CDL Hospitality Trusts - Supply shock threatens hotels

We revise our distributable income forecasts to S$67.9m (-8%) for FY09, attributed to a lower financing cost of 3.2% (50bp lower than we expected), and S$58.1m (+23%) for FY10. We now assume a 25% yoy (from 20%) decline in RevPar in FY09 and 10% yoy decline (from 15%) in FY10. We expect a decline in FY10 RevPar, in view of the strong supply pipeline in 2009-10, which represents 40% of current stock. We estimate tourism arrivals must grow 25% yoy in 2010 and 13% yoy in 2011 for hotels to achieve 80% occupancy; a tall order given a still sluggish global economy. RevPar grew 11% yoy during the 2007 boom period. Our improved FY10 RevPar assumption reflects expectations of higher weekend occupancy rates, which are currently about 70% vs close to 80% on weekdays, as the Integrated Resorts could boost the number of leisure travellers.

CDREIT will be reviewing its dividend payout policy in 2H09, and a decision on whether to reinstate the 100% payout should be reached by year-end. The trust cut the payout to 90% (from 100%) from 3Q08 in order to increase its financial flexibility amid a tight credit environment. According to our channel checks, credit spreads have since declined some 30- 100bp qoq for real estate companies, and therefore this reduction may no longer be necessary.

Our DCF-based target price of S$1.14 (from S$1.00) is derived by discounting CDREIT's distributable income by its cost of equity of 9.1%. Dividend yield is 7.4% for FY09F but drops to 6.3% for FY10F due to our lower RevPar assumptions. Downgrade to Hold (from Buy).

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Ho Bee Investment - Maintain HOLD recommendation

2Q FY2009 results. Ho Bee reported 2Q FY2009 revenue of S$740.8m (+534.2% yoy) and net profit of S$157.3m (+325.6% yoy). It announced an interim dividend of S$0.02 per ordinary share, which was an increase from S$0.01 for the same period last year.

Revenue rose sharply as a result of the progressive recognition of projects that have been substantially sold, namely The Coast and Paradise Island in Sentosa Cove. Net profit increased because of higher revenue partially offset by a write-down of S$109.8m in fair value changes of properties.

Earnings estimates for FY2009F to FY2011F. We expect Ho Bee to report record profit of S$380.3m in FY2009F as it recognizes revenue from most of its projects in Sentose Cove. Following that, it is likely to remain profitable as it recognises profits from the remaining projects. We anticipate profit of S$90.0m and S$33.3m for FY2010F and FY2011F respectively.

Outlook for FY2009F. Ho Bee mentions that it expects to be profitable for the next two quarters this year. Moreover, it has re-launched The Orange Grove and Dakato Residences, and achieved sales of more than 20% each. We expect the strong sales momentum to continue for its residential projects.

Maintain HOLD recommendation, fair value raised from S$0.85 to S$1.17. We maintain our hold recommendation for Ho Bee as the share price has run up sharply in the recent rally and we believe that upside may be limited. Due to the improvement in sentiment in the property market, we raise the fair value from S$0.85 to S$1.17. This is based on a reduction in the discount from 50% to 40% of the RNAV. The RNAV has also been revised from S$1.71 to S$1.95 to reflect the higher than expected selling prices of the residential projects.

Hotel Grand Central: Gains from forex

Once again, its bottlomline performance was boosted by forex gains. Hotel Grand Central (HGC) posted a muted set of results, but its net performance was significantly boosted by strong foreign exchange gains which amounted to S$7.57m in 2Q, bringing half-year gains to a total of S$10.52m, or half of the reported pretax profit of S$23.0m in 1H09. Stripping out these gains, operating profits fell 49% YoY and 18% QoQ to S$4.5m.

Revenue in 2Q09 fell 25% YoY, but was flat QoQ. For 1H09, operating profit plunged 49% to S$10.0m. This was seen from the decline in operating margins which slipped from close to 30% in 1H08 to around 20.7% in 1H09. Acquisition of holiday Inn in Adelaide. This month, the group also announced the purchase of the Holiday Inn at Adelaide for A$34.9m. This comprised of a 181-room hotel located within the Central Business District in Adelaide. Management expects this acquisition to add abut 0.27 cents to its EPS.

