• 1H20 operating PATMI formed 33% of our estimates, a reflection of a challenging first-half weighed down by the retail and lodging segments; earnings are broadly in line as we expect back-end loaded development earnings.
• Recovery in China and retail segment underway, while the industrial, commercial segments and rental housing portfolio remain resilient. Strategic advancement in digitalisation and flex-space offering to help future-proof portfolio.
• Maintain BUY with lower TP of S$3.82 (prev. $3.94). We trim our FY20e revenue by 2.1% as we factor in additional rental rebates and a longer than anticipated recovery in the lodging segment.

The Positives

+ Green shoots in China (42% of AUM) and Retail (28% of AUM) portfolio – Residential sales offices in China were progressively reopened in March. 1Q20’s sales included the 288 units in La Botanica (Xi’an) that were sold out within 4 days of the 24 March launch date. Strong demand momentum continued in 2Q – all 528 units of La Botanica (Xi’an) and 194 units in Parc Botanic (Chengdu), which were launched in May, have been sold at pre-COVID average selling prices. Sell-through rate in China remains high at 92% of launched units, and on track to launch 4,000 more units in 2H20. Most FY20 handovers are expected to be delivered in the 2H20. While most countries are slowly emerging from lockdowns, 95% of office tenants and 89% of business park tenants in China have resumed operations in their premises. CAPL’s core retail markets (China, Singapore, Japan and Malaysia) show evidence of recovery in footfall and tenant sales (Figure 1).

+ Opportunities to future-proof operations amidst adversity. The COVID-19 pandemic has accelerated CAPL’s digitalisation initiatives for the retail and residential segment. The closure of non-essential trade impacted CAPL’s retail and residential business. CAPL responded with virtual tours for leasing and residential projects, as well as the launch of its e-commerce (eCapitaMall) and online food ordering (Capita3Eats) platforms in June, which would not only help boost tenant sales, but also drive new business, and create an ecosystem for customer and tenant stickiness, future-proofing the retail segment.

+ Experienced, future-forward diversified real estate player. CAPL’s strategic investment in wholly-owned flexible workspace operator, Bridge+, will provide Core+Flex solutions in these times of changing occupier strategies (i.e. dedensification, flexible and scalable space needs). There are currently 9 Bridge+ locations operating in China, Singapore and India, with 20 more Bridge+ locations to be launched over the next 24 months. CAPL’s portfolio of complementary office and business park foot print across core geographies also allows CAPL to capture hub-and-spoke demand from tenants looking to average down the cost of space. While international travel bans put pressure on the lodging segment, CAPL’s predominantly service residence (SR) and rental housing portfolio has a lower breakeven occupancy and is geared towards long stays, which helps to provide a steady-state occupancy, mitigating the impact to the lodging portfolio (1H20 RevPAU: -43% YoY, occupancy: c.50%). Additionally, CAPL managed to sign 6,500 keys YTD, as investors validate the value proposition and resilience of the SR asset class.

The Negatives

– 1H20 EBIT -71% YoY, dragged down by lodging (-82.5%) and retail (-25.3%) segments. $300mn in rental waivers for retail tenants, containment measures and restrictions on travel and mobility has impacted these two segments the most. The lower EBIT was mainly attributable to fair value losses on investment properties in 1H20 as compared to a gain in 1H19, and lower portfolio gains from assets recycling. Despite a weaker operating environment, CAPL managed to generate $300mn net cash from operating activities. Balance sheet remains strong with $14bn in cash and undrawn credit facilities. Healthy take-up of script dividends scheme will also help to conserve $388mn in cash for the Group.

Outlook

Vietnam residential inventory running low, hampered by longer approvals process. CAPL has secured 3 to 4 projects in Vietnam. However, the longer approval process has stalled launches, hindering the Group’s ability to replenish the pipeline.

CAPL remains committed to their annual divestment target of S$3bn. Asset recycling activity in 1H20 has been muted in light of the uncertainty, which should pick up in 2H20 as markets stabilise and investment activity returns. CAPL’s strategy remains to divest non-core assets while achieving a more balanced asset distribution – CAPL may trim heavier asset classes such as retail (28% of AUM) and commercial (21% of AUM).

Maintain BUY with lower TP of S$3.82 (prev. S$3.94).

We trim our FY20e revenue by 2.1% as we factor in additional rental rebates and a longer than anticipated recovery in the lodging segment. Our TP, which is based on a 20% discount to RNAV, was cut by 3.0% from $3.94 to $3.82, after incorporating an enlarged share based from the script dividend scheme. We believe CAPL’s diversified portfolio and experience as a real estate player puts it in good position to mitigate near-term headwinds.