Singapore Financials 26 February 2016 CapitaLand (CAPL SP) CapitaLand Target price: SGD3.930 Share price (25 Feb): SGD2.880 | Up/downside: +36.5% Initiation: recurring income to back land replenishment Shane Goh (65) 6499 6546 China: earnings upside with malls/integrated development openings [email protected] Singapore: rental and offices provide recurring income David Lum, CFA (65) 6329 2102 Initiate with a Buy rating and 12-month SOTP-based TP of SGD3.93 [email protected] Investment case: In our view, CapitaLand’s investment properties (malls, Share price performance offices, serviced residences) offer a resilient income source amid economic (SGD) (%) uncertainty and a depressed residential property market in Singapore. We 3.8 115 are positive on its forthcoming malls and integrated developments in China, 3.5 109 slated to open in 2016-18, coupled with positive rental reversions at 3.2 103 2.9 96 existing malls. We forecast a core China-led EBIT CAGR of 9% for 2015- 2.6 90 18, with the share of recurring income from investment properties seen Feb-15 May-15 Aug-15 Nov-15 Feb-16 rising to 79% for 2018, from 64% in 2015. Capitaland (LHS) Relative to FSSTI (RHS) With most of CapitaLand’s China residential projects scheduled to be 12-month range 2.680-3.790 completed by 2019E, we expect it to replenish its landbank in 2016-17 to Market cap (USDbn) 8.74 ensure continuation of completed projects. China’s economic slowdown and 3m avg daily turnover (USDm) 30.09 Shares outstanding (m) 4,261 market volatility could create investment opportunities for strong players like Major shareholder Temasek Holdings (39.6%) CapitaLand. Land acquisitions in line with its focus on mixed developments in tier-1/upper tier-2 cities may be share-price catalysts, in our view. Financial summary (SGD) Year to 31 Dec 16E 17E 18E In Singapore, the “Asset Reconstitution” theme could be a focus in 2016, Revenue (m) 4,147 4,273 4,531 with the group’s asset sales, particularly non-core properties, continuing Operating profit (m) 1,175 1,346 1,920 Net profit (m) 884 1,012 1,140 after the sale of the Bedok Mall and PWC Building in 2015. Amid low Core EPS (fully-diluted) 0.185 0.212 0.239 transaction volume and declining prices for residential properties, we take EPS change (%) 7.4 14.5 12.6 comfort in the resilient income stream from CapitaLand’s portfolio of malls. Daiwa vs Cons. EPS (%) 24.4 8.3 2.1 PER (x) 15.5 13.6 12.1 While cognisant of the potential office oversupply in 2016-18E, we believe Dividend yield (%) 3.3 3.5 3.6 the group’s commercial assets will ride out the period, albeit at lower rents DPS 0.095 0.100 0.105 and occupancy rates. We do not expect transactional volume for the overall PBR (x) 0.7 0.6 0.6 residential market to pick up significantly until there is a relaxation of EV/EBITDA (x) 15.2 13.2 9.2 ROE (%) 4.8 5.3 5.6 property-cooling measures, which we think may happen in 2H16. Source: FactSet, Daiwa forecasts Catalysts: We see 3 share-price catalysts: 1) the acquisition of new landbank in China, 2) disposal of assets at favourable valuations, and 3) relaxation of property cooling measures in Singapore. Valuation: We initiate with a Buy (1) call and SOTP-based 12-month TP of SGD3.93, a 20% discount to our end-2016E RNAV of SGD4.90. We find valuations undemanding, as the stock has been trading at more than 1SD below its past-11-year mean price-to-RNAV since July 2015, a 41% discount to our RNAV estimate, which has not been seen since the GFC. Relative to the consensus, we are more positive on the outlook for the company’s Singapore residential segment and China malls. Risks: The key risks: 1) prolonged slowdown in the global economy affecting the retail scene in Singapore and China, 2) property tightening measures in China, and 3) an uncontrolled increase in new office and retail land supply in Singapore. See important disclosures, including any required research certifications, beginning on page 56 CapitaLand (CAPL SP): 26 February 2016 Table of contents Landbank replenishment and asset reconstitution offer share-price catalysts ........ 6 Valuation...................................................................................................................................7 Investment properties to drive strong earnings ........................................................... 9 Asset reconstitution: a key theme in Singapore for 2016 ......................................................... 10 Stage set for a relaxation of cooling measures in 2H16............................................. 12 Adjustments to cooling measures expected in 2H16 ............................................................... 18 Retail rents and occupancy to moderate as supply slows ....................................................... 