Better global prospects, but tourism likely to remain muted. Economic outlook looks better now compared to a quarter ago, and we expect tourism activities to pick up, albeit from a low base. However, with still-cautious consumer demand, we expect the operating environment for hotels to remain challenging. While occupancy rates could possibly edge up in its core markets (Singapore and Australia), room rates have limited potential for upward adjustments. This was similarly reflected in the management's brief statement that "the hotel market conditions in the countries where the group operates in, are not expected to recover in 2009 compared to last year."

Maintain HOLD and fair value estimate of S$0.58. While we are maintaining a decline in FY09 operating profits, we are raising our bottomline estimates to take into account the strong foreign exchange gains seen in 2Q09, which look unlikely to be repeated in the 2H of this year. With this key adjustment, our FY09 net profit has been raised to S$29.6m, up from S$14.4m. However, at the operating level, we expect operating profits to decline 38% YoY to S$19.5m in FY09. We are also maintaining our fair value estimate at S$0.58. After our previous report in May 2009, the stock has moved up 19% to the current price of S$0.635. We see limited price drivers ahead and are maintaining our HOLD rating.

Wing Tai - Greater contribution from Belle Vue Residences in Q4

Wing Tai is announcing its FY09 results on 25 Aug. We are expecting a net profit of $113.3m (excluding potential fair value losses), with contributions coming mainly from Helios Residences, the Riverine by the Park and Belle Vue Residences. We do not expect any writedowns for its residential developments, but Wing Tai may book in some fair value loss on its investment properties.

To-date, Wing Tai has sold 82 of the 176-unit Belle Vue Residences. The bulk of it was sold in Q4, at an average of about $1,800 psf as we expected. The project is already under construction, so Wing Tai will be able to recognize profits from it almost immediately.

Based on the URA’s statistics, 31% of the 373-unit Ascentia Sky has been sold as of July, achieving an ASP of about $1,250 psf - about 13.6% higher than the $1,100 psf we were expecting. Having seen the showsuite, we were quite impressed with the product offering and have raised our ASP assumption to $1,200 psf for the whole development. Contribution from Ascentia Sky is expected to kick-in only from FY10.

In line with its peers, we expect Wing Tai to suffer some fair value loss on its investment properties, probably in the magnitude of a 10%-decline, or about $55m. However, such losses will not affect the underlying cash earnings, which comes predominantly from the residential development business.

The current shareprice implies a Gross Development Value of $1,444 psf for its land bank. We think this still significantly undervalues the landbank, which comprises mainly high-end developments such as the remaining 50% of Helios Residences and the two Ardmore Park sites. Maintain BUY with a target price of $2.05, pegged at a smaller 10%-discount to its FY10 RNAV of $2.28.

Hotel Properties Limited – Hospitality business still challenging

HPL reported a worse-than-expected 2Q09 net profit, which slumped by 72% yoy to $4.4m, despite its revenue declining by a relatively smaller 27%. Not only was the hospitality business affected by the global financial crisis, HPL has to share losses suffered by its associate, mainly due to interest expenses for the Farrer Court site. The effective tax rate was also higher-than- expected.

Due to the global financial crisis, political instability in Thailand and the H1N1 pandemic, HPL’s hospitality business suffered. HPL also owns several luxury resorts, such as the Four Seasons Jimbaran Bay in Bali and the resorts in the Maldives. We believe that they are less resilient in the downturn vis-à-vis hotels, which could still attract corporate clients.

Based on the STB’s statistics, visitor arrivals in Jun declined by 8.9% yoy to 750,000. Competition remains keen amongst hoteliers, with the average RevPar for upscale hotels declining by 31% yoy. HPL’s three hotels in Singapore are the Four Seasons Hotel, the Hilton Hotel and the Concorde Hotel. Outlook for these hotels, which contribute to about 30% of HPL’s topline, could be challenging in the short-term.

Via its stakes in Farrer Court and Gillman Heights, as well as its wholly-owned Beverly Mai, HPL’s future earnings are likely to be boosted by development profits from these projects. The 1000-unit Gillman Heights project could be launched in 2H09, with CapitaLand leading the project. If launched this year, profits are likely to be recognized only next year.

