CapitaLand Ltd: Leveraging on China's growth story

Secured RMB25b credit lines from Chinese banks. Earlier this week, CapitaLand (CapLand) announced that it had secured RMB25b (S$5b) of credit lines from two Chinese banks - Bank of China and Industrial and Commercial Bank of China. New credit lines will give CapLand direct access to a significant amount of RMB funding which will help to support CapLand's growing operations in China. As at end 1Q09, assets in China accounted for 28.2% of CapLand's total assets (ex-cash) and with the funding support, CapLand is well-positioned to achieve its targeted 40%-45% of total assets from China. Recent improvement in the China property market could also be sustainable, as backed by China's improving economy, urbanization trend and supportive government policies and CapLand should benefit with its significant exposure in China.

Acquisitions needed for re-rating. While the securing of new credit lines is positive for CapLand's China operations, we believe that CapLand's strong balance sheet and strength in capital management have already been reflected in its share price which is currently trading at a premium to its peers. With credit market thawing, there is now less incentive to hoard cash, which generates low returns to shareholders. We are now looking beyond the strength of CapLand's balance sheet and focusing our attention on the value that CapLand can generate through the deployment of its funds. At current price level, we believe that accretive acquisitions will be the key for re-rating of CapLand's shares.

Maintain HOLD. We have raised our RNAV estimate of CapLand from S$2.95 to S$3.34, on the back of improved valuations of its listed investments and lower discount rate that is in line with the higher risk appetite for equities. While recent buying sentiment in the Singapore property market has improved, we think that it is still early for us to raise our selling price assumptions for CapLand's landbank, which has a significant exposure to the high-end segment, as the bulk of the sales had come from the mass market segment and had also been largely driven by aggressive price cutting by developers. Nevertheless, we are now removing our RNAV discount on CapLand (previously 30% discount), on the back of better outlook for its China operations. As such, our fair value of CapLand has now been raised from S$2.43 to S$3.34. We maintain our HOLD rating on CapLand and will turn buyers of CapLand at price level of S$3.00 to S$3.10.

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