CapitaLand: China residential headwinds intact, low exposure (OSKDMG)

(BUY, S$2.46, TP S$3.52)

We paid a visit to China for an update on CapitaLand’s assets in Shanghai, Suzhou and Hangzhou. While we conclude sites acquired through the OODL transaction are in good locations and present a value proposition, we believe any upside potential for CapitaLand regarding its China residential exposure is capped in the near term with policy headwinds intact. That said, we highlight CapitaLand’s only c.14% China residential exposure of which CapitaLand’s poor share price performance, if attributed to concerns over China residential exposure, is largely overdone. The bright spot lies with its commercial/retail exposure through 65% owned CMA. Maintain BUY, TPS$3.52 with stock attractively priced at c.44% discount to RNAV.

Residential headwinds intact. Post site visit with takeaways from management and project sales staff on site, we believe the government has a strong hand at regulating both prices and volume through buying restrictions, lower LTVs and project sales licences. Policy reversal is unlikely in the near term at least till 2H12.

Only c.14% China residential exposure, concerns overdone. We believe investors’ concerns on the China residential segment is likely to persist. However we highlight only c.41% of CapitaLand’s China exposure lies in the residential segment with a residential pipeline of c.24,000 units translating to CapitaLand’s c.14% effective exposure to the China residential segment. With CapitaLand’s poor share price performance underperforming Singapore residential barometer CDL, if largely attributed to investors concerns on the Chinese residential market, is largely overdone in our view.

Positive on OODL transaction post site visit. We gather on-site update on a number of sites OODL transaction eg. The Pinnacle, The Metropolis and the Raffles City Chang Ning site. We conclude sites are in good locations and present a value proposition.