CapitaLand - Dragged by accounting changes (DBSV)

BUY S$2.45 STI : 2,712.41

Price Target : 12-month S$ 3.28 (Prev S$ 4.34)

Reason for Report : 3Q11 Results/TP revision

Potential Catalyst: Accretive new investments

DBSV vs Consensus: FY12 below

• Within estimates, 9M profit forms 85% of FY11F earnings

• Spore and China residential activities to drive earnings

• Maintain Buy, TP lowered to S$3.28

In line. Capitaland reported a 58% decline in revenue over its restated 3Q10 to S$606.6m while PATMI posted an 83% decline y-o-y to S$80.2m. The drag came mainly from Singapore and China residential where change in accounting policy to recognise overseas development profits and those that were sold under deferred payment scheme in S’pore on a completed rather than progressive basis. In S’pore, deferred profits from the Seafront and Latitude boosted 3Q10 profits while 3Q11 saw only progressive contributions from The Interlace, Urban Resort and The Wharf Residence. In China, revenue dipped on smaller units being delivered to buyers and came mainly from Foshan. This was partially offset by profits from Vietnam and better showing from CMA. 9M revenue was 21% lower y-o-y to S$1.96bn while reported PATMI was S$580.7m, down 30% and made up 85% of our FY11 estimates. Excluding revaluations and impairments, PATMI would have been S$351.6m, -43.4%.

Residential to drive profits. Going forward, residential activities will continue to be the growth driver. It plans to launch the Bishan, Bedok and Marine Point enbloc sites as well as offer more units at The Interlace, Urban Resort and D'Leedon, totalling 1,246 units. In China, TOP of an estimated 4,369 units over 4Q11-2012 should boost bottomline. It has several projects that are launch ready in China - Paragon and Pinnacle in Shanghai, Intl Trade Centre in Tianjin, Beaufort in Beijing, Dolce Vita in Guangzhou and The Loft in Chengdu. These launches will be timed according to market and when sold, will extend forward earnings visibility. Construction of the 2,600 value home project in Wuhan is expected to commence by end 2011. CMA is expected to perform better while negative rental reversions and uncertain global macro outlook are likely to drag on the commercial property outlook. The group has committed about S$7bn of new investments YTD, exceeding its target of S$5-6bn. Gearing as at Sep 2011 stood at a low 0.28x with gross cash of S$5.5bn.

Maintain Buy, TP lowered to S$3.28. We have retained our FY11/FY12F estimates but reduced RNAV to S$5.05 on the back of lower TP for CMA and CCT. As such, Capitaland’s TP is also lowered to S$3.28 on adopting a slightly steeper discount of 35%. The stock is trading at 0.73x P/Bk and offers 34% upside to TP.