City Developments - Singapore outlook remains challenging


CIT’s 2Q15 performance was slightly below our projections, with management citing a challenging outlook (particularly residential) in Singapore, which forms 80% of our RNAV. On the bright side, South Beach Tower’s pre-commitment has improved further, with pick-up in China resi sales. CIT has corrected 14% YTD, underperforming the market (-7%). While it is now trading at 30% discount to RNAV (vs. mean of 9% and 1 SD of 37%), we believe that near-term catalysts remain limited, in view of headwinds across majority of its business segments. Residential (30% of RNAV) remains challenging, with office (34% of RNAV) just entering its downcycle. Similarly for hospitality (24% of RNAV), its key geographies continue to be faced with economic uncertainty. While further portfolio fine-tuning (including divestment of non-core assets to 3rd-parties or newly-created fund management platforms) could provide more ammunition for acquisitions, we think the pace could slow in view of a downtrend in office/retail/industrial capital values/rents. Maintain Neutral; prefer CapitaLand given its more attractive valuations, i.e. 47% discount to RNAV or 1 SD below mean.
 
· 2Q15 net profit fell 3.2% YoY (+8.5% QoQ) to S$133.5m, due to decline in PBIT contribution from Property Development (-8%) and Hotel Operations (-9%) but mitigated by a 3% rise in Rental Properties. Adjusting for one-off items (forex, divestment gains and revaluation), we estimate 2Q15 core PATMI would have declined 8.1% YoY (flat QoQ) to S$123.2m, with 1H15 core PATMI of S$246.4m (-4% YoY) accounting for 40% of our full-year projections. A special interim DPS of 4.0 Scts was declared. Net gearing remains strong at 28%, but book value was down 1% QoQ to S$9.36/share which translates to P/B of 0.94x.

· South Beach Tower’s pre-commitment improved to 90% (vs. 88% in 1Q15), with another 6% confirmed (pending confirmation) and remaining 4% in advanced negotiations. The South Beach (654-room upscale hotel) will soft open in Sep-15, while South Beach Residences (190-unit luxury condo; 2Q16 completion) will only be launched when market conditions become favorable.

· Resi prices/volumes will remain challenging in the near term according to management, partly due to potential rise in mortgage rates. While Gramercy Park (174-unit luxury condo; 2016 completion) was expected to be launched in 2015, CIT will now monitor the launch timing given the challenging luxury segment. It will instead launch another mass market EC – The Criterion (505-unit; land cost - S$330 psf; PBT margin: 10%) in Yishun, in view of The Brownstone’s (638-unit) recent healthy take-up of 31%. Office rent growth is expected to moderate given moderating demand.

· China resi picks up. CIT is seeing signs of increased buying activity in the past 3 months post the lifting of several cooling measures and relaxed loan restrictions. Suzhou Hong Leong City Center’s (HLCC) 462-unit residential Tower 1 has sold 281 units as of Aug-15 since its initial launch in Jun-15. Tower 3 (899 SOHO units) has just accepted sales, with two more projects slated for launch in 4Q15, namely the 126-unit Eling Residences in Chongqing and another 85-unit luxury project in Shanghai.


Technical Analysis
Daily Chart
· Maintain Neutral. CIT has corrected 14% YTD, underperforming the market (-7%). While it is now trading at 30% discount to RNAV (vs. mean of 9% and 1 SD of 37%), we believe that near-term catalysts remain limited, in view of headwinds across majority of its business segments. Residential (30% of RNAV) remains challenging, with office (34% of RNAV) just entering its downcycle. Similarly for hospitality (24% of RNAV), its key geographies continue to be faced with economic uncertainty. While further portfolio fine-tuning (including divestment of non-core assets to 3rd-parties or newly-created fund management platforms) could provide more ammunition for acquisitions, we think the pace could slow in view of downtrend in office/retail/industrial capital values/rents. Maintain Neutral; prefer CapitaLand given its more attractive valuations, i.e. 47% discount to RNAV or 1 SD below mean. (Read Report)

Read Related Report
City Developments - Asset divestment is the key catalyst
Thursday, 13 August 2015
- JP Morgan Asia Pacific Equity Research

Source : JP Morgan Asia Pacific Equity Research

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