CapitaLand - China business remains under-recognised

Thursday, July 2, 2009

Recent signs include a rebound in residential sales volume, falling city inventories, and a return of consumer confidence. Our China property analyst believes there is limited pricing pressure from the current level and expects positive price creep in the coming months. The recovery in the property sector is also consistent with our China Economist’s view of a housing investment recovery in H209. CapitaLand has a pipeline of 13 projects, which it can expedite to capitalise on this demand.

In addition to the pipeline of residential projects, the group has a China footprint of 58 malls across 40 cities, nine commercial projects, and China-focused private equity funds. At this juncture, we believe the full potential of this business has not been factored into the price. We estimate China comprises about 28% of CapitaLand’s RNAV.

We think there is a strong need for management to source new opportunities to retain the velocity of value growth. We foresee a high probability of deployment of cash towards acquiring distressed assets and we believe it could happen as early as H209. This would signal the asset market trough and would be a re-rating catalyst, in our view.

We lower our 2009 EPS estimate from S$0.23 to 0.13. We raise our price target from S$3.20 to S$4.65. We take a 12-month view and believe positive share price catalysts will emerge, giving the market confidence to trade CapitaLand to our price target.

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