Asian Insights SparX Singapore Property

Refer to important disclosures at the end of this report

DBS Group Research . Equity 1 Aug 2017

More (Land)-Bank for Buck STI : 3,329.52 • Property prices to rise 6%-10% in 2 years as volumes approaches 5-year peaks Analyst Derek TAN +65 6682 3716 Mervin SONG CFA +65 6682 3715 • Land tenders in residential and commercial [email protected] [email protected] sites could fetch up to S$14bn in 2H17. Rachel TAN +65 6682 3713 Singapore Research Team • Catalysts abound for developers (UOL, City [email protected] [email protected] Dev) and Office REITs (K-REIT and CCT)

Singapore market to see increased capital allocations. The time has come. With the Singapore property market entering the end of a period of over-supply amidst a stable operating environment, we STOCKS PICKS envision that developers to allocate more capital into Singapore and 12-mth see the residential and office as prime beneficiaries of these trends. Price Mkt Cap Target Price Performance (%) Residential market to see a 6%-10% rise in prices by 2019. We S$ US$m S$ 3 mth 12 mth Rating see multiple catalyst for residential prices to head higher in the next City Developments 11.26 7,556 12.63 4.4 32.3 BUY 2 years. We believe a sustained rise in sales volume post a strong CapitaLand 3.69 11,565 4.33 (1.9) 16.4 BUY 47% rebound in sales in 1H17 will set the stage for developers UOL Group 7.89 4,734 8.73 9.0 36.7 BUY raising prices. In addition, unsold inventories are at 16-year low at Frasers 1.3 27.1 1.93 4,128 2.30 BUY 29k units with market absorption rate (ratio of unsold units and Centrepoint Ltd new sales) at multiyear low of 2.1x. A wildcard to further rebound in CapitaLand 5.9 14.3 1.72 3,816 1.85 BUY volumes and prices is when the wave of foreigner purchases returns Commercial Trust (c.6% of volumes in 1H17), especially for homes in the Core Central Keppel REIT 1.16 2,858 1.23 9.4 8.9 BUY region. Closing price as of 31 Jul 2017 Winner-takes all, S$14bn in gross development value (GDV) up for grabs with over S$1.4bnof profits could be reaped. Source: DBS Bank, Bloomberg Finance L.P. Developers should turn optimistic in their pricing strategy and see plum sites for sale in the 2H17 GLS and we expect developers to come out in force to bid for residential land and expect prices to continue inching higher in 2H17. Limited commercial sites will mean robust bids and reiterate our belief that office REITs (CCT and K- REIT) are trading below replacement costs. Assuming all sites are triggered, we estimate that the GDV for 2H17 GLS is estimated at S$14bn and a potential S$1.4bn in profits can be reaped.

Catalyst abound for developers. We see strong correlations with volumes and prices to drive developer price higher going forward and see a target 1.0x P/NAV multiple as fair in the current upcycle. Top picks are UOL, City Dev.

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Asian Insights SparX Singapore Property

The DBS Asian Insights SparX report is a deep dive look into thematic angles impacting the longer term investment thesis for a sector, country or the region. We view this as an ongoing conversation rather than a one off treatise on the topic, and invite feedback from our readers, and in particular welcome follow on questions worthy of closer examination. Table of Contents

Investment Summary 3

Sustainable sales volume growth to lead recovery in prices 2017 sales momentum to hit 5-year highs 4 Wild card: Prices will rise further when foreign interest returns 7

Unsold inventory at its lowest since 2001 Market absorption at multi-year lows 10 Increase in new supply can be absorbed if sales velocity is maintained 13

Land-Banking: Going all out to win5 Developers pricing in rising prices in tenders 16 Strong pre-sales can greatly improve returns 18

Office: At the cusp of a multi-year recovery Office sector: Demand to remain robust 25 Office sector: Demand for physical real estate to continue 28

Critical factors: Volumes and prices drive developers’ prices Volumes and price correlate strongly to developer prices 30

Company Guide CapitaLand 35 CapitaLand Commercial Trust 47 City Developments 56 Frasers Centrepoint Ltd 64 Keppel REIT 74 UOL Group 83

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Investment Summary

Property prices could rise 6-10% in two years as volumes Office sector to continue seeing strong capital allocations as approach five-year peaks. The time has come. Recent market the sector operating environment turns up in 2018. Limited indicators point toward a property market inflection in 2017 commercial sites and the gradual turnaround in office sector and an eventual rise in property prices from 2018 onwards. has prompted robust bits for commercial sites and transactions 1H17 total property sales have increased 46% y-o-y and if the of Grade A office buildings at compressed yields, pushing sales momentum continues, volumes will reach a five-year returns closer to 3.0% level, one of the tightest we have seen peak. In our analysis, we found that 94% of home buyers in in recent times. This supports our thesis that office REITs 1H17 are Singaporean households. A wildcard to a further (which are trading at a P/NAV of 0.8x-0.9x) are cheap and acceleration in price is when the wave of buying from trading below replacement costs. Expectations of robust bids foreigners return, especially for homes in the Core Central for upcoming commercial GLS will reiterate our belief that region. office REITs (CCT and K-REIT) offer good value for investors.

Market absorption rate at multi-year lows. Supporting a rise in Catalyst abound for developers. We see strong correlations the property price – unsold inventories are at 16-year lows at with volumes and prices to drive developer price higher going 29k units. When compared against current transaction levels, forward and see a target 1.0x P/NAV multiple as fair in the we found that market absorption rate (ratio of unsold units current upcycle. Top picks are UOL, City Dev. and new sales) stands at 2.1x and it is the tightest in the suburb (Outside Central region). Even if we were to include the Key Risk. more than 3k unlaunched new units from the recent government land sales (GLS) and en blocs, we believe the Economic environment turn down. Demand for property is market can absorb them easily. typically driven by buyers’ perception of job security and income growth. At this moment, our economist projects the Winner takes all – S$14bn in gross development value (GDV) Singapore economy to still grow steadily in 2018, while up for grabs with a potential to reap more than S$1.4bn in unemployment rate has turned the corner. profits . Assuming developers achieve a 10% profit margin on their projects, that could translate to an internal rate of return Will government tighten? While do not envision a change in (IRR) of 9% but returns could be as high as 40% if pre-sales do current policy stance by the government, a faster than well. As such, we expect developers to come out in force to projected rise in property prices, could result in government bid for residential land and expect prices to continue inching raising the number of land sites in 2018 and thus taper some higher in 2H17. of the enthusiasm seen in the land tenders.

Developers trading at historical mean but could re-rate higher

(X) Discount 2.20 0.40 2.00 0.20 1.80 -

1.60 (0.20)

1.40 (0.40)

1.20 (0.60) 1.03 x 1.00 (0.80) 0.90 x 0.87 x 0.80 (1.00) 0.77 x 0.60 (1.20)

0.40 (1.40)

3Q08 1Q13 1Q00 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17

Discount to RNAV P/NAV P/NAV (mean) P/NAV (+1 SD) P/NAV (-1 SD)

Source: DBS Bank, Bloomberg Finance L.P.

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Asian Insights SparX Singapore Property

Sustainable sales volume growth to lead recovery in prices

2017 sales volumes projected to hit five-year highs. The lift in Sales from new launches make up only 23% of primary sales, sentiment following the government’s move to relax property implies strong sales momentum in unsold inventories. Despite measures at the beginning of the year led to strong sales the numerous headlines about strong sales of new launches, volume in 1H17, up 46% y-o-y. If the sales momentum holds, sales from new launches in 1H17 only comprised 23% of annualised 2017 total sales (primary and secondary) could primary sales vs the peak of 72% in 2011 and 2008. This reach 29k units, which would be the highest since volumes means that the strong sales momentum was from previous peaked in 2012. It has surpassed the historical average of 22k launches (figure 5). units and is 68% of the historical high of 42k units recorded in 2012 (figure 1). The sales volume was largely led by primary Better sales volume yet to translate into a recovery in property sales (1H17: +52% y-o-y). Similarly, secondary sales showed prices. Historically, sales volume tends to lead property prices strong growth (+39% y-o-y) but at a lesser quantum compared movement by two to three quarters (table 1 below). Despite to primary sales. sales volume having bottomed in FY15, PPI has yet to bottom and continues to decrease from its peak in FY13, though the Rebound in sales volume growth started in 2016. Contrary to decline has started to moderate since 4Q16. We believe the popular belief that sales only rebounded after the relaxation of recovery in property prices is imminent with sustainable robust property measures, we note that sales volume had rebounded sales volume. in FY16. FY16 sales grew 20% to 21k units, close to the historical average, and FY16 primary sales of 12k units Table 1: Sales volume leads prices by 2 to 3 quarters surpassed the historical average of 11k units (figure 2). Volume PPI No. of Q PPI bottomed / bottomed / before Volume changes Take-up rates within the month of new launches above 40%, peaked peaked PPI turns changes after 1Yr hitting a high of 47% in 1H17. The take-up rates within the 3Q03 1Q04 2 11% 2% month of new launches increased to 41% in 2016 and hit a 3Q07 2Q08 3 -47% -25% 4Q08 2Q09 2 47% 38% high of 47% in 1H17 from the low of 29% in 2015 (figure 4), 4Q12 3Q13 3 -25% -4% implying a pickup in interest for new property launches. 1Q15 Yet to turn 9* 74%* -6%*

Source: URA, DBS Bank

* volumes increased and PPI decrease from 1Q15 to-date (2Q17)

Figure 1: 2017 annualised sales volume has surpassed historical average Remarks • Strong sales volume shown in 45,000 1H17 (+46% y-o-y).

40,000 • Sales volume has increased

35,000 from trough in 2014 to annualised 2017 sales above 30,000 historical average. Historical Average Sales = 21.6k units 25,000 20,000

15,000 Sales Volume (units)10,000

5,000

-

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Primary sales Secondary sales Average total sales 2017 Annualised Source: URA, DBS Bank

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Figure 2: 2017 annualised primary sales volume has surpassed historical Remarks average • Strong primary sales volume 30,000 shown in 1H17 (+52% y-o-y).

• Sales volume has increased 25,000 from trough in 2014 to above 20,000 historical average since 2016.

15,000 Historical Average Primary Sales = 11.1k units

10,000 (units) Sales Volume 5,000

-

1996 1997 1998 1999 2000 2001 2013 2014 2015 2016 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Annualised 2017 Source: URA, DBS Bank

Figure 3: 2017 annualised secondary sales volume close to historical average Remarks • Secondary sales volume 30,000 showed similar upward trends as shown in primary 25,000 sales. 20,000 • 1H17 secondary sales +39% y-o-y 15,000 • Annualised 2017 secondary Historical Average Secondary Sales = 10.6k units sales of 11k units is close to 10,000 the historical average of Sales Volume (units) 10.6k units

5,000

-

2013 2014 2015 2016 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Secondary sales Average secondary sales Annualised 2017 Source: URA, DBS Bank

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Figure 4: Take-up rates within month of launch cross 50% Remarks

90% 30,000 • Optimistic sentiment drives take-up rates within the 80% 25,000 month of launch to historical 70% peak in the past 10 years

60% 20,000

50% 15,000

up rate s (%)40%

-

30% 10,000 No. of units Take 20% 5,000 10%

0% -

2008 2009 2010 2011 2012 2013 2014 2015 2016 2H2007 1H2016 1H2017 New launches - RHS Sales within the month of launch - RHS Sales by year-end - RHS Take-up rates within the month of launch - LHS Take-up rates by year-end - LHS

Source: URA, DBS Bank

Figure 5: Sales from new launches comprise only 23% of total sales in 1H17 Remarks

30,000 80% • Despite the headline news on strong sales seen in quite a 70% 25,000 number new launches, sales

60% volume was driven by 20,000 50% properties sold from older launches. 15,000 40% • Sales from new launches 30% 10,000 comprise only 23% of total

Sales Volume (units) 20% sales 5,000 10%

% sales from new launches (%) - 0%

2008 2009 2010 2011 2012 2013 2014 2015 2016

2H2007 1H2016 1H2017

Sales from older launches - LHS Sales from new launches - LHS

% of sales from new launches - RHS

Source: URA, DBS Bank

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Wild card: Prices will rise further when foreign interests Hence, these cities recently started implementing aggressive return cooling measures such as raising stamp duties to curb a potential overheating in their property markets (figure 9). Foreign participation has risen significantly in the primary The hike in stamp duties have now brought the cost of buying market but comprise only 6% of total transactions. Although in these markets to comparable levels. For example, taxes / 1H17 foreign buying volumes rose 49% y-o-y (largely in the stamp duties for foreign buyers in Hong Kong could be up to secondary market; 1H17: +69% y-o-y), the proportion of 30%, Canada has raised it to 15%, and Australia has doubled foreign buying remains low at 6%, below the historical its rates (figure 9). These rates now look more comparable to average of 9% (figure 7). The historical peak was 19% in 2011 Singapore’s buyer stamp duty of up to 18% for foreigners. when foreign buying volumes peaked at 5.7k units. Majority of buyers hail from China, comprising 28% of total sales and up Singapore property remains attractive to foreign buyers given 33% y-o-y in 1H17. Malaysian and Indonesian buyers slumped its strong and stable currency. As such, we believe foreign 44% and 34%, respectively, while Indian buyers soared 88%. interest may return to Singapore now that sentiment has turned and local demand has seen strong growth. If foreign Implementation of tightening measures in the region could see interest continues to rise, we believe this may boost demand foreign interest return. When the Singapore property market which could lead to a quicker and stronger-than-expected went through a period of lacklustre demand due to a series of recovery akin to what we saw in 2009 to 2011. However, the tightening measures implemented prior to 2013, foreign caveat to a weaker-than-expected recovery in foreign interest buyers flocked to major cities such as Hong Kong, Sydney, would be capital restrictions from their home countries. Melbourne and Vancouver in droves, causing prices to rise.

Figure 7: Sales largely driven by local demand; foreign buying still low Remarks • Sales largely driven by local demand, especially in primary sales.

• Foreign buying remains low at 6% of total sales, below historical average of 9%, implying potential growth when foreign buyers return to the Singapore property market.

Source: URA, DBS Bank

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Figure 8: Foreign buying sales remains low despite recorded 49% growth y-o-y Remarks in 1H17 • China remains to be the Foreign buying largest foreign buyer of 6000 Singapore properties (28%

of total sales to foreigners). 5000 • Buyers of Singapore 4000 property from China grew 33% y-o-y in 1H17. 3000 • Sales to Malaysian and

Units sold 2000 Indonesian buyers have fallen by 44% and 34% 1000 respectively

• 0 The number of India buyers grew 88% y-o-y in 1H17 to 2001 2002 2003 2004 2005 2000 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 32 units from a low base of 17 units in 1H16.

YTD Jun 2017 Jun YTD Malaysi a China Indonesia India Others 2016 Jun YTD

Source: URA, DBS Bank

Figure 9: Property measures in major cities Country City Stamp Duties / taxes Loan-to-value Additional measures Australia NSW • Foreign Investor Surcharge Duty - 8% (from • Offshore foreigners • 50% cap on foreign 4% previously) effective 1 July 2017 - max 70% ownership for new • Annual land tax surcharge 2% (0.75% • Onshore foreigners - property developments previously) 80-90% Victoria • Additional stamp duty for foreign buyers 7% • Offshore foreigners (from 3% previously) effective 1 July 2016 - max 70% • Annual land tax surcharge 1.5% (0.5% • Onshore foreigners - previously) 80-90% Canada Vancouver • Foreign buyers will be taxed at 15%, • Empty homes tax - 1% exempted on pre-sale purchases Toronto • Non-Resident Speculation Tax - 15% in the Great Golden Horseshoe region China Hong Kong • Ad Valorem Tax - step-up rates range • < HK$10mn - 50% • Risk-weighted between 1.5-8.5% for first time buyers; flat • > HK$10mn - 40% mortgage loans at 25% rate 15% for non-first time buyers (>1 • Corporates - 40% property) • Buyers' stamp duty - 15% for non-HK PR buyers • Special stamp duty (SSD) - 10% (sold within third year of purchase) to 20% (sold within six months of purchase)

Source: News, DBS Bank

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Figure 9: Property measures in major cities (cont’d) Country City Stamp Duties / taxes Loan-to-value Additional measures China Beijing • Loan-to-value (LTV) – 60-65% for first- home purchase • 70% for subsequent home purchases Shenzhen • LTV – 50-70% for first-home purchase • 30% for subsequent home purchases Guangzhou • LTV - 30% for subsequent home purchases UK London • Step-up rates range between 2-12% for owner-occupied property • 5-15% for investment property • Surcharge of 3% if buyer owns another property anywhere in the world

Source: News, DBS Bank

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Unsold inventory at its lowest since 2001

Unsold inventory at 16-year low. Unsold inventory stood at Low absorption rate (undersupply) may drive rising property 29k units as of 1Q17, the lowest in 16 years, following the prices. While sales volume and market sentiment are the more supply restriction in the past two years. After the common drivers to property prices, historically, we saw implementation of the cooling measures, the government property prices rise when absorption rates are below four years restricted new supply, reducing the number of residential units (figure 11). We believe the three- to four-year time period is from the GLS list to 7.4k units in 2016 from the peak of 14.3k critical as this is the typical timeframe to construct a new units in 2011. residential development in which the developer receives progressive payments from home buyers. However, we note Absorption rate at 2.1 years; potential undersupply against that the recent low absorption rate has yet to be translated current demand. Despite falling demand, the contraction of into increasing property prices though the decline in property supply in the market has reduced the absorption rate (number prices have moderated in the past 2-3 quarters. of years to sell all unsold inventory) from a high of five years to 2.1 years as at 1Q17. The low absorption rate raises a potential OCR and RCR most undersupplied. Based on the unsold near-term undersupply issue against current transaction levels. inventory and absorption rate, OCR and RCR appear to be the most undersupplied with absorption rate at one year and 1.9 years, respectively, while CCR appears to have more room at 10 years’ absorption rate.

Figure 10: Unsold inventory at 16-year low; absorption rate at its lowest of 1.5 Remarks years as at FY17E • Unsold inventory is at its 16- 80,000 8.0 year low at 29k units as at 1Q17 and 33k units as at 70,000 7.0 FY16.

60,000 6.0 • Absorption rate at its lowest at 2.1 years as at 1Q17 and 2.8 50,000 5.0 years as at FY16. • 40,000 4.0 Based on the annualised 2017E sales, it is estimated

No of units 30,000 3.0 that the absorption rate could decline further to 1.5 years,

20,000 2.0 thus, raising the issue of a

Absorption rate (no of years) of (no rate Absorption potential undersupply against 10,000 1.0 current demand - - • Absorption rate = number of years to sell all unsold

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 inventory 2017E 2018E 2019E Source: URA, DBSUnsold Bank inventory - LHS Sales - LHS Absorption rate - RHS

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Figure 11: Low inventory levels (absorption rate <4 years) drives the increase in Remarks prices • Property prices tend to rise when inventory 12 160.0 levels are low, ie

140.0 absorption rate of less 10 than 4 years Rising PPI 120.0 Rising PPI • However, the drop in 8 100.0 recent absorption rate in 2015 and 2016 due to 6 80.0 low supply has yet to be

A bsorption rate = 4 years PPI ( Index) 60.0 reflected in the re-rating 4 of property prices 40.0

Absorption rate (no. of years) of (no. rate Absorption 2 20.0

0 -

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

2017E

Absorption rate - RHS Property Price Index - All

Source: URA, DBS Bank

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Figure 12: CCR region Figure 13: CCR region

18,000 18.0 18,000 2,500 16,000 16.0 16,000 14,000 14.0 14,000 2,000 12,000 12.0 12,000 1,500 10,000 10.0 10,000 8,000 8.0 8,000 1,000 Sales (units) 6,000 6.0 No . of years 6,000

Unsold inventory (units) 4,000 4.0 Unsold inventory (units) 4,000 500 2,000 2.0 2,000 - - - -

3Q2006 1Q2007 3Q2007 1Q2008 3Q2008 1Q2009 3Q2009 1Q2010 3Q2010 1Q2012 3Q2012 1Q2013 3Q2013 1Q2014 3Q2014 1Q2015 3Q2015 1Q2016 3Q2016 1Q2017 1Q2011 3Q2011 3Q2006 1Q2007 3Q2007 1Q2008 3Q2008 1Q2009 3Q2009 1Q2010 3Q2010 1Q2011 3Q2011 1Q2012 3Q2012 1Q2013 3Q2013 3Q2016 1Q2017 1Q2014 3Q2014 1Q2015 3Q2015 1Q2016 CCR Absorption rate - no. of years (RHS) Unsold inventory Sales (quarter)

Source: URA, DBS Bank Source: URA, DBS Bank

Figure 14: RCR region Figure 15: RCR region

14,000 9.0 14,000 2,000

8.0 1,800 12,000 12,000 1,600 7.0 10,000 10,000 1,400 6.0 1,200 8,000 5.0 8,000 1,000 6,000 4.0 6,000 800 Sales (units)

3.0 No. quarters of 4,000 4,000 600 Unsold inventory (units)

Unsold invesntory (units) 2.0 400 2,000 2,000 1.0 200 - - - -

3Q2006 1Q2007 3Q2007 1Q2008 3Q2008 1Q2009 3Q2009 1Q2010 3Q2010 1Q2011 3Q2011 1Q2012 3Q2012 1Q2013 3Q2013 1Q2014 3Q2014 1Q2015 3Q2015 1Q2016 3Q2016 1Q2017 3Q2006 1Q2007 3Q2007 1Q2008 3Q2008 1Q2009 3Q2009 1Q2010 3Q2010 1Q2011 3Q2011 1Q2012 3Q2012 1Q2013 3Q2013 1Q2014 3Q2014 1Q2015 3Q2015 1Q2016 3Q2016 1Q2017 RCR Absorption rate - no. of years (RHS) Unsold inventory Sales (quarter)

Source: URA, DBS Bank Source: URA, DBS Bank

Figure 16: OCR region Figure 17: OCR region

30,000 10.0 30,000 8,000 9.0 7,000 25,000 25,000 8.0 6,000 7.0 20,000 20,000 6.0 5,000

15,000 5.0 15,000 4,000 4.0 Sales (units) No . of years 3,000 10,000 10,000 3.0 2,000 Unsold inventory (units) 2.0 Unsold inventory (units) 5,000 5,000 1.0 1,000 - - - -

3Q2006 1Q2007 3Q2007 1Q2008 3Q2008 1Q2009 3Q2009 1Q2010 3Q2010 1Q2011 3Q2011 1Q2012 3Q2012 1Q2013 3Q2013 1Q2014 3Q2014 1Q2015 3Q2015 1Q2016 3Q2016 1Q2017 3Q2006 1Q2007 3Q2007 1Q2008 3Q2008 1Q2009 3Q2009 1Q2010 3Q2010 1Q2011 3Q2011 3Q2012 1Q2013 3Q2013 1Q2014 3Q2014 1Q2015 3Q2015 1Q2016 3Q2016 1Q2017 1Q2012 OCR Absorption rate - no. of years (RHS) Unsold inventory Sales (quarter)

Source: URA, DBS Bank Source: URA, DBS Bank

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Influx of supply from land sales, en bloc, and potentially from Increase in new supply can be absorbed if sales velocity is the secondary market following the expiry of SSD. To capitalise maintained. Concerns are rising on whether the market could on the positive sentiment, developers are now competing for absorb the influx in supply in the next 1-2 years. Given the opportunities to replenish their landbank either via undersupply situation as shown above, we believe the market government land tenders, en bloc or M&A opportunities. In is capable of absorbing the increase in supply even if sales the 2H17 GLS list released recently, the government injected volume were to fall back to 2016 levels. more supply (+9% h-o-h) to slightly more than 8k residential units. En bloc transactions have increased since last year, with Based on our sensitivity analysis of potential increase in new 12 deals inked to-date from zero between 2012-2015. supply and the annualised 2017E sales volume (figure 19), the absorption rate would fall to 1.3-1.5 years in the next three Based on GLS and en bloc transactions to-date, we estimate years. For scenario 1 (figure 20), we assume sales volume to that new supply from these segments could increase to 11k decline back to 2016 levels (assuming the optimism in 2017 is units in 2017E and grow at 26% and 28% in 2018E and short-lived) and the absorption rate, despite the increase to 2019E, respectively (figure 18). 2.7-3.3 years, is still below four years. Scenario 2 assumes that sales volume declines marginally to halfway between 2016 and In addition to the primary market, the secondary market could 2017’s sales volume, and the absorption rate is 1.9-2.0 years. see another influx of supply as the seller stamp duty (SSD) Hence, we believe the increase in supply can be absorbed by period on new primary sales made in 2012 (where sales the market against current demand levels. volume hit a historical high of 27k units) has expired in 2016.

Figure 18: Estimated new supply from GLS and en bloc to grow at 26% - 28% Remarks in 2018E and 2019E respectively Key Assumptions: 20 • 18 2017E GLS supply is based on sites awarded / launched 18 + 28% year-to-date, 2H17 GLS 16 confirm list and half of 2H17 14 GLS reserve list 14 + 26% • 2018E / 2019E GLS supply is 12 11 based on a 20% increase from 2017E GLS sites 10 • + 154% 2017E enbloc supply is based 8 on enbloc sites in 2016

No of ('000) units • 2018E enbloc supply is based 6 4 on 1H17 enbloc sites 4 • 2019E enbloc supply

2 assumes 20% increase in 2018E enbloc supply and

- 2H17 enbloc sites (total 2016 2017E 2018E 2019E +57%)

GLS Enbloc sites est potential enbloc (assume +20%) Source: URA, DBS Bank

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Figure 19: Sensitivity analysis if supply can be absorbed – Base case Base case: Assume annualised 2017E sales sustainable in 2018E/2019E 2016 2017E 2018E 2019E % increase Total Sales (based on annualised 2017E) 20,377 28,900 28,900 28,900 42% Primary Sales 11,971 17,712 17,712 17,712 48% Secondary Sales 8,406 11,188 11,188 11,188 33%

Unsold inventory (total) 41,143 37,631 30,808 27,957 Unsold inventory (primary) 33,191 26,533 22,708 22,829 Est. new supply in secondary market (assume 50% of previous new sales) 7,952 11,099 8,101 5,129

Est. new supply in primary market (as per figure 18) 11,054 13,887 17,833 % increase 154% 26% 28%

Absorption rate (total) 2.0 1.3 1.1 1.0 Absorption rate (primary) 2.8 1.5 1.3 1.3

Source: URA, DBS Bank

Figure 20: Sensitivity analysis if supply can be absorbed – Scenario 1 Scenario 1: Assume sales fall back to 2016 levels 2016 2017E 2018E 2019E % increase Total Sales 20,377 20,377 20,377 20,377 0% Primary Sales 11,971 11,971 11,971 11,971 0% Secondary Sales 8,406 8,406 8,406 8,406 0%

Unsold inventory (total) 41,143 43,372 42,290 45,180 Unsold inventory (primary) 33,191 32,274 34,190 40,052 Est. new supply in secondary market (assume 50% of previous new sales) 7,952 11,099 8,101 5,129

Est. new supply in primary market 11,054 13,887 17,833 % increase 154% 26% 28%

Absorption rate (total) 2.0 2.1 2.1 2.2 Absorption rate (primary) 2.8 2.7 2.9 3.3

Source: URA, DBS Bank

Figure 21: Sensitivity analysis if supply can be absorbed – Scenario 2 Scenario 2: Assume sales moderates to halfway between 2016 sales and % increase 2017E annualised sales (~ +20%) 2016 2017E 2018E 2019E Total Sales 24,639 24,639 24,639 24,639 21% Primary Sales 14,842 14,842 14,842 14,842 24% Secondary Sales 9,797 9,797 9,797 9,797 17%

Unsold inventory (total) 41,143 72,775 70,739 76,620 Unsold inventory (primary) 33,191 29,403 28,449 31,440 Est. new supply in secondary market (assume 50% of previous new sales) 7,952 43,372 42,290 45,180

Est. new supply in primary market 11,054 13,887 17,833 % increase 154% 26% 28%

Absorption rate (total) 1.7 1.6 1.5 1.5 Absorption rate (primary) 2.2 2.0 1.9 2.1

Source: URA, DBS Bank

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Asian Insights SparX Singapore Property

Land-Banking – Going all out to win

Intense competition for land as developers vie for the next plot. land prices remaining elevated. Average bids per tender have With dwindling property inventory on their books, most increased from 10 bids per tender in 2015 bids to 12 bids per developers are facing challenges in restocking land in tender in 2016. 2017 started strongly, with an average 13 bids Singapore, given lower returns amid strong competition - per tender with a high of 24 for a tender at Toh Tuck Road. largely from new players and foreign developers; the returns are worsened by a lack of available land sites for tender in the Tender prices for land sites that were awarded in 1H17 have government land sales (GLS) programme. surprised investors, with a number of “record bids” for selected residential and mixed-use4-cum residential sites that In addition, the increased presence of new foreign players in exceeded S$1bn and topped consultants’ estimates. According land tenders whose motivations go beyond profit margins – to our estimates, average bids have exceeded S$800 psf in they seek to “plant their flag” in Singapore as well as deploy 2016 and so far in 2017. The increase is also partially due to a their internal excess capital and resources – has also resulted in rise in the availability of centrally located land sites.

