City Developments Ltd - A new market, a new risk profile (CIMB)

UNDERPERFORM Maintained

S$10.50 Target: S$10.86

Mkt.Cap: S$9,548m/US$7,942m

Bulking up in China

Acquiring prime land in Suzhou. CityDev has acquired a prime mixed development site in Suzhou Industrial Park (SIP), China, for S$167m or Rmb3k psm (GFA: 295,455sm). The project will have high-end residential, office, retail and hotel components. This is the group’s second major venture into China, following its earlier announcement of setting aside initial funds of S$300m for development opportunities. We see the move as opportunistic, capitalising on softening land prices. However, other big-cap developers with a deeper and longer presence in China are likely to have more competitive cost structures. While China remains a small part of its assets (less than 5%), we believe the market should begin to reassess CityDev’s risk profile if more capital is allocated to China going forward. For now, residential concerns in Singapore remain its key overhang. We keep our earnings estimates and target price of S$10.86, still at a 15% discount to RNAV of S$12.77 with muted accretion of 1.5% expected from the project. Maintain Underperform. We prefer KepLand and CapLand among the big caps. For a Singapore pure developer, we would go for OUE.

The details

The 3.2m sf GFA project is located in the heart of SIP with a major subway line several blocks to the north of the site currently under construction. CityDev plans to build a 750-unit high-end residential block, accompanied by an office tower, a retail mall and a luxury hotel. The site was acquired through a government land tender held on 27 Jul for S$167m or Rmb3k psm − bigger than its first deal in China.

Muted accretion. CityDev is in discussions with a local developer, Genway Housing Development Group, for a possible JV to develop the site. On a 100% stake basis, we estimate accretion at a muted 1.5% for RNAV, assuming a capital value of Rmb12k-15k psm for the project.

More capital to be allocated to China? This is the group’s second major venture into China, on the heels of its earlier announcement of setting aside initial funds of S$300m for development opportunities last year. The Chairman of CDL China, Mr Sherman Kwek, earlier suggested that the decision to go into China was strategic, motivated by a cooling property market which could result in bargains down the road. We see this latest move as opportunistic, as land prices in China have begun to soften. However, other big caps (e.g. CapLand and KepLand) with a deeper and longer presence in China are likely to have more competitive cost structures there. While China remains a small part of its assets (less than 5%), we believe the market should begin to reassess CityDev’s risk-profile if more capital is allocated to China going forward. For now, we believe residential concerns in Singapore will remain its key overhang.

Valuation and recommendation

Maintain Underperform. We keep our earnings estimates and target price of S$10.86, still set at a 15% discount to RNAV of S$12.77 with muted accretion of 1.5% expected from the project. We prefer KepLand and CapLand among the big caps. For a pure Singapore developer, go for OUE.