Besides the potential earnings kicker from the residential projects, we are still cautious on the hospitality sector, which is HPL’s core business. We have reduced our FY09-10 forecasts by 28% and 1.6%, respectively. Maintain HOLD at a target price of $2.25, pegged at a 20%-discount to its RNAV of $2.82.

Tat Hong Holdings Ltd: Holding out for inorganic growth

1Q10 performance fell short of expectations. Tat Hong Holdings Ltd's (Tat Hong) 1Q10 results came in below expectations. Revenue slipped 37.2% YoY to S$120.1m and net profit tumbled 63.9% to S$10.6m. Stripping away the impact of non-core items such as forex, core net profit would have fallen by a larger 67.4% to S$8.2m. Sequentially, sales improved by 8.5% but core net profit decreased by 58.6%. No dividends are declared for 1Q. Broad-based revenue decline, with the exception of Tower Crane.

With the exception of the Tower Crane division, all other segments posted weaker revenue. Equipment Sales recorded the steepest fall (-60% YoY) as customers reigned in on capital expenditure in light of the economic crisis. Crane Rental, on the other hand, remained relatively stable with revenue contracting by just 2%. We expect stable rental income to partially offset the steep decline in equipment sales in FY10.
Profit margins contracted. While we had anticipated weaker revenue, the sharp drop in 1Q10 earnings came as a surprise. Although gross profit margin improved by 2.6ppt to 39.4%, operating expenses did not fall as significantly as revenue, and this resulted in a 4.6ppt drop in EBIT margin to 17.1%. Poor results from associates further dragged down its bottom line, with net profit margin contracting by 6.5ppt to 8.8%.

Holding out for inorganic growth. Management continued to paint a cautious outlook for FY10 as weak equipment sales are expected to dull the group's performance. On the bright side, economic stimulus plans may support its rental income. In our view, the environment for organic growth remains highly challenging in the near term. Tat Hong's next phase of growth is more likely to be driven by inorganic growth. Following AIF Capital's recent S$65m strategic investment, Tat Hong is equipped with the financial flexibility to expand via M&As or JVs. In addition, AIF Capital could introduce new growth opportunities that were previously unavailable to the group.

Maintain HOLD. We have cut our FY10 earnings forecast by 20% following Tat Hong's poor 1Q10 showing, bringing our fair value estimate slightly lower to S$1.13 (previously S$1.15). While we note the risk of continued near term earnings pressure, we maintain our HOLD rating on the stock given the enhanced likelihood of inorganic growth following the emergence of a strategic investor, coupled with a relatively decent 3.6% dividend yield.

Soilbuild Group: Better outlook, upgrade to BUY

Results above expectations. Soilbuild Group reported its 2Q09 results that exceeded our expectations. Revenue increased by 10.1% YoY and 49.7% QoQ to S$96.9m, driven by additional revenue recognition from Leonie Parc View, Montebleu, The Centrio, Tuas Lot and maiden contribution from Heritage 9. Recurrent rental income rose 38% YoY with the leasing of newly-completed business space. While PATMI fell by 14.7% YoY to S$19.7m due to higher cost provisions for ongoing projects, it increased marginally by 3% QoQ.

Strong sales achieved in 1H09. As at 31st July, Soilbuild had achieved sales (including Options to Purchase) of S$207m from residential and business space projects. This brings the total sales value to S$638m, of which more than 50% of the amount (S$319m) has yet to be recognized. With the launch of Meier Suites, Soilbuild does not have any landbank left and we take a positive view on this as we think current environment is a good opportunity for developers to lock in revenue visibility and for Soilbuild, it can also realign its focus towards its large-scale business space projects.

Convertible bond overhang removed. At the end of July, Soilbuild successfully repurchased S$42.5m in principal amount of the convertible bonds after the bond holders exercised their put options. Following the repurchase, there will be no outstanding bonds remaining. Even though we had previously said that there is no liquidity concern in the event of an early redemption of the bond, recent cases of companies facing liquidity issues with bond redemptions may have sent a negative signal on companies that carry such instruments. The removal of this overhanging concern could provide a positive catalyst to Soilbuild's share price going forward.

