+ Strong momentum in Singapore Property segment amid improvement in sentiment. Continuing the sales momentum from 1H17, sales value for Singapore Property segment close to tripled YTD17 to S$1.76bn. Number of units sold YTD was double YoY, implying an increased proportion of higher-end units sold. Going forward, 3 projects are due for launches in 1H18 at New Futura (124-units at Leonie Hill), Tampines Ave 10 (861 units), and South Beach Residences (190 units).
+ Broad-based recovery for Hotel Operations as global sentiment and tourism improves. On a like-for-like basis, Millennium & Copthorne (M&C)’s global RevPAR improved 1.4%, led by strong growth in Australasia, London and New York. These 3 markets make up close to 40% of M&C FY16 revenue. Including the impact of acquisitions, closures and refurbishments, global RevPar improved 4% in constant currency, an improvement in the -2.3% drop for FY16.
+ Strategic partnership with Vanke in China likely to boost asset sales for partnered assets: CDL’s strategic partnership with China Vanke sets the stage for future collaborations which would enable CDL to tap on the local expertise and business networks of Vanke. The partnership which was achieved through the partial divestment of two properties in Chongqing, namely 70% of Chongqing Huang Huayuan and 50% of Eling Residences allows for 1) partial monetization (c.RMB1bn) of assets for capital recycling 2) access to Vanke’s extensive local networks and development expertise which we believe could lead to increased future saleability for the two projects.
– Slower residential sales in UK, China. Uncertainties over Brexit and government cooling measures in UK and China led to slower sales of residential projects in these countries. The Group soft-launched 240-unit Teddington Riverside in late October, but opined that transactions could take time to gain traction as local buyers typically prefer to buy finished products.
Sales at the other major China project, HLCCC in Suzhou, continued at roughly the same slow pace as the previous quarter, with 25 (Phase 1) and 17 units (Phase 2) sold in the quarter. (2Q17: 56units and 9 units respectively)
– Drop in office occupancy to 92.5% (from 95.9% at FY16), but likely to improve going in to FY18. Tapering new supply and improved corporate demand as noticed across most office S-REITs leads us to believe the blip in occupancy will likely improve going into FY18.
Main catalysts to come from successful launches of 4 residential projects in Singapore, mostly in 1H18: CDL remains one of the most well-stocked developer under our coverage to benefit from the upcycle in the Singapore residential and commercial property market. Healthy demand and a recent pickup in interest in high end developments such as newly launched Martin Modern and CDL’s Gramercy Park suggests healthy saleability for New Futura with new limited new supply in Core Central Region. We are similarly confident of take-up rates and ASPs for South Beach and Tampines Ave 10 site given 1) exclusivity of South Beach site with unblocked panoramic views of Marina Bay and the city 2) smaller units at Tampines site with affordable quantum – we have seen similar suburban projects sell well at psfs higher than the forecasted c.S$1100psf for Tampines, such as in the S$1300+ range in Tanah Merah precinct. We think higher execution risks exist for the Amber Park site. Healthy take-up rates and ASPs for these 4 launches next year and forward could be catalysts for share price and upward revision of target price.
Office outlook looks set to further recover in 2018: Grade A office rents appear to have bottomed with the first increase in 3Q17 after 10 quarters of decline. We believe the recovery should continue will improved corporate demand as evident across most office S-REITs and tapering new supply. This will likely mitigate the magnitude of negative reversions expected for the 27% leases (by NLA) expiring in 2018 for CDL’s office portfolio.
Hotel refurbishment programme ongoing which is likely to impact M&C earnings in the short term. Management expects M&C to progress with its capital expenditure across a number of hotels for M&C, which will likely further impact M&C’s earnings.
Outlook for China Property development segment still bright in the longer term: While we opine that China property development in China is likely to remain weak in the short term. This will be cushioned by the Group’s relatively limited exposure to the country (value of unsold units amounted to ~4% of our RNAV estimates). We are of the view that some of the Group’s development is likely to benefit in the longer term. For instance, the Group’s 58%-sold Hongqiao Royal Lake villa project in Shanghai will enjoy some scarcity value as Villa development is no longer permitted in China in a move to intensify land use.
Maintained Accumulate with unchanged TP S$12.10 (successful accretive acquisition of M&C could increase our TP to S$13.50 depending on offer price)
Post-acquisition of M&C, depending on final offer price, TP could potentially increase to S$13.50. An offer, if any, would likely be at a substantial premium to the initial offer price given that current trading price is already 10% higher than the initial offer. For now, pending closure of the deal, we maintain ACCUMULATE with a TP of S$12.10. We continue to favour CDL for its large Singapore development exposure of unlaunched and available for sale inventory to capture the potential upswing in SG property prices. Post consolidation, SG residential makes up c.31% of adjusted GAV. Including properties in other sectors, SG exposure stands at c.56% of adjusted GAV.
Figure 1: Revised RNAV Table (assuming acquisition at current offer price)