier at Hillview (~$1,200 psf) and Watertown at Punggol Central (~$1,100 psf) have both attracted strong demand. In the near-term, demand for attractive suburban projects may continue to be supported by the benign interest rate environment and our economists are not expecting interest rates to hike up markedly before 2H13. This may have encouraged some developers to continue to acquire sites to meet upgraders’ demand.

Risky bet against time. The developers with mass market projects on their hands may be facing a race against time to launch their recently acquired projects. We estimate that from the sites that have been sold under the GLS which have yet to be launched, the potential supply that may come onto the market over the next 12 months stands at 12,248 condominium units and 2,495 EC units, and counting. Developers could find it harder to find suitable windows of opportunity to launch projects.

ASPs and sales volume set to fall. Faced with a more daunting income/employment outlook due to economic concerns and ample housing options, we believe that upgraders will inadvertently adopt greater caution when reality bites, potentially by mid-2012. That may then lead to the precipitation of mass market prices of up to 20% by end-2013. We also expect primary market sales to be reduced to
11,000 units p.a. for 2012 and 2013.

Remain neutral on Singapore-centric names. Despite our expectations of lower ASPs and sales volume, we remain neutral on the stocks with significant exposure to the Singapore residential market as the downside risks have been priced in. Maintain HOLD on City Developments Limited (TP:$9.38), Wing Tai (TP:$0.97), SC Global (TP:$1.05) and Ho Bee (TP:$1.01), while we prefer the more diversified players like CapitaLand (TP:$3.21) and Keppel Land (TP:$3.30).

Telcos top picks in two outlook reports as volatility persists

From Businesstimes on 9 Jan 2012

Telcos top picks in two outlook reports as volatility persists

M1, SingTel, DBS, Frasers Centrepoint Trust have emerged as key 'buy' calls

WITH global uncertainties carrying over from 2011 into the new year, telecommunications stocks have once again come up as top picks in two market outlook and strategy reports.

M1, SingTel, DBS, and Frasers Centrepoint Trust, in particular, have emerged as key 'buy' calls from both UOB Kay Hian Research and OCBC Bank's Wealth Panel, in separate reports released on Friday.

Forecasting a 2012 Straits Times Index (STI) price to earnings (PE) ratio of 12.1x, UOB Kay Hian said the index's valuation is 'undemanding' - at a 26 per cent discount to its long-term PE mean of 16.3x (since 1993).
'Nevertheless, we think the discount may remain elevated in the near term, given the uncertain prospects for 2012 corporate earnings and lingering concerns over the euro debt crisis,' said UOB Kay Hian.

The research house said investors should opt for a balance of sustainable high-yield stocks, selective retail Reits, and 'undervalued laggards with specific stock catalysts'.

Apart from the telcos, UOB Kay Hian's key 'buys' included CapitaLand and Ezion, while City Developments and NOL sat in its key 'sells' list. It also recently upgraded Wing Tai and Ho Bee to 'buys' due to their deep value after sharp share price corrections in December last year.

Meanwhile, OCBC Investment Research head Carmen Lee warned that even though share prices appear to have discounted weaker earnings expectations, 'they may not have been fully priced in the worst case scenario'.
Said Ms Lee: 'If the outlook deteriorates significantly, earnings estimates will need to be shaved further.'

With volatility persisting and investor confidence remaining fragile, the OCBC Wealth Panel said that it prefers quality and safer assets, and high dividend yielding defensive stocks.

Telecommunications aside, the OCBC team said that they continue to favour the healthcare and oil and gas sectors in 2012. Its picks for the year include Raffles Medical, Keppel Corp, Sembcorp Marine, Biosensors, and Golden Agri-Resources.

Singapore Property Sector

UOB Kay Hian Research on Jan 3

THE Urban Redevelopment Authority's (URA) latest flash estimates indicate that private home prices stayed flat at up 0.2 per cent q-o-q in Q4 2011, against being up 1.3 per cent in the previous quarter.

This is the ninth consecutive quarter of moderation in private residential prices. Overall in 2011, private property prices increased about 6 per cent (2010: 18 per cent y-o-y). Public housing prices advanced at a slower pace of 1.7 per cent q-o-q compared with 3.8 per cent in Q3 2011. Overall public housing prices climbed 11 per cent in 2011 (2010: 14 per cent).

The public and private residential indices are currently at all-time highs of 206.2 and 190.4 points respectively.
The flash estimates do not fully reflect the recent market slowdown (post additional property measures on Dec 2, 2011), as the data are compiled based on transaction prices during the first 10 weeks of the quarter and use a normalisation procedure.

We believe the final figures due in the last week of January are likely to be lower than the flash estimates, marking a downturn in property prices. Our recent showflat visits affirm the trend of falling volumes (about 20-30 per cent) and moderating prices despite hefty discounts offered by developers.

For 2012, we expect transaction volumes to slow by 20-30 per cent and prices to fall by 10-15 per cent.
We believe physical property prices are at an inflection point of the current cycle, with recent cooling measures further dampening home buying sentiment. However, selective property stocks have over-discounted the negative prospects, having corrected by over 20 per cent in the past month.

We see value emerging in selective property counters with CapitaLand (TP: $3.00) and Wing Tai (TP: $1.30) as our top 'buys', and City Developments (TP: $8.10) as our top 'sell'.
During Q4 2011, foreign buyers accounted for about 21 per cent of overall non-landed transactions (excluding executive condominiums).

The recent property measures mainly target foreign buyers whose proportion has been increasing steadily from 11 per cent in Q3 2010 to 19 per cent in Q3 2011. We expect foreign buying transactions to slow down sharply in the coming quarters due to the increase in transaction cost by 10 per cent acting as strong deterrent.