Figure 22. Competition for land tenders has been increasing Remarks

18 The average number of bids have been 16 16 rising over the past few years to an

14 13 average 13 bidders per tender in 2017. 12 12 12 10 10 A verage no. of bids = 9 10 8 8 8 8 8 8 6 6 6 bids of no. Average 4 2

-

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: URA, DBS Bank

Figure 23. Tender prices have been inching higher to cross S$800 psf Remarks

1,400 1,239 Average prices have also been 1,163 1,200 1,108 increasing steadily to cross S$800 psf 1,051 in 2016 and 2017, mainly due to high 1,000 prices paid for land plots near the core 869 871 849 central region (CCR). 800 809 830 639 607 724 695 681 650 600 507 533 460 Av erage S$ psf 565 436 463 463 400 413 404 489 483 481 418 438 310 318 320 200 280 291 228 203

- 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: URA, DBS Bank

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Developers pricing in rising in launch prices According to our assumptions, we estimate that average net margins are expected to turn negative for a majority of projects Margins under pressure; developers are pricing in a recovery in awarded in the later part of 2016 to the first half of 2017, prices in 2018. Over time, we have found that the costs of implying the zealousness in developers’ bids, with most construction have continued to remain elevated, mainly imputing higher launch prices when these projects come to the because cost components have stayed high – i.e. cost of labour market sometime in 2018. This is based on the assumption of a and materials have stayed stable over time while the authority’s 10% net margin and current prices for newly launched projects push for the use of pre-fabrication, pre-finished volumetric in the vicinity. (Figure 24). construction (PPVC) at selected GLS sites and most future GLS sites has meant that the total costs of construction are likely to A risk of losses if prices stay where they are. According to our remain high going forward. base-case scenario of a two-tier market recovery in 2018 led by the luxury end of the residential market, we believe that there With developers’ inability to raise prices, coupled with upward is a possibility that selected projects that were won in recent pressures from the rising costs of construction, developers’ net tenders could see losses if a more sustained recovery in prices is margins have been compressing over the past few years. underway. Developers could also time their project launchesto Meanwhile, some mid-sized developers have also teamed up capture rising buyer sentiment to maximise returns. with contractors to keep their overall project costs down in order to compete. Therefore, going forward, we believe that Developers’ projects’ “time to market” to shorten if market mid-sized developers are likely to be increasingly crowded out picks-up. Over time, developers have calibrated their project in land tenders and will likely either focus on smaller sites launch schedules to suit market demand. A typical project which are lower in quantum or on collective sites as land- time-to-market ranges <10 months to 13 months, depending banking alternatives. on the prevailing buyer sentiment. We have found that the average time-to-market has been close to 12 months, and with The intense competition for land has resulted in narrowing developers typically aiming to achieve strong pre-sales in order margins. Based on our estimates, developers’ average net to lock in profits and optimise project returns, we believe that margins have fallen over 2006-2012 from an average of 20% – time-to-market could shorten going forward, if the market’s ranging from 18%-26% - to an average of 9%-15% from transaction velocity remains high. 2013 onwards.

Figure 24. Average net margins (after tax) will be negative if prices stay flat Remarks

We estimate that margins have been compressing to sub-15% over 2014- 2016 from an average of 20% over 2006-2012. Expectations of price recovery Competitive land bids have brought margins to a -8% for tenders awarded in 2017, implying that developers are projecting at least a 5%-10% increase in selling prices at the submarket in order to break even.

*2017 margins are estimated using current prices. In recent land tenders, developers have been pricing in a recovery in selling prices. Source: URA, DBS Bank

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Figure 25. Land prices form a substantial c.60% of total construction costs Remarks

Months Land prices as a percentage of total construction cost have remained high 60% 59% at c.59% but in a 54%-59% range 58% 57% 56% 56% 56% 55% 55% 54% 54% 53% 52% 51% 50% 50%

48% 46% 44% 44%

42% 40% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: URA, DBS Bank

Figure 26. Average time-to-market could be shortened to catch the “wave” Remarks and the current positive buyer sentiment

Months Index V alue Average time-to-market has been 18.0 150.0 declining in recent years as the 15.8 15.5 property indices are bottoming out. 16.0 15.1 15.0 140.0 13.9 13.5 14.0 13 We believe that developers could look 130.0 to launch earlier in order to catch the 12.0 10.8 current positive buyer sentiment. 9.7 10.0 9.2 120.0 8.2 8.5 8.0 110.0 6.0 100.0 4.0 90.0 2.0

- 80.0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017* Months Property Price Index (Non-Landed)

*2017 launch time is estimated

Source: URA, DBS Bank

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Strong pre-sales can greatly improve returns S$461 and S$789 psf, depending on the quality of the product that a developer would like to build. Assuming a Qualitative aspects such as connectivity to public project with medium-quality furnishes (our base-case transportation, as well as historical and potential competing scenario) and achieving an average selling price of S$1,700 supply in the submarket are key attributes that a developer psf, we estimate the project to achieve a net margin of will consider when deciding to bid for a site. This will c.8.3%. Every S$100 increase in the selling price will raise inevitably have an impact on home-buyers response and the margins by 4 percentage points. level of pre-sales the developer can achieve when the project is launched. Based on our estimates, strong pre-sales can Assuming that the project sells out by year five, the substantially lower the overall costs of development and a development will achieve a project rate of return (IRR) of developer’s return-on-equity (ROE). 9%. Assuming an even more positive response from buyers, the IRR could improve to 40%. Assuming a 65% funding for Below is an illustration of a bid, based on the following the land purchase, return-on-equity is fairly decent at close assumptions. Assuming a land bid of S$1,000 psf ppr, we to 40%. estimate that development costs could range between

Figure 27. Breakdown of a potential land-tender exercise Site Assumptions: Cost of development: S$psf S$'m Land Size (Sqm) 10,000 Land Cost 1,000 301.4 (Sqft) 107,640 Construction Cost 300 90.4 Plot Ratio (x) 3 Professional Fees, Sales & Marketing, and Other 104 31.4 Fees GFA/NSA (sqft) 301,392 Agency Commissions - 5.1 Assumed Land Bid (S$psf ppr) 1,000 Cost of Development (Before Financing) 1,421 428.3

Construction cost* S$psf range Cost of Financing (land) 5 years 89 26.9 Medium Quality 250-315 Construction Loan (5 years) 19 5.7 Good Quality 315-400 Cost of Financing 108 32.7 Luxury Quality 410-560 Total Cost of Development (With Financing) 1,529 461

Profit Analysis: Launch Price 1,700 512 Less: total development cost (1,421) (428) Less: total Financing cost (108) (33) Profit Before tax 171 51 Profit After tax 142 43 Net Margin (After tax) 8.3%

* Estimates are obtained from Rider Levett Bucknall (RLB) 1Q17 construction estimates Source: URA, DBS Bank

Figure 28. Sensitivity of project IRR to pre-sales Figure 29. Sensitivity of net margins to selling prices 45% 40% 40% 35%

30% 26%

25% 19% 20% 15% 9% 10%

5% 0% 25% 50% 75% 100%

Source: DBS Bank

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“Margin of error” diminishing given intense competition What should developers do?

With improved market sentiment amongst buyers and in a Upcoming GLS offers interesting opportunities to land-bank. climate where competition for new sites is expected to remain We believe tender bids would remain buoyant and expect intense, we believe that developers will continue remaining winning spreads to tighten further. With the need for PPVC optimistic in their bidding strategy going forward. However, construction techniques, we believe that developers might look we are wary of taking an all-out-to win stance, especially when to have collaborations with contractors who may help lower the “margin of error” for development sites are now thin, with the overall costs of construction. selected sites already pricing a rise in selling prices in order for the project to break even. While we believe that property Meanwhile the upcoming GLS programme in 2H17 does offer prices remain on the road to recovery, the pace of increase is interesting opportunities in our view, especially when there is a expected to be on a more gradual path of 3%-5% per annum variety of available sites in the CCR and OCR region which in the coming few years, rather than accelerate. The gradual should pique the interest of most developers. pace of growth could mean that selected projects, if launched at their target prices that are above current market clearing Commercial sites in the GLS programme also offer interesting levels, will see slow absorption at the start before gaining alternatives to add to developers’ recurring income, especially momentum as the projects approach TOP. when new developments will be completed sometime in 2022- 2023, when there will be no competing supply. Amongst the tenders awarded in 1H17, we highlight two sites which we believe offer the most talking points, given differing En bloc market an alternative. An alternative is to enter the market expectations when these sites were offered. collective sales market (en bloc deals) by whichdevelopers could have interesting opportunities to restock land. These Sterling Road site won at S$1.03bn. The tender for the Sterling older properties are located at more established residential Road site was awarded to a JV between Logan Property and districts which could mean that there’ll be a ready buyer pool Nanshan Group for a record S$1.03bn, implying a price of when these projects are re-launched. Downside to an en bloc close to S$1,050psf ppr. Assuming construction costs of exercise are tighter timeline restrictions that developers would S$320 psf, other professional fees, stamp duties and have to adhere to (qualifying certificate rules on top of miscellaneous costs of S$161 psf, we have come up with a additional buyer stamp duty (ABDS) on the land price); this breakeven price of close to S$1,600 psf. Assuming a 10% could mean that developers will remain likely remain selective margin, the developer will have to launch the project at close on pricing. In addition, time-to-market is typically longer to a to S$1,750 psf, which is slightly above the price of comparable GLS site given time to vacate the existing households and developments in the vicinity; Commonwealth Towers and additional feasibility studies needed to be conducted to Queens Peak are selling at an average price of S$1,600- prepare the site for redevelopment. A total of S$1.5bn in en S$1,700 psf). Unless the developer is able to keep its bloc transactions have been completed YTD and we will likely construction costs down (compared to our estimates), at see more deals in the coming year. current market prices, we estimate that the developer is likely to make a loss. The IRR for this project ranges from 1% (current market prices) to as high as 15%.

Toh Tuck site saw “bullish bid” by SP Setia. Another GLS tender that caught many by surprise is a low-density housing site which saw a whopping 24 bids. The Toh Tuck Road site was awarded to SP Setia, a Malaysian developer for S$265m or S$939 psf ppr, a new record high for a land site in the ‘Outside Central’ region. The tender saw a whopping 24 bids and our assumed breakeven is close to S$1,400 psf, which is already above current transaction prices of close to S$1,100-S$1,200 psf. This implies that launch prices could top S$1,600 psf, which means that developer is expecting prices to increase fairly strongly for the sub-market when the project is launched sometime in 2018.

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Figure 30. Summary of selected sites since 2016 Project Site Location* Developer Project Name Est. # mths from Est Awarded launch Tender Units Date (Jul'17) Woodleigh Lane TBC RCR Chip Eng Seng N.A. Est 2018 N.A. 735 Upper Serangoon Road Jun-17 OCR SPH N.A. Est 2018 1 825 Lorong 1 Realty Park Jun-17 OCR Fantasia Invesment N.A. Est 2018 1 50 Stirling Road May-17 RCR Logan Property & Nanshan N.A. Est 2018 2 1110 Group Tampines Avenue 10 May-17 OCR City Developments N.A. Est 2018 2 715 Toh Tuck Road Apr-17 CCR SP Setia N.A. Est 2018 3 325 West Coast Vale Feb-17 OCR China Construction N.A. Est 2018 4 520 Perumal Road Jan-17 RCR Low Kheng Huat N.A. Est 2018 5 200 Margaret Drive Dec-16 RCR MCL Land N.A. Est 2018 6 275 Fernvale Road Sep-16 OCR Sing Holdings & Wee Hur N.A. Est 2018 10 575 Anchorvale Lane (EC) Sep-16 OCR Hoi Hup N.A. Est 2018 10 635 Martin Place Jul-16 CCR Guocoland Martin Modern Est 3Q17 12 450 Bukit Batok West Avenue 6 May-16 OCR Qingjian Le Quest Est 3Q17 14 425 Jalan Kandis Apr-16 OCR Tuan Sing Holdings Kandis Est 3Q17 14 110 Residences Yio Chu Kang Road (EC) Feb-16 OCR Hoi Hup Hundred Palms Jul'17 16 520 Total launched (GLS) 7,470

*CCR: Core Central Region, RCR: Rest of Central Region, OCR: Outside Central Region Source: URA, DBS Bank

Figure 31. Bid Analysis of sites Projects # of Bids Winning Bid GFA Land Est Prevailing Margins Price Breakeven prices (m’sqft) (S$psf) (S$psf) (S$psf) (%) Woodleigh Lane 15 700.7 0.63 1,107 1,700 1,300 -19% Upper Serangoon Road 12 1,132.0 0.96 1,182 1,650 1,300 -21% Lorong 1 Realty Park 11 75.8 0.14 538 946 1,000 6% Stirling Road 13 1,002.7 0.95 1,051 1,521 1,550 2% Tampines Avenue 10 9 370.1 0.65 566 985 1,100 12% Toh Tuck Road 24 265.0 0.28 940 1,359 1,200 -12% West Coast Vale 9 292.0 0.49 592 1,012 1,150 14% Perumal Road 11 174.1 0.17 1,001 1,421 1,400 -1% Margaret Drive 14 238.4 0.24 998 1,418 1,550 9% Fernvale Road 14 287.1 0.56 517 937 980 5% Anchorvale Lane (EC) 16 241.0 0.68 355 725 800 10% Martin Place 13 595.1 0.48 1,239 1,759 2,300 28% Bukit Batok West Avenue 6 11 301.2 0.47 635 1,055 1,050 0% Jalan Kandis 9 51.1 0.11 481 901 1,050 17% Yio Chu Kang Road (EC) 10 183.8 0.56 331 701 830 18% Total launched (GLS) Source: URA, DBS Bank

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Figure 32. Available sites in 2H17 government land sales programme No Type Site Zoning Location Land Size Plot Ratio GFA Estimated Commercial Status Units (Sqm) (x) (Sqm) (number) (Sqm) 1 Confirmed Serangoon North Residential OCR 28,100.0 2.5 70,250 825 - Open Avenue 1 2 Confirmed Chong Kuo Road Residential OCR 4,800.0 1.4 6,720 90 - Oct-17 3 Confirmed Handy Road Residential CCR 5,200.0 2.8 14,560 130 - Nov-17 4 Confirmed Hillview Rise Residential OCR 28,000.0 2.8 78,400 535 - Dec-17 5 Confirmed Holland Road Commercial & OCR 23,000.0 2.6 59,800 570 13,500 Nov-17 Residential 6 Confirmed Sengkang Commercial & OCR 36,300.0 2.1 76,230 700 13,300 Dec-17 Central Residential 7 Reserve Bartley Road / Residential OCR 4,700.0 2.1 9,870 115 - Available Jalan Bunga Rampai 8 Reserve Yishun Avenue 9 Residential OCR 21,700.0 2.8 60,760 805 - Available 9 Reserve Jiak Kim Street Residential CCR 13,500.0 3.8 51,300 525 1,500 Available 10 Reserve Fourth Avenue Residential CCR 20,200.0 1.8 36,360 445 - Available 11 Reserve West Coast Vale Residential OCR 19,500.0 2.8 54,600 730 - Sep-17 12 Reserve Cuscaden Road Residential CCR 5,700.0 2.8 15,960 170 - Oct-17 13 Reserve Canberra Drive Residential OCR 41,100.0 2.8 115,080 765 - Nov-17 14 Reserve Mattar Road Residential OCR 6,400.0 3.0 19,200 255 - Nov-17 15 Reserve Silat Avenue Residential OCR 25,000.0 3.5 87,500 1160 450 Dec-17 16 Reserve Beach Road Commercial CCR 21,000.0 4.2 88,200 - 88,200 Open 17 Reserve Woodlands Commercial OCR 22,400.0 3.5 78,400 275 54,840 Available Square

Confirmed 2,850 26,800 Reserve 5,245 144,990 Total 8,095 171,790 Source: URA, DBS Bank

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Figure 33. Potential en bloc deals Est launch / tender Property Est land Plot Est GFA Current no. Potential closing Property Development Location Type size (sqft) ratio (sqft) of units no. of units date Tampines Court Tampines Street 11 HUDC 702,458 2.8 1,966,882 560 2,610 04-Jul Dunearn Court Bukit Timah Private 14,000 1.4 19,600 12 26 27-Jul Villa D'Este Dalvey Road Private 55,480 1.4 77,672 12 103 25-Aug Normanton Park Queenstown HUDC 667,368 2.1 1,401,473 488 1,860 Aug-17 Pearl Bank Apartments Outram Private 82,376 7.2 593,107 280 787 4Q2017 Cairnhill Mansion Orchard Road Private 38,220 2.8 107,016 61 142 2017 Changi Gardens Jalan Mariam Private 200,080 1.4 280,112 60 372 2017 Braddell View Braddell Hill HUDC 618,222 2.1 1,298,266 918 1,723 Florence Regency Hougang Ave 2 HUDC 389,236 2.8 1,089,861 336 1,446 Laguna Park Marine Parade Rd HUDC 677,493 2.8 1,896,982 528 2,518 Chancery Court Dunearn Road HUDC 123,139 1.4 172,395 136 229 Lakeview Estate Upper Thomson Rd HUDC 242,734 2.1 509,741 240 677 Ivory Heights Jurong East St 13 HUDC 825,500 1.6 1,320,800 654 1,753 Pine Grove Clementi HUDC 893,129 2.1 1,875,571 660 2,489 Lagoon View Marine Parade HUDC 535,330 2.8 1,498,925 480 1,989 Thomson View Bright Hill Drive HUDC 540,314 2.1 1,134,659 254 1,506 Lakeside Towers Jurong Private 153,237 2.1 321,798 427 The Claymore Orchard Private 246,000 2.8 688,800 914 Balmoral Road & Ewe Boon Road Orchard Private 57,349 1.6 91,758 121 Spring Grove Grange Road Private 263,513 2.1 553,377 325 734 4-storey mixed used & 2-storey Rangoon Road Farrer Park Private 6,879 3.0 20,637 shophouses 27 Riviera Point River Valley Private 14,580 3.4 49,266 33 65 Lakepoint Condominium Jurong Private 560,000 1.4 784,000 304 1,041 Boon Teck Tower Balestier Private 57,588 2.8 161,246 78 214 Brookvale Park Clementi Private 373,000 1.6 596,800 160 792 Amber Park Amber Gardens Private 213,676 2.8 598,293 200 794 Cavenagh Gardens Cavenagh Road Private 128,256 2.1 269,338 172 357 Chuan Park Lorong Chuan Private 402,995 2.1 846,290 452 1,123 City Towers Bukit Timah Private 104,535 2.1 219,524 78 291 Crystal Tower Ewe Boon Road Private 60,482 1.6 96,771 28 128 Gilstead Court Gilstead Road Private 75,479 1.4 105,671 48 140 Hollandia Holland Road Private 53,507 1.8 96,313 48 128 Jalan Kemaman, Kemaman Point off Baltestier Road Private 43,826 2.8 122,713 89 163 Pine Tree Condo Balmoral Park Private 41,361 1.6 66,178 50 88 Total 9,461,342 20,931,832 7,744 27,779 Source: URA, DBS Bank

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Office sector – At the cusp of a multi-year recovery

Healthy interest from investors. Investor demand for rents was estimated to have risen 1.7% from 1Q17 to S$8.51 Singapore’s office properties has been firm over the past three psf/mth but were still down 4% y-o-y. The key driver of the years despite spot office rents being in a downturn. This can sequential improvement was a recovery in the Marina Bay be attributed to investors taking a medium-term view of the area, where rents jumped 5.8% q-o-q and Marina One office market and assets in Singapore being a potential store achieved pre-commitment levels of around 70%. In addition, of value, given its stable government, rule of law, and a rents at Raffles Place were reported to have increased 2.5%, relatively stable currency versus other regional currencies. following a decline of 1.9% in 1Q17. This is in line with our view that the recovery is likely to be led by Grade A office Soft demand has contributed to downturn but recent data specs, given the current “flight to quality” that we are seeing points appear to imply that the sector is at an inflexion point. from tenants looking to upgrade their own office The Singapore’s office market has been experiencing a specifications. downturn on the back of sluggish demand and an increase in supply. As estimated by CB Richard Ellis (CBRE), Grade A CBD Supply exacerbates headwinds in the near term but will taper office rents have been falling for eight consecutive quarters, off significantly from 2018-2020. Concurrently, as demand from a peak of S$11.40 psf/month in 1Q15 to S$8.95 continues to be weak, supply has increased. Supply in the psf/month in 1Q17. Demand for office space has been soft as Downtown Core area is projected to increase about.15.6% the financial services and banking industry, which traditionally from 2015 to 2018, or c.5.3m sqft. The jump in supply is represents approximately 40% of demand for CBD office mainly concentrated in 2016 and 2017, with around 2.2m sqft space, has downsized on the back of slower regional economic p.a., primarily related to the following buildings - Duo Tower growth, declines in Singapore’s residential market, and slower (570k sqft), Guoco Tower (890k sqft), and Marina One (1.9m capital market activity. Partially offsetting the weakness of the sqft). financial services and banking industry has been the emergence of the technology sector, whose companies are Thereafter, new office completion will fall off to an average of basing themselves in the CBD instead of business parks, and 0.9m sqft a year, which in our view can be absorbed easily. the growth of the insurance industry. With slower completion and less competition for tenants, we believe that the operating environment will improve and result However, data points appear to be bottoming out. According in a rise in rents going forward. to Cushman & Wakefield, premium office rents rose in 2Q17, . the first increase in nine quarters. 2Q17 Grade A CBD office

Figure 34: Singapore’s Downtown Core office supply and demand outlook 3,000 '000 sqft S$ psf pm 20.0

Post GFC 18.0 2,500 2010-2014 average: 2015-2019 average: 16.0 2,000 1.1m sqft 1.1m sqft

14.0 1,500 12.0 1,000 10.0 500 8.0

0 6.0

-500 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 4.0

-1,000 Net supply: Downtown Core (LHS) Net demand: Downtown Core (LHS) 2.0 CBRE Grade A office rents (RHS) -1,500 -

Source: CBRE, Press reports, DBS Bank

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Figure 35. Recent and upcoming office supply Office (CBD) Location Developer Estimated NLA Property Taken- (sqft) Type Up/Sold 2016 Guoco Tower Peck Seah Street Guocoland 890,000 Leasing 94% CPF Building Shenton Way Ascendas-Singbridge JV (324,000) Leasing - SBF Center Robinson Road Far East 353,480 Strata Sale 84% DUO Tower Rochor Road M + S 570,475 Leasing 50% GSH Plaza Cecil Street GSH/TYJ/Vibrant/DB2 282,000 Strata Sale 14% OUE Downtown 1 Shenton Way OUE 50,000 Leasing n/a 2,145,955 2017 Marina One Marina Bay M + S 1,876,000 Leasing 85% UIC Building Shenton Way UIC 277,540 Strata Sale 41% EON Shenton Shenton Way Roxy Pacific Holdings 101,045 Strata Sale 85% Oxley Tower Robinson Road Oxley Consortium 111,710 Strata Sale 75% Crown @ Robinson Robinson Road WyWy Developments 70,000 Strata Sale 14% 2,435,925 2018 Ex International Factors Building Robinson Road Tuan Sing 194,380 Strata Sale n/a and Robinson Towers Frasers Tower Cecil Street Frasers Centrepoint Limited 645,000 Leasing 40% 858,380 2019 Funan North Bridge Road CapitaLand Mall Trust 204,000 Leasing n/a 204,000 2020 CPF Building Shenton Way Ascendas-Singbridge, 500,000 Leasing Mitsui and Tokyo Tatemono Astro-Asia Redevelopment Shenton Way Afro-Asia Shipping and JV 154,000 Leasing 654,000 2021 Golden Shoe Market Street CapitaLand Commercial Trust 635,000 Leasing Central Boulevard Marina Bay IOI Properties 1,170,000* Leasing 1,705,000 * Maximum potential NLA but may be smaller due to incorporation of service apartments or residential units into the development Source: URA, Corporate Locations, CBRE, various REITs and corporate, press reports, DBS Bank

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Office sector – Demand to remain robust Fierce competition for land, given the limited supply. Beyond secondary sales of office buildings in Singapore, competition to Record prices achieved for secondary sales. While Grade A buy land for the development of new office towers has also CBD office rents have fallen by 21% since peaking out in 1Q15 been fierce. Beyond the established locally based developers, – deeper than the 14% decline experienced between 3Q11- foreign developers have taken an active interest. Out of the top 3Q13 but shallower than 57% drop over 2Q08 and 1Q10 – seven bidders in the recent tender for the Central Boulevard investor interest in Singapore buildings has not diminished. site, only one bid was from a Singapore developer, Mapletree Demand has been broad-based, coming from local and Group, with the other bidders either a foreign developer or a a overseas investors, as well as SGX-listed REITs, sovereign consortiurm of a local and foreign developer. Incidentally, the wealth funds, insurance companies, corporates, and tycoons. site was won by IOI Property, a Malaysia-based developer, at a record price for land of S$1,689 psf, or implied S$3,000 psf of In fact, record prices have been achieved for some office NLA when the building is completed, assuming a 10% properties in recent years. For example, the Straits Trading development margin. The strength in demand for the Central building, a 999-year leasehold property located at Raffles Boulevard site is not an isolated example. This is illustrated by Place, was acquired by Mr Tahir, an Indonesian tycoon, for news that the reserve price for an office site at Beach Road (at S$3,524 psf, the highest price ever paid on a psf basis for an the fringe of the CBD) has been triggered by a developer that office building in Singapore. As a consequence, effective cap implies a land price of c.S$1,200 or implied psf of completed rates are compressing, with a fall in spot rents. NLA of S$2,100-2,200; this is the price implied by the equity markets for certain SREITs in the heart of Singapore’s CBD.