Fair value raised to S$1.36; Upgrade to BUY. Construction schedule for Leonie Parc View was ahead of our expectations and we are now raising our FY09 revenue and PATMI forecasts to S$376m and S$86m respectively. Our RNAV estimate has now been raised to S$1.70 per share (previously S$1.55) to reflect our new selling price assumptions for Heritage 9 (S$1,300 psf) and Meier Suites (S$1,300 psf). With the strong sales of its new projects and repurchase of the bonds, outlook has improved significantly. As such, we are now lowering our RNAV discount from the previous 50% to 20%. Our fair value has now been raised to S$1.36 (previously S$0.77). Valuation remains attractive as Soilbuild is now trading at Price/Book of 0.88x and Price/RNAV of 0.54x. With an upside potential of 47.7%, we are now upgrading Soilbuild from HOLD to BUY.

UOL Group Ltd: 2Q09 within expectations

Operating performance remained within expectations. UOL Group reported losses for 2Q09 due to fair value losses from its investment properties but operating performance remained within expectations. Revenue increased by 2.1% YoY and 8.6% QoQ to S$213.7m and the increase came from revenue recognition of its development projects - Duchess Residences, The Regency at Tiong Bahru and Breeze by the East. Rental revenue from investment properties increased by 16.5% YoY but was flat QoQ. Hotel operations remained weak, with revenue falling by 21.4% YoY and 3% QoQ to S$67.5m in the quarter. Uncertain economic outlook and the outbreak of H1N1 virus affected the travel industry which led to lower occupancy and average room rates in the quarter. Dividend income plunged 39.7% YoY but was due to lower payouts from investment and non-inclusion of dividend income from UIC which has now become an associated company of UOL.

Rising NTA was a pleasant surprise in midst of losses. Fair value losses of S$77m were recognized on UOL's investment properties in 2Q09 and this was compounded by the fair value losses recognized by associated companies - UIC and Marina Centre Holdings. As a result, PATMI plunged into the red in 2Q09 with a loss of S$20.1m. Excluding fair value losses, underlying PATMI would have increased by 28% YoY to S$90m. Despite the losses in 2Q09, UOL's NTA per share rose by 2.3% QoQ to S$4.88 as the increase in the market value of its available-for-sale financial assets (not recognized on income statement) more than offset the decline in its asset value.

Fair value raised to S$4.07; upgrade to BUY. Our RNAV estimate of UOL has now been raised to S$4.44 per share (previously S$4.11), driven by the increase in share prices of UOB, UIC and Pan Pacific Hotels. The market value of UOL's holdings in these entities had risen by 12.5% since our last report on 15th July. In line with our recent adjustment of valuation discount rates on property developers, we have now lowered the discount rate on our valuation of UOL's development profit and investment properties, from the previous 30% to 20%. As such, our fair value of UOL now stands at S$4.07 (previously S$3.56). Valuation remains attractive as UOL is currently trading at Price/NTA of 0.7x and Price/RNAV of 0.77x. With an upside potential of 18.9%, we are now upgrading UOL from HOLD to BUY.

Ascendas REIT - Rasing funds through private placement

Embark on equity fund raising. Ascendas REIT (A-REIT) has launched a private placement of 185m new units at between S$1.63 to S$1.70 per unit, or 3.8% to 7.8% discount to volume-weighted average price on 7 Aug 09. The equity fund raising is expected to raise gross proceeds of S$301.6m, which will be used in the following manner:

S$175.4m will be used to fund the development of the hi-tech built-to-suit facility for SingTel

S$120.6m will be used to fund potential acquisition of income-producing properties and built-to-suit development opportunities in the pipeline the balance to be used for general corporate and working capital purposes

The book building process starts today and is expected to be completed by 12 Aug 09. Gearing is expected to be reduced from 35.7% as at 9 Aug 09 to 29.3% after the completion of the private placement. There will be an advanced distribution based on distributable income from 1 Jul 09 to the day before new units are issued.

Improved financial flexibility. A-REIT will redeem Commercial Mortgage Backed Securities (CMBS) of €144.0m (about S$300m) to be completed by 19 Aug 09. The CMBS is secured by the cash flows and mortgage on 17 properties. 14 out of the 17 properties worth about S$944m will be released from the security. Financial flexibility is enhanced with A-REIT having 30 unencumbered properties worth about S$1,868.5m.

