CDL

Kim Eng on 11 Jan 2012


Relative outperformer. Since the market sell-down in August last year, City Developments Limited (CDL) has been a relative outperformer (-14.2%) compared to big-cap peers CapitaLand (-19.5%) and Keppel Land (-39.2%), even slightly outperforming the Straits Times Index (-15.4%). While its recent residential launches have continued to attract keen demand, its exposure to some luxury projects could pose an overhang on shares. Maintain Hold.


Meeting upgraders’ demand. Last week, CDL launched the 466-unit Executive Condominium called The Rainforest at Choa Chu Kang. Priced at around $720 psf, it is in line with our expectation of $700 psf. When applications closed two days ago, more than 800 applications were received. The early launch was timely, as we expect mass market prices to fall by up to 20% by end-2013 amid weakening economic fundamentals and ample options for homebuyers.


Potential overhang from high-end projects. The introduction of the Additional Buyer’s Stamp Duty (ABSD) last month is also likely to further curtail demand for high-end properties. While headline ASPs may stay resilient, we anticipate an effective 10% drop in selling prices as developers begin to absorb the ABSD either partially or in full to attract buyers, thus eroding their profit margins. If this eventuates, it will lower our RNAV estimate for CDL by 2%, or 27 cents per share.


China exposure still small. CDL recently made a RMB540m acquisition in Chongqing, making it its third project in China. The land cost translates to RMB4,968 psm ppr and we estimate a breakeven of RMB11,000 psm for the project, which would add 4 cents per share to CDL's RNAV. While stocks with China exposure have been negatively affected, CDL's post-acquisition exposure is still relatively small.
Fairly-valued bellwether. On balance, CDL seems fairly valued at this moment. We maintain our Hold recommendation, with the target price reduced from $11.05 to $9.38, pegged at a 25% discount to RNAV.

Fairly-valued bellwether. On balance, CDL seems fairly valued at this moment. We maintain our HOLD recommendation, with the target price reduced from $11.05 to $9.38, pegged at a 25% discount to RNAV in line with trading conditions in 2008.


Brisk sales from mass market projects

Warming up to The Rainforest. CDL’s latest launch is the 466-unit Executive Condominium (EC) known as The Rainforest at Choa Chu Kang. Launched last Wednesday, more than 800 applications were received when applications closed two days ago, indicating that the underlying demand from upgraders is still strong. The units were priced at around $720 psf, in line with our original expectation of $700 psf. Assuming 50% of the applicants eventually go on to book a unit, the project could easily achieve 85% sales. 


Concentrating on mass market launches. The Rainforest is just one of the few mass market launches that CDL has undertaken in recent months. Last November, it rolled out the leasehold condominium called The Palette at Pasir Ris Grove. To date, over 80% of the 450 units released have been sold at an ASP of $880 psf. Earlier in July, the group launched another EC project called Blossom Residences at Bukit Panjang and has sold nearly 80% of the units at an ASP of $680 psf.


Timing of future launches critical. In our view, while the demand for mass market projects appears to be still strong, the ASP may come under downward pressure from 2H12 as weakening economic fundamentals coincide with possibly more launches of such developments, ECs and HDB Build-to-Order projects. We believe that the prices of mass market projects would correct by 20% by end-2013. Against such a backdrop, CDL’s timing of new mass market launches will be critical. Looking at its landbank, the group may try to roll out Bartley Residences, the 698-unit leasehold development beside the Bartley MRT Station, by 1H12. In lowering our ASP assumptions for its unlaunched mass market projects by 20%, we cut our RNAV per share by 26 cents, or a 2% reduction.

High-end segment a no-go. The introduction of the Additional Buyer’s Stamp Duty (ABSD) last month is likely to further curtail demand for high-end properties, which has largely been buoyed by foreign demand. While headline ASPs may stay resilient, we anticipate an effective 10% drop in selling prices as developers begin to absorb the ABSD either partially or in full to attract buyers, thus eroding their development margins. In lowering our ASP assumptions for high-end projects by 10%, CDL’s RNAV per share is reduced by 2%, or 27 cents. 


Keep an eye on The Residences at W. While most of CDL’s high-end projects are still in the early stages of construction, one project that stands out is The Residences at W at Sentosa Cove. Having already obtained its Temporary Occupation Permit (TOP) in 2Q11, the group has sold only 21 out of the 228 units to-date. Under the Residential Property Act, it now faces a diminishing timeframe of slightly under 18 months to sell the remaining 207 units.

Making further inroads in China


Second acquisition in Chongqing. CDL recently made a RMB540m acquisition in Chongqing’s Yuzhong District (渝中区), making it its third project in China and second in the city of Chongqing. The land cost translates to RMB4,968 psm ppr and we estimate a breakeven of RMB11,000 psm for the project. Eighty per cent of the GFA will be for residential use, potentially yielding 900 homes, while the remaining 20% will be for commercial use.


The site is located near Huang Hua Yuan (黄花园) Metro station, just one metro station away from the Jiefangbei (解放碑) CDB area, with waterfront views of the Jialing River. A project nearby called City Heights (协信公馆) by local developer Sincere Holding has a current ASP of RMB17,000 psm. We have assumed a conservative ASP of RMB15,000 psm for the residential component and a capital value of RMB27,000 psm for the commercial component, translating to a potential RNAV accretion of just 4 cents per share.


Second acquisition in Chongqing not a mere coincidence. While China’s overall economic outlook still draws dissenting views, the city of Chongqing continues to be a shining light. Based on the latest reports, Chongqing achieved GDP growth of 16.5% last year, making it the fastest-growing city in China. In addition, as CDL already has a project team in place for the E-ling site, the group could leverage on those resources and potentially reap economies of scale.


China exposure still small. We estimate that post-acquisition, CDL’s exposure to China is approximately 10% of the group’s Gross Development Value. Despite the market’s general aversion to companies with exposure to China real estate, we think CDL’s exposure is still small.