Figure 36. Grade A office transactions versus Grade A office rents

4,000 12.00

11.50 3,500 11.00

3,000 10.50

10.00 2,500

9.50 2,000 9.00

1,500 8.50 Nov-10 Apr-12 Aug- 13 Dec-14 May-16 Sep-17

Grade A Office transactions (S$ psf) - LHS Singapore Grade A CBD rents (S$ psf/mth) - RHS

Linear (Grade A Office transactions (S$ psf) - LHS)

Source: CBRE, Press reports, DBS Bank

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Figure 37. Recent office transactions Date Property Name Tenure Attributed Net Lettable Price ($) Rate per NLA Buyer Area (sq ft) 1Q14 Finexis Building (50%) 999 LH 142,000 336,600,000 2,371 NTUC Income 1Q14 OUE Bayfront 99 LH (Nov 2106) 402,374 1,005,000,000 2,498 OUE Commercial REIT 2Q14 Straits Trading Building 999 LH 158,897 450,000,000 2,832 Sun Venture Jun-14 Prudential Tower 99 years (81) 221,080 512,000,000 2,316 KOP/KSH/Lian Beng/Centurion Global 2Q14 Cecil House 99 LH (2080) 50,045 110,000,000 2,177 Vibrant Group and DB2 Capital Aug-14 Equity Plaza 74 years remaining 252,135 550,000,000 2,181 GSH Holdings Jul-14 Anson House 82 years remaining 76,362 172,000,000 2,252 SEB

Sep-14 MBFC Tower 3 (one 92 447,327 1,248,000,000 2,790 Keppel REIT third stake) Jan-15 AXA Tower 66.5 remaining 675,000 1,170,000,000 1,733 PREH (2015) Jun-15 One Raffles Place 99/FH 600,000 1,429,166,667 2,382 OUECT Jun-15 PWC Building (30% 99 LH 106,712 150,000,000 1,892 DBS Bank stake) Dec-15 ICS Building Freehold 67,550 210,000,000 3,109 Mr Zhou Dec-15 Suntec Tower Two - 99 LH 38,352 101,560,000 2,648 Suntec REIT 12, 13 and 29 Floor

Nov-15 CPF Building 99 LH (2067) 324,000 550,000,000 1,698 Ascendas Land Apr-16 78 Shenton Way (50% 99 LH 181,100 301,500,000 1,665 Alpha Investment Partners stake)

May-16 Remaining 60% 57 remaining 703,122 1,600,500,000* 2,276 (2,700 CCT interest in CapitaGreen expiring assuming 99 31Mar2073 year leasehold)

May-16 Straits Trading Building 999 LH 158,897 560,000,000 3,524 Mr Tahir - Found of Mayapada Group Jun-16 Asia Square Tower 1 99 LH from 2007 1,200,000 sqft office & 3,400,000,000 2,668 Qatar Investment Authority 40,000 sqft retail

Sep-16 110 Robinson Road FH 14,233 45,100,000 3,169 Mr Tahir - Found of Mayapada Group Jan-17 GSH Plaza Remaining 72 725,200,000 2,900 Fullshare Holdings years Feb-17 PWC Building (100% 78.5 years 355,704 747,000,000 2,100 Manulife stake) May-17 One George Street Remaining 85 446,473 591,600,000 2,650 FWD Group (50% stake) years *Based on 100% equity interest

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Figure 38. Previous land sales Date Property/Site Land tenure GFA (sqft) Total land Price per Developer price (S$m) sqf (S$) Jul-17 Beach Road 99-year leasehold 950,592 1,138 n/a n/a Nov-2016 Central Boulevard 99-year leasehold 1,520,874 2,569 1,689 IOI Properties Nov-2015 CPF Building 99-year leasehold 606,088 550 1,032 Ascendas-Singbridge expirying 2067 Aug-2013 Frasers Tower (Expected 99-year leasehold 830,564 924 1,112 Frasers Centrepoint Limited completion in 2018) Sep-2011 SBF Center 99-year leasehold 353,476 312 882 Far East Organisation Nov-2010 Guoco Tower 99-year leasehold 1,697,876 1,708 1,006 Guocoland Dec-2007 Asia Square 2 99-year leasehold 1,222,564 953 779 Macquarie Global Property Advisors Sep-2007 Asia Square 1 99-year leasehold 1,432,890 2,019 1,409 Macquarie Global Property Advisors Sep-2007 South Beach 99-year leasehold 1,580,431 1,689 1,069 City Developments, Dubai World and Elad Group Aug-2007 20 Anson 99-year leasehold 252,069 237 941 Firstoffice Jul-2007 Mapletree Anson 99-year leasehold 383,808 392 1,021 Mapletree Jul-2005 MBFC 99-year leasehold 4,714,588 1,908 405 Keppel Land, Cheung Kong and Hong Kong Land Source: URA, Press reports, DBS Bank

Figure 39. List of bidders and bid prices Ranking Bidder Tendered Tendered Sale Breakeven costs for office Implied S$ per sqft of Sale Price Price in S$ per NLA (S$/sqft) completed NLA (S$m) sqft of GFA Low end High end Low end High end 1 IOI Properties 2,569 1,689 2,780 2,942 3,090 3,275 2 Mapletree Investments 2,207 1,451 2,461 2,623 2,727 2,911 3 Nashan Group 2,187 1,438 2,444 2,605 2,707 2,891 4 Hongkong Land & Cheung 2,126 1,398 2,390 2,552 2,646 2,831 Kong 5 CapitaLand & Great Eagle 2,005 1,318 2,283 2,445 2,524 2,708 Group 6 Yanlord 1,985 1,305 2,266 2,427 2,504 2,688 7 OUE Limited, Guangzhou 1,910 1,256 2,199 2,361 2,429 2,613 R&F Properties and Tang City Properties Source: URA, press reports, DBS Bank

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Office sector – Demand for physical real estate to Australia. While we understand that Chinese investors are continue looking at the Singapore market, the ability of these Chinese buyers to close transactions is partially curtailed by the lack of Investors in physical property taking a medium-term view. large Grade A properties that are available for sale. A Given the disparity between public and private markets on the significant number of premium buildings are owned by a valuation of Grade A office buildings, with the public markets handful of owners who are unlikely to sell, given the difficulty ascribing a 10-20% discount to recent market transactions, the in redeploying capital back into Singapore. Nevertheless, going question has arisen: How far an investment horizon investors forward, we believe it is matter of time before Chinese prepared to take given given headline yields for these investors make a splash. Given the intense level of competition transacations, assuming current spot rates are low. remain low and potentially low cost of capital for certain investors, we ? Assuming a purchase price of S$2,700 psf and 95% would expect capital values for office assets to remain firm in occupancy, CBRE Grade A spot rents of S$8.95 translates to a the near term and bidding for any land released by the cap rate of c.2.8%. With borrowing costs of, say, 2-2.5%, this government to be fierce. This may have the unintended leaves a tight spread of 0.3-0.8%. consequence of crowding out Singapore-based developers.

As such, investors in the office sector are pricing in a recovery Actual recovery in office rents needed to support positive view in rents, in anticipation of a recovery in office rents, given an of physical market participants. While our base case is for easing in new supply over the next three years as well as other office capital values to remain stable, given strong investor factors such as the Singapore dollar being a store of value. interest, and we expect market rents to recover over the Based on the purchase price of S$2,700-3,000 psf for recent coming three years, primarily concentrated in Grade A offices, transactions, investors may be anticipating rents to eventually an actual recovery in spot rents will still need to take place to recover to S$12.75-$14.00 psf/mth, assuming a stabilised cap validate the views of buyers. If market rents do not recover, rate of 4%. increase slower than expected to due to weaker-than-expected demand, or the impact of shadow space (space vacated by Chinese investors yet to make a splash. Despite an increase in tenants who move to newer buildings) becomes more foreign buyers from Malaysia, Qatar, Indonesia, and Hong pronounced, the interest in office properties at current prices Kong, there remains an absence of transactions by Chinese would likely moderate, tempering capital. In addition, a investors in Singapore. Chinese investors have been actively recession would put into question prices paid by investors buying commercial assets in Hong Kong, the US, the UK, and currently.

Figure 40. Office yield spread (cap rate less 10-year Singapore bond yield) Remarks

3.5% Average yield spreads have been compressing over time due to the 3.0% robust demand for assets. Spreads are mow close to 1.0% above the 10-year 2.5% historical average, implying that purchasers are pricing in higher rents. 2.0% 1.5%

1.0%

0.5%

0.0%

Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17

Yield spread Average -1 SD +1 SD Source: URA, DBS Bank

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Figure 41. Prime office capital values versus estimated prime office rents Remarks 2,600 15 Prime office capital values have 2,400 14 generally tracked movements in rents. 13 Therefore, with rents expected to 2,200 improve in 2018, capital values are 12 2,000 expected to remain sticky and could 11 potentially head higher. 1,800 10 1,600 9 1,400 8 1,200 7

1,000 6

Sep-09 Sep-10 Sep-08 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17

Prime office capital value (S$/sqft) - LHS Rent (S$/sqft) - RHS Source: Press reports, various SREITs, DBS Bank

Figure 42. Prime office capital values versus estimated cap rate Remarks

2,600 5.5% Estimated cap rates have hovered 2,400 around the 3.5%-4.0% over the past 5.0% few years. Estimated spot cap rates 2,200 have reduced to sub-3.5% in recent 2,000 4.5% years, driven by strong capital inflows into the office sector. 1,800 1,600 4.0%

1,400 3.5% 1,200

1,000 3.0%

Sep-11 Sep-12 Sep-13 Sep-15 Sep-16 Sep-08 Sep-09 Sep-10 Sep-14

Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17

Prime office capital value (S$/sqft) - LHS Estimated cap rate - RHS

Source: Colliers, DBS Bank

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Critical factors – Volumes and prices drive developers’ prices

Market volumes and prices drive prices. Market transaction There’s still value in developers. While developers’ shares have volumes and prices have historically been key drivers of done well year-to-date (YTD) – up close to 23% - we continue developers’ stock prices, with investors looking for proxies to to see catalysts to drive prices higher to closer to an average of leverage the potential upswing/downcycle of the property 1x P/NAV, in line with their five-year historical mean. At that market. According to our analysis, property prices (measured level, developers will be trading at an average P/RNAV of 0.9x. by the PPI) and developers’ P/NAV have a 0.6x positive Catalysts will come in the form of higher transaction volumes, correlation while volumes were positively correlated at 0.5x. resulting in the clearing of unsold inventory or even higher prices. In addition, we view that successful land-banking An increase in volumes also precide a rise in property prices by activities that could mean potential reflation of NAVs, which 6-9 months, which implies that the current increase in will further boost share prices. Our picks are City Dev, UOL, volumes, if sustained, is setting the stage for an eventual rise in and CapitaLand Limited. prices in 2018, the first since 2013. As such, we believe that property developers could potentially re-rate further towards a Key Risks. P/NAV of 1.1x P/NAV, as per previous property upcycles. Back While market expectations are for policies to generally head in 2004-2006 when property prices increased 10% over three towards further loosening in the event of further price years, property developers’ shares rose an average of 20% , a weakness the reverse could also be true. This might come in scenario which we envision can repeat, given similar market the event of unwanted capital inflows into the Singapore conditions. residential market or stratospheric land prices, which might prompt the government to act in order to prevent runaway prices.

Figure 43. Developers’ Historical P/NAV and Discount to RNAV

(X) Discount 2.20 0.40

2.00 0.20

1.80 -

1.60 (0.20)

1.40 (0.40)

1.20 (0.60) 1.03 x 1.00 (0.80) 0.90 x 0.87 x 0.80 (1.00) 0.77 x 0.60 (1.20)

0.40 (1.40) 1Q00 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17

Discount to RNAV P/NAV P/NAV (mean) P/NAV (+1 SD) P/NAV (-1 SD)

Source: URA, Bloomberg Finance L.P., DBS Bank

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Figure 44. Developers’ P/NAV to volumes Volumes vs Developers valuation Units Sold (x) 16,000 2.50

14,000 2.00 12,000

10,000 B C 1.50 8,000 D 1.00 6,000 A E 4,000 0.50 2,000

- - 1Q00 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17

Volumes transacted (Primary and Secondary) (LHS) P/NAV (RHS)

Source: URA, Bloomberg Finance L.P., DBS Bank

Figure 45. Developers’ P/NAV to volumes Price Changes vs Developers valuation (%) Change (x) 15 2.50

10 2.00

5 1.50 B C - D 1.00 1Q00 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 (5) A E

0.50 (10)

(15) -

Price Changes (%) (LHS) P/NAV (RHS)

Source: URA, Bloomberg Finance L.P., DBS Bank

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Period Observations A 1Q01-1Q03 Developers’ prices / P/NAV declined by >40% as volumes tapered off due to SARS B 3Q03 – 1Q07 Multi-year bull run in prices and volumes, which correspondingly saw developer’s P/NAV rise from a low of 0.7x to a peak of more than 2.0x C 2Q07-1Q09 Global Financial Crisis which saw volumes dry up and prices correct significantly. Developers’ shares corrected significantly to multi-year lows D 3Q12 – 2Q15 A minimal correction in prices and volumes due to eight rounds of cooling measures. Developers’ shares corrected from >1.0x P/NAV to as low as 0.65x P/NAV E 1Q17 onwards Volumes started to move up in 2016 and 1H17, while prices have yet to do so. Developers’ P/NAV have re-rated close to their mean of 0.9x P/NAV. Source: URA, Bloomberg Finance L.P., DBS Bank

Figure 46. Developers exposure by market segment Company SG Resi SG Commercial Overseas Total

% % % %

Covered by DBS CapitaLand 3% 27% 70% 100% City Dev 27% 52% 21% 100% Frasers Centrepoint Ltd 5% 50% 45% 100% UOL 7% 85% 8% 100%

Non-Covered Guocoland 25% 45% 30% 100% UIC 40% 45% 5% 100% Ho Bee 15% 63% 22% 100% Wheelock 30% 39% 32% 100% Wing Tai 15% 56% 29% 100% Bukit Sembawang 99% 1% 0% 100% Oxley Holdings 25% 35% 40% 100%

Source: URA, Bloomberg Finance L.P., companies, DBS Bank

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Figure 47:. Developer’s exposure of unsold inventory by market segment.

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% CDL CapitaLand UOL UIC FCL Guocoland Keppel Land Wingtai

Outside Central Region Core Central Region Rest of Central Region

Source: URA, Bloomberg Finance L.P., companies, DBS Bank

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Asian Insights SparX Singapore Property

Company Guide

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Singapore Company Guide CapitaLand

Version 11 | Bloomberg: CAPL SP | Reuters: CATL.SI Refer to important disclosures at the end of this report

DBS Group Research . Equity 7 Jul 2017

BUY Upward March Last Traded Price ( 6 Jul 2017): S$3.50 (STI : 3,226.34) Price Target 12-mth: S$4.33 (24% upside) Maintain BUY, TP maintained at S$4.33. There is reason to remain vested in CapitaLand Limited (CAPL) as we see strong Analyst catalysts in the medium term to drive its share price higher. We Derek TAN +65 6682 3716 [email protected] have raised our target price to S$4.33 on the back of a 10% Rachel TAN +65 6682 3713 [email protected] discount to RNAV. We believe that CAPL will see higher What’s New valuations on the back of improved property market sentiment, leading to strong sales. In addition, continued asset recycling • Robust pre-leasing activities at recently completed activities could translate to higher gains and boost ROEs going properties in China forward. • Increased confidence in the group’s ability to deliver sustained growth in recurring income Robust activities at its newly completed properties. During our visit of a selected number of newly completed properties in • Ready to pounce on new opportunities; asset recycling to drive returns Wuhan, Shenzhen, Hangzhou and Shanghai, we were

pleasantly surprised to see robust foot traffic at the malls, underpinned by CapitaMalls Asia (CMA)’s ability to bring in new-to-market brands, to consistently refresh offerings to Price Relative consumers. A majority of the recently completed properties have been substantially pre-leased ahead of completion, supporting higher recurring income going forward.

Ready to pounce on opportunities. We believe that it is opportune for the group to turn more active in terms of

merger & acquisitions (M&A) to grow inorganically. Acknowledging strong competition for land, management is Forecasts and Valuation FY Dec (S$ m) 2015A 2016A 2017F 2018F looking at opportunities to acquire land through JVs and Revenue 4,762 5,252 5,536 4,643 remains keen to invest in value-added opportunities where the EBITDA 2,325 2,374 1,881 1,928 group can drive higher returns through active management. In Pre-tax Profit 1,839 1,907 1,590 1,417 addition, CAPL is also looking towards potentially recycling its Net Profit 1,066 1,190 960 836 Net Pft (Pre Ex.) 1,066 1,190 799 836 capital to achieve higher returns. Net Pft Gth (Pre-ex) (%) (8.2) 11.7 (32.9) 4.7 EPS (S cts) 25.0 28.0 22.5 19.6 EPS Pre Ex. (S cts) 25.0 28.0 18.8 19.6 Valuation: EPS Gth Pre Ex (%) (8) 12 (33) 5 Our target price of S$4.33 is based on a 10% discount to our Diluted EPS (S cts) 25.0 28.0 22.5 19.6 adjusted RNAV of S$4.81/share. Net DPS (S cts) 8.98 9.95 9.95 9.95

BV Per Share (S cts) 420 413 426 436 PE (X) 14.0 12.5 15.5 17.8 Key Risks to Our View: PE Pre Ex. (X) 14.0 12.5 18.7 17.8 Slowdown in Asian economies. The risk to our view is if there P/Cash Flow (X) 6.0 4.5 14.0 36.0 is a slowdown in Asian economies, especially China, which EV/EBITDA (X) 14.5 13.2 17.0 17.1 could dampen demand for housing and private consumption. Net Div Yield (%) 2.6 2.8 2.8 2.8 P/Book Value (X) 0.8 0.8 0.8 0.8 Net Debt/Equity (X) 0.5 0.4 0.4 0.4 At A Glance ROAE (%) 6.1 6.7 5.4 4.6 Issued Capital (m shrs) 4,247 Earnings Rev (%): 0 0 Mkt. Cap (S$m/US$m) 14,865 / 10,755 Consensus EPS (S cts): 21.5 20.5 Major Shareholders (%) Other Broker Recs: B: 17 S: 0 H: 5 Temasek Holdings Private Ltd 40.0 Source of all data on this page: Company, DBS Bank, Bloomberg Blackrock 6.0 Finance L.P Free Float (%) 54.0 3m Avg. Daily Val (US$m) 26.5 ICB Industry : Real Estate / Real Estate

ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa:SM, PY Page 35 Company Guide CapitaLand

WHAT’S NEW

Wings to Fly

Key Management Meeting Highlights. Key visit highlights.

CapitaLand turning more active in acquisitions; value-add real Retail is not dead, in our view. The group’s efforts to combat estate opportunities most interesting. 2017 will be a banner against the rising threat of e-commerce is making headway, year for the group, with the completion of a number of and we believe that CMA is taking steps in the right direction. integrated developments and retail malls. The group’s focus is The overall aim for the group is to continue to gain to grow its recurring income to 72% of assets (vs 68% mindshare with consumers through active management of previously), with another 15% of its portfolio to deliver a malls in the portfolio, introducing new concepts in fashion stronger performance going forward after stabilisation. and F&B to their malls, which seems to be gaining traction with consumers. With the opening and stabilisation of close to 8 major properties in 2017, we project earnings to grow strongly and Strong pre-leasing at new properties: A majority of the we believe that management can start to turn more active in completed properties have been pre-leased ahead of terms of merger & acquisitions (M&A) to grow inorganically. completion and opened with high occupancies of close to 100%. Management is seeing interesting opportunities in China and new developed markets and remains keen to execute on During our site visit, we found that CAPL has made efforts to them going forward. We understand that group is most keen put in a higher experiential component in the malls, with to invest in value-add real estate opportunities where the 30%-35% of tenants either new in terms of fashion brands, group is able to turn around asset performance either or offering new concepts in F&B. through re-leasing the property, asset repositioning or Hangzhou physical upgrades in order to deliver higher returns. Such investments typically offer higher returns than core-plus We visited Raffles city Hangzhou (RCH) which was recently investing and execution of such deals will underpin a strong opened. Located in Qianjiang New town, Hangzhou’s new earnings potential going forward. central business district (CBD), the 298,276 sqm GFA integrated development is one of the largest Raffles City Given its retail network and expertise, CapitaMalls Asia branded property within CAPL and stands out as a prominent (CMA) has been gaining traction with asset owners and landmark in the area, which has seen a number of new office signed over 6 property management contracts in Singapore buildings completed in recent years. and China, comprising over 200,000 sqm of retail GFA. We understand that CMA has a rights of first refusal (ROFR) to Pre-leasing at RCH is progressing exceedingly well. The retail acquire those assets if the owners intend to sell in the future. mall (40% of GFA) is substantially leased with a committed occupancy of over 95% as of April 2017 with more than Asset reconstitution strategy in place. While CAPL has ample 30% of the tenants are concept, flagship stores that are new cash resources with over S$4bn cash that can be deployed, to Hangzhou. Some of the notable tenants include the asset re-cycling remains a key strategy in the aim to optimise popular Heytea, Yanjiyou lifestyle bookstore and Orange Sky portfolio returns. An example of such an asset recycling Golden Harvest Cinema. initiative is the recent sale of Innov Toer (RMB 38,000 sqm, exit yield of c.4.2%) in Shanghai and the subsequent re- The property’s office component (13% of GFA) is held for investment into Guozheng (renamed as Innov Centre) at a income by the group, and has also seen strong pre-leasing lower entry price (RM 32,700 psm) and potentially higher with close to c.52% of space leased as of Jun’17. The aim is yield (c.4.5%-4.6%). to achieve 80% by year end while strata offices available for have been substantially sold (c.95% of available space. Strata This strategy is also consistently employed by its managed sales for the SOHO Apartments (Sky Habitat) ( c.88% of 102 REITs with CapitaLand Commercial Trust (CCT) and Ascott units have been sold) . REIT (ART) who have been actively selling assets which management deemed to have achieved optimal maturity level. Going forward, it is expected that CAPL and its REITs will continue to actively manage their portfolio with the aim to achieve stable returns over time.

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Shenzhen given its location with the WujiaoChang district and is of the four emerging decentralised zones within Shanghai. We We visited the recently opened Raffles City Shenzhen (RCSZ ), understand that there is an emerging demand for firms to located in Nanshan district with one of the highest relocate there given soaring rents within downtown concentration of expats and international schools. The mall Shanghai, and the ground team is seeing a growing number saw good traffic and has many new-to-market concepts of firms in the Technology re-locating to the vicinity. anchoring the mall. There are a number of new competing buildings entering the As is the case with other Raffles City developments, RCSZ is market in the next few years but should be absorbed as the well located and linked to 2 upcoming MRT train lines (lines 9 strength of the location is (i) proximity to metro station; and and 12) which will open in 2019 and 2021 which will mean (ii) access to a number of universities (i.e. Fudan) and stronger traffic in the medium term. residential district, implying readily available labour pools. The Ascott Serviced apartment offers a good catchment for Wuhan the mall and is understood to receive robust enquiries from potential corporates. Demand for rooms is generally from In Wuhan, we visited two malls – CapitaLand 1818 and local SMEs. CapitaLand Westgate - which are fairly new malls that opened in recent years within the CMA portfolio. These are Shanghai all within the 3rd ring road, meaning that there is strong In Shanghai, we went to Raffles City Changning (RCS) which resident density and catchment. was officially launched recently. The property is a unique CapitaLand Westgate opened in April 2017 and has since property integrated with three historical buildings, with two seen strong returning foot traffic. The property is located office towers and two retail podiums (West and East Wing). within a business district and is positioned as a family-themed Given its location within a residential district with high expat mall with AEON supermarket as an anchor at B1, and a concentration, it has an immediate catchment of more than 1 cinema. The integrated development is linked to an office million residents living within 1 km. We noted that the tower (from level 4) and has direct links to metro station in B1 positioning of the mall is more upper mid-tier with a good and a residential block from level 2 (built and owned by mix of international brands. Like its other Raffles City projects, China Merchants Group). This means that retailers are able to there is a good number of new to-Changning brands (C.20% enjoy consistent traffic and patronage throughout the week. of tenants), and those offering new concepts. CapitaLand 1818, likewise is positioned with more The retail podium is close to 100% leased while office tower experiential components within the mall, anchored by a has been substantially taken up with tenants doing their fit- cinema and a high concentration of F&B outlets, some of outs to start operations soon. which are new-to-market concepts. The mall does not have a We also visited the recently acquired Innov Tower (formerly supermarket given its location with the CBD. We understand known as Guozheng). While one of the key motivations to that the fashion component might be a little weak but acquire the property was to recycle its capital into Shanghai, generally tenants in the sports and F&B are doing well. we see potential for the property to increase its occupancy

Recurring income to further increase as more properties turn operational

Source: Company, DBS Bank

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Portfolio of assets completing in 2017-2018

Management contracts signed

Source: Company, DBS Bank

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Wuhan Mall ( CapitaMall Westgate and CapitaMall 1818)

CapitaMall West Gate (Note the visit was early at 10am in the morning on a Friday)

Mall is linked to office/residential Selected F&B outlets (morning) Internal mall layout towers

CapitaMall 1818

Entrance Atrium Activities in the mall B1 where majority of F&B are located

Shenzhen ( Raffles City Shenzhen)

Atrium Activities in the mall Fashion tenant with good patronage Popular F&B outlet (a common sight)

Source: Company, DBS Bank

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Hangzhou ( Raffles City Hangzhou)

Surrounding office supply Surrounding office supply New supply in construction

Hangzhou ( Raffles City Hangzhou)

Popular “Hey Tea” with queues Atrium Activities Strong traffic in the basement

Source: Company, DBS Bank

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Shanghai

Hangzhou ( Raffles City Changning)

Outdoor activities Atrium Internal layout

Innov Centre

Overall view Surrounding supply and residential

Source: Company, DBS Bank

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Revenue (S$’m) CRITICAL DATA POINTS TO WATCH S$'m Critical Factors: 6,000.0

5,000.0 Critical Factors 4,000.0 Growing recurring revenues from retail mall portfolio and Ascott. While trading properties (residential development and 3,000.0 strata offices) account for 24% of assets, we see continued 2,000.0 strength from CMA (CAPL’s retail mall division) and commercial 1,000.0 integrated developments, including Ascott Group, its successful - serviced residence brand, which form a significant 76% of total 13A 14A 15A 16A 17F 18F assets and is expected to contribute to growing recurring income for the group. PATMI Growth (S$;m) 1,400.0 S$'m Retail malls seeing good tenant sales growth, operational 1,200.0 outlook remains stable. There are 87 operating properties across 1,000.0 Asia (56 of them in China). In 1Q17, the group’s shopping malls 800.0 continued to record steady sales and occupancy rates. Portfolio 600.0 tenant sales remained relatively steady at -0.3% for Singapore 400.0 and was healthy at 12.6% in China on the back of improving 200.0 traffic. Shopper traffic and tenant sales generally performed - better on a y-o-y basis. CAPL will be completing a substantial 13A 14A 15A 16A 17F 18F 1m sqm of retail GFA in 2017, a majority coming from China (Suzhou Center Mall) and three Raffles City projects (Raffles City Asset base breakdown (S$44.2bn)

Changning, Raffles City Hangzhou and Raffles City Shenzhen) Asc ott CL 17% Singapore which have seen strong pre-leasing interest with committed 23% rates of more than 90%.

The Ascott Limited remains on the fast track to achieve its 80,000-unit target by year 2020 and will add another 770 units by 4Q16. Ascott’s investment in China’s largest and fastest- growing online apartment sharing platform, Tujia has yet to CMA bear fruit meaningfully but we continue to believe in its longer- 33% term synergies and ability to leverage on Tujia’s platform to CL China 27% reach out to a wider addressable market in the medium term.

