City Developments Limited

Kim Eng on 7 May 2012

Not expecting any surprises, upgrade to HOLD. City Developments Limited (CDL) will announce its 1Q12 results on Thursday. We are not expecting any earnings surprise, and note that 1Q is seasonally a weak quarter. With its hotel operations likely to remain steady and valuations looking less expensive at these levels, we upgrade the stock to HOLD.

Unit absorption slow but steady for now. Based on the URA’s statistics, CDL sold 258 residential units in the month of March, mainly from Bartley Residences, The Palette and The Rainforest. However, we do not expect profits from these projects to be recognised anytime soon, given their early stages of construction. Of these ongoing launches, about 27% of their total units (or 1,179) remain unsold, with the bulk attributable to Bartley Residences.

Hotel business to report steady growth. CDL’s subsidiary, Millennium & Copthorne (MLC LN), has reported a robust 29.1% YoY growth in its 1Q12 PATMI to GBP18.2m, underpinned by a rate-driven sales strategy and continued cost discipline. Besides the usual growth cities of London and Singapore, M&C also enjoyed strong RevPAR growth in cities such as Seoul, Kuala Lumpur and Jakarta.

Chongqing sites not “Bo-mbs”. Despite former Chongqing Party Secretary Bo Xilai’s fall from grace, life goes on in the city. CDL remains sanguine about the city’s investment prospects, and rightly so, in our opinion. CDL is likely to reaffirm its confidence in the Chinese market and continue to look for acquisition opportunities. However, its operations in China are not likely to contribute to earnings until 2014/15.

Inexpensive, but policy risks remain. We think that CDL’s share price is still vulnerable to potential policy risks concerning Singapore’s residential property market, given its perception as a bellwether. However, we believe that most of the downside risks have been priced in and upgrade the stock to HOLD with a higher target price of SGD9.45, pegged at a 25% discount to RNAV. We would be buyers should the share price correct to SGD8.20 for a potential 15% upside.