Building an edge in China
▊ Our recent ground checks on CapLand’s China projects suggest that it is gradually establishing an edge in large-scale mixed developments. Asset build is on track and retail footfalls are encouraging. Its attitude of improving returns at the project level is also a positive, in our view. We tweak our FY13-15 core EPS by 1-2% but keep our target price, based on a 20% discount to RNAV. CapLand remains an Outperform, with catalysts from more capital recycling and yield uplifts.
Last week, we toured CapLand’s projects in Shanghai and parts of south China (Guangzhou and Shenzhen), and also interacted with senior management and ground staff.
What We Think
We think CapLand is gradually carving out a competitive advantage over the local developers in large-scale commercial and mixed developments. Though not all will bear fruit in the near term, we believe the stage is set for more asset recycling once many of its Raffles City (RC) mixed projects are completed in 2015-17. Meanwhile, we see improvements at the operational and project levels. In Shanghai, retail mall footfall remains robust, with a distinct improvement in traffic at Hongkou Plaza (CMA) since our last visit in 2012. This asset will enter its first renewal cycle in 2014 and management is confident of getting 15-20% rental reversions, like the group’s other malls. We think this is achievable. The feel is more mixed on China’s residential segment (12% of its GAV). The high-end segment remains weak due to the home purchase restrictions (HPR) but mid-end projects continue to sell well. Dolce Vita, a mid-range product in Guangzhou sold over 86% of its launched units at Rmb15k-20k psm. CapLand’s ground staff told us that property remains the most sought-after investment asset class in China. Interestingly, we noticed more of CapLand’s commercial projects being carved out for strata sales, a segment not affected by HPR. CEO Mr Lim Ming Yan’s style of management is to go bottom-up and improve yields and IRR at the project level. He expects development sales to be the ROE kicker, while maintaining a target 34% of its assets for development growth. Overall, we think CapLand is progressing well in achieving its ROE target of 8-12%.
What You Should Do
CapLand remains one of our key picks in the sector at 0.8x P/BV.
Publish date: 27/11/13