Residential sales see strong uplift as property market sentiment CL Singapore CL China CMA Ascott improves. CAPL continue to see strong momentum in its RNAV residential division in both Singapore and China. In Singapore, RNAV of CapitaLand S$'m the group has substantially sold most of its available development projects with the latest launch – Marine Blue Value of CapitaLand Singapore 7,331.8 seeing strong take-up in the recent launch.In addition, China Value of CapitaLand China 9,819.4 sales momentum remains strong and the group will look to CapitaMalls Asia 17,399.3 launch another 7,000 units for the remainder of 2017. In Ascott 4,237.1 addition, the group has close to RMB10.5bn in unrecognized Others 855.0 revenues which will be booked in 2017-2018. GDV of CAPL Group 39,642.6 Less: Net Debt (11,552.3) Launch of new PE funds. CAPL remains on track to reach its Less: devt capex (7,709.0) S$8-10bn AUM target by 2020. We think that by tapping on RNAV of CAPL 20,501.3 third-party capital, CAPL would be able to leverage on larger Total Shares 4,258.6 economies of scale, better capitalise on market opportunities RNAV per share 4.81 and at the same time de-risk its property level exposure. Discount to RNAV 10%

Target price 4.33

Source: Company, DBS Bank

ASIAN INSIGHTS VICKERS SECURITIES Page 8 Page 42 Company Guide CapitaLand

Leverage & Asset Turnover (x) Balance Sheet: Balance sheet remains strong. We forecast debt/equity ratio to remain stable, at below c.0.6x over the coming years. Debt maturity profile remains long at 3.5 years (as of 3Q16) with an average cost of 3.4%. Approximately 70% of the interest cost is hedged into fixed rate debt.

Share Price Drivers: Strong residential sales to translate into higher prices. CAPL has taken advantage of the improved property sentiment in Singapore to sell most of its existing inventory. Key will be Capital Expenditure potential land-banking opportunities to replenish its balance sheet. In China, the group remains on track to launch 7,000 units in 2017. Good sales, we believe, will result in higher prices.

M&A and acquisitions. CAPL is looking at opportunities across the region and with the strong residential sales recorded in recent years across Singapore, China and Vietnam, it makes sense to be replenishing land banks in these countries. Acknowledging strong competition for land, management is looking at opportunities to acquire land through JVs or mergers ROE (%) & acquisitions (M&A) which will offer the group an alternative and cheaper entry price. The group remains keen to build on its recurring income base and we could see acquisitions in that space. Asset recycling into listed S-REITs/funds. CAPL will continue to demonstrate its ability to crystallise value through strategic divestments of mature assets to its listed REITs, which are market leaders in their respective subsectors of retail, office and hospitality. The ability to recycle capital efficiently will enable the group to free up capital, improve its balance sheet position and deploy capital to projects with higher returns. Forward PE Band (x)

Key Risks: Slowdown in Asian economies. The risk to our view is a further slowdown in Asian economies which could dampen demand for housing and private consumption expenditure and retail sales. This in turn could result in slower-than-expected projections.

Company Background CapitaLand (CAPL) is one of Asia’s largest real estate companies headquartered and listed in Singapore. Its two core PB Band (x) markets are Singapore and China; while Indonesia, Malaysia and Vietnam have been identified as new growth markets.

Source: Company, DBS Bank

ASIAN INSIGHTS VICKERS SECURITIES Page 9 Page 43 Company Guide CapitaLand

Key Income Statement (S$m) FY Dec 2014A 2015A 2016A 2017F 2018F

Revenue 3,925 4,762 5,252 5,536 4,643 Cost of Goods Sold (2,543) (3,287) (3,654) (3,440) (2,489) Gross Profit 1,382 1,475 1,598 2,096 2,154 Other Opng (Exp)/Inc (513) (431) (435) (444) (466) Operating Profit 869 1,044 1,163 1,652 1,688 Other Non Opg (Exp)/Inc 541 490 437 0.0 0.0 Associates & JV Inc 970 726 708 164 174 Net Interest (Exp)/Inc (382) (422) (401) (386) (445) Exceptional Gain/(Loss) 0.0 0.0 0.0 161 0.0 Pre-tax Profit 1,997 1,839 1,907 1,590 1,417 Tax (238) (344) (403) (257) (255) Minority Interest (599) (430) (314) (373) (325) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 1,161 1,066 1,190 960 836 Net Profit before Except. 1,161 1,066 1,190 799 836 EBITDA 2,444 2,325 2,374 1,881 1,928 Growth Revenue Gth (%) 11.8 21.3 10.3 5.4 (16.1) EBITDA Gth (%) 7.4 (4.9) 2.1 (20.7) 2.5 Opg Profit Gth (%) 27.8 20.2 11.3 42.1 2.2 Net Profit Gth (Pre-ex) (%) 32.7 (8.2) 11.7 (32.9) 4.7 Margins & Ratio Gross Margins (%) 35.2 31.0 30.4 37.9 46.4 Opg Profit Margin (%) 22.1 21.9 22.1 29.8 36.4 Net Profit Margin (%) 29.6 22.4 22.7 17.3 18.0 ROAE (%) 7.1 6.1 6.7 5.4 4.6 ROA (%) 2.6 2.3 2.6 2.1 1.8 ROCE (%) 1.9 2.0 2.2 3.4 3.3 Div Payout Ratio (%) 33.0 35.9 35.6 44.2 50.7 Net Interest Cover (x) 2.3 2.5 2.9 4.3 3.8 Source: Company, DBS Bank

ASIAN INSIGHTS VICKERS SECURITIES Page 10 Page 44 Company Guide CapitaLand

Quarterly / Interim Income Statement (S$m) FY Dec 1Q2016 2Q2016 3Q2016 4Q2016 1Q2017

Revenue 894 1,132 1,374 1,853 898 Cost of Goods Sold (615) (828) (950) (1,261) (564) Gross Profit 279 304 423 592 334 Other Oper. (Exp)/Inc 2.70 77.9 (89.3) 10.8 106 Operating Profit 282 382 334 602 440 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 165 198 149 195 169 Net Interest (Exp)/Inc (108) (102) (101) (90.1) (94.3) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 339 477 383 707 515 Tax (51.6) (82.1) (61.2) (208) (55.6) Minority Interest (69.6) (101) (74.1) (69.0) (72.3) Net Profit 218 294 248 431 387 Net profit bef Except. 218 294 248 431 387 EBITDA 447 580 483 797 609

Growth Revenue Gth (%) (48.6) 26.6 21.4 34.9 (51.6) EBITDA Gth (%) (22.4) 29.6 (16.6) 64.9 (23.6) Opg Profit Gth (%) (19.9) 35.3 (12.5) 80.3 (26.9) Net Profit Gth (Pre-ex) (%) (11.9) 34.7 (15.8) 73.9 (10.2) Margins Gross Margins (%) 31.2 26.8 30.8 31.9 37.2 Opg Profit Margins (%) 31.5 33.7 24.3 32.5 49.0 Net Profit Margins (%) 24.4 26.0 18.0 23.2 43.1

Balance Sheet (S$m) FY Dec 2014A 2015A 2016A 2017F 2018F

Net Fixed Assets 1,047 808 781 880 978 Invts in Associates & JVs 12,781 12,858 12,617 12,924 13,237 Other LT Assets 18,705 20,760 20,577 21,232 21,732 Cash & ST Invts 2,941 4,257 5,067 5,248 4,749 Inventory 0.0 0.0 0.0 0.0 0.0 Debtors 963 1,424 1,859 1,845 1,548 Other Current Assets 7,676 6,945 4,839 3,958 4,139 Total Assets 44,113 47,053 45,741 46,087 46,382

ST Debt 3,469 2,246 2,373 2,373 2,373 Creditor 3,070 4,064 4,685 3,822 3,111 Other Current Liab 463 620 670 627 582 LT Debt 12,517 13,812 12,479 12,979 13,479 Other LT Liabilities 1,386 1,373 1,233 1,233 1,233 Shareholder’s Equity 16,758 17,905 17,605 18,140 18,553 Minority Interests 6,451 7,032 6,696 6,912 7,051 Total Cap. & Liab. 44,113 47,053 45,741 46,087 46,382

Non-Cash Wkg. Capital 5,107 3,685 1,343 1,354 1,993 Net Cash/(Debt) (13,045) (11,801) (9,785) (10,104) (11,103) Debtors Turn (avg days) 99.1 91.5 114.1 122.1 133.4 Creditors Turn (avg days) 438.9 404.1 444.9 460.1 522.3 Inventory Turn (avg days) N/A N/A N/A N/A N/A Asset Turnover (x) 0.1 0.1 0.1 0.1 0.1 Conservative gearing Current Ratio (x) 1.7 1.8 1.5 1.6 1.7 Quick Ratio (x) 0.6 0.8 0.9 1.0 1.0 Net Debt/Equity (X) 0.6 0.5 0.4 0.4 0.4 Net Debt/Equity ex MI (X) 0.8 0.7 0.6 0.6 0.6 Capex to Debt (%) 0.8 0.4 0.5 1.1 1.0 Z-Score (X) 1.1 1.1 1.1 1.1 1.1

Source: Company, DBS Bank

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Cash Flow Statement (S$m) FY Dec 2014A 2015A 2016A 2017F 2018F

Pre-Tax Profit 1,997 1,839 1,907 1,590 1,417 Dep. & Amort. 64.6 65.0 66.0 66.0 66.0 Tax Paid (256) (145) (350) (300) (300) Assoc. & JV Inc/(loss) (970) (726) (708) (164) (174) Chg in Wkg.Cap. 51.9 1,264 2,292 31.7 (594) Other Operating CF 111 169 97.5 (161) 0.0 Net Operating CF 999 2,466 3,305 1,063 414 Capital Exp.(net) (127) (64.0) (75.2) (164) (164) Other Invts.(net) (1,357) (718) (575) (494) (500) Invts in Assoc. & JV 841 509 65.3 (200) (200) Div from Assoc & JV 406 394 393 57.3 60.9 Other Investing CF (102) 33.0 121 275 0.0 Net Investing CF (339) 154 (71.4) (527) (804) Div Paid (705) (727) (752) (581) (610) Chg in Gross Debt 177 (212) (809) 500 500 Capital Issues 1.38 0.0 0.0 0.0 0.0 Other Financing CF (3,746) (274) (901) 0.0 0.0 Net Financing CF (4,272) (1,213) (2,462) (80.7) (110) Currency Adjustments 55.0 16.9 (153) 0.0 0.0 Chg in Cash (3,557) 1,424 619 456 (499) Opg CFPS (S cts) 22.2 28.2 23.8 24.2 23.7 Free CFPS (S cts) 20.5 56.4 75.8 21.1 5.87 Source: Company, DBS Bank

Target Price & Ratings History

Source: DBS Bank Analyst: Derek TAN Rachel TAN

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Version 10 | Bloomberg: CCT SP | Reuters: CACT.SI Refer to important disclosures at the end of this report

DBS Group Research . Equity 20 Jul 2017

BUY An investment that keeps giving

Last Traded Price ( 19 Jul 2017): S$1.73 (STI : 3,325.07) Upside remains. We maintain our BUY call on CapitaLand Price Target 12-mth: S$1.85 (7% upside and 5.3% yield) (Prev Commercial Trust (CCT) with a revised TP of S$1.85. CCT’s share S$1.85) price has rallied over the past two years on account of management’s ability to deliver steady DPU growth amidst a Analyst downturn in office rents. With signs that office rents may have hit Mervin SONG CFA +65 6682 3715 [email protected] a cyclical low in 2Q17, which is earlier than market expectations, Derek TAN +65 6682 3716 [email protected] increased investor interest in CCT on anticipation of a recovery in the office market will trigger a further rally in CCT’s share price. What’s New This share price behaviour is consistent with prior episodes where CCT’s share price leads the spot office rents by 6-12 months. • 2Q17 DPU of 2.27 Scts (+3% y-o-y) in line with our

expectations Where we differ – CCT to trade above book. Consensus has • Improvement largely due to 100% ownership of pegged target prices at a discount to CCT’s latest book value of c.S$1.77. However, we believe this is unwarranted, given CCT has CapitaGreen versus 40% previously been able to demonstrate the conservative valuation of its • CCT to distribute S$171m in net gains from recent properties, through the recent sale of three office buildings at 14- asset disposals to stabilised its DPU 39% premium to book. This understated valuation remains in such buildings as Capital Tower and 999-year leasehold HSBC Building, which are priced at S$1,844 and S$2,275 psf respectively, a discount to recent transactions of between S$2,400-S$2,700 for Price Relative comparable buildings. Thus, in our view, CCT can trade at a S$ Relative Index premium to book, implied by our TP of S$1.85. 2.1 2.0 206 1.9 186 1.8 1.7 166 Further catalysts in sight. While the re-rating catalyst in the form 1.6 146 1.5 of CCT selling its properties at premium, which we had earlier 1.4 126 1.3 106 identified, has now been realised, positive newsflow to maintain 1.2 1.1 86 the upward trajectory in CCT’s share price remains. We believe the Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 expected sale of Asia Square Tower 2 and Chevron House at CapitaLand Commercial Trust (LHS) Relative STI (RHS) between S$2,600-2,800 psf as well as the Beach Road land tender will highlight the fact that CCT’s Grade A portfolio is on sale, Forecasts and Valuation given it currently trades on an implied psf of c.S$2,250. FY Dec (S$m) 2015A 2016A 2017F 2018F Gross Revenue 273 299 321 281 Valuation: Net Property Inc 213 231 253 222 After incorporating the latest property sales, the Golden Shoe Total Return 307 261 689 237 redevelopment, and lowering the beta to better capture the Distribution Inc 254 269 278 281 EPU (S cts) 8.17 7.89 8.53 7.66 heightened investment demand for Grade A office buildings, we EPU Gth (%) (35) (3) 8 (10) have raised our DCF-based TP to S$1.85 from S$1.69. DPU (S cts) 8.62 9.08 9.08 9.08 DPU Gth (%) 2 5 0 0 Key Risks to Our View: NAV per shr (S cts) 177 178 176 176 Key risks to our positive view are weaker-than-expected rents, PE (X) 21.1 21.9 20.2 22.5 and/or CCT not distributing capital gains, causing DPU to come in Distribution Yield (%) 5.0 5.3 5.3 5.3 below expectations as well as investors focusing more on P/NAV (x) 1.0 1.0 1.0 1.0 underlying DPU rather than headline DPU. Aggregate Leverage (%) 30.0 37.5 35.2 35.6 ROAE (%) 4.6 4.4 4.9 4.3 At A Glance Issued Capital (m shrs) 3,006 Mkt. Cap (S$m/US$m) 5,186 / 3,790 Distn. Inc Chng (%): HELLO HELLO Major Shareholders (%) Consensus DPU (S cts): 9.10 9.00 CapitaLand Limited 32.2 Other Broker Recs: B: 9 S: 3 H: 11 BlackRock 6.7 Source of all data on this page: Company, DBS Bank, Bloomberg CBRE Group Inc 4.9 Finance L.P Free Float (%) 56.2 3m Avg. Daily Val (US$m) 12.4 ICB Industry : Real Estate / Real Estate Investment Trust

ASIAN INSIGHTS VICKERS SECURITIES ed: JLC / sa:YM, PY Page 47 Company Guide CapitaLand Commercial Trust

WHAT’S NEW

Delivers again

2Q17 DPU up 3% y-o-y rents of between S$8.65-10.40 versus average • 2Q17 DPU came in at 2.27 Scts, which is 3.2% higher expiring rents of S$9.71. y-o-y. This represents c.24% of our FY17F DPU (before • Subject to the pace in recovery in spot rents, risk of adjusting for recently announced disposals) and is in negative rental reversions continuing going forward line with our expectations. 2Q17 DPU of 2.27 Scts is a remains moderate to high, given average expiring preliminary estimate based on year-to-date number of rents for 2H17, 2018 and 2019 stand at S$10.58, outstanding shares which is subsequent to change if S$11.45 (80% of lease) and S$10.24 (69% of leases) additional conversion of convertible bonds into shares respectively versus current Grade A core CBD rents of occurs before the book closure date. The actual DPU S$8.95. will be announced on book closure date on 27 July • For the remainder of 2017, CCT faces minimal tenancy 2017. risks with only 2% of office leases up for renewal (by • Similar to 1Q17, the increase in DPU was largely GRI). However, this steps up to 15% and 33% of attributed to the acquisition of the remaining 60% leases up for renewal in 2018 and 2019. interest in CapitaGreen and continued improvement in the underlying performance of CapitaGreen (NPI up Expected near-term decline in gearing post additional 20% on higher effective occupancies and absence of conversion of CB’s rent free/fit-out periods). The boost from CapitaGreen • Gearing declined to 36% from 38.1% at end 1Q17 also resulted in group 2Q17 NPI rising 34% y-o-y. The following the sale of 50% interest in OGS. In addition, uplift in DPU and NPI was further caused by better the fall in gearing was attributed to 2.8% increase in performance at Capital Tower (+11% increase in NPI) property values as CCT’s valuers on average reduced on the back of higher occupancies (99.4% versus cap rates by 15bps to better reflect recent market 98.7% in 2Q16). This was partially offset by lower transactions and buoyant investment demand for contributions from Golden Shoe (-36% fall in NPI) office assets. CCT’s office buildings are now valued on ahead of the closure for the redevelopment into a new a cap rate of between 3.60-4.10%. office tower as well as the sale of 50% interest in One • Post balance date, gearing has subsequently fallen to George Street, which was completed on 19 June 35.2%, following additional conversion of CB’s into 2017. NPI for CCT’s other buildings were relatively shares. stable in 2Q17. • With the upcoming disposal of Wilkie Edge as well as • Overall portfolio occupancy at end 2Q17 stood at the recent announcement that it will redevelop Golden 97.8%, marginally up from 97.1% at end 1Q17 and Shoe Car Park into a Grade A office tower with 97.2% at end 2Q16. Other highlights for the quarter CapitaLand and Mitsubishi, gearing is expected to include a drop in occupancy at 20 Anson to 84.2% settle around the 35% level. from 91.7% at end 1Q17 because of a loss of tenants • Average cost of debt was stable at 2.6%, with 85% of who returned space after a merger or downsized their debt on fixed rates. space requirements. • On the back of favourable prices achieved for the sale of 50% interest in OGS and uplift in the value of its Downward pressure on passing rents despite early signs of office portfolio, excluding distributable income, NAV potential recovery per unit was S$1.80 at end 2Q17 or S$1.77 as at 14 • Despite some signs that spot office rents may have July after the additional conversion of CBs. bottomed in 2Q17, with CBRE reporting flat q-o-q rents and JLL and Cushman & Wakefield estimating a Expect DPU to remain flat for the next few years 1-2% increase q-o-q, CCT continues to face • To offset the loss of income from the sale of Wilkie downward pressure on its passing rents, given CCT’s Edge, Golden Shoe and 50% interest in OGS, CCT success in securing favourable rents three years ago. guided that to achieve a stable DPU, it intends to Thus, over the quarter, CCT reported negative rental distribute the S$171.7m in net gains from these asset reversions at Six Battery Road and One George Street. disposals over time. At Six Battery Road, it achieved committed rents of • Therefore, we now assume, CCT will maintain a DPU between S$10.40-13.80 versus average expiring rents of around 9.08 Scts in line with its FY16 over the next of S$12.37, while at One George Street, it signed few years, until underlying earnings recovery on the

ASIAN INSIGHTS VICKERS SECURITIES Page 2 Page 48 Company Guide CapitaLand Commercial Trust

back of rising spot office rents and when the Maintain BUY, with TP of S$1.85 redeveloped Golden Shoe office tower is completed. • With an excess of 10% total return over the coming • Post results, we have also raised our DCF-based TP to 12 months, we maintain our BUY call with a revised TP S$1.85 from S$1.69. The higher valuation was of S$1.85. achieved after rolling our valuation forward to FY18, • We believe the upcoming sale of Asia Square Tower 2 incorporating the latest property sales and the recently and Chevron House, as well as the office land tender announced Golden Shoe redevelopment (for more bid at Beach Road, will highlight the fact that CCT’s details see our report entitled “Polishing our golden book is conservatively valued. This, in our view, will shoe” dated 13 July 2017), and lowering our beta trigger a share price re-rating, causing CCT to assumption from 0.80 to 0.75 to better capture the rightfully trade above its NAV per share of S$1.77. heightened investment demand for Grade A office buildings.

Quarterly / Interim Income Statement (S$m) FY Dec 2Q2016 1Q2017 2Q2017 % chg yoy % chg qoq

Gross revenue 67.6 89.5 87.5 29.5 (2.3) Property expenses (16.1) (19.7) (18.4) 14.1 (6.5) Net Property Income 51.5 69.9 69.1 34.3 (1.1) Other Operating expenses (4.5) (5.4) (6.3) 40.6 16.4 Other Non Opg (Exp)/Inc 0.0 (0.8) (3.2) nm 296.8 Net Interest (Exp)/Inc (8.3) (17.7) (17.4) nm 1.6 Exceptional Gain/(Loss) 0.0 0.0 0.0 - - Net Income 74.3 65.9 68.1 (8.4) 3.3 Tax 0.0 (0.1) (0.2) 257.1 25.9 Minority Interest 0.0 0.0 0.0 - - Net Income after Tax 74.3 65.8 67.9 (8.6) 3.3 Total Return 0.0 0.0 0.0 - - Non-tax deductible Items 0.0 0.0 0.0 - - Net Inc available for Dist. 65.1 71.3 69.5 6.7 (2.6) Ratio (%) Net Prop Inc Margin 76.1 78.0 79.0 Dist. Payout Ratio 100.0 100.0 100.0

Source of all data: Company, DBS Bank

ASIAN INSIGHTS VICKERS SECURITIES Page 3 Page 49 Company Guide CapitaLand Commercial Trust

Net Property Income and Margins (%) CRITICAL DATA POINTS TO WATCH S$ m 300 Critical Factors 85.6% 250 Recovery in spot office rents. There are signs that spot office 83.6% 200 rents may have bottomed in 2Q17 (office rents were flat q-o-q, 81.6% 150 based on CBRE estimates or up by 1-2%, according to JLL and 79.6% 100 Cushman & Wakefield) – earlier than market and our 77.6% expectations of a bottom at end 2017 or early 2018. Given 50 75.6%

CCT’s share price has historically led a recovery in spot rents by 0 73.6% 6-12 months, with a potential upturn in rents, this will result in 2014A 2015A 2016A 2017F 2018F the rally in CCT’s share price to continue going forward. Net Property Income Net Property Income Margin %

Staggered weighted lease expiry profile to help mitigate near term negative rental reversions. While we expect office rents to Net Property Income and Margins (%) 74 80% recover next year, the rebound in rents is unlikely to match the 79% rents signed three years ago during more buoyant times. Thus, 69 79% 78% we expect negative rental reversions at several of CCT’s 64 78% buildings such as Six Battery Road and One George Street. 77% Nevertheless, with a staggered lease expiry profile, only 2% of 59 77% 76% office leases are up for renewal (by GRI) for the remainder of 54 76% FY17 and 15% in FY18, therefore the impact from these 75% negative reversions is contained. Beyond this, a defensive 49 75% weighted average lease expiry (WALE) of 6.4 years by net 1Q2015 2Q2015 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 4Q2016 1Q2017 2Q2017 lettable area (NLA) provides the REIT some measure of earnings Net Property Income Net Property Income Margin % stability and certainty. Distribution Paid / Net Operating CF Boost from CapitaGreen contribution. CCT’s near-term earnings 1.5 (x) will be driven by the acquisition of the 60% remaining interest in CapitaGreen last year. The increased contribution from 1.3 CapitaGreen will help offset potential negative rental reversions 1.1 at CCT’s other properties and loss in income from the recent sale of Wilkie Edge, closure of the Golden Shoe carpark for 0.9 redevelopment and 50% interest in One George Street. Beyond the boost from the higher equity interest in CapitaGreen (40% 0.7 previously to 100%), CCT should benefit from the higher 0.5 underlying earnings at CapitaGreen as tenants progressively 2014A 2015A 2016A 2017F 2018F move into the building and rent-free periods start to expire.

Divestment gains to smooth future distributions. The recent sale Interest Cover (x) (x) of Wilkie Edge, closure of the Golden Shoe carpark for 7.00 redevelopment and 50% interest in One George Street netted 6.00 CCT a net gain of S$171.7m. To offset the loss of income from these disposals, CCT intends to distribute these gains over time 5.00 to provide unitholders with a stable DPU profile going forward. 4.00

3.00

Medium-term upside from redevelopment of Golden Shoe Car 2.00 Park. CCT has announced that it has entered into a JV with its 1.00 sponsor, CapitaLand Limited (CAPL) and Mitsubishi Estate Co., Ltd (MEC) to redevelop its Golden Shoe Car Park property into a 0.00 2014A 2015A 2016A 2017F 2018F 635k-sqft office tower with a 299-room serviced apartment. CCT and CAPL will hold a 45% interest each, with MEC owning Source: Company, DBS Bank 10%. Costing S$1.82bn with a targeted yield on cost of 5% and to be completed in 1H2021, the property will provide a medium-term uplift to CCT’s earnings and CCT’s current NAV per unit (excluding distributions) of S$1.77.

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Aggregate Leverage (%) Balance Sheet: Gearing to stabilise around 35-36%. Post the disposal of Wilkie Edge, Golden Shoe Car Park and 50% interest in One George 35.0%

Street, and investment in a JV to develop an office tower at the 30.0%

Golden Shoe site, we expect gearing to stabilise around the 35- 25.0%

36% level. 20.0%

15.0% Share Price Drivers: 10.0% Recovery in the office market. With CCT’s share price historically 2014A 2015A 2016A 2017F 2018F tracking the office market by 6-12 months, we believe a recovery in office rents next year will lead to a further re-rating in CCT’s share price. In our view, further market transactions, ROE (%) which are above the implied price per sqft of CCT’s Singapore office portfolio, should also drive CCT’s share price higher.

Key Risks: Competition from other landlords. Between 2017 and 2018, c.3m sqft of office (NLA) will be completed within the downtown core area. Due to weaker net absorption rates of <1m sqft in recent years, CCT could face higher competition for large tenants from landlords of newer buildings, which have large floor plates of 30-40k sqft.

Pressure on rents from shadow space. We see some Distribution Yield (%) ( %) downsizing activity from banks and financial institutions, and 7.4 shadow space (particularly in the Marina Bay area) could put 6.9 + 2sd: 20x some pressure on rents for CCT’s portfolio, which is located 6.4 + 1sd: 17x primarily in the Raffles Place/Tanjong Pagar areas. 5.9 Avg: 5.6% 5.4 Interest rate risk. Any increase in interest rates will result in -1sd: 10.9x 4.9 higher interest payments that the REIT has to make annually to -2sd: 7.8x 4.4 service its loans. Nevertheless, the risk is partially mitigated by 3.9 the fact that c.85% of CCT’s debts are on fixed rates. 2013 2014 2015 2016 2017

Company Background PB Band (x)

CapitaLand Commercial Trust (CCT) is a real investment trust 1.3 (x) investing exclusively in commercial properties in Singapore. 1.2

1.1

+ 2sd: 20x 1.0 + 1sd: 17x 0.9 Avg: 0.88x

0.8 -1sd: 10.9x

-2sd: 7.8x 0.7

0.6 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17

Source: Company, DBS Bank

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CCT share price versus Singapore office rents Remarks

2.50 20.00 CCT’s share price has 18.00 historically led the upturn 2.00 16.00 and downturn in spot office 14.00 rents by 6-12 months. 1.50 12.00 10.00 Over the past year, CCT’s 1.00 8.00 share price has rebounded in anticipation of a recovery 6.00 in the office market, which 0.50 4.00 we believe will be validated 2.00 when spot rents rebound 0.00 0.00 from 2018 onwards.

