City Developments (KimEng)

Event

City Developments Limited (CDL) reported a 2Q11 net profit of $220.9m (+17% YoY) and a 1H11 net profit of $503.2m (+45% YoY). Excluding fair value and divestment gains, we estimate the 1H11 core profit to be $270.4m, largely in line with consensus estimates. Despite a more cautious outlook from management, CDL remains optimistic that it is in a good position to seize opportunities, albeit in a prudent manner. An interim dividend of 5 cents per share has been declared. Maintain BUY.

Our View

Property development remained the key contributor to CDL’s 1H11 pre-tax profit, accounting for 39%. However, profits from H2O Residences (70% sold), Hedges Park (63% sold) and Buckley Classique (56% sold) have not been recognised as construction works have yet to begin. Despite the slower market, CDL still sold 809 units ($794m in sales value) in 1H11, more than the 773 units sold in 1H10.

Management is of the view that some slowdown in the residential market can be expected, but demand for well-located projects will still remain keen if priced correctly. With a relatively large landbank of about 3.8m sq ft in attributable GFA, CDL can afford to be prudent and take a selective approach to future land tenders. It will also withhold launches of its high-end projects until market sentiment improves in a bid to extract maximum value from these sites. The group will also continue to look for acquisitions in China.

CDL’s hotel subsidiary, Millennium & Copthorne (M&C), recorded a strong 2Q11 PATMI of £47.9m (up 91.6% QoQ) on the back of divestment gains. At the operating level, RevPAR (constant currency) grew strongly by 6.3% for 2Q11 and 5.5% for 1H11, led by its key gateway cities, namely, Singapore, London and New York. Even if conditions were to take a turn for the worse, M&C remains financially sound with a very low net gearing of just 4.1%.

Action & Recommendation

The low interest rate environment is likely to continue to underpin demand for CDL’s mass market and well-located mid-end projects. Backed by a strong balance sheet, we see little need for CDL to reduce ASPs for new launches. Maintain BUY with a target price of $13.27, pegged at parity to RNAV.