Yanlord Land - Landbanking at the right price

2Q09 results post little surprise. Yanlord announced 2Q09 net profit of S$91.6mil, in line with our expectations. Net margin post LAT remains high at 41% on our estimates with ASP for 1H09 at RMB23,531 psm, thanks to the contribution from Yanlord Riverside City. Given most of the FY09 earnings have been locked in, we see more emphasis on the group's forward development and strategic planning.

Landbanking is the key catalyst, in our view. Post recent fundraising, we estimate that the company has about S$1.8B 'war-chest' that could be potentially deployed for landbank replenishment and land acquisition in key cities would be the key catalyst to propel a further re-rating of the stock. Assuming Yanlord was to be able to acquire at 30% gross margin (minimum targeted return), the full deployment of the existing capital would add another S$0.25/share to our RNAV estimates.

Management emphasizing prudence. With land prices having run up significantly in China, management indicated that they have sufficient landbank to sustain their growth in the near term and would be rather rational in making the acquisition decisions. Given most of Yanlord's major launches are done for the year, we believe that the stock is likely to be range bound in the near term.

We retain our Neutral rating on Yanlord, with our Jun-2010 price target unchanged at S$2.80/share, on par with our RNAV estimates. Key risks to our rating and price target include a substantial increase in ASP achieved and a quicker-than-expected deployment of the 'war-chest'. A key downside risk would be potential measures from the government.

MacarthurCook Industrial REIT - downgrade from Hold to Sell.

Gross revenue was lower in 1Q10 mainly because of a refund of service charges to tenants. Service charge is a reimbursable item by tenant and does not affect the actual revenue. Underlying rental revenue from tenants remains stable with portfolio occupancy rate of 98.64%. Net property income stays fairly constant, but distributable income has fallen since 4Q09 because of a claim for industrial building allowance and also higher interest cost in 1Q10. In FY09, MIREIT had maintained a quarterly payout of 2.35 cents for the first three quarters while any retained income was distributed in 4Q09. For 1Q10, it is paying out 100% of the distributable income. However distributable margin has fallen from 0.5 in 1Q09 to 0.36 in 1Q10 due to the reasons mentioned above.

The REIT manager wrote down the asset value of its Japan property by 9.5% and subsequently portfolio value decreased from $530.3 million at 31st March 2009 to $526.4 million at 30 June 2009. The current gearing is 41.8% with total debt of $225 million that is due in Dec 2009.

We keep our revenue forecasts as we believe the portfolio is able to maintain its occupancy. However we factor in the decreased in distributable income arising from the claim for industrial building allowance which results in a downward revision of our FY10F DPU forecast by 30% to 5.82 cents. We raised the weighted average cost of capital (WACC) in our DCF model from 9.8% to 10.6%. Our fair value is thus lowered from $0.39 to $0.26. The impending refinancing need still poses a big certainty to us. We downgrade our recommendation from Hold to Sell.

Hongkong Land - Time for a breather

Without any surprises in the results, plus the fact that Hongkong Land's earnings are backward-looking, we do not expect any impact on share price.

We have raised full-year earnings by 8% on the assumption that more units will be sold and booked at One Central Macau given the improved market conditions, and reflecting the good prices fetched by The Sail at Victoria.

Capital values for offices in Central have come down only 2% ytd, while rents have fallen 36%, an anomaly caused by excess liquidity. Such discrepancy is not sustainable in the long run. We expect office value to fall 15% from the current level before bottoming out, caused partly by another 5% softening in rents, resulting in our appraised NAV of US$4.90. Our fair price is based on the recent peak valuation of a 15% discount to NAV.

Upside risk? If office capital values stabilise at the current level, using Hongkong Land’s US$5.92 appraised asset value as at Jun 09, fair price will rise to US$5.03.

All Green - More positive guidance

In line. 2Q09 core net profit of S$22m forms 25% and 23% of our FY09 forecast and consensus respectively. 1H09 core net profit of S$39m accounts for 45% of our full-year number.