CCT share price (S$) - LHS Grade A office rents (S$ psf/mth) - RHS

Source: Bloomberg Finance L.P., STB, DBS Bank

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Income Statement (S$m) FY Dec 2014A 2015A 2016A 2017F 2018F

Gross revenue 263 273 299 321 281 Property expenses (57.4) (60.5) (67.3) (68.5) (58.5) Net Property Income 205 213 231 253 222 Other Operating expenses (16.2) (17.6) (17.6) (22.1) (20.9) Other Non Opg (Exp)/Inc (3.5) (0.5) 3.59 3.06 3.06 Net Interest (Exp)/Inc (32.7) (32.1) (46.2) (60.0) (54.1) Exceptional Gain/(Loss) (2.5) (18.9) (22.1) 0.0 0.0 Net Income 368 241 235 262 238 Tax 0.0 (0.1) (1.2) (0.9) (0.8)

Minority Interest 0.0 0.0 0.0 0.0 0.0

Preference Dividend 0.0 0.0 0.0 0.0 0.0

Net Income After Tax 368 241 234 261 237 Total Return 449 307 261 689 237 Non-tax deductible Items (200) (52.8) 8.41 16.9 43.6 Net Inc available for Dist. 249 254 269 278 281 Growth & Ratio Revenue Gth (%) 4.4 4.0 9.3 7.6 (12.7) Earnings growth will be N Property Inc Gth (%) 4.1 3.7 8.7 9.4 (12.2) driven by increased Net Inc Gth (%) 40.9 (34.5) (3.0) 11.8 (9.2) contribution from Dist. Payout Ratio (%) 100.0 100.0 100.0 100.0 100.0 CapitaGreen, which should offset income loss from Net Prop Inc Margins (%) 78.2 77.9 77.5 78.7 79.1 lower occupancies and Net Income Margins (%) 140.0 88.1 78.2 81.2 84.5 negative rental reversions at Dist to revenue (%) 94.9 93.1 90.1 86.5 100.0 existing office assets such Managers & Trustee’s fees 6.2 6.4 5.9 6.9 7.4 as Capital Tower, 6 Battery RO AE (%) 7.3 4.6 4.4 4.9 4.3 Road and One George ROA (%) 5.8 3.7 3.2 3.3 3.1 Street ROCE (%) 3.0 3.0 2.9 2.9 2.6 Int. Cover (x) 5.8 6.1 4.6 3.8 3.7 Source: Company, DBS Bank

ASIAN INSIGHTS VICKERS SECURITIES Page 53 Page 7 Company Guide CapitaLand Commercial Trust

Quarterly / Interim Income Statement (S$m) FY Dec 2Q2016 3Q2016 4Q2016 1Q2017 2Q2017

Gross revenue 67.6 74.4 89.7 89.5 87.5 Property expenses (16.1) (17.4) (19.0) (19.7) (18.4) Net Property Income 51.5 57.0 70.8 69.9 69.1 Other Operating expenses (4.5) (3.9) (5.2) (5.4) (6.3) Other Non Opg (Exp)/Inc 0.0 1.22 0.99 (0.8) (3.2) Net Interest (Exp)/Inc (8.3) (11.4) (18.3) (17.7) (17.4)

Exceptional Gain/(Loss) 0.0 (13.5) 0.0 0.0 0.0 Net Income 74.3 51.6 55.6 65.9 68.1 Tax 0.0 (0.2) (0.8) (0.1) (0.2)

Minority Interest 0.0 0.0 0.0 0.0 0.0 Net Income after Tax 74.3 51.4 54.7 65.8 67.9 Total Return 0.0 0.0 0.0 0.0 0.0

Non-tax deductible Items 0.0 0.0 0.0 0.0 0.0 Net Inc available for Dist. 65.1 68.3 70.8 71.3 69.5 Growth & Ratio Revenue Gth (%) 1 10 21 0 (2) N Property Inc Gth (%) (1) 11 24 (1) (1) Net Inc Gth (%) 20 (31) 6 20 3 Net Prop Inc Margin (%) 76.1 76.6 78.9 78.0 79.0 Dist. Payout Ratio (%) 100.0 100.0 100.0 100.0 100.0

Balance Sheet (S$m) FY Dec 2014A 2015A 2016A 2017F 2018F

Investment Properties 4,882 4,962 6,591 5,492 5,494 Other LT Assets 1,499 1,504 1,259 2,052 2,083 Cash & ST Invts 101 81.2 160 137 139 Inventory 0.0 0.0 0.0 0.0 0.0 Debtors 38.3 45.3 41.9 45.1 39.4 Other Current Assets 0.0 0.0 0.0 0.0 0.0 Total Assets 6,521 6,593 8,051 7,726 7,756

ST Debt 270 0.0 173 173 173 Creditor 47.4 37.3 52.8 56.8 49.6 Other Current Liab 11.4 8.68 9.92 9.28 9.16 LT Debt 970 1,255 2,457 1,948 1,985 Other LT Liabilities 68.6 57.6 79.3 79.3 79.3 Unit holders’ funds 5,153 5,234 5,279 5,459 5,459 Minority Interests 0.0 0.0 0.0 0.0 0.0 Total Funds & Liabilities 6,521 6,593 8,051 7,726 7,756

Non-Cash Wkg. Capital (20.5) (0.7) (20.8) (21.0) (19.4) Net Cash/(Debt) (1,139) (1,174) (2,471) (1,984) (2,020) Fall in gearing due to recent Ratio asset sales. Current Ratio (x) 0.4 2.8 0.9 0.8 0.8 Quick Ratio (x) 0.4 2.8 0.9 0.8 0.8 Aggregate Leverage (%) 30.4 30.0 37.5 35.2 35.6 Z-Score (X) 2.3 2.4 1.2 1.3 1.3

Source: Company, DBS Bank

ASIAN INSIGHTS VICKERS SECURITIES Page 54 Page 8 Company Guide CapitaLand Commercial Trust

Cash Flow Statement (S$m) FY Dec 2014A 2015A 2016A 2017F 2018F

Pre-Tax Income 368 241 235 262 238 Dep. & Amort. 3.51 3.51 3.51 3.51 3.51 Tax Paid 0.0 0.0 (0.1) (1.5) (0.9)

Associates &JV Inc/(Loss) (217) (97.3) (85.7) (88.1) (87.7)

Chg in Wkg. Cap. (4.6) (19.8) 18.7 0.83 (1.5)

Other Operating CF 39.3 69.5 31.9 16.9 43.6 Net Operating CF 189 197 203 194 195 Net Invt in Properties (29.8) (21.3) (374) 334 (5.6) Other Invts (net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV (397) 0.0 0.0 (201) (31.6) Div from Assoc. & JVs 86.1 85.0 115 88.1 87.7 Other Investing CF 392 0.0 0.0 175 0.0 Net Investing CF 51.7 63.7 (259) 396 50.6 Distribution Paid (243) (252) (257) (278) (281) Chg in Gross Debt 50.3 5.00 464 (334) 37.2 New units issued 0.0 0.0 0.0 0.0 0.0 Other Financing CF (30.7) (33.4) (71.5) 0.0 0.0 Net Financing CF (223) (280) 135 (612) (244) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash 17.0 (19.9) 78.8 (22.7) 1.91

Operating CFPS (S cts) 6.63 7.35 6.22 6.30 6.35 Free CFPS (S cts) 5.45 5.95 (5.8) 17.2 6.12 Source: Company, DBS Bank

Target Price & Ratings History

1.82 S$ 12-mth 1.77 Date of Closing S.No. Target Rating Report Price 1.72 Price 10 1: 21 J ul 16 1.56 1.70 BUY 1.67 8 2: 05 Sep 16 1.59 1.70 BUY 11 3: 19 Oct 16 1.58 1.70 BUY 1.62 2 9 4: 09 Nov 16 1.56 1.70 BUY 5 7 1.57 4 6 5: 19 J an 17 1.57 1.69 BUY 3 6: 08 Mar 17 1.55 1.69 BUY 1.52 1 7: 20 Apr 17 1.62 1.69 BUY 8: 02 May 17 1.63 1.69 BUY 1.47 9: 22 J un 17 1.65 1.69 BUY 1.42 10: 04 J ul 17 1.68 1.69 BUY 11: 14 Jul 17 1.68 1.69 BUY 1.37 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17

Note : Share price and Target price are adjusted for corporate actions.

Source: DBS Bank Analyst: Mervin SONG CFA Derek TAN

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Version 7 | Bloomberg: CIT SP | Reuters: CTDM.SI Refer to important disclosures at the end of this report

DBS Group Research . Equity 12 May 2017

Progressing as planned BUY Last Traded Price ( 11 May 2017): S$10.85 (STI : 3,271.11) Lifting TP to parity to RNAV at S$12.63. We remain buyers of City Price Target 12-mth: S$12.63 (16% upside) (Prev S$10.52) Developments (CDL) despite the recent share price rally, on expectations that CDL’s share price remains on an upward trajectory supported by Analyst positive catalysts coming from good sales momentum in 2017. We Rachel TAN +65 6682 3713 [email protected] maintain our BUY call on CDL with a higher TP of S$12.63 based on a Derek TAN +65 6682 3716 [email protected] parity to RNAV (15% discount previously) or an implied 1.2x P/NAV.

With the Singapore property market in the nascent stages of recovery, What’s New CDL is largely seen as a proxy to Singapore residential market and has • 1Q17 earnings in line historically traded up to 1.2x-1.3x P/NAV.

• New launches in Singapore seeing good buyer Where we differ. Stronger property sales could lift earnings estimates traction higher. While CDL is largely the preferred stock by those who have gradually turned positive on the Singapore market, we believe that • Land-banking a positive catalyst to stock price further upside surprises will come on the back of (i) better than projected • Raising TP to S$12.63 based on parity to RNAV sell-through rates at remaining unsold and unlaunched inventories in

Singapore and (ii) stronger than projected sales at its International portfolio, mainly in the UK. Our estimates are generally higher than consensus on the back of our positive stance towards the group’s ability Price Relative to drive good sales across its projects.

1Q17 earnings performance in line. Despite a 19% drop in 1Q17 net earnings to S$85.5m, underlying performance is tracking in line with our estimates. We see continued strong take-up for its projects in Singapore - Forest Woods (82% sold) and Tower 2 of Gramercy Park. Recurring income from its hotel and commercial properties portfolios are delivering

steady returns.

Forecasts and Valuation Some light on overseas investments. CDL’s decision to diversify into the FY Dec (S$ m) 2014A 2015A 2016A 2017F overseas property market amid a challenging outlook in the Singapore Revenue 3,764 3,304 3,905 4,361 property market is finally coming to fruition. With most of its Singapore EBITDA 939 954 1,050 1,508 property projects completed or are soon-to-be-completed, we expect Pre-tax Profit 1,004 985 914 1,205 international properties (UK and China) to drive property sales/revenue in Net Profit 757 760 640 760 Net Pft (Pre Ex.) 401 442 474 760 2017/2018. We believe this could partly offset the impact of a weak Net Pft Gth (Pre-ex) (%) (40.4) 10.2 7.2 60.4 property market in Singapore. In addition, successful land-banking EPS (S cts) 83.2 83.6 70.4 83.6 activities could mean upside to RNAV estimates which will be a catalyst EPS Pre Ex. (S cts) 44.1 48.6 52.1 83.6 to share price. EPS Gth Pre Ex (%) (40) 10 7 60 Diluted EPS (S cts) 79.3 79.7 67.1 79.7 Valuation: Net DPS (S cts) 16.0 17.4 17.4 16.0 We maintain our BUY call, and raise our TP to S$12.63 (from S$10.52), BV Per Share (S cts) 925 989 1,022 1,088 based on a parity to RNAV (15% discount previously) or an implied 1.2x PE (X) 13.0 13.0 15.4 13.0 P/NAV. PE Pre Ex. (X) 24.6 22.3 20.8 13.0 P/Cash Flow (X) 33.8 126.8 8.4 7.0 Key Risks to Our View: EV/EBITDA (X) 16.0 15.7 13.4 8.9 Net Div Yield (%) 1.5 1.6 1.6 1.5 Decline in residential prices in Singapore. As a proxy to Singapore’s P/Book Value (X) 1.2 1.1 1.1 1.0 residential market, a deteriorating operating environment will cap share Net Debt/Equity (X) 0.3 0.3 0.2 0.1 price performance. ROAE (%) 9.4 8.7 7.0 7.9 At A Glance Earnings Rev (%): 0 0 Issued Capital (m shrs) 909 Consensus EPS (S cts): 66.9 63.6 Other Broker Recs: B: 18 S: 0 H: 5 Mkt. Cap (S$m/US$m) 9,866 / 6,994 Major Shareholders (%) Source of all data on this page: Company, DBS Bank, Davos Investments Holdings Ltd 16.4 Bloomberg Finance L.P Hong Leong Investment Holdings 15.4 Aberdeen 12.0 Free Float (%) 56.2 3m Avg. Daily Val (US$m) 14.9 ICB Industry : Real Estate / Real Estate

ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa:PY Page 56 Company Guide City Developments

WHAT’S NEW

No surprises from 1Q17 results

1Q17 results in line • That said, CDL put in the winning bid for a new • City Developments Limited (CDL) reported 1Q17 net condominium site at Tampines Avenue 10, topping profit of S$85.5m, a 19% drop y-o-y. This is on the the second highest bidder by a slim 5.7%. The site is back of 8.4% rise in revenues to S$783.7m and a planned to be developed into a residential project 2.2% rise in gross profit to S$365.9m. with about 800 units and a child care centre. • The stronger topline was attributable to higher • The group will be commencing a refurbishment recognition of sales from the (i) progressive handover programme at Le Grove Serviced residences costing of units at Phase 1 Suzhou Hong Leong City Center S$30m, which will see an increase in total units to (HLCC), good take-up at Gramercy Park, which was 173 (from the current 97 units). The refurbished offset by contribution from projects that received property is expected to complete in 2Q18. Temporary Occupation Permits (TOP) a year ago. Hotel revenues remained stable while rental income International Residential – an uptick in sales. dipped by 9% y-o-y mainly due to sale of properties • China. Recorded maiden contributions from Phase 1 to their fund structure (profit participating securities of Suzhou Hong Leong City Center (77% sold) which or PPS). will continue into 1H17 given ongoing handovers of • Net profit fell by 19% to S$85.5m, mainly due to completed units. absence of contributions from JV development • Sales for existing projects such as Hongqiao Royal projects, forex losses, and weak results from Lake and Eling Residences has paused given soft Millennium & Copthorne Hotels plc. demand. We understand that CDL is taking a more measured launch approach for both projects given the unique project attributes as both are in the high- Review and Outlook end segment where demand appears soft in the near term. Singapore residential : good start to 2017, new launches – • Australia. Total sales at Ivy and Eve remain flat at New Futura & South Beach - to look out for in 2H17. 95%, flat q-o-q and will compete in 1H2018 • Performance for the group’s residential division in • New launches in UK. UK pipeline projects largely are Singapore is going as planned with CDL reporting expected to complete from Q22017 and 2018 sales of 293 units (Forest Woods, 82% sold at an onwards and should be launched when completed. average selling price of S$1,400 psf, and Gramercy Park Tower 2, selling 16 out of 20 launched units). Hospitality. Total sales value was S$477.1m. • Trading performance of M&C is stable – Topline was • CDL’s existing unsold inventory of its various 16% higher y-o-y to GBP 223m while profit came in launched projects in Singapore amounted to close to GBP 3m. 1,033 units, representing close to 16% of total units. • RevPAR (reported currency) was up 17.7%, due to a CDL’s effective stake in this unsold inventory is close rebound in performance across its portfolio. to 598.3 units (vs 737.3 units in 4Q16). • CDL will be starting on its AEI (asset enhancement • With positive sales momentum at Gramercy Park in initiative) programme across various hotels in order to 1Q17, subject to market conditions ahead, we see improve the product mix to travellers. the group launching the 124-unit New Futura at Leonie Hill Road, and South Beach Residences in 2H17. • We note that CDL has only 507k sqft (GFA of 0.9m sqft) of land available for sale which means that there is urgency to replenish its land bank in the medium term.

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Quarterly / Interim Income Statement (S$m) FY Dec 1Q2016 4Q2016 1Q2017 % chg yoy % chg qoq

Revenue 723 1,167 784 8.4 (32.8) Cost of Goods Sold (365) (637) (418) 14.4 (34.4) Gross Profit 358 530 366 2.2 (30.9) Other Oper. (Exp)/Inc (82.9) (66.3) (101) 22.5 53.0 Operating Profit 143 322 133 (6.9) (58.7) Other Non Opg (Exp)/Inc 0.0 0.0 0.0 - - Associates & JV Inc 10.6 31.0 0.20 (98.2) (99.4) Net Interest (Exp)/Inc (14.8) (21.1) (18.2) (22.6) 13.9 Exceptional Gain/(Loss) 0.0 0.0 0.0 - - Pre-tax Profit 138 332 115 (17.0) (65.4) Tax (14.5) (63.8) (15.6) 7.8 (75.5) Minority Interest (18.6) (24.0) (13.8) 25.9 (42.5) Net Profit 105 244 85.5 (18.9) (64.9) Net profit bef Except. 105 244 85.5 (18.9) (64.9) EBITDA 208 418 186 (10.5) (55.5) Margins (%) Gross Margins 49.5 45.4 46.7 Opg Profit Margins 19.7 27.6 16.9 Net Profit Margins 14.6 20.9 10.9

Source of all data: Company, DBS Bank

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Revenue growth (FY14A-18F) CRITICAL DATA POINTS TO WATCH 5,000.0 4,500.0 S$'m Critical Factors 4,000.0 Deployment of capital in key markets in 2017. Weighed down 3,500.0 by a lack of sizable investable deals in Singapore, one of the 3,000.0 key focus area for the group has been to deploy capital 2,500.0 2,000.0 overseas into 5 countries (Australia, China, UK, Japan and US) 1,500.0 as key markets that the group sees attractive adjusted returns. 1,000.0 The group has invested close to S$770m in 2017. 500.0 0.0 We expect to see CDL reap the fruits of its past investments 2014A 2015A 2016A 2017F 2018F Others Hotel operations Rental income Property devt from 2017 onwards. In London – CDL will progressively complete projects at Belgravia and Knightsbridge in 1H17 and Breakdown in revenues (FY17F) Others is projected to launch the Teddington Riverside development in 4% 1H17. Other projects like the Stag Brewery Mortlake site and the recently acquired site at Ransomes Wharf (acquired for GBP58m, GDV of GBP 222m) is projected to be launched in Hotel operations the medium term. 38% Property devt 50% In China, CDL will continue to focus on the execution and delivery of Hong Leong City Center, which started in 4Q16. Phase 1 is 76% sold (sales value RMB 2.21bn) and phase 2 is Rental income 40% sold with sales value of RMB 502.1m adds to earnings 8% visibility. However, we expect to see some delays in the sales at Revenue growth from hotel segment the group’s other projects in Shanghai (Hongqiao Royal Lake 1,720.0 60% project which moved 34 units (out of 85) for RMB668m) and S$'m two projects other projects in Chongqing given the soft buyer 1,700.0 50% demand for luxury products in the respective markets. In 1,680.0 40% Australia, the group’s JV residential project in Brisbane is 95% sold (Ivy and Eve, two 30-storey towers comprising 472 1,660.0 30% apartments), and will be booked in 2018. The group’s 1,640.0 20% developments in Tokyo will likely be launched in the medium term. 1,620.0 10%

1,600.0 0% New launches in Singapore in 2017. CDL existing unsold 2014A 2015A 2016A 2017F 2018F inventory of its various launched projects in Singapore Revenue % of topli ne amounted to close to 1,299 units, representing close to 16% RNAV of total units. CDL’s effective stake in this unsold inventory is RNAV S$'m close to 737 units. The group is gearing up for new launches Investment Portfolio (office) 3,122.2 which are notably in the high-end residential segment in 2017. Investment Portfolio (mixed Development ) 1,505.1 This include i) Gramercy Park South Tower (87 units) launched Investment Portfolio (hotels) 1,071.5 in end-Mar17, ii) 124-unit New Futura at Leonie Hill Road and Investment Portfolio (retail) 893.5 iii) South Beach Residences. Investment Portfolio (industrial and others) 137.4 GDV of residential portfolio 4,686.9 Funds management platform. CDL remains on track to hit Listed Stakes in their S$5bn AUM target by 2018. Over the past 3 years M&C 1,785.0 injected close to S$3.5bn in assets into its funds management CDL HT 327.8 platform through 3 separate profit participating securities (PPS) Others 0.0 structures, seeded by various assets across its portfolio. The Gross Asset Value 13,529.4 launch of these PE funds is expected to drive regular income Less: pref conversion (211.8) stream through fund management fees and promotes when Less: Net debt (1,264.7) these funds exit. RNAV of CDL 12,052.9 No of shares 954.3 RNAV/share 12.63 Discount 0% TP 12.63 Source: Company, DBS Bank

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Leverage & Asset Turnover (x) Balance Sheet: Undervalued Net Asset Value (NAV). As the group has chosen to account for investment properties on a historical cost basis, its NAV is conservative as we estimate that current fair values of CDL’s properties are much higher than carrying values.

Low gearing of 16%. CDL’s gearing is estimated to remain low at <30% (and closer to mid-teens assuming that its investment property values are marked-to-market) which is within management’s comfortable range. This provides greater financial flexibility and debt headroom for the group to acquire Capital Expenditure opportunistically.

Share Price Drivers: Replenishing land bank is key to income sustainability. The ongoing tight government measures have taken a toll on the group’s residential business segment, with the group staying selective on land banking activities while continuing to clear existing land-bank in its portfolio. Looking ahead, 2017 will be an important year as CDL readies to launch three high-end residential projects (Gramercy Park South Tower, New Futura and South Beach Residences). The successful launch of these ROE (%) projects will be positive to investor sentiment on property stocks, which we believe will enable CDL to close the gap between its stock price and NAV.

Key Risks: Decline in residential prices in Singapore. Seen as a proxy to Singapore’s residential market, a worsening of the operating environment is expected to cap any upside potential for the stock. Unsold inventories are mainly in the high-end and executive segments whose unsold stock typically take time to clear. Forward PE Band (x)

Interest rate risk. A rise in interest rates will have a negative impact on property transactions, given lower affordability and thus could adversely affect the group’s outlook.

Company Background City Developments Limited (CDL) is one of the pioneers in Singapore's property sector. It is a property and hotel conglomerate involved in real estate development and investment, hotel ownership and management, and facility management. PB Band (x)

Source: Company, DBS Bank

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Segmental Breakdown FY Dec 2013A 2014A 2015A 2016A 2017F Revenues (S$m) Property devt 1,198 1,581 1,037 1,745 2,177 Rental income 379 385 405 367 376 Hotel operations 1,529 1,678 1,698 1,634 1,647 Others 107 120 163 160 160 Driven by locked in sales Total 3,213 3,764 3,304 3,905 4,361 and overseas development projects Income Statement (S$m) FY Dec 2013A 2014A 2015A 2016A 2017F

Revenue 3,213 3,764 3,304 3,905 4,361 Cost of Goods Sold (1,552) (2,132) (1,648) (2,148) (1,976) Gross Profit 1,661 1,632 1,656 1,758 2,385 Other Opng (Exp)/Inc (877) (948) (1,024) (1,001) (1,127) Operating Profit 784 684 632 757 1,258 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 41.4 54.8 107 70.5 28.4 Net Interest (Exp)/Inc 123 (90.5) (72.2) (80.1) (81.2) Exceptional Gain/(Loss) 0.0 356 318 166 0.0 Pre-tax Profit 948 1,004 985 914 1,205 Tax (69.6) (95.1) (119) (151) (238) Minority Interest (192) (139) (92.7) (109) (193) Preference Dividend (12.9) (12.9) (12.9) (12.9) (12.9) Net Profit 673 757 760 640 760 Net Profit before Except. 673 401 442 474 760 EBITDA 1,014 939 954 1,050 1,508 Growth Revenue Gth (%) (4.2) 17.1 (12.2) 18.2 11.7 EBITDA Gth (%) (0.2) (7.4) 1.6 10.1 43.7 Opg Profit Gth (%) 0.4 (12.8) (7.6) 19.8 66.1 Net Profit Gth (Pre-ex) (%) 25.8 (40.4) 10.2 7.2 60.4 Margins & Ratio Gross Margins (%) 51.7 43.4 50.1 45.0 54.7 Opg Profit Margin (%) 24.4 18.2 19.1 19.4 28.8 Net Profit Margin (%) 21.0 20.1 23.0 16.4 17.4 ROAE (%) 9.0 9.4 8.7 7.0 7.9 ROA (%) 4.1 4.1 3.8 3.2 3.8 ROCE (%) 4.8 3.6 3.1 3.5 5.5 Div Payout Ratio (%) 21.6 19.2 20.8 24.7 19.1 Net Interest Cover (x) NM 7.6 8.8 9.5 15.5 Source: Company, DBS Bank

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Quarterly / Interim Income Statement (S$m) FY Dec 1Q2016 2Q2016 3Q2016 4Q2016 1Q2017

Revenue 723 1,092 923 1,167 784 Cost of Goods Sold (365) (652) (493) (637) (418) Gross Profit 358 440 430 530 366 Other Oper. (Exp)/Inc (82.9) (98.5) (50.6) (66.3) (101) Operating Profit 143 214 245 322 133 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 10.6 12.5 16.5 31.0 0.20 Net Interest (Exp)/Inc (14.8) (21.4) (22.7) (21.1) (18.2) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 138 205 239 332 115 Tax (14.5) (37.6) (35.6) (63.8) (15.6) Minority Interest (18.6) (33.7) (33.1) (24.0) (13.8) Net Profit 105 134 170 244 85.5 Net profit bef Except. 105 134 170 244 85.5 EBITDA 208 280 313 418 186

Growth Revenue Gth (%) (15.4) 51.0 (15.5) 26.5 (32.8) EBITDA Gth (%) (61.7) 34.6 12.0 33.3 (55.5) Opg Profit Gth (%) (68.9) 50.0 14.6 31.2 (58.7) Net Profit Gth (Pre-ex) (%) (74.3) 27.0 27.3 43.1 (64.9) Margins Gross Margins (%) 49.5 40.3 46.6 45.4 46.7 Opg Profit Margins (%) 19.7 19.6 26.6 27.6 16.9 Net Profit Margins (%) 14.6 12.2 18.5 20.9 10.9

Balance Sheet (S$m) FY Dec 2013A 2014A 2015A 2016A 2017F

Net Fixed Assets 4,399 4,918 5,175 5,136 5,314 Invts in Associates & JVs 1,037 1,128 1,307 1,462 1,536 Other LT Assets 3,381 3,324 2,949 3,120 3,120 Cash & ST Invts 2,756 3,933 3,597 3,690 4,477 Inventory 8.42 11.2 11.2 11.8 9.88 Debtors 1,642 1,589 1,762 1,166 1,454 Other Current Assets 4,330 4,797 5,519 5,213 4,545 Total Assets 17,554 19,701 20,319 19,797 20,454

ST Debt 894 2,233 1,911 1,783 1,783 Creditor 1,327 1,463 1,602 1,575 1,450 Other Current Liab 224 261 319 301 288 LT Debt 4,401 4,466 4,572 3,955 3,955 Other LT Liabilities 493 501 702 774 774 Shareholder’s Equity 7,731 8,410 8,996 9,294 9,896 Minority Interests 2,484 2,365 2,217 2,115 2,308 Total Cap. & Liab. 17,554 19,701 20,319 19,797 20,454

Non-Cash Wkg. Capital 4,429 4,672 5,371 4,515 4,271 Net Cash/(Debt) (2,538) (2,766) (2,885) (2,047) (1,261) Debtors Turn (avg days) 160.4 156.6 185.0 136.8 109.6 Creditors Turn (avg days) 315.9 263.6 390.3 301.1 314.7 Inventory Turn (avg days) 2.3 1.9 2.9 2.2 2.3 Asset Turnover (x) 0.2 0.2 0.2 0.2 0.2 Gearing remains Current Ratio (x) 3.6 2.6 2.8 2.8 3.0 conservative Quick Ratio (x) 1.8 1.4 1.4 1.3 1.7 Net Debt/Equity (X) 0.3 0.3 0.3 0.2 0.1 Net Debt/Equity ex MI (X) 0.3 0.3 0.3 0.2 0.1 Capex to Debt (%) 2.4 14.0 (13.0) 7.5 7.0 Z-Score (X) 1.9 1.7 1.7 1.8 1.8

Source: Company, DBS Bank

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Cash Flow Statement (S$m) FY Dec 2013A 2014A 2015A 2016A 2017F

Pre-Tax Profit 948 1,004 985 914 1,205 Dep. & Amort. 188 200 215 222 222 Tax Paid (221) (188) (194) (157) (252) Assoc. & JV Inc/(loss) (41.4) (54.8) (107) (70.5) (28.4) Chg in Wkg.Cap. (177) (482) (712) 330 257 Other Operating CF (19.4) (187) (110) (57.4) 0.0 Net Operating CF 677 292 77.8 1,181 1,404 Capital Exp.(net) (125) (936) 843 (433) (400) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 14.1 828 (227) (113) (100.0) Div from Assoc & JV 88.0 17.9 16.9 53.9 53.9 Other Investing CF 12.0 47.6 (113) 810 0.0 Net Investing CF (11.1) (41.8) 520 318 (446) Div Paid (320) (275) (271) (237) (171) Chg in Gross Debt 397 172 (310) (664) 0.0 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF (243) 842 (333) (440) 0.0 Net Financing CF (166) 739 (914) (1,341) (171) Currency Adjustments 17.5 189 (16.6) (49.7) 0.0 Chg in Cash 517 1,178 (333) 108 787 Opg CFPS (S cts) 93.9 85.1 86.8 93.6 126 Free CFPS (S cts) 60.7 (70.7) 101 82.3 110 Source: Company, DBS Bank

Target Price & Ratings History

Source: DBS Bank Analyst: Rachel TAN Derek TAN

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Page 63 Singapore Company Guide Frasers Centrepoint Ltd

Version 8 | Bloomberg: FCL SP | Reuters: FRCT.SI Refer to important disclosures at the end of this report

DBS Group Research . Equity 12 May 2017

BUY Poised for growth and expansion

Last Traded Price ( 11 May 2017): S$1.865 (STI : 3,271.11) Growing developer with high dividend yields. We maintain our Price Target 12-mth: S$2.30 (23% upside) (Prev S$2.00) BUY rating on Frasers Centrepoint Ltd (FCL) as valuations remain

Analyst attractive at 0.8x P/NAV. The stock still lags the other large-cap Rachel TAN +65 6682 3713 [email protected] developers, trading close to 1x P/NAV, implying that its Derek TAN +65 6682 3716 [email protected] upcoming Singapore projects have been broadly overlooked.

