City Developments Limited (KimEng)

Event

City Developments Limited (CDL) recently announced that it will take a 30% effective stake in a development acquired by Millennium & Copthorne (M&C) in Ginza, Tokyo. M&C owns the remaining 70% stake. The acquisition allows M&C to gain a strategic foothold in Ginza at what we believe is a reasonable price. Going into 2012, the potential slowdown in M&C’s European (ex‐London) operations is unlikely to have a significant impact on its bottomline. Maintain HOLD.

Our View

M&C will be working with Mitsui Fudosan to redevelop the prime site in Ginza into a deluxe 325‐room hotel, expected to be completed by end‐2014. Mitsui Fudosan will be the project manager and also the eventual lessee to operate the hotel. M&C estimates the total development cost including land to be £113m, or £349,000 per key. We think this is a fair price, as we estimate the breakeven Average Room Rate (ARR) to be £173/night, when we think the hotel may eventually command an ARR of £200/night.

Meanwhile, the ongoing Eurozone debt crisis could weigh on the hospitality business in Europe, particularly if demand for business travel shrinks. However, we believe that the impact on M&C will be minimal as Europe ex‐London generally accounts for less than 5% of its EBITDA. In contrast, London, its biggest market in Europe accounting for about 25% of earnings, should perform well next year as the city hosts the 2012 Summer Olympics from 27 July to 12 August.

In Singapore, we expect CDL to moderate the pace of its new launches. In particular, we think the launch of high‐end projects such as Lucky Tower will likely be deferred until the jitters in global markets dissipate. On the other hand, the raising of the monthly income ceiling to buy executive condominium units from $10,000 to $12,000 should benefit CDL, which has an inventory of about 700 unsold EC units from Blossom Residences, as well as the yet‐to‐be‐launched site at Choa Chu Kang.

Action & Recommendation

Given the strong likelihood of a recession next year, we see few positive catalysts to upgrade our call. Maintain HOLD with a target price of $11.05, pegged at 15% discount to RNAV.