22 Pressure on office rents in the face of looming supply ............................................................ 24 Focus on tier-1 and upper tier-2 cities in China ....................................................................... 26 What is our view of China’s physical property market? ........................................................... 31 The Ascott Limited: on track for 80,000 units by 2020E .......................................................... 34 What’s next for ASEAN? ......................................................................................................... 35 Rising interest negative … but not a deal-breaker ................................................................... 38 Effective capital management should result in the 8% ROE target being reached by 2018E .. 40 Risks to our Buy call on the stock ........................................................................................... 43 Valuation and recommendation .............................................................................................. 44 Appendix 1: company profile ................................................................................................... 46 Appendix 2: harnessing technology across its business units ................................................. 47 Appendix 3: extension/ABSD charges for Singapore-listed developers ................................... 48 Appendix 4: on the ground in China (November 2015) ............................................................ 49 2 CapitaLand (CAPL SP): 26 February 2016 How do we justify our view? Growth outlook Valuation Earnings revisions Growth outlook CapitaLand: EBIT breakdown by business units We forecast CapitaLand’s core EBIT to see a CAGR of 9% (SGD '000) 2,500 17 for 2015-18, driven by recurrent income contributions from 25 27 411 new malls and mixed developments in China. Such a 2,000 23 48 351 223 300 CAGR would help its operating ROE (excluding revaluation 183 1,500 962 gains and impairments) gain 2.1pp, hitting 5.6% for 2018E, 600 801 684 698 from 3.5% for 2014, in our view. Including revaluation 1,000 433 gains, we forecast an overall ROE of 8.7% for 2018. 309 513 467 449 500 492 482 421 480 551 While we are positive on the outlook for retail malls and 0 2014 2015 2016E 2017E 2018E mixed developments in Singapore and China’s tier-1 and CapitaLand Singapore CapitaLand China CapitaMalls Asia upper tier-2 cities, we are cognisant of the large upcoming Ascott Corporate and Others supply of office in Singapore, which could dampen rents Source: Company, Daiwa forecasts and lower occupancy. Note: Includes income from associates and JVs excludes revaluation gains and impairment Valuation CapitaLand: price-to-SOTP We arrive at our TP of SGD3.93 by ascribing a 20% (x ) discount to our SOTP-based end-2016E RNAV of 1.6 SGD4.90. We think its valuation is undemanding, at more 1.4 than 1SD below its past-11-year mean price-to-RNAV since 1.2 July 2015, a 41% discount to our RNAV estimate. We 1.0 derive the RNAV by estimating the capital value of the 0.8 company’s retail, commercial and integrated development 0.6 portfolio, applying a PER to its fund-management 0.4 business, adding the NPV of future profits for its residential Feb-05 Feb-07 Feb-08 Feb-09 Feb-11 Feb-12 Feb-13 Feb-14 Feb-15 Feb-06 Feb-10 Aug-04 Aug-05 Aug-07 Aug-08 Aug-09 Aug-11 Aug-12 Aug-13 Aug-15 Aug-10 Aug-14 development and valuing its REITs using Daiwa’s target Aug-06 Price-to-SOTP Mean +1 SD prices or last traded unit prices. We think a 20% discount is -1 SD Median fair as CapitaLand’s median price-to-SOTP discount has Source: Bloomberg, Daiwa forecasts been 17% since 2010. Earnings revisions CapitaLand: Daiwa’s core EPS forecasts vs. consensus The Bloomberg consensus has lowered its 2016-17 EPS 30% forecasts for CapitaLand by 18-23% since February 2015. 25% We think concern about how Singapore’s property cooling measures would affect sales at CapitaLand’s residential 20% developments was the key reason behind the downward revisions. 15% 10% Our 2016-18E core EPS are 2-24% above consensus, likely due to our more positive outlook for the Singapore 5% residential market and on the potential earnings contribution from the opening of integrated developments 0% 2016E 2017E 2017E and shopping malls in China. Source: Bloomberg, Daiwa forecasts 3 CapitaLand (CAPL SP): 26 February 2016 Financial summary Key assumptions Year to 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E CL Singapore EBIT margin (%) 0.0 53.9 60.5 64.7 40.4 12.4 44.7 41.6 CL China EBIT margin (%) 0.0 75.2 43.1 64.2 32.6 38.8 44.9 49.2 CMA EBIT margin (%) 242.5 191.2 131.9 80.3 119.9 123.3 137.7 168.1 Ascott EBIT margin (%) 0.0 44.8 50.9 43.6 43.8 46.7 48.4 48.9 Overall EBIT