FCL's dividend yield remains the highest among developers at What’s New c.5%. • 1H17 results in line, driven by completion of properties in China Where we defer: Poised to benefit from positive sentiment in Singapore property with free float improvement a wild card. The • Strong property sales seen in recent launches strong sales seen in Seaside Residences is a testament to positive (Seaside Residences and Gemdale Megacity) sentiment in the property market. Given its diminishing • Management is positive on Singapore residential landbank, we believe that any potential land-banking activities will be a positive catalyst. Frasers Tower, which is the only major • Management continues to look for landbank / building completing in the Central Business District (CBD) in development opportunities 2018, should do well in the midst of a drop-off in competitive

supply that year. In the retail space, Waterway Point and Northpoint City are potential assets for recycling as AEIs Price Relative complete and operations ramp-up. A potential improvement in S$ Relative Index 2.2 2.1 208 free float would be a wild card.

2.0 188 1.9 168 1.8 Potential catalyst: Improved property sales, asset monetisation 1.7 148 1.6 128 1.5 and improving free float and liquidity. 108 1.4 1.3 88 Jan-14 Jan-15 Jan-16 Jan-17 1H17 results in line. 1H17 net profit grew 17% y-o-y to Frasers Centrepoint Ltd (LHS) Relative STI (RHS) S$259m, 47% of the street’s full-year forecast. The strong

growth was largely driven by higher recognition from the Forecasts and Valuation completion of properties in China. Management is positive on FY Sep (S$ m) 2016A 2017F 2018F 2019F Singapore residential following government’s relaxation Revenue 3,440 2,412 3,103 2,633 EBITDA 993 1,051 1,153 1,107 measures but remains cautious on Australia residential. Pre-tax Profit 960 830 886 836 Net Profit 533 387 415 378 Valuation: Net Pft (Pre Ex.) 368 387 415 378 Net Pft Gth (Pre-ex) (%) (23.8) 5.0 7.2 (8.8) We maintain our BUY rating and raise our target price to EPS (S cts) 18.4 13.3 14.3 13.0 S$2.30 by reducing our discount to RNAV, to 20% from 30% EPS Pre Ex. (S cts) 12.7 13.3 14.3 13.0 previously, implying a 1x P/NAV, following positive sentiment EPS Gth Pre Ex (%) (24) 5 7 (9) Diluted EPS (S cts) 18.4 13.3 14.3 13.0 on Singapore property. Net DPS (S cts) 8.61 8.60 8.60 8.60 BV Per Share (S cts) 230 234 240 245 Key Risks to Our View: PE (X) 10.2 14.0 13.0 14.3 Dependent on the outlook of the Australian real estate market PE Pre Ex. (X) 14.7 14.0 13.0 14.3 P/Cash Flow (X) 4.9 nm 16.9 nm and currency. The group derives an estimated 30% of PBIT EV/EBITDA (X) 18.4 19.5 18.1 19.9 from Australia, and returns could be impacted by the Net Div Yield (%) 4.6 4.6 4.6 4.6 weakening AUD/SGD exchange rate. P/Book Value (X) 0.8 0.8 0.8 0.8 Net Debt/Equity (X) 0.6 0.8 0.8 0.8 At A Glance ROAE (%) 8.1 5.7 6.0 5.4 Issued Capital (m shrs) 2,906 Earnings Rev (%): 0 0 0 Mkt. Cap (S$m/US$m) 5,420 / 3,842 Consensus EPS (S cts): 16.1 20.4 18.7 Other Broker Recs: B: 8 S: 0 H: 0 Major Shareholders (%) TCC Assets Ltd 59.1 Source of all data on this page: Company, DBS Bank, Thai Beverage PCL 28.4 Bloomberg Finance L.P Free Float (%) 12.5 3m Avg. Daily Val (US$m) 0.54 ICB Industry : Real Estate / Real Estate Investment & Services

ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa:SM, PY Page 64 Company Guide Frasers Centrepoint Ltd

WHAT’S NEW

Poised for growth and expansion

1H17 results in line. FCL’s 1H17 net profit grew 17% y-o-y Segmental results to S$259m, making up 47% of the street’s full-year forecast. Core PBIT (S$'m); FYE Sep 1H17 1H16 %YoY The strong growth was driven by higher recognition from sale Development properties 202 151 34% of development properties, largely contributed by the - Singapore 33 67 -50% completion of Phase 3C1 of Baitang One in Suzhou, China - China 129 27 378% (100% sold), and North Park Residences (76% sold), and sale - Australia 13 (5) -367% of a bungalow at Holland Park recognised in 1Q17. - UK & Others 27 62 -56%

2Q17 net profit fell 42% y-o-y to S$71m, mainly due to the Recurring income 338 329 3% absence of profits from Twin Fountains EC which obtained - Non-REIT 93 167 -45% TOP in March 2016. This was partially mitigated by higher - Singapore 28 30 -6% - Australia (C&I) 38 106 -65% share of results of JV and associates (which tripled to S$15m) - Hospitality 27 31 -13% largely from contributions from Thai associates, TICON and - REIT 220 141 55% Golden Land, and Waterway Point. - Singapore 111 107 3% - Australia (C&I) 62 - nm The group’s 2Q17 EBIT margin fell marginally by 2.4ppts to - Hospitality 47 34 38% 23% due to lower profit recognition from development - Fee income 26 21 26% properties. - Singapore 19 17 12% - Hospitality 7 4 85% FCL declared a 2.4-Sct interim dividend (flat y-o-y) for 1H17. Corporate & others (30) (43) -29%

Segmental results: Development profits driven by Group PBIT 510 437 17% completion of China properties; recurring income grew Source: Company, DBS Bank 3% y-o-y (details in the table below). 1H17 core PBIT from development properties grew 34% y-o-y to S$202m led Management is positive on Singapore residential by the completion of Phase 3C1 of Baitang One in Suzhou, following government’s relaxation measures but China which was recognised in 1Q17. However, 2Q17 cautious on Australia residential. FCL recorded property development properties' PBIT fell 58% y-o-y, largely due to sales of only 1,600 units in 1H17 vs 2,900 units in 1H16. This the absence of profits following the completion of Twin was largely impacted by lower property sales in China (-78% Fountains EC which was recorded in 2Q16, partially offset by y-o-y) and Australia (-18%). Despite the lower sales volume in higher completions in Australia (S$20m in 2Q17 vs a loss of China, its recent launch (in February 2017) of Gemdale S$14m in 2Q16). Megacity (Phase 4F) in Songjiang recorded strong sales of 81%. The project is expected to complete by 4Q18. 1H17’s PBIT for recurring income from investment properties (REITs and non-REITs) increased marginally by 3% y-o-y to In Singapore, FCL sold over 163 units of residential homes vs S$338m mainly due to contributions from Frasers Hospitality 100 units in 1H16. The strong sales recorded at Seaside Trust (+38%) with its newly acquired Novotel Melbourne on Residences of 434 units (52% take-up rate) as at 8 May 2017 Collins, and Maritim Hotel Dresden in Australia and Germany. have yet to be included this quarter. At the results briefing, 2Q17 PBIT increased by 11% y-o-y. management expressed its optimism on the Singapore property market following the government’s relaxation Net debt-to-equity stood at 0.7x. Net debt-to-equity measures. With the strong sales volume seen in the recent (including REITs) and cost of debt remained relatively stable q- property launches, management believes this could be an o-q at 0.7x and 3.1% respectively. indication of Singapore property market bottoming out. However, land supply remains limited and land bids are competitive, hence making it a challenge to replenish its land bank.

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Page 65 Company Guide Frasers Centrepoint Ltd

Unrecognised development revenue stood at S$3.4bn (vs and Frasers Tower are on track and expected to complete by S$3.6bn in 1H16), mostly from Australia (S$2.5bn). Projects end-2017 and 1H18 respectively. that are expected to be completed in 3Q17 include Watertown and RiverTrees Residences in Singapore (all >98% Hospitality portfolio growth driven by new acquisitions. sold), while earlier phases of Gemdale Megacity in China are In 1H17, hospitality portfolio PBIT growth was largely led by expected to complete by 4Q17 (close to 100% sold). maiden contributions from new acquisitions, Novotel Melbourne on Collins and Maritim Hotel Dresden, offset by - Singapore sales volume continued to pick up (1H17 weakness in GBP. Despite the weaker demand impacted by +63% y-o-y), led by Parc Life (EC), North Park bombings and political uncertainties in some countries, Residences and RiverTrees Residences. Strong sales at management continues to see strong growth in Australia and Seaside Residences will be recorded in 3Q17. Japan. The scheduled openings of eight new properties this - China achieved sales volume of 285 units (vs 1,300 year are on track. units in 1H16). This was largely from the launch of Gemdale Megacity (Phase 4F), Songjiang in February Active in acquisitions in Australia (land banking), 2017. Europe (M&A) and Thailand (M&A and land banking). - Australia’s 1H17 sales volume fell 18% y-o-y to 1,200 The group remains active in investing into new development units from 1,500 units in 1H16. Property sales were opportunities as seen in its few recent mainly from projects in New South Wales and Victoria. acquisitions/investments of land sites and M&A in Australia, Management targets to launch 2,500 units in FY17, of Europe (Geneba) and Thailand (TICON, One Bangkok). Given which 31% were released in 1H17. Unrecognised the development pipeline in Singapore in tapering off and revenue stood at S$2.5bn as at 1H17, largely to be management’s positive view on the Singapore property recognised in 2017/2018. Management is cautious on market, we expect the group to remain on a lookout for new the outlook of residential properties in Australia as it is land sites either in upcoming GLS or en bloc (though slowly seeing softer volumes following cooling historically this may not have been the group’s main strategy). measures implemented by the Australian government. Maintain BUY; raised TP to S$2.30 from S$2.00. We Summary of property sales volume and unrecognised revenue maintain our BUY rating as valuations remain attractive at 0.8x P/NAV. The stock still lags the other large-cap Units; FYE Sep 1H17 1H16 %YoY FY16 Singapore 163 100 63% 330 developers, trading at an average of close to 1x P/NAV, China 285 1,319 -78% 1,700 despite the re-rating of its share price recently. FCL's dividend Australia 1,198 1,457 -18% 2,850 yield remains the highest among developers at c.5%. We Total 1,646 2,876 -43% 4,880 raised our TP to S$2.30 from S$2.00 previously on a reduced discount to RNAV of 20% (previously 30%) following the Unrecognised revenue positive sentiment on Singapore property market. (S$'b) 3.4 3.6 -6% 3.1 - Singapore 0.6 0.9 -33% 0.7 - China 0.3 0.7 -57% 0.5 Key catalysts include i) improved property sales across its - Australia 2.5 2.0 25% 1.9 major markets following a potential recovery/continued positive sentiment on the property market, ii) potential asset Source: Company, DBS Bank monetisation from ongoing strategies to crystallise value across its portfolio including Northpoint and Waterway Point, Commercial portfolio to deliver steady returns; AEIs on and iii) improve free float and liquidity in the market with the track. In Singapore, the retail and office portfolio still potential restructuring of TCC Group, Thai Beverage and achieved positive average rental reversions but marginally group of companies. lower q-o-q of 5.1% and 3.7% (5.8% and 3.8% in 1Q17) respectively on slightly lower average occupancy rates of 91% and 88% (92% and 90%). Construction of Northpoint City

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Page 66 Company Guide Frasers Centrepoint Ltd

Quarterly / Interim Income Statement (S$m) FY Sep 2Q2016 1Q2017 2Q2017 % chg yoy % chg qoq

Revenue 898 972 706 (21.4) (27.4) Cost of Goods Sold (610) (614) (477) (21.7) (22.3) Gross Profit 288 357 228 (20.7) (36.1) Other Oper. (Exp)/Inc (57.3) (50.1) (63.7) 11.2 27.1 Operating Profit 231 307 165 (28.6) (46.5) Other Non Opg (Exp)/Inc 0.0 0.0 0.0 - - Associates & JV Inc 4.77 23.7 14.8 209.4 (37.8) Net Interest (Exp)/Inc (37.3) (23.9) (25.6) 31.3 (7.0) Exceptional Gain/(Loss) 9.41 5.14 0.01 (99.9) (99.9) Pre-tax Profit 207 312 154 (25.9) (50.8) Tax (37.2) (59.0) (26.1) (29.8) (55.7) Minority Interest (47.0) (65.8) (56.4) (19.9) (14.3) Net Profit 123 188 71.2 (42.2) (62.0) Net profit bef Except. 114 182 71.2 (37.4) (60.9) EBITDA 262 331 179 (31.6) (45.8) Margins (%) Gross Margins 32.1 36.8 32.3 Opg Profit Margins 25.7 31.6 23.3 Net Profit Margins 13.7 19.3 10.1

Source of all data: Company, DBS Bank

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Page 67 Company Guide Frasers Centrepoint Ltd

Revenue (FY15A-FY19F) CRITICAL DATA POINTS TO WATCH 4,000.0 S$'m 3,500.0 Critical Factors Growing recurring revenues from its commercial and hospitality 3,000.0 divisions. Frasers Centrepoint Limited (FCL) is one of the largest 2,500.0 property developers in Singapore with an asset base of over 2,000.0

S$24bn as at end-FY16. The group aims to grow recurring 1,500.0 revenues to 60-70% of PBIT in the medium term. 1,000.0

500.0 The group’s commercial portfolio will see incremental income 0.0 from the completions of Waterway Point (completed in January 2015 2016 2017F 2018F 2019F 2016), Northpoint City (retail) and Frasers Towers (commercial) from 2018 onwards, which will boost its earnings further while PBIT breakdown by divisions (FY16) The Centrepoint mall’s asset enhancement initiative (AEI) was completed in September 2016. Frasers Hospitality is also expected to expand its footprint to 30,000 managed units by Fr asers 2019. In addition, the acquisition of the Malmaison Hotel du vin P r operty Australia De velopment Group (MHDV), which has a portfolio of 29 boutique lifestyle 26% pr operties 31% hotels and 2,082 keys within 25 regional cities in the UK, will further deepen its presence and clientele reach. We see cross- Hospitality selling opportunities and synergies between MHDV and the 13% Commercial Frasers brand, propelling the division’s performance to greater pr operties 30% heights.

New launches across its portfolio; more than 20m sqft of development space to be realised. The group currently has PATMI (FY15A-19F) more than 20m sqft of development space to be progressively 600.0 realised, largely in Australia industrial properties. The group S$'m continues to replenish its land bank with recent purchases 500.0 mostly in Australia (residential and industrial). Unrecognised 400.0 revenues from its property division, including Frasers Property Australia totalled about S$3bn. 300.0

200.0 Sustainable high dividend. FCL has one of the highest ROEs among property developers (c.8-11% over FY14A-16A) and 100.0 dividend yield of close to 6% vs industry average ROE of close - to 6% and dividend yield of c.2-3%. This is mainly due to the 2015 2016 2017F 2018F 2019F group’s efficient operating model of quick-asset turns for its residential development projects and its focus on a portfolio of RNAV RNAV S$'m recurring commercial properties (hotels, retail and office) which Surpluses from: boosts returns. Commercial Portfolio (Office, retail, hotels) (699) Stakes in REITs 179 Frasers Australand 519 Golden Land acquisition to bear fruit in the medium term. The Fee income : Hotel Mgmt 854 group currently owns close to a 40% stake in Golden Land Fee income : REITs 373 Property Development PCL (GOLD) and management believes NPV development projects 346 that this acquisition offers good synergies to FCL as both Total Surpluses 1,572 Add: companies share similar investment philosophies with an aim to Book NAV 8,053 continue growing its recurring income base. GOLD also offers Gross Development Value 9,624 FCL the ability to tap into the growing real estate market in less: preference shares (1,392) less: MI (3,791) Thailand, supported by favourable market fundamentals. Add: MI Attributable to REITs 3,827 RNAV 8,269 RNAV/share ($) 2.85 Discount 20% TP ($) 2.30

Source: Company, DBS Bank

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Page 68 Company Guide Frasers Centrepoint Ltd

Appendix 1: Remarks FCL relative performance vs Singapore property sales

600 North Park 25 Residences - Strong property sales 570 units 500 20 preclude the re-rating of Share price re-rating led 400 by strong property sales ...Seaside 15 share prices. Riv erTrees f rom SG, CH, AU Residences - Residences? 300 218 units 10

200 5 Share price Rel Perf (%) Perf Rel Share price

Units of residential property Units residential of 100 0

0 -5 Jun-14 Jun-15 Jun-16 Sep-14 Sep-15 Sep-16 Dec-13 Dec-14 Dec-15 Dec-16 Mar-14 Mar-15 Mar-16 Mar-17

SG property sales (Q) - RHS Relative Performance - LHS

Source: DBS Bank, Thomson Analytics, Company

FCL relative performance vs group property sales Remarks

St rong property sales f rom SG, CH, AU Strong group property sales (led by all major 2,500 25 countries – Singapore,

2,000 20 China and Australia) led 15 to a continued share 1,500 price outperformance 10 1,000 from September 2014 to 5 December 2015. 500

0 (%) Perf Rel Share price Units of property residential 0 -5 Jun-14 Jun-15 Jun-16 Sep-14 Sep-15 Sep-16 Dec-13 Dec-14 Dec-15 Dec-16 Mar-14 Mar-15 Mar-16 Mar-17

Property sales (Q) - RHS Relative Performance - LHS

Source: DBS Bank, Thomson Analytics, Company

FCL relative performance vs asset recycling strategy (major divestment / acquisitions) Remarks

2,000 Sold 25 O n e @ Cha F LT listing Some correlation of 1,500 Sold Changi Sold 357 ngi City to share price 1,000 Cit y Point F HT listing Collins St to A REIT 20 t o FCT F COT outperformance prior to 500 15 0 the listings of FHT and - 500 FLT. However, we do not A c quire 10 - 1,000 30% of A c quire find much share price Golden 87% of movements from -1,500 A cquire Land G eneba5 - 2,000 Malmaison A cquire 36% divestment of assets. Hot el du of TICON (%) Perf Rel Share price - 2,500 0 A ustraland V in -3,000 ac quisition The acquisition of -3,500 -5 Australand which was perceived as expensive Proceeds (S$'mn) / acquisitions divestments from Jun-14 Jun-15 Jun-16 Sep-14 Sep-15 Sep-16 Dec-13 Dec-14 Dec-15 Dec-16 Mar-14 Mar-15 Mar-16 Mar-17 at the time could have led to the fall in share Property sales (Q) - RHS Relative Performance - LHS price in 2H14. Source: DBS Bank, Thomson Analytics, Company, SGX

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Page 69 Company Guide Frasers Centrepoint Ltd

Leverage & Asset Turnover (x) Balance Sheet: 0.2 1.00 Balance sheet remains strong. Debt/equity ratio is expected to 0.2 0.2 remain fairly stable at between 0.8-0.9x over FY17F-19F which 0.80 0.1 is within management's comfortable range. Debt maturity 0.1 0.60 profile remains long at approximately three years with an 0.1 average cost of debt of c.3%. Fixed rate percentage of its loans 0.40 0.1 0.1 remains high at 81%. 0.20 0.0 0.0 0.00 0.0 Share Price Drivers: 2015A 2016A 2017F 2018F 2019F Replenishing land bank key to income sustainability. The group Gross Debt to Equity (LHS) Asset Turnover (RHS) currently has more than 20m sqft of development space, mainly Capital Expenditure in Australia. It is actively looking to replenish its land bank S$m especially in Singapore but remains selective, given the 60.0 sustained high land prices seen in recent government land 50.0 tenders. The ability to secure additional land bank at lower 40.0 prices will mean upside to RNAVs, which could re-rate the 30.0 stock. 20.0

10.0 Relaxation of property cooling measures in Singapore. 0.0 Expectations of policy relaxation (especially cyclical measures like 2015A 2016A 2017F 2018F 2019F the buyers’ and sellers’ stamp duties) may improve sentiment Capital Expenditure (-) for property buyers, and spark a revival in transaction volumes ROE (%) in the Singapore residential market. This would also lift sentiment on property stocks, which we believe will enable FCL 10.0% to close the gap between its stock price and NAV. 8.0%

Gains from asset recycling into its listed S-REITs to boost share 6.0% price. Recycling activities are perceived positively by investors as 4.0% FCL is able to free up capital by selling its matured assets to its listed REITs, which will improve the group’s balance sheet 2.0% position and recycle capital to projects with higher returns. 0.0% 2015A 2016A 2017F 2018F 2019F

Key Risks: Forward PE Band (x) Small free float. The stock has a low free float with 87.9% (x) held by major shareholders TCC Group and Thai Beverage, 14.2 thus leading to low liquidity. +2sd: 13.7x 13.2 +1sd: 12.7x 12.2 Dependent on the outlook of Australia's real estate market, Avg: 11.7x currency outlook. The group derives an estimated 30% of 11.2 -1sd: 10.6x PBIT from Australia which is dependent on the real estate 10.2 -2sd: 9.6x market there, and whose returns could be impacted by the 9.2 weakening AUD/SGD exchange rate. 8.2 Jan-14 Jan-15 Jan-16 Jan-17

Company Background PB Band (x)

Frasers Centrepoint Ltd (FCL) is a one of Singapore’s main real 1.1 (x) estate companies with assets exceeding S$20bn. The group 1.0 +2sd: 0.94x has four key core businesses focused on residential, 0.9 commercial, hospitality and industrial sectors spanning 77 cities 0.8 +1sd: 0.8x 0.7 across Asia, Australasia, Europe and the Middle East. Avg: 0.67x 0.6

0.5 -1sd: 0.53x

0.4 -2sd: 0.39x 0.3

0.2 Jan-14 Jan-15 Jan-16 Jan-17 Source: Company, DBS Bank

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Page 70 Company Guide Frasers Centrepoint Ltd

Income Statement (S$m) FY Sep 2015A 2016A 2017F 2018F 2019F

Revenue 3,562 3,440 2,412 3,103 2,633 Cost of Goods Sold (2,479) (2,407) (1,337) (1,827) (1,440) Gross Profit 1,082 1,033 1,075 1,276 1,193 Other Opng (Exp)/Inc (257) (266) (193) (248) (184) Operating Profit 825 767 882 1,028 1,009 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 279 171 114 70.6 44.1 Net Interest (Exp)/Inc (149) (142) (166) (212) (216) Exceptional Gain/(Loss) 241 164 0.0 0.0 0.0 Pre-tax Profit 1,197 960 830 886 836 Tax (184) (194) (141) (151) (142) Minority Interest (241) (169) (238) (257) (252) Preference Dividend (46.9) (64.5) (64.3) (64.3) (64.3) Net Profit 724 533 387 415 378 Net Profit before Except. 483 368 387 415 378 EBITDA 1,146 993 1,051 1,153 1,107 Growth Revenue Gth (%) 61.7 (3.4) (29.9) 28.6 (15.1) EBITDA Gth (%) 47.2 (13.3) 5.9 9.7 (4.0) Opg Profit Gth (%) 33.0 (7.1) 15.1 16.5 (1.9) Net Profit Gth (Pre-ex) (%) 16.6 (23.8) 5.0 7.2 (8.8) Margins & Ratio Gross Margins (%) 30.4 30.0 44.6 41.1 45.3 Opg Profit Margin (%) 23.2 22.3 36.6 33.1 38.3 Net Profit Margin (%) 20.3 15.5 16.0 13.4 14.4 ROAE (%) 11.2 8.1 5.7 6.0 5.4 ROA (%) 3.6 2.3 1.6 1.6 1.4 ROCE (%) 3.8 2.8 3.2 3.7 3.5 Div Payout Ratio (%) 34.4 46.9 64.5 60.1 65.9 Net Interest Cover (x) 5.5 5.4 5.3 4.8 4.7 Source: Company, DBS Bank

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Page 71 Company Guide Frasers Centrepoint Ltd

Quarterly / Interim Income Statement (S$m) FY Sep 2Q2016 3Q2016 4Q2016 1Q2017 2Q2017

Revenue 898 682 1,188 972 706 Cost of Goods Sold (610) (453) (924) (614) (477) Gross Profit 288 229 264 357 228 Other Oper. (Exp)/Inc (57.3) (85.6) 210 (50.1) (63.7) Operating Profit 231 143 474 307 165 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 4.77 23.8 110 23.7 14.8 Net Interest (Exp)/Inc (37.3) (38.2) (33.9) (23.9) (25.6) Exceptional Gain/(Loss) 9.41 64.0 92.3 5.14 0.01 Pre-tax Profit 207 193 643 312 154 Tax (37.2) (29.0) (92.4) (59.0) (26.1) Minority Interest (47.0) (9.5) (69.7) (65.8) (56.4) Net Profit 123 154 481 188 71.2 Net profit bef Except. 114 90.0 388 182 71.2 EBITDA 262 192 611 331 179

Growth Revenue Gth (%) 33.7 (24.0) 74.2 (18.2) (27.4) EBITDA Gth (%) 8.8 (26.7) 218.4 (45.9) (45.8) Opg Profit Gth (%) 29.4 (38.0) 231.7 (35.2) (46.5) Net Profit Gth (Pre-ex) (%) 13.9 (20.9) 331.4 (53.0) (60.9) Margins Gross Margins (%) 32.1 33.5 22.2 36.8 32.3 Opg Profit Margins (%) 25.7 21.0 39.9 31.6 23.3 Net Profit Margins (%) 13.7 22.6 40.5 19.3 10.1