More positive guidance on strong property sales. Revenue for the quarter grew 14% yoy to S$85m as presale proceeds from its recent property launch began to stream in. The group has been relentless in capitalising on much-improved sentiment, launching One Devonshire (ASP S$1,770psf) in June and more recently, Viva at Suffolk Walk (ASP S$1,550psf). Demand for these projects has been robust, with 148 of the 152 units launched and 162 of the 235 units launched sold respectively. Management guides for a much better 2H09 vs. 2H08.

Hotels remained weak. Hotel occupancy and room rates continued to drop. We believe occupancy at its Traders Hotel may have fallen to 60-70% currently.

Balance sheet and cash flow. Net gearing was stable at 0.45x as a lower cash balance was offset by the recognition of presale proceeds. Operating cash flow in 2Q09 turned positive. Allgreen also paid a further S$20m to its JV companies in Chengdu and Shenyang for its stake in the China projects developed with Kerry Properties. Allgreen is likely to pay a further S$130m-150m in equity, with the remaining S$500m-600m development capex secured through debt.

More launches to sustain momentum; maintain Outperform. We adjust our FY09-11 core EPS estimates by -21% to +12% on changes to our recognition schedule. We raise our end-CY10 RNAV and target price from S$1.32 to S$1.38 on higher-than-expected ASPs achieved for Viva. Allgreen has a strong pipeline of mass-mid-tier inventory ready for launch. We believe Holland Residences and RV Residences could be released to good take-up in 2H09. The stock remains our top mid-cap pick in the sector. Maintain Outperform.

Singapore Land - Hospitality business continues to be weak

Due to a net fair value loss on investment properties to the tune of $395.7m, SingLand posted a net loss of$344.7m in 2Q09. However, core operating net profit was in-line with expectations, growing 16% yoy as aresult of positive rental reversion and cost management. No interim dividend was declared.

SingLand suffered a total fair value loss of $492.1m on its investment properties versus six months ago(11%-decline). Such fair value loss is rather academic, as SingLand’s business model seldom involvestrading of the investment properties. SingLand’s businesses are cashflow generative, and on a sequentialbasis, SingLand’s gross revenue from its investment properties remained flat.

The revenue from Pan Pacific Hotel Singapore slumped by 33% yoy due to lower room rates andoccupancy rates, as well as lower F&B revenue. Similarly, associated earnings from Marina Mandarin andMandarin Oriental hotels are also lower. It is also in-line with the overall weak tourism sector, as well as theH1N1 pandemic concerns.

We have lowered our estimated breakeven cost for the Trizon to $1,280 psf, due to lower expectedconstruction costs. However, despite the resurgence of strength in the private property market, we believethat a realistic ASP for the project would be around $1,200 psf, implying that SingLand may still make lossof about $30m from the project.

Both the office and hospitality sectors are likely to remain muted in the near-term, before recovering. At thecurrent price, valuations are not compelling. We are maintaining our HOLD recommendation, with a targetprice of $5.57 at a 30%-discount to its RNAV.

BBR Holdings - Steady results

PATMI decreased 12.1% to S$1.8m in 2Q09 ? The Group's revenue decreased by 41.3% to S$53.8m in 2Q09, mainly due to substantial completion of a few key construction projects in 2Q09.

Order book stood at S$292m at 7th Aug 2009 ? The Group clinched a 26 months contract amounting to S$77.7m to build the Singapore Island Country Club's ("SICC") main clubhouse at Island Club Road, bringing the Group's year-to-date order book of civil engineering and building projects to S$292m as at 11 May 2009.

Share of results of associates of S$3.6m recognized in 1H09 ? In line with expectations ? Mainly attributable to the Group's share of profits recognized from the development project at No. 8 Nassim Hill. We believe the development project is on track to meet our expected completion of 65% by end of FY09.

Maintain Hold; Target price raised to S$0.065 ? We raise our FY09F & FY10F earnings forecast by 9.5% and 3.0% respectively, adjusting for the new contract clinched and higher GPM achieved. We continue to use sum-of-the-parts valuation methodology to value its property development and construction business. We increased the valuation of the Group's unsold development projects, namely Nassim Hill & Holland Hill to reflect the current rise in property prices and value construction business at 3x FY09F construction earnings. Our target price is increased to S$0.065 after removing discount factor to SOTP valuation.

