City Developments Limited

Kim Eng on 11 May 2012

Results in line. City Developments Limited (CDL) reported a 1Q12 net profit of SGD156.8m, down 44.5% YoY. Excluding one-off items, core PATMI decreased by 22% YoY mainly due to lower development profit recognized. Coming in at approximately 17% of our full-year estimate, CDL’s 1Q12 results are largely in line with expectations. Without any foreseeable positive catalysts, we are maintaining our HOLD rating.

Recognising profits from projects with lower margins. While property development continues to account for the bulk of CDL’s earnings at 41% of PBT, overall margins appear to be declining from 38.8% in 1Q11 to 22.3% in 1Q12 as high-margin projects such as One Shenton and Cliveden at Grange were completed in 2011. As of 1Q12, profits from H2O Residences, Buckley Classique, The Palette, Bartley Resdences, Blossom Residences and The Rainforest have not been recognized due to their early stages of construction.

Two launches on the way. CDL is preparing to launch the 70-unit UP@Robertson Quay very shortly. Part of a mixed development with a 300-room lifestyle hotel called M Social, UP@Robertson Quay will have an array of smaller-sized riverside apartments. CDL will also be rolling out 96 units of terrace houses in the development known as HAUS@Serangoon Garden. We think that demand should be quite strong given its location and the limited supply of landed housing.

Confidence in China reaffirmed. As expected, CDL remains confident about its investments in Chongqing, as demand will continue to be driven by progressive urbanization, strong economic growth and pro-business policies, even under new Party Secretary Zhang Dejiang. CDL will still continue to seek further acquisitions in China.

Near-term upside limited. We maintain our belief that the possibility of further property cooling measures in Singapore remains high and further upside in CDL’s share price is likely to be limited even if current valuations are inexpensive. Maintain HOLD with a target price of $9.45, pegged at a 25% discount to RNAV.