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.

China XLX - An exceptionally strong 3Q (DBSV)

BUY S$0.295 STI : 2,712.41

Price Target : 12-Month S$ 0.40

Reason for Report : Earnings revision

Potential Catalyst: Urea ASP increase

DBSV vs Consensus: Our forecast is among the lowest on the back of weak urea margins.

• 3Q11 net profit surged 263% y-o-y and q-o-q to RMB102.9m on higher margin spreads

• Profitability to normalize in 4Q

• Valuation near GFC trough levels. Maintain BUY and S$0.40 TP

• Key risks are stretched balance sheet and persistent industry overcapacity issue

A strong 3Q. China XLX reported a 263% increase both y-o-y and q-o-q in 3Q net profit to RMB102.9m. This was largely attributable to higher margin spread of RMB150/t as urea ASP surged (+8% q-o-q to RMB2250/t) on the back of temporary supply shortages post power interruption in 1H as well as higher compound fertiliser sales during the peak 3Q. Methanol remained in marginal loss. Overall gross margin expanded by 8.8ppt y-o-y and 6.8ppt q-o-q to 19.8%.

Net gearing was high at 0.71x as of end Sept 2011. It will likely cross 1x net gearing next year as the company increases borrowings to finance the construction of 4th plant. Fund raising exercises through bond or capital markets could be expected in the near term.

Urea prices to ease in 4Q. 9M11 net profit of RMB152.4m exceeded our full year estimate by 5%. We raised FY11F net profit by 23.4% to RMB179.8m on account of the strong ASP in 3Q. This implies net profit of RMB27m for 4Q. We believe urea prices will ease in 4Q after the peak planting season. This will likely drag gross margins down to normal levels of c.13-15%.

Valuation is undemanding. Our TP is unchanged at S$0.40 as we apply a lower target PE multiple of 10.5x vs 12.0x previously against higher FY11/12 EPS. This is in line with -1.5SD from mean, which is justifiable given the current gloomy industry outlook and global economic slowdown. This translates to 1.1x P/BV (-1.0SD). While stock has gone up 13% since our upgrade in mid-Oct, current valuations are attractive at close to GFC trough levels of 0.78x 12-month forward P/BV and 8x PE, offering 33% upside to our TP. Maintain BUY. Key risks remain China XLX’s stretched balance sheet, ASP fluctuations and industry overcapacity concern.

Hi-P - Cuts profit guidance again (DBSV)

FULLY VALUED S$0.585

STI : 2,712.41

Price Target : 12-month S$ 0.44 (Prev S$ 0.45)

Reason for Report : Earnings revision

Potential Catalyst: Strong handset/tablet shipment, higher DPS

DBSV vs Consensus: Profits 30% below street; lower sales & margin assumptions

• 3Q11 profit to decline q-o-q against previous guidance of sequential growth

• 4Q may rebound but insufficient to support FY11 growth; FY11/12F cut by 12%/3%

• Share price has fallen >50% but valuations are not particularly compelling; Maintain Fully Valued

Weaker than expected 3Q11. Hi-P warns that net profit in 3Q11 would be lower than 2Q11, compared to previous guidance of q-o-q growth. Despite higher revenue, wage hikes and relocation expenses are hurting profits as well as a product mix change to one with more assembly work, which boosts revenue but not bottomline. We believe the ramp in assembly is for RIM’s new models. As with all new products and shift in production facilities, these transitions can affect yield and result in margin squeeze.

4Q rebound insufficient to support FY11 growth. Despite the likelihood of higher volume in 4Q11, the rebound is insufficient to offset YTD earnings decline. We therefore cut FY11/12F estimates by 11.7% and 2.6%. FY12 earnings growth is expected to stem from i) more new launches by smartphone /tablet customers; ii) recovery in operating margin post consolidation; and iii) new consumer appliances customers. But, Hi-P’s biggest risk is market share loss in the tablet/smartphone segment, either through a) further market share loss of key customer RIM and/or b) competition from Apple’s new contract manufacturer and its related supply chain. As of now, it appears that Hi-P is maintaining supplies to Apple.

Maintain Fully Valued, TP lowered slightly to S$0.44. Although Hi-P’s stock price has fallen in excess of 50% from its peak in Feb this year, valuation is not exactly compelling at < -1SD PE on FY12 earnings whereas the barometer STI has corrected close to –1.5SD FY12 PE. In view of still uncertain outlook, Hi-P’s share price may not have fully priced in all earnings risks. Hence, we maintain Fully Valued rating on Hi-P with TP of S$0.44 based on 5.5x FY12 PE (- 1SD)