Ascendas REIT - Private placement to raise S$301.6m

Seeking S$301.6m through private placement. The manager of AREIT is proposing the issuance of 185m units to institutional and other investors at S$1.63-1.70 apiece to raise gross proceeds of at least S$301.6m. The price range represents a discount of 3.8-7.8% to the volume weighted average price of S$1.7674 per unit for full-day trades on 7 Aug 09. The placement is being managed and underwritten by Cazenove and DBS. Assuming approval from the SGX, the new units are expected to trade from 20 Aug 09.

Proceeds to fund SingTel BTS and potential acquisitions/BTS. Proceeds from the private placement will be used to: 1) fund the development of a build-to-suit (BTS) facility for SingTel (about S$175.4m; 58% of gross proceeds) announced in May this year; and 2) fund potential acquisitions and/or build-to-suit opportunities (S$120.6m; 40% of gross proceeds); and 3) general corporate and working-capital purposes, and expenses incurred for the placement.
Asset leverage pared below 30%. Assuming the placement is fully taken up and net proceeds are fully utilised to cut debt, asset leverage will decline to 29.3% from 35.7%. This should give AREIT more financial flexibility to acquire or develop build-to-suit properties when opportunities arise.

Share base diluted by 11%; DPU diluted by 10%. Upon completion and assuming no other changes, AREIT’s share base of 1,685m units will expand by 11%, and DPU for FY10 will fall 10%. Dilution for FY11-12 is less severe at 3-4% as contributions from SingTel BTS and other development projects kick in.

Acquisitions look probable, once more. With an expanded share base, dividend yield at 7% makes acquisitions more probable, as physical property yields of industrial assets remain high at 7-8% and SIBOR remains low at under 1%.

SingTel BTS in a nutshell. AREIT is developing a 9-storey hi-tech industrial building at Kim Chuan Road for SingTel. The total estimated development cost is S$175.4m, which includes construction and land costs, and the installation of mechanical and electrical equipment. The completed building will be leased to SingTel for an initial 20 years with annual rental escalations and an option to renew for a further 10 years on expiry. Completion of the building is expected in Apr 2010. Management expects an average net yield of 11% from the facility in the 20-year lease period.
Increased contributions and less severe expense assumptions. We account for dilution and add in potential contributions from SingTel BTS from FY2011. We also assume that S$120.6m of the proceeds will be used to acquire properties. Separately, we increase our net property income margin assumptions to 75% from 73% in view of strong cost-control initiatives in the last few quarters; and decrease our cost-of-debt assumptions to 4.3% from 4.7% as we believe lower asset leverage after the placement and continued low interest rates will result in a less demanding cost of debt for AREIT. Following our changes, our DPU estimates fall 8% for FY10 but rise 3-5% for FY11-12. Our DDM-based target price rises to S$1.74 from S$1.70 (discount rate of 8.4%).

Maintain Neutral with higher target price of S$1.74 (from S$1.70). Although the equity issuance did not come totally as a surprise, we were disappointed that no firm acquisitions or development works were announced in tandem.

As one of the market leaders in the SREIT space, we expect AREIT’s speedy move to capture ready equity to be followed by a second round of equity fund-raising by REITs to further strengthen their balance sheets in preparation for a sharp devaluation of asset values at year-end and uncertainties in capital markets.

AREIT is trading above its book value at 1.1x and offers a 7% dividend yield. While yields still look relatively attractive, we believe there are cheaper alternatives among the REITs while the outlook for the industrial sector has yet to turn sunny. Maintain Neutral.

Parkway Life REIT has no short term refinancing concern

The growth in revenue comes mainly from the contribution of Japanese properties that were acquired in 3Q08 and also the annual revision of rental from the Singapore hospitals that took effect from August 2008. It can be seen that from 4Q08 onwards, revenue and DPU were fairly stable. The REIT manager further announced that the Singapore hospitals rental is set to increase by 4.36% beginning 23 August 2009. Revenue is also expected to get a boost from the increase in rental of the P-Life Matsudo property following completion of an asset enhancement initiative (AEI) to maximize plot ratio.

Plife REIT has no short term refinancing concern with a gearing of 22.7%. Total debt is $242 million with $34 million coming due in 2nd half 2010 and the rest in 2011. Plife has in place a $500 million multicurrency MTM programme as well as a newly secured $50 million Islamic revolving credit facility.