CapitaLand - Key Takeaways from Investor Meetings in USA

Four key messages 
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. 

Citi’s view: Aside from corporate (re)structuring, a more trained focus, whether by way of geography (ALZ divestment, China “clusters”), typology (mixed-use projects, where the competitive advantage of its expertise across four asset classes can surface) or business model (faster residential churn rate, management contract build-out for Ascott), serves to bring out a fuller realization of CAPL’s enterprise value.

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. 

Citi’s view: The new thinking of an ASEAN (vs purely Singapore) engine would come down to capital deployment and investor perception of execution risk. It would also deepen CAPL’s involvement in emerging markets, and investors should be duly compensated with higher ROEs as a result. As for share price performance, our analysis shows that while CAPL does not benefit (on the upside) from the full weight of macro and policy easing in China versus its Chinese peers, it does outperform on the downside (see Fig. 1 and 2 on next page).

The ROE question 
Investors’ key concern was how CAPL could get to its 8-12% target

Mgmt highlighted that based on previous guidance, they should get to this level within the next 1-3 years, underpinned by 
(i) completion of projects under development (PUDs), with S$8-10bn of assets (primarily in China) completing in the next 3 years; 

(ii) cost management, which has been largely seen on the financing line; and 

(iii) reconstitution of portfolio, whether by way of selling stabilized assets to its REITs, seeding new private funds with PUDs, or even the disposal of non-core and underperforming assets. 

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

Citi’s view: The first two drivers of improved ROE are largely factored in by investors. As such, further upside could come from the effects to reconstitute its asset base. While potential divestments into its sponsored REITs have been well-flagged, and the revisiting of its private fund management platform as an efficient growth vehicle could be neutral to marginally positive, given investors’ concerns on a return to complexity, any disposal of nonperforming (lower ROE) assets to third parties could be a positive signal that in its drive to improve ROEs, it is willing to do so at the expense of a reduced asset base, even if said assets are seen to be part of its core markets or business.

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. 

Citi’s view: 
While still at a nascent stage, early recognition that it is better to embrace structural pressures (since these are industry-wide and not company-specific) and to innovate around these, so as to come out strongest, is a good sign. That said, potential start-up costs and/or incubation-related downtime could be near-term challenges that both the company and investors would likely have to get past.


Technical Analysis
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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)

Read Related Report
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Tuesday, 23 June 2015
- OCBC Investment Research

Source : Citi Research

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