Balance Sheet (S$m) FY Sep 2015A 2016A 2017F 2018F 2019F

Net Fixed Assets 1,991 1,972 1,919 1,867 1,814 Invts in Associates & JVs 585 793 907 978 1,022 Other LT Assets 14,150 14,467 14,615 14,764 14,912 Cash & ST Invts 1,393 2,169 576 633 455 Inventory 7.47 5.68 2.12 2.93 2.29 Debtors 844 678 345 443 376 Other Current Assets 4,096 4,120 6,961 8,088 8,721 Total Assets 23,067 24,204 25,326 26,774 27,302

ST Debt 1,020 1,470 1,470 1,470 1,470 Creditor 1,315 1,695 2,137 2,954 2,310 Other Current Liab 218 284 188 198 189 LT Debt 9,255 8,325 8,725 8,925 9,725 Other LT Liabilities 608 586 586 586 586 Shareholder’s Equity 7,803 8,053 8,190 8,356 8,485 Minority Interests 2,848 3,791 4,028 4,285 4,537 Total Cap. & Liab. 23,067 24,204 25,326 26,774 27,302

Non-Cash Wkg. Capital 3,415 2,825 4,983 5,383 6,601 Net Cash/(Debt) (8,882) (7,627) (9,620) (9,763) (10,740) Debtors Turn (avg days) 81.7 80.7 77.4 46.3 56.8 Creditors Turn (avg days) 196.8 263.0 608.3 608.3 608.3 Inventory Turn (avg days) 1.1 0.9 0.6 0.6 0.6 Asset Turnover (x) 0.2 0.1 0.1 0.1 0.1 Gearing to remain Current Ratio (x) 2.5 2.0 2.1 2.0 2.4 stable at 0.8x Quick Ratio (x) 0.9 0.8 0.2 0.2 0.2 Net Debt/Equity (X) 0.8 0.6 0.8 0.8 0.8 Net Debt/Equity ex MI (X) 1.1 0.9 1.2 1.2 1.3 Capex to Debt (%) 0.4 (0.5) 0.0 0.0 0.0 Z-Score (X) 0.0 0.0 0.0 1.0 1.0

Source: Company, DBS Bank

ASIAN INSIGHTS VICKERS SECURITIES

Page 72 Company Guide Frasers Centrepoint Ltd

Cash Flow Statement (S$m) FY Sep 2015A 2016A 2017F 2018F 2019F

Pre-Tax Profit 955 766 830 886 836 Dep. & Amort. 781 54.5 54.5 54.5 54.5 Tax Paid (184) (194) (237) (141) (151) Assoc. & JV Inc/(loss) (279) (171) (114) (70.6) (44.1) Chg in Wkg.Cap. 1,122 344 (2,063) (409) (1,210) Other Operating CF (1,710) 298 0.0 0.0 0.0 Net Operating CF 684 1,097 (1,529) 320 (514) Capital Exp.(net) (45.3) 50.6 0.0 0.0 0.0 Other Invts.(net) (1,501) (264) (150) (150) (150) Invts in Assoc. & JV (57.9) (317) 0.0 0.0 0.0 Div from Assoc & JV 350 197 0.0 0.0 0.0 Other Investing CF (146) (389) 0.0 0.0 0.0 Net Investing CF (1,401) (722) (150) (150) (150) Div Paid (249) (456) (249) (249) (249) Chg in Gross Debt 936 (940) 400 200 800 Capital Issues 649 1,000 0.0 0.0 0.0 Other Financing CF (111) 340 (64.3) (64.3) (64.3) Net Financing CF 1,225 (56.2) 86.3 (114) 486 Currency Adjustments (8.4) 39.1 0.0 0.0 0.0 Chg in Cash 500 358 (1,593) 56.5 (177) Opg CFPS (S cts) (15.1) 26.0 18.4 25.1 24.0 Free CFPS (S cts) 22.1 39.6 (52.7) 11.0 (17.7) Source: Company, DBS Bank

Target Price & Ratings History

1.99 S$ 12-mth Date of Closing 12 S.No. Target Rating Report Price 1.89 Price 1: 11 May 16 1.67 2.05 BUY 10 1.79 2: 08 Aug 16 1.53 1.90 BUY 8 11 3: 30 Sep 16 1.49 1.90 BUY 9 4: 18 Oct 16 1.50 1.90 BUY 1.69 6 5: 10 Nov 16 1.53 2.00 BUY 7 6: 10 Feb 17 1.67 2.00 BUY 1 1.59 7: 13 Mar 17 1.71 2.00 BUY 2 5 8: 17 Mar 17 1.74 2.00 BUY 3 4 9: 04 Apr 17 1.77 2.00 BUY 1.49 10: 07 Apr 17 1.79 2.00 BUY 11: 18 Apr 17 1.80 2.00 BUY 1.39 12: 19 Apr 17 1.89 2.00 BUY May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17

Note : Share price and Target price are adjusted for corporate actions.

Source: DBS Bank Analyst: Rachel TAN Derek TAN

ASIAN INSIGHTS VICKERS SECURITIES

Page 73 Singapore Company Guide Keppel REIT

Version 9 | Bloomberg: KREIT SP | Reuters: KASA.SI Refer to important disclosures at the end of this report

DBS Group Research . Equity 19 Jul 2017

BUY Further market transactions to drive Last Traded Price ( 18 Jul 2017): S$1.17 (STI : 3,306.08) rally Price Target 12-mth: S$1.23 (5% upside and 5% yield) Rally to continue. We maintain our BUY call on Keppel REIT Analyst (KREIT) with a TP of S$1.23. KREIT’s share price typically leads a Mervin SONG CFA +65 6682 3715 [email protected] recovery in spot office rents by 6-12 months. With early signs Derek TAN +65 6682 3716 [email protected] that rents may have bottomed in 2Q17 and we are on the cusp of an upturn, we believe the rally in KREIT’s share price can be What’s New sustained despite KREIT’s share price having increased by around 30% since end January 2016. • 2Q17 DPU of 1.42 Scts (-12% y-o-y) below

expectations Where we differ – Capital values resilient. While consensus is • Positive rental reversions in 2Q17 slowly turning more bullish on a recovery in office rents, there remains significant scepticism that KREIT’s Singapore office • Management open to distributing capital gains to portfolio should be valued at S$2,700-2,900 psf. We believe this smoothen DPU view is incorrect, given there have been several transactions at or above this valuation for comparable buildings, by both a mix • Positive sentiment from earlier-than-expected of foreign but more importantly experienced local developers bottoming of office rents and further market and landlords, demonstrating the resilience of KREIT’s portfolio transactions to sustain share price rally values. While acknowledging that KREIT is unlikely to sell its buildings in the near term to crystallise value and has a flattish DPU profile boosted by capital distributions, we believe the Price Relative c.20% discount to book value is too wide for a best-in-class S$ Relative Index office portfolio. 1.5 209 1.4 189 1.3 169 Further transactions to support our view. Going forward, we 1.2 149 1.1 129 believe the expected sale of Asia Square Tower 2 and Chevron 1.0 109 House at between S$2,600-2,800 psf will once again highlight 0.9 89

0.8 69 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 the undervalued status of KREIT’s Singapore portfolio, which is trading on an implied c.S$2,500 psf. This, combined with a Keppel REIT (LHS) Relative STI (RHS) potential recovery in spot office rents, will act as catalysts to trigger a further re-rating of KREIT. Forecasts and Valuation FY Dec (S$m) 2015A 2016A 2017F 2018F Gross Revenue 170 161 161 163 Valuation: Net Property Inc 137 128 127 129 We maintain our DCF-based TP of S$1.23. Our TP implies a Total Return 337 250 131 125 valuation of c.S$2,600 psf for KREIT’s Grade A offices in Distribution Inc 217 208 196 199 Singapore. EPU (S cts) 3.71 4.01 3.91 3.68 EPU Gth (%) (32) 8 (3) (6) Key Risks to Our View: DPU (S cts) 6.80 6.37 5.85 5.85 Key risks to our positive view are weaker-than-expected rents, DPU Gth (%) (6) (6) (8) 0 and/or KREIT not distributing capital gains, causing DPU to NAV per shr (S cts) 143 143 141 138 PE (X) 31.5 29.2 29.9 31.8 come in below expectations as well as investors focusing more Distribution Yield (%) 5.8 5.4 5.0 5.0 on underlying DPU rather than headline DPU. P/NAV (x) 0.8 0.8 0.8 0.8 Aggregate Leverage (%) 40.0 38.9 39.0 39.5 At A Glance ROAE (%) 2.6 2.8 2.8 2.6 Issued Capital (m shrs) 3,338 Mkt. Cap (S$m/US$m) 3,906 / 2,858 Major Shareholders (%) Distn. Inc Chng (%): (2) (2) Keppel Corp 46.4 Consensus DPU (S cts): 6.10 6.10 Free Float (%) 53.6 Other Broker Recs: B: 8 S: 5 H: 6 3m Avg. Daily Val (US$m) 4.9 Source of all data on this page: Company, DBS Bank, Bloomberg ICB Industry : Real Estate / Real Estate Investment Trust Finance L.P

ASIAN INSIGHTS VICKERS SECURITIES ed: JLC / sa:YM, PY Page 74 Company Guide Keppel REIT

WHAT’S NEW

Down but not out

2Q17 DPU of 1.42 Scts Steady gearing with no refinancing till 2018 • 2Q17 DPU fell 12% y-o-y to 1.42 Scts, which • Gearing remains steady at 38.5% but is expected to represents 23% of our original FY17 DPU forecasts. climb closer to 40% once the recently acquired 311 • While we had expected DPU to fall due to the absence Spencer Street development is completed in 4Q19. of income from the divestment of 77 King Street and • Meanwhile, KREIT’s all-in costs of debt ticked up capital distributions, the results were below marginally to 2.59% from 2.57% in 1Q17. expectations as we had forecast a faster recovery in • The proportion of fixed-rate loans was relatively stable occupancy at Bugis Junction Tower. In addition, at 77%, with no refinancing due until 2018. trustee expenses and units outstanding were higher • NAV per share (excluding distributable income) stood than expected. at S$1.40. • Meanwhile 2Q17 NPI came in at S$31.9m, which was only down 2% y-o-y. This was a creditable result, Trimming DPU estimates by 2% considering the loss of contribution from 77 King • After incorporating higher trustee expenses and units Street and a 20% y-o-y fall in income from Bugis outstanding as well as reducing the contribution from Junction Tower. The negative drag from these two Bugis Junction Tower, we have lowered our FY17-18F buildings was partially offset by a 1-2% increase in NPI DPU by 2%. To temper a fall in underlying DPU, we from (1) Ocean Financial Centre (OFC), which was have also incorporated capital distributions after partially boosted by S$0.3m in one-off income, and (2) receiving guidance from KREIT’s management that the Australian properties 275 George Street and 8 despite not paying out capital distributions over the Exhibition Street, which benefited from a stronger previous three quarters, it remains open to paying out AUD. gains to achieve a sustainable and stable DPU going • Distribution income received from associates and JVs forward, subject to any acquisition plans. was up 9% y-o-y, mainly due to increased contribution • Post the 2Q17 results, we have also maintained our TP from Marina Bay Financial Centre (MBFC) (+19% y-o- of S$1.23, after rolling forward our DCF-based y) as occupancies jump to 100% from 99.4% in 2Q16 valuation to FY18 and including the recent A$347.2m and lower interest income. In addition, distribution investment by KREIT in a 50% stake in the 311 from 8 Chifley Square rose 8% y-o-y as it gained from Spencer Street project located in Melbourne, Australia. a rally in the AUD versus SGD. Nevertheless, In conjunction with CBUS, KREIT will be develop a distribution received from associates and JVs was 717k sqft Grade A office tower which, upon down q-o-q owing to one-off income at MBFC and completion in 2019, will be leased to the Victoria One Raffles Quay (ORQ) in 1Q17. Police for 30 years with an inbuilt rental escalation of • Overall portfolio occupancy ticked up marginally to between 3-4% per annum (for more details please see 99.8% from 99.4% in 1Q17 due to occupancies at our report “Melbourne calls again” dated 29 June Bugis Junction Tower improving to 97.6% from 2017). 95.9% in 1Q17. Maintain BUY with TP of S$1.23 Positive rental reversions in 2Q17 • With some early signs that spot office rents may have • Over 2Q17, KREIT renewed 23 leases equivalent to bottomed in 2Q17 (flat q-o-q, based on CBRE c.288k sqft of space (mainly related to the Singapore estimates or up by 1-2%, according to JLL and portfolio), with positive rental reversions achieved. As Cushman & Wakefield) earlier than expected, we a consequence, for 1H17, KREIT reported 0% rental believe the positive sentiment will continue to drive reversions, compared to -1% in 1Q17. KREIT’s share price higher. In addition, while • For the remainder of 2H17, KREIT faces minimal acknowledging that KREIT’s DPU will likely remain flat renewals, with only 2% of leases subject to over the coming couple of years and is supported by negotiations with tenants. capital distributions, there remains upside to KREIT’s • However, going into 2018, KREIT faces slightly higher share price as its implied price per sqft for its amount of renewals – equivalent to 6.6% of leases. Singapore portfolio of c.S$2,500 remains below that We understand that expiring rents for some of these of recent market transactions of S$2,700-3,500 psf. leases are between mid-S$9’s and S$12.50. Thus, we maintain our BUY recommendation and TP Depending on the pace of recovery in spot rents, there of S$1.23. remains a risk of negative rental reversions. • In addition, for 2018, around 14.6% of leases are subject to rent review and these are predominantly related to leases at MBFC Tower 3.

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Quarterly / Interim Income Statement (S$m) FY Dec 2Q2016 1Q2017 2Q2017 % chg yoy % chg qoq

Gross revenue 40.6 39.9 39.8 (1.7) 0.0 Property expenses (8.1) (8.5) (8.0) (1.7) (6.0) Net Property ncome 32.5 31.4 31.9 (1.7) 1.6 Other Operating expenses (13.2) (14.6) (14.6) 10.4 (0.1) Other Non Opg (Exp)/Inc 1.15 3.50 (3.4) nm (198.3) Net Interest (Exp)/Inc (9.5) (9.7) (10.7) (13.4) (10.8) Exceptional Gain/(Loss) 0.0 0.0 0.0 - - Net Income 39.4 42.0 31.4 (20.2) (25.3) Tax (3.0) (2.1) (1.8) (38.1) (11.4) Minority Interest 0.0 0.0 0.0 61.2 0.0 Net Income after Tax 34.5 38.1 27.7 (19.7) (27.3) Total Return 96.5 38.1 27.7 (71.3) (27.3) Non-tax deductible Items (44.0) 10.0 19.7 (144.8) 96.8 Net Inc available for Dist. 52.5 48.1 47.4 (9.7) (1.5) Ratio (%) Net Prop Inc Margin 80.0 78.8 80.0 Dist. Payout Ratio 100.0 100.0 100.0

Source of all data: Company, DBS Bank

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Net Property Income and Margins (%) CRITICAL DATA POINTS TO WATCH S$ m 200 Critical Factors 180 89.1% Recovery in spot office rents. There are signs that spot office 160 87.1% 140 85.1% rents may have bottomed in 2Q17 (office rents were flat q-o-q, 120 based on CBRE estimates or up by 1-2%, according to JLL and 100 83.1% 80 81.1% Cushman & Wakefield) earlier than market and our expectations 60 79.1% of a bottom at end 2017 or early 2018. In addition, there is risk 40 20 77.1% that Grade A core CBD rents have hit a cyclical low of S$8.95 0 75.1% psf/mth, higher than our original estimate of around S$8.50. 2014A 2015A 2016A 2017F 2018F

Given KREIT’s staggered lease expiry profile – only 2% and 7% Net Property Income Net Property Income Margin % of lease due to be renewed in 2017 and 2018 respectively and 15% of leases are up for rent review in 2018 – the full impact Net Property Income and Margins (%) from this potential early recovery on KREIT’s earnings will not be 82% felt till possibly 2019 and there remains some risk of negative 36 82% 81% rental reversions in 2018. Nevertheless, we believe the positive 35 81% 80% sentiment from this newsflow will provide a tailwind to KREIT’s 34 80% share price, given it trades at a large discount to its book value. 33 79% 79% 32 78% Divestment gains to smooth future distributions. We 78% 31 understand KREIT has c.S$48m of divestment gains which it has 77% yet to pay out to unitholders. These gains are from past 30 77% disposals such as the sale of Prudential Tower and 77 King 1Q2015 2Q2015 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 4Q2016 1Q2017 2Q2017 Street. We believe these gains provide KREIT with the flexibility Net Property Income Net Property Income Margin % to smooth future distributions, providing income stability in the event of an unexpected rise in interest rates and/or lower-than- Distribution Paid / Net Operating CF projected rents. While KREIT has not paid out these gains over 5.2 (x) 4Q16-2Q17, which disappointed the market, we gain comfort 4.7 from management’s recent guidance that it remains open to 4.2 smoothening its DPU. We believe that the potential that the 3.7 payment of these gains will be restarted from 4Q17 will be a 3.2 positive surprise and catalyst for the stock later this year. 2.7 2.2 Long WALE offers income visibility. Despite the cyclical nature of 1.7 1.2 the office market, KREIT provides a high degree of income 0.7 stability. This arises as it has a long weighted average lease 2014A 2015A 2016A 2017F 2018F expiry (WALE) of c.6 years (9 years including the 311 Spencer Street acquisition). In addition, due to the prime locations of its office buildings, including the new CBD in the Marina Bay area, Interest Cover (x) we believe KREIT’s offices will continue to command premium rents and remain attractive to prospective and current tenant.

Exposure to Australia a positive. Investors were previously cautious on KREIT’s Australian exposure (c.15% including the recent acquisition of 311 Spencer Street), given the depreciation of the AUD. However, with the AUD starting to rally again and office rents in Melbourne and Sydney rising due to favourable demand and supply dynamics, KREIT's Australian properties are now a tailwind. In addition, KREIT benefits from a WALE profile in excess of 10 years (including 311 Spencer Street), with a majority of leases having annual rental escalation clauses. Source: Company, DBS Bank Furthermore, KREIT recently bought a 50% stake in a project to develop a Grade A office tower at 311 Spencer Street in Melbourne. This project, which will be completed in 4Q19, provides the REIT an additional source of income in the medium term.

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Aggregate Leverage (%) Balance Sheet:

Gearing to rise back to 40% by 2019 With recent asset 45.0% revaluation gains and the disposal of 77 King Street in Sydney, 40.0% KREIT’s gearing is now at c.38%. Going forward, we expect gearing to inch back up to 40% by 2019 when its 311 Spencer 35.0% Street project is completed. 30.0%

25.0% Decent debt maturity. KREIT has a weighted average debt to 20.0% expiry of 3.1 years, with c.77% of debt on fixed rates. 2014A 2015A 2016A 2017F 2018F

Share Price Drivers: Sentiment too negative on office capital values? Many investors ROE (%) have avoided the office sector due to concerns that KREIT’s 3.5% gearing will spike above the 45% regulatory limit and its book 3.0% value will erode on the back of declining property values as spot 2.5% rents have fallen over the past two years. However, these concerns have proven to be unfounded, given recent sales of 2.0% office buildings and tenders for land to develop new office 1.5% towers. Thus, with KREIT trading on attractive valuations, as the 1.0% implied price per sqft for KREIT’s Singapore office portfolio is 0.5% below that of recent market transactions, we believe KREIT 0.0% 2014A 2015A 2016A 2017F 2018F warrants a relook by investors, especially with early signs we may have hit a cyclical low in office rents. Distribution Yield (%) ( %) Key Risks: 8.6

Risks to capital values. Should an increase in office supply and 8.1 a persistently weak office market outlook lead to a larger-than- 7.6 + 2sd: 20x expected fall in rents, valuers could downgrade rental and 7.1 + 1sd: 17x growth outlook, and this could trigger a decline in capital 6.6 Avg: 6.3% 6.1 values, which would put the REIT’s NAV at risk. -1sd: 10.9x 5.6 -2sd: 7.8x Interest rate risk. Any increase in interest rates will result in 5.1 4.6 higher interest payments that the REIT has to make annually to 2013 2014 2015 2016 2017 service its loans. Nevertheless, the risk is partially mitigated by the fact that c.77% of KREIT’s debts are on fixed rates PB Band (x)

1.1 (x) Currency risk. As KREIT earns rental income from its Australian assets in AUD, any depreciation in the AUD would result in 1.0 relatively lower contributions from Australia to KREIT's total 0.9 + 2sd: 20x + 1sd: 17x distributable income. 0.8 Avg: 0.76x 0.7 Company Background -1sd: 10.9x -2sd: 7.8x KREIT is a real estate investment trust investing predominantly 0.6 in commercial properties in Singapore and key gateway cities 0.5 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 in Australia. It currently owns eight commercial Grade A office assets. Source: Company, DBS Bank

ASIAN INSIGHTS VICKERS SECURITIES Page 5 Page 78 Company Guide Keppel REIT

KREIT’s share price versus Singapore office rents Remarks

3.00 20.00 KREIT share prices typically 18.00 leads spot office rents by 6- 2.50 12 months 16.00

2.00 14.00 With estimates from various property consultants 1.50 12.00 indicating that spot rents 10.00 may have hit a bottom in 1.00 2Q17 and a potential 8.00 recovery around the corner, 0.50 6.00 based on previous 0.00 4.00 correlations, the rally in office S-REITs and KREIT’s share price should continue.

KREIT share price (S$) - LHS Grade A office rents (S$ psf/mth) - RHS

Source: Bloomberg, STB, DBS Bank

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Page 79 Company Guide Keppel REIT

Income Statement (S$m) FY Dec 2014A 2015A 2016A 2017F 2018F

Gross revenue 184 170 161 161 163 Property expenses (32.7) (32.9) (32.9) (33.7) (33.6) Net Property Income 151 137 128 127 129 Other Operating expenses (52.9) (56.8) (56.9) (57.5) (57.7) Other Non Opg (Exp)/Inc 12.6 5.60 10.5 (3.0) 0.0

Net Interest (Exp)/Inc (22.7) (30.4) (36.6) (41.3) (53.2)

Exceptional Gain/(Loss) 12.3 0.0 0.0 0.0 0.0

Net Income 171 149 160 146 139 Tax (11.6) (28.0) (21.3) (7.7) (6.6) Minority Interest (0.1) (0.1) (0.1) 0.0 0.0 Preference Dividend 0.0 (1.2) (7.5) (7.5) (7.5) Net Income After Tax 160 119 131 131 125 Total Return 372 337 250 131 125 Non-tax deductible Items (166) (120) (42.1) 65.1 73.9 Net Inc available for Dist. 206 217 208 196 199 Growth & Ratio Revenue Gth (%) 5.8 (7.5) (5.3) (0.1) 1.1

N Property Inc Gth (%) 9.5 (9.2) (6.6) (0.7) 1.4

Net Inc Gth (%) 9.4 (25.1) 9.4 0.1 (4.6) Dist. Payout Ratio (%) 100.0 100.0 100.0 100.0 100.0 Net Prop Inc Margins (%) 82.3 80.7 79.6 79.1 79.4 Net Income Margins (%) 86.7 70.1 81.1 81.2 76.6 Dist to revenue (%) 112.0 127.5 129.1 121.6 122.0 Managers & Trustee’s fees 28.8 33.3 35.3 35.7 35.4 RO AE (%) 3.8 2.6 2.8 2.8 2.6 ROA (%) 2.3 1.6 1.7 1.7 1.6 ROCE (%) 1.3 0.9 0.8 0.9 0.9 Int. Cover (x) 4.3 2.7 2.0 1.7 1.3 Source: Company, DBS Bank

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Page 80 Company Guide Keppel REIT

Quarterly / Interim Income Statement (S$m) FY Dec 2Q2016 3Q2016 4Q2016 1Q2017 2Q2017

Gross revenue 40.6 39.5 40.0 39.9 39.8 Property expenses (8.1) (8.0) (8.6) (8.5) (8.0) Net Property Income 32.5 31.6 31.4 31.4 31.9 Other Operating expenses (13.2) (15.7) (13.1) (14.6) (14.6) Other Non Opg (Exp)/Inc 1.15 3.07 5.86 3.50 (3.4) Net Interest (Exp)/Inc (9.5) (9.7) (10.0) (9.7) (10.7)

Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Net Income 39.4 41.8 41.9 42.0 31.4 Tax (3.0) (1.8) (9.5) (2.1) (1.8)

Minority Interest 0.0 0.0 0.0 0.0 0.0 Net Income after Tax 34.5 40.0 30.4 38.1 27.7 Total Return 96.5 40.0 59.6 38.1 27.7

Non-tax deductible Items (44.0) 12.5 (10.9) 10.0 19.7 Net Inc available for Dist. 52.5 52.5 48.7 48.1 47.4 Growth & Ratio Revenue Gth (%) (1) (3) 1 0 0 N Property Inc Gth (%) (1) (3) (1) 0 2 Net Inc Gth (%) 24 16 (24) 25 (27) Net Prop Inc Margin (%) 80.0 79.9 78.6 78.8 80.0 Dist. Payout Ratio (%) 100.0 100.0 100.0 100.0 100.0

Balance Sheet (S$m) FY Dec 2014A 2015A 2016A 2017F 2018F

Investment Properties 3,614 3,691 3,618 3,621 3,625 Other LT Assets 3,490 3,570 3,627 3,821 3,910 Cash & ST Invts 200 145 279 108 83.7 Inventory 0.0 0.0 0.0 0.0 0.0 Debtors 25.0 18.1 10.7 10.7 10.8 Other Current Assets 0.76 1.29 0.85 0.85 0.85 Total Assets 7,329 7,425 7,535 7,562 7,630

ST Debt 275 25.4 0.0 0.0 0.0 Creditor 84.5 51.2 51.8 53.1 53.0 Other Current Liab 21.0 13.4 8.04 8.04 8.04 LT Debt 2,390 2,464 2,482 2,522 2,613 Other LT Liabilities 99.1 93.4 95.1 95.1 95.1 Unit holders’ funds 4,457 4,776 4,896 4,882 4,858 Minority Interests 2.05 2.10 2.14 2.14 2.14 tal Funds & Liabilities 7,329 7,425 7,535 7,562 7,630

Non-Cash Wkg. Capital (79.7) (45.2) (48.4) (49.6) (49.4) Net Cash/(Debt) (2,466) (2,345) (2,203) (2,413) (2,530) Gearing expected to rise on Ratio the back of KREIT’s Current Ratio (x) 0.6 1.8 4.8 2.0 1.6 investment in the 311 Spence Quick Ratio (x) 0.6 1.8 4.8 1.9 1.5 Street project Aggregate Leverage (%) 43.3 40.0 38.9 39.0 39.5 Z-Score (X) 0.8 1.0 1.0 1.0 1.0

Source: Company, DBS Bank

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Page 81 Company Guide Keppel REIT

Cash Flow Statement (S$m) FY Dec 2014A 2015A 2016A 2017F 2018F

Pre-Tax Income 171 149 160 146 139 Dep. & Amort. 0.0 0.0 0.0 0.0 0.0 Tax Paid (14.3) (7.6) (21.3) (7.7) (6.6)

Associates &JV Inc/(Loss) (70.6) (92.9) (114) (120) (120)

Chg in Wkg.Cap. (74.0) (5.5) (0.6) 1.26 (0.2)

Other Operating CF 30.0 71.5 84.8 50.3 50.4 Net Operating CF 42.6 114 108 69.5 62.0 Net Invt in Properties 504 (12.1) 155 (3.2) (3.3)

Other Invts (net) 0.0 0.0 0.0 0.0 0.0 Net gain of c.S$140m Invts in Assoc. & JV (585) 53.5 45.4 (194) (89.2) from the disposal of 77 Div from Assoc. & JVs 73.4 99.2 110 120 120 King Street Other Investing CF 99.6 0.0 0.0 0.0 0.0 Net Investing CF 92.2 141 310 (76.4) 28.0 Distribution Paid (215) (204) (183) (196) (199) Chg in Gross Debt (20.9) (225) (18.5) 40.0 91.5 New units issued 225 150 0.0 0.0 0.0 Other Financing CF (56.5) (13.6) (68.3) (7.5) (7.5) Net Financing CF (67.4) (292) (269) (163) (115) Currency Adjustments 41.7 (1.5) 5.58 0.0 0.0 Chg in Cash 109 (39.1) 154 (170) (24.7)

Operating CFPS (S cts) 3.99 3.72 3.34 2.04 1.83 Free CFPS (S cts) 18.7 3.18 8.08 1.98 1.73 Source: Company, DBS Bank

Target Price & Ratings History

S$ 12-mth Date of Closing 1.19 S.No. Target Rating Report Price Price 1416 1: 20 J ul 16 1.08 1.26 BUY 1.14 4 2: 22 J ul 16 1.07 1.26 BUY 13 15 6 3: 29 Aug 16 1.07 1.26 BUY 1.09 4: 05 Sep 16 1.12 1.26 BUY 2 12 5 5: 26 Sep 16 1.10 1.26 BUY 7 8 1 6: 19 Oct 16 1.10 1.23 BUY 1.04 3 10 11 7: 08 Nov 16 1.09 1.23 BUY 8: 06 J an 17 1.05 1.23 BUY 0.99 9 9: 25 J an 17 1.02 1.23 BUY 10: 17 Mar 17 1.02 1.23 BUY 11: 20 Apr 17 1.05 1.23 BUY 0.94 12: 17 May 17 1.07 1.23 BUY Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 13: 12 Jun 17 1.15 1.23 BUY 14: 22 Jun 17 1.15 1.23 BUY Note : Share price and Target price are adjusted for corporate actions. 15: 30 Jun 17 1.15 1.23 BUY 16: 03 Jul 17 1.15 1.23 BUY

Source: DBS Bank Analyst: Mervin SONG CFA Derek TAN

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Page 82 Singapore Company Guide UOL Group

Version 8 | Bloomberg: UOL SP | Reuters: UTOS.SI Refer to important disclosures at the end of this report

DBS Group Research . Equity 15 May 2017

Deep value play BUY Last Traded Price ( 12 May 2017): S$7.07 (STI : 3,255.29) Price Target 12-mth: S$8.73 (23% upside) (Prev S$7.64) Valuations still attractive. We maintain our BUY rating on UOL Group (UOL) as it is trading at an attractive valuation of c.0.7x

P/NAV, which is at the lower end of its historical range. The Analyst Derek TAN +65 6682 3716 [email protected] successful launches of recently purchased land sites in the Rachel TAN +65 6682 3713 [email protected] enbloc market will be re-rating catalysts for the stock. We have lifted our TP to S$8.73 based on a narrower 20% discount to RNAV of S$10.90. What’s New 1Q17 results stable. UOL reported a 4% rise in earnings to

 1Q17 net profit was in line with estimates S$80.3m, in line with expectations. Management believes the Singapore property market has stabilized, and UOL has been  Commercial and hotel portfolio offers stability more aggressive in landbanking than the other large cap

 More launches of recently acquired sites in 2018 developers. Key positives from the results were: i) revenue growth from all divisions, and ii) stable portfolio occupancy  Raised TP to S$8.73 on narrower 20% discount to rates. The group has recently acquired more landbank, offering RNAV longer term income visibility.

