CapitaLand - Not to be tarred with the same brush (KE)

More than just a China developer. We recently visited a number of CapitaLand’s projects in and around Shanghai. A key takeaway is that the group remains disciplined in its China operations, focusing on well-located properties. Its China business is in net cash position and is not just focused on residential development. We maintain our belief that CapitaLand’s China business will prove profitable and that China should remain a key market for the group. Maintain Buy.

Revisiting the OODL sites. CapitaLand acquired the OODL portfolio for US$2b early last year. To-date, it has already launched and sold a substantial number of units from the first phases at The Metropolis and The Pinnacle. All eyes will now be on the crown jewel, The Paragon, which is launch-ready. We expect an ASP of around RMB120,000 psm, with demand likely to be robust given its strong product positioning.

Location, location, location. Even as the Chinese residential market comes to a slow grind, CapitaLand remains committed to deepening its presence in key cities such as Shanghai and Beijing. We believe that prices of well-located projects, such as those near city centers, will hold up and be less susceptible to drastic corrections.

It’s not all about residential property. The current policies are aimed at cooling home prices and have little impact on commercial properties. Residential development only accounts for 14% of CapitaLand’s assets, or 41% of its China assets. The majority of the assets in China are made up of commercial properties, such as retail malls and the seven Raffles City developments.

Focus on asset quality. CapitaLand’s current share price implies an overly punitive 70% impairment to the asset values held under CapitaLand China Holdings. In our view, investors should instead focus on the quality of its investments in China. We maintain our Buy recommendation but lower our target price to $3.21, pegged at a steeper discount of 20% to RNAV, given that the policy overhang may remain at least until 2H12, in our view.