CapitaLand: Focus on key residential launches ahead (OCBC)

3Q11 within expectations. CapitaLand (CAPL) announced 3Q11 PATMI of S$80.2m, down 82.6% YoY mostly due to earnings recognized for DPS units at The Seafront at Meyer and Latitude in restated 3Q10 earnings as required by the new INT FRS 115 standards. 3Q11 earnings came in mostly within our expectations and 9M11 PATMI now forms 72.4% of our FY11 forecast. Top-line of S$608.6m also came in line, with 9M11 numbers constituting 75.3% of our annual forecast.

Bedok and Bishan launches to be key catalysts ahead. We estimate that the group sold 67 units in 3Q11, mostly at The Interlace, d'Leedon and Urban Resort for a total sales value of ~S$150m, compared to 271 units sold (S$565m) over 1H11. The sequential slowdown, however, is expected to reverse with new project launches at Bedok and Bishan in 4Q11-1Q12. We believe the market is likely to focus on the performances of these launches as key share price catalysts in the short term.

Chinese homes sales could slow further. The pace of home sales in China moderated in 3Q11 to ~RMB 0.7b (410 units sold) versus RMB 1.9b (930 units) in 1H11. We expect the downtrend to continue due to purchase restrictions and further tightening conditions in China. For the new CapitaLand Value Homes unit, we understand that its Wuhan project (2,600 units) is set to commence construction by end 2011. The Raffles City Chengdu project also achieved structural top-up in 3Q11 and we expect retail operations to begin by 2Q12.

Balance sheet remains strong. We saw the group commit another ~S$2b in new investments in 3Q11, bringing the YTD total to S$7b while net gearing remained at a relatively low 28% with about S$5.5b of cash on its balance sheet. We believe this is a key strength of the group and that capital deployment could well slow down in 4Q11 given macro uncertainties and that the group has reached its S$5-6b target for FY11.

Maintain BUY with revised S$2.91 fair value. We revise our fair value estimate to S$2.91 from S$3.46 previously to reflect latest valuations for its listed holdings and weaker forecasts for the office sector. In addition, we also apply a higher 20% discount (versus 15% previously) to RNAV, in-line with our valuations for other major developers, to reflect heightened macrorisks since our last update. Maintain BUY. Possible catalysts ahead are strong performances at Bedok and Bishan launches and a stronger share buy-back program.