We hosted CapitaLand’s senior management to meet with institutional investors in the USA. We distilled four key messages that management sought to convey. We also summarise investor feedback and our take on these key issues.
■ The simplification dividend
With the initiatives all done and dusted, mgmt was able to explain the rationale behind each move in a holistic fashion – from the halving of business units, to the sale of ALZ, to the privatization of CMA. Investors responded positively, particularly in comparison to the growing complexity of other Singapore-listed peers, though some sounded out that a return to growing the private fund management platform could re-introduce the complexity element.
■ Twin engines
Mgmt highlighted that it remains a long-term player in China, and YTD pre-sales have shown yoy improvement. It will continue to focus on building up exposure in Tier 1 cities, and key Tier 2 cities which it had identified under its China clusters. As for Singapore, it seems to see pure residential development as a more opportunistic business, preferring to cast Singapore in the heart of a bigger ASEAN footprint. It sees residential development as more attractive (higher ROEs) in Vietnam and Indonesia, with both underpinned by stronger structural drivers in the form of urbanization. Most investor concerns, from an operations perspective, were on the residential cycles in China and Singapore, with some appreciating that if diversification is a given, expanding into geographies that are physically closer to home would be seen as more sensible. From a share price perspective, some investors flagged that it looked like CAPL has now de-coupled somewhat from that of China property stocks.
■ The ROE question
Investors’ key concern was how CAPL could get to its 8-12% target.
Longer-term, CAPL hopes to have 70-75% of its income from recurring sources, which would underpin a stable and defensive minimal ROE of close to 8%, with the upside into the stretched target a function of residential trading income, whereby opportunistic acquisitions and a faster churn would still be the order of the day.
■ Disruptive technology
CAPL is also taking a serious look at how to harness technology across all its asset classes, in recognition of structural changes within its core businesses, like the threat of e-commerce and labour cost-push pressures in developed markets. The starting point is to increase stickiness among its customer base (primarily in the retail segment) as well as to improve operational efficiency (primarily in the serviced residence segment). Investors generally responded well to this, given that e-commerce and labour costs have been two of the stronger structural headwinds that most landlords have been facing.
■ Preferred pick
Overall, we detect a stronger sense of confidence on the part of management in terms of executing their strategy; they are also cognizant that investors are mindful of execution as a catalyst. We also sense that investor perception has improved versus 1-2 years ago, where concerns about unwieldy diversification and an overly complex structure were issues working against the name. CAPL remains our preferred pick in the Singapore developer universe. (Read Report)
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- OCBC Investment Research
Source : Citi Research