Most aggressive in landbanking in Singapore; bulk of new launches in 2018. There was good interest The Clement Price Relative Canopy (1Q17; 505 units), which was officially launched in S$ Relative Index

220 8.7 1Q17. Management expects to launch Raintree Garden, Amber 8.2 200 7.7 180 Road and Bishopsgate in 2018.

7.2 160 6.7 140 6.2 120 5.7 5.2 100 Valuation: 4.7 80 Maintain BUY on attractive valuations. We raised our TP to May-13 May-14 May-15 May-16 May-17

UOL Group (LHS) Relative STI (RHS) S$8.73, pegged to a 20% discount to our RNAV of S$10.90, taking into account new properties acquired. Forecasts and Valuation FY Dec (S$ m) 2015A 2016A 2017F 2018F Key Risks to Our View: Revenue 1,279 1,441 1,286 1,192 Economic slowdown. The downside risk to our projections is if EBITDA 514 483 558 679 Pre-tax Profit 460 354 422 542 residential sales are slower than our projections or if Net Profit 391 287 343 447 commercial properties and hotels operations are impacted by Net Pft (Pre Ex.) 343 324 343 447 slower-than-projected growth in rental/room rates. Net Pft Gth (Pre-ex) (%) (5.9) (5.3) 5.8 30.2 EPS (S cts) 49.2 35.7 42.7 55.5 EPS Pre Ex. (S cts) 43.0 40.3 42.7 55.5 At A Glance EPS Gth Pre Ex (%) (7) (6) 6 30 Issued Capital (m shrs) 805 Diluted EPS (S cts) 49.2 35.7 42.7 55.5 Mkt. Cap (S$m/US$m) 5,691 / 4,053 Net DPS (S cts) 15.0 15.0 15.0 15.0 Major Shareholders (%) BV Per Share (S cts) 991 1,010 1,038 1,078 CY Wee & Co Pte Ltd 13.9 PE (X) 14.4 19.8 16.6 12.7 Wee Investment Pte Ltd 13.4 PE Pre Ex. (X) 16.4 17.5 16.6 12.7 United Overseas Bank 7.5 P/Cash Flow (X) 10.9 10.6 21.0 20.1 EV/EBITDA (X) 16.3 17.1 14.9 12.1 Free Float (%) 59.8 Net Div Yield (%) 2.1 2.1 2.1 2.1 3m Avg. Daily Val (US$m) 5.6 P/Book Value (X) 0.7 0.7 0.7 0.7 ICB Industry : Real Estate / Real Estate Net Debt/Equity (X) 0.3 0.2 0.2 0.2 ROAE (%) 5.0 3.6 4.2 5.2 Earnin gs Rev (%): - Consensus EPS (S cts): 44.3 49.7 Other Broker Recs: B: 10 S: 0 H: 3 Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P

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UOL Group

WHAT’S NEW Developments drive profitability

1Q17 results in line : UOL reported a 4% rise in earnings to Garden is seeing good interests on the back of the current S$80.3m on the back of a 6% rise in revenues to S$350.7m. buoyant mood in the Singapore residential market. The better performance was mainly due to higher revenue The group will be looking to launch its newly acquired sites in recognition from projects like Principal Garden and Botanique Amber Road and Raintree Gardens in 2018. at Bartley which are currently under development. The group’s revenues from its commercial portfolio remained Commercial portfolio remains under pressure but abating. stable with the contribution from 110 High Holborn. Hotel While performance of UOL’s commercial portfolio remained performance remained fairly flattish given the mixed outlook stable, the group is actively engaging tenants in their offices across various geographies. Australia hotel continued to and retail malls in order to retain them to main high perform strongly, offset the weaker hotel performance in occupancies and cash-flows. Given the weak operating Singapore and lower revenue due to on-going refurbishment climate, we understand that rental reversions at One KM mall at PARKROYAL Penang. was negative while its office portfolio generally saw flattish rental reversions. Supply pressure could be abating, which points to a possible Associates’ share of profits increased marginally due to new bottoming of the office sector, a view which is shared by a contribution from recently launched The Clement Canopy number of landlords. development and Holborn Island London, which more than offset the loss in contribution from Thomson Three which In London, UOL is seeing increasing headwinds due to was completed close to a year ago. increased uncertainty post Brexit but downside appears to be limited by a lack of competitive supply. Outlook. New launches from 2018 onwards: UOL’s existing projects are substantially sold out while ongoing projects like Principal

Quarterly / Interim Income Statement (S$m) FY Dec 1Q2016 4Q2016 1Q2017 % chg yoy % chg qoq

Revenue 330 354 351 6.2 (0.8) Cost of Goods Sold (216) (238) (235) 8.7 (1.4) Gross Profit 114 115 116 1.5 0.3 Other Oper. (Exp)/Inc (55.0) (55.6) (53.3) (3.1) (4.1) Operating Profit 59.0 59.8 62.4 5.9 4.4 Other Non Opg (Exp)/Inc 5.33 1.24 4.58 (14.1) 270.7 Associates & JV Inc 34.1 35.0 34.4 1.0 (1.6) Net Interest (Exp)/Inc (4.8) (8.0) (4.8) 1.5 40.7 Exceptional Gain/(Loss) 0.17 (11.0) 0.92 441.4 nm Pre-tax Profit 93.7 77.0 97.6 4.1 26.7 Tax (12.4) (12.9) (11.3) (8.8) (12.7) Minority Interest (4.3) (10.1) (6.0) (40.9) (39.9) Net Profit 77.1 54.0 80.3 4.2 48.6 Net profit bef Except. 76.9 65.0 79.4 3.2 22.0 EBITDA 115 117 119 3.1 1.2

Margins (%) Gross Margins 34.5 32.6 33.0 Opg Profit Margins 17.9 16.9 17.8 Net Profit Margins 23.3 15.3 22.9

Source of all data: Company, DBS Bank

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UOL Group

Revenue (S$’m) 1,600.0 S$'m 1,400.0

CRITICAL DATA POINTS TO WATCH 1,200.0 1,000.0 Critical Factors 800.0 600.0 Retail and office sub-segments to offer stable returns. UOL 400.0 Group Limited (UOL) derives a significant 47%-58% of its 200.0 revenues from retail, office and hotel segments which should 0.0 continue delivering stable cashflows in the coming years. 15 16 17F 18F Investments Management Services Hotel Operations While we see headwinds in both the retail and office segments Property Investments Property Development ahead, we believe that the positioning and location of UOL’s PATMI growth portfolio of commercial properties mainly along the fringe areas 500.0 S$'m of the CBD will result in lower volatility in rents. Thus, 450.0 operational performance is likely to remain stable going 400.0 forward. 350.0 300.0 Its retail malls - United Square and Novena Square - are located 250.0 in the Novena area, close to the emerging medical hub. The 200.0 malls have formed a niche, which should result in high tenant 150.0 stickiness. This is especially so for United Square, which houses 100.0 tenants well known for providing various children’s education 50.0 programs. On the other hand, Novena Square’s tenant mix 0.0 mainly caters to necessity shopping and the needs of the 15 16 17F 18F vicinity’s growth as a medical hub. Operating Margins (%) 35.0% Hotel performance – weakness in Asia; overall outlook stable. 30.0% Growth will be driven by the addition of close to 1,582 rooms (6 hotels), implying 16% growth in total rooms under 25.0% management. Performances from hotels and serviced residences 20.0% are expected to remain mixed. We expect the operational 15.0% performance of the group’s hotels & residences in Singapore and Malaysia to be weak, but partially offset by a better 10.0% performance from its hotels in Australia. We project portfolio 5.0% RevPAR to remain fairly flattish. 0.0% FY13 FY14 FY15F FY16F FY17F FY18 Presales for residential projects doing well amid muted residential outlook. As at 1Q17, the Group has substantially sold RNAV (S$’m) Properties OMV ($m) most of its projects that are completed or currently under Investment Properties 3,481 development. UOL sold 484 residential units (S$558m in value) less book value -4,300 in FY16 which was half of the sales made in FY15. However, Surplus/deficit -819 management has turned positive on the Singapore property NPV of devt profits 324 Mark to TP value of quoted holdings market but expects the landbanking market to remain Listed equities/Strategic Holdings 3,271 competitive. Management believes that the Singapore property Hotel operations 2,218 market has found a steady state at current levels and the Total 5,489 less book value -4,355 increase in industry sales volume has been encouraging. The Surplus 1,134 launch of the recently acquired sites at 45 Amber Road and Raintree Gardens will be keenly watched given the group’s Book NAV 8,127 dwindling land-bank. RNAV 8,766 Total Shares 805 RNAV/share ($) 10.90 Discount 20% Price Target ($) 8.73

Source: Company, DBS Bank

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UOL Group

Leverage & Asset Turnover (x) 0.45 0.2 Balance Sheet: 0.40 0.2 Balance sheet remains strong. Debt to equity ratio is expected 0.35 0.2 0.1 to remain stable at 0.3x from FY17F-FY18F. This leaves UOL 0.30 0.1 0.25 with sufficient headroom to acquire projects / new sites when 0.1 0.20 such opportunities come by. 0.1 0.15 0.1 0.10 0.0 Share Price Drivers: 0.05 0.0 Replenishing land bank key to income sustainability. The Group 0.00 0.0 turns around its projects quickly and has little land bank on its 2014A 2015A 2016A 2017F 2018F Gross Debt to Equity (LHS) Asset Turnover (RHS) balance sheet. UOL has always been active in land tenders to replenish its land bank especially in Singapore but remains Capital Expenditure S$m selective given the high competitive environment seen in recent 300.0 government land tenders. The ability to secure additional land 250.0 bank at lower prices will mean upside to RNAVs and this could 200.0 re-rate the stock. 150.0 Relaxation of property cooling measures in Singapore. Expectations of policy relaxation (especially cyclical measures like 100.0 the buyers’ and sellers’ stamp duties) may improve market 50.0 sentiment and spark a revival in transacted volumes in the 0.0 2014A 2015A 2016A 2017F 2018F

Singapore residential market. This would also lift sentiment on Capital Expenditure (-) property stocks, which should enable UOL to close the gap between its stock price and its NAV. ROE (%) Deep value from its hotel business. We believe that deep value 9.0% lies in the group’s portfolio of well located hotels and serviced 8.0% 7.0% residences in Singapore, Malaysia and Australia. These hotels 6.0% are held on a historical cost basis, which we believe are 5.0% conservative compared to potential realisable value. We 4.0% estimate potential upside of more than S$1bn if these 3.0% properties are valued on marked-to-market basis. 2.0% 1.0%

0.0% Key Risks: 2014A 2015A 2016A 2017F 2018F Economic slowdown. The downside risk to our projections is if Forward PE Band (x) residential sales are slower than projected or if its hotel (x) operations are impacted by slower-than-projected RevPAR 20.9 performance. The upside risks to our view and target price 18.9 would be higher-than-expected selling prices or upgrades to +2sd: 17.9x 16.9 the target prices of its listed investment holdings. +1sd: 16.4x

14.9 Avg: 15x

Company Background ‐1sd: 13.6x With a track record of nearly 50 years, UOL Group's impressive 12.9 ‐2sd: 12.1x list of property development projects includes best-selling 10.9 residential units, office towers, shopping centres, hotels and May-13 May-14 May-15 May-16 serviced suites. PB Band (x)

1.0 (x)

0.9

+2sd: 0.83x 0.8 +1sd: 0.75x 0.7 Avg: 0.67x 0.6 ‐1sd: 0.6x ‐2sd: 0.52x 0.5

0.4 May-13 May-14 May-15 May-16 Source: Company, DBS Bank

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UOL Group

Segmental Breakdown FY Dec 2014A 2015A 2016A 2017F 2018F

Revenues (S$m) Property Development 676 578 734 621 520 Property Investment 198 219 225 241 245 Hotel Operations 438 419 430 371 374 Investments 20.3 42.3 30.2 30.2 30.2 Locked-in residential Others 28.8 20.2 22.0 22.6 23.3 sales to drive topline Total 1,361 1,279 1,441 1,286 1,192

Income Statement (S$m) FY Dec 2014A 2015A 2016A 2017F 2018F Commercial portfolio remain stable Revenue 1,361 1,279 1,441 1,286 1,192 Cost of Goods Sold (780) (775) (956) (762) (694) Gross Profit 581 504 485 524 497 Other Opng (Exp)/Inc (209) (231) (222) (206) (191) Operating Profit 372 273 263 318 307 Other Non Opg (Exp)/Inc 13.4 18.4 17.2 17.2 17.2 Associates & JV Inc 158 156 136 157 288 Net Interest (Exp)/Inc (28.5) (35.6) (24.9) (69.5) (70.2) Exceptional Gain/(Loss) 322 48.8 (37.3) 0.0 0.0 Pre-tax Profit 837 460 354 422 542 Tax (76.7) (47.2) (48.3) (50.7) (65.0) Minority Interest (74.3) (21.8) (18.6) (28.5) (29.9) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 686 391 287 343 447 Net Profit before Except. 364 343 324 343 447 EBITDA 604 514 483 558 679 Growth Revenue Gth (%) 28.5 (6.0) 12.7 (10.7) (7.3) EBITDA Gth (%) 15.1 (14.8) (6.2) 15.7 21.5 Opg Profit Gth (%) 10.1 (26.6) (3.8) 21.1 (3.6) Net Profit Gth (Pre-ex) (%) 39.5 (5.9) (5.3) 5.8 30.2 Margins & Ratio Gross Margins (%) 42.7 39.4 33.7 40.7 41.7 Opg Profit Margin (%) 27.3 21.4 18.2 24.7 25.7 Net Profit Margin (%) 50.4 30.6 19.9 26.7 37.5 ROAE (%) 9.5 5.0 3.6 4.2 5.2 ROA (%) 6.2 3.4 2.5 2.9 3.7 ROCE (%) 3.2 2.2 2.0 2.4 2.3 Div Payout Ratio (%) 17.2 30.5 42.0 35.2 27.0 Net Interest Cover (x) 13.0 7.7 10.6 4.6 4.4 Source: Company, DBS Bank

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UOL Group

Quarterly / Interim Income Statement (S$m) FY Dec 1Q2016 2Q2016 3Q2016 4Q2016 1Q2017

Revenue 330 364 393 354 351 Cost of Goods Sold (216) (238) (263) (238) (235) Gross Profit 114 125 130 115 116 Other Oper. (Exp)/Inc (55.0) (55.2) (56.5) (55.6) (53.3) Operating Profit 59.0 70.2 73.7 59.8 62.4 Other Non Opg (Exp)/Inc 5.33 3.86 6.75 1.24 4.58 Associates & JV Inc 34.1 38.1 29.1 35.0 34.4 Net Interest (Exp)/Inc (4.8) (6.3) (5.7) (8.0) (4.8) Exceptional Gain/(Loss) 0.17 (26.5) 0.0 (11.0) 0.92 Pre-tax Profit 93.7 79.3 104 77.0 97.6 Tax (12.4) (10.7) (12.3) (12.9) (11.3) Minority Interest (4.3) 0.19 (4.4) (10.1) (6.0) Net Profit 77.1 68.8 87.1 54.0 80.3 Net profit bef Except. 76.9 95.3 87.1 65.0 79.4 EBITDA 115 128 123 117 119

Growth Revenue Gth (%) (4.1) 10.1 8.2 (10.1) (0.8) EBITDA Gth (%) (6.3) 11.7 (4.3) (4.7) 1.2 Opg Profit Gth (%) (12.1) 18.9 5.1 (18.9) 4.4 Net Profit Gth (Pre-ex) (%) (2.6) 23.9 (8.5) (25.4) 22.0 Margins Gross Margins (%) 34.5 34.5 33.1 32.6 33.0 Opg Profit Margins (%) 17.9 19.3 18.7 16.9 17.8 Net Profit Margins (%) 23.3 18.9 22.1 15.3 22.9

Balance Sheet (S$m) FY Dec 2014A 2015A 2016A 2017F 2018F

Net Fixed Assets 1,241 1,179 1,166 1,299 1,282 Invts in Associates & JVs 3,162 3,366 3,488 3,644 3,932 Other LT Assets 4,528 4,981 5,312 5,312 5,312 Cash & ST Invts 935 276 302 251 364 Inventory 0.80 0.73 0.65 0.58 0.54 Debtors 248 197 99.6 88.9 82.4 Other Current Assets 1,735 1,501 1,191 1,191 1,171 Total Assets 11,848 11,501 11,558 11,787 12,144

ST Debt 1,292 523 728 728 728 Creditor 282 238 203 181 168 Other Current Liab 75.2 42.1 51.0 51.0 65.3 LT Debt 1,737 1,980 1,614 1,614 1,614 Other LT Liabilities 332 317 326 326 326 Shareholder’s Equity 7,643 7,894 8,127 8,350 8,676 Minority Interests 488 507 508 537 567 Total Cap. & Liab. 11,848 11,501 11,558 11,787 12,144

Non-Cash Wkg. Capital 1,626 1,419 1,038 1,049 1,021 Net Cash/(Debt) (2,094) (2,227) (2,041) (2,091) (1,979) Debtors Turn (avg days) 83.9 63.5 37.6 26.8 26.2 Creditors Turn (avg days) 184.8 134.1 90.6 100.9 101.5 Inventory Turn (avg days) 0.4 0.4 0.3 0.3 0.3 Asset Turnover (x) 0.1 0.1 0.1 0.1 0.1 Conservative gearing Current Ratio (x) 1.8 2.5 1.6 1.6 1.7 Quick Ratio (x) 0.7 0.6 0.4 0.4 0.5 Net Debt/Equity (X) 0.3 0.3 0.2 0.2 0.2 Net Debt/Equity ex MI (X) 0.3 0.3 0.3 0.3 0.2 Capex to Debt (%) 5.2 1.9 10.6 8.5 2.1 Z-Score (X) 2.0 2.2 2.1 2.1 2.1 Source: Company, DBS Bank

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UOL Group

Cash Flow Statement (S$m) FY Dec 2014A 2015A 2016A 2017F 2018F

Pre-Tax Profit 760 413 354 422 542 Dep. & Amort. 60.1 67.2 66.6 66.6 66.6 Tax Paid (96.5) (66.7) (33.5) (50.7) (50.7) Assoc. & JV Inc/(loss) (158) (156) (136) (157) (288) Chg in Wkg.Cap. (726) 259 260 (11.1) 13.7 Other Operating CF (250) (0.1) 27.7 0.0 0.0 Net Operating CF (411) 517 539 271 283 Capital Exp.(net) (157) (47.0) (248) (200) (50.0) Other Invts.(net) (0.8) 0.68 0.0 0.0 0.0 Invts in Assoc. & JV (1.6) 79.8 (61.7) 0.0 0.0 Div from Assoc & JV 18.7 42.0 57.4 0.0 0.0 Other Investing CF 8.89 (12.3) 3.12 0.0 0.0 Net Investing CF (132) 63.2 (249) (200) (50.0) Div Paid (57.1) (64.3) (66.3) (121) (121) Chg in Gross Debt 690 (466) (105) 0.0 0.0 Capital Issues 3.58 7.93 1.10 0.0 0.0 Other Financing CF (103) (62.1) (88.2) 0.0 0.0 Net Financing CF 534 (584) (259) (121) (121) Currency Adjustments 2.42 (5.7) (5.9) 0.0 0.0 Chg in Cash (6.9) (10.1) 25.1 (50.1) 112 Opg CFPS (S cts) 40.1 32.4 34.6 35.0 33.5 Free CFPS (S cts) (72.2) 59.0 36.1 8.77 29.0 Source: Company, DBS Bank

Target Price & Ratings History

7.49 S$ 12-mth Date of Closing S.No. Target Rating Report Price 14 Price 6.99 12 1: 27 May 16 5.68 7.39 BUY 2: 09 J un 16 5.61 7.39 BUY 10 13 3: 05 Aug 16 5.83 7.20 BUY 6.49 4: 16 Sep 16 5.51 7.20 BUY 11 5: 30 Sep 16 5.61 7.20 BUY 5.99 6: 07 Oct 16 5.85 7.20 BUY 3 6 7 9 7: 18 Oct 16 5.76 7.20 BUY 8 2 8: 11 Nov 16 5.66 7.20 BUY 4 5.49 9: 06 J an 17 6.20 7.20 BUY 1 5 10: 16 Feb 17 6.55 7.20 BUY 11: 27 Feb 17 6.51 7.64 BUY 4.99 12: 13 Mar 17 6.94 7.64 BUY May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 13: 17 Mar 17 6.98 7.64 BUY 14: 19 Apr 17 6.99 7.64 BUY Note : Share price and Target price are adjusted for corporate actions.

Source: DBS Bank Analyst: Derek TAN Rachel TAN

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Asian Insights SparX Singapore Property

DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends

Completed Date: 1 Aug 2017 07:27:13 (SGT) Dissemination Date: 1 Aug 2017 08:28:48 (SGT)

Sources for all charts and tables are DBS Bank unless otherwise specified.

GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd.

The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies.

Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report.

This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer.

The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:

(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein.

Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.

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PagePage 35 90

Industry Focus Singapore Property

Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report.

DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making.

ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate1 does not serve as an officer of the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or his associate does not have financial interests2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the DBS Group.

COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), DBSV HK or their subsidiaries and/or other affiliates have proprietary positions in City Developments, CapitaLand, UOL Group, Frasers Centrepoint Ltd, CapitaLand Commercial Trust, Keppel REIT recommended in this report as of 30 June 2017.

2. Neither DBS Bank Ltd, DBS HK nor DBSV HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.

3. DBS Bank Ltd, DBS HK, DBSVS, DBSV HK, their subsidiaries and/or other affiliates have a net long position exceeding 0.5% of the total issued share capital in CapitaLand Commercial Trust recommended in this report as of 30 June 2017

Compensation for investment banking services: 4. DBS Bank Ltd, DBS HK, DBSVS, DBSV HK, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past 12 months for investment banking services from Keppel REIT as of 30 June 2017.

5. DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have managed or co-managed a public offering of securities for Keppel REIT in the past 12 months, as of 30 June 2017.

6. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst. 2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.

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Directorship/trustee interests: 7. Euleen Goh Yiu Kiang, a member of DBS Group Holdings Board of Directors, is a Non-Exec Director of CapitaLand as of 30 June 2017.

Disclosure of previous investment recommendation produced: 8. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.

RESTRICTIONS ON DISTRIBUTION General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

Australia This report is being distributed in Australia by DBS Bank Ltd. (“DBS”) or DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”). DBS holds Australian Financial Services Licence no. 475946.

DBSVS is exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. DBSVS is regulated by the Monetary Authority of Singapore under the laws of Singapore, which differ from Australian laws.

Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.

Hong Kong This report has been prepared by a person(s) who is not licensed by the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities in Hong Kong pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong). This report is being distributed in Hong Kong and is attributable to DBS Vickers Hong Kong Limited, a licensed corporation licensed by the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong). For any query regarding the materials herein, please contact Paul Yong (CE. No. ASE988) at [email protected].

Indonesia This report is being distributed in Indonesia by PT DBS Vickers Sekuritas Indonesia.

Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.

Wong Ming Tek, Executive Director, ADBSR

Singapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report.

Thailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. Research reports distributed are only intended for institutional clients only and no other person may act upon it.

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United This report is produced by DBS Bank Ltd which is regulated by the Monetary Authority of Singapore. Kingdom This report is disseminated in the United Kingdom by DBS Vickers Securities (UK) Ltd, ("DBSVUK"). DBSVUK is authorised and regulated by the Financial Conduct Authority in the United Kingdom.

In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVUK. This communication is directed at persons having professional experience in matters relating to investments. Any investment activity following from this communication will only be engaged in with such persons. Persons who do not have professional experience in matters relating to investments should not rely on this communication.

Dubai This research report is being distributed by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3rd Floor, International Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Financial Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for Centre professional clients (as defined in the DFSA rulebook) and no other person may act upon it.

United Arab This report is provided by DBS Bank Ltd (Company Regn. No. 196800306E) which is an Exempt Financial Adviser as Emirates defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. This report is for information purposes only and should not be relied upon or acted on by the recipient or considered as a solicitation or inducement to buy or sell any financial product. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situation, or needs of individual clients. You should contact your relationship manager or investment adviser if you need advice on the merits of buying, selling or holding a particular investment. You should note that the information in this report may be out of date and it is not represented or warranted to be accurate, timely or complete. This report or any portion thereof may not be reprinted, sold or redistributed without our written consent.

United States This report was prepared by DBS Bank Ltd. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.

Other In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, jurisdictions professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

DBS Bank Ltd 12 Marina Boulevard, Marina Bay Financial Centre Tower 3 Singapore 018982 Tel. 65-6878 8888 e-mail: [email protected] Company Regn. No. 196800306E

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