City Developments - Sell: Stock Reflecting Our Best-case Valuation

Raising RNAV to S$7.21, target S$7.57 — We raise our RNAV from S$5.98 to S$7.21 to reflect the higher than expected clearing prices for residential projects. We have raised selling prices by 5-15% depending on the timing of launches. We expect the high-end segment to eventually decline by 10%, as opposed to 20% assumed earlier. We have also raised our office capital value assumption in anticipation of lower cap rates with falling interest rates. We have also valued M&C at a 30% discount to its book, rather than marking it to market previously.

Continued sales at existing launches — With renewed interest in the mid and mass market segment, CityDev has sold 90% of The Arte at an average price of S$910psf. At Livia, the number of units sold has also progressed to about 450 units of the total 724 units.

Impending and possible launches — With strong demand in the mass and lower mid segment, CityDev plans to launch the former Hong Leong Garden in 3Q09 and possibly The Gale in 3Q and Parcel 2 of Pasir Ris in 4Q09. If demand is strong, CityDev would also look to The Quayside at Sentosa and the former Garden Hotel sites

Strong management but stock is not cheap — Although we continue to like CityDev’s good track record and astute management as well as its ability to capture the current strong demand for residential properties, we think there is no upside for the stock given the recent rally. The stock is already reflecting our best-case valuation, which assumes a sustained 20% rise in residential property prices and prime grade A office capital values bottoming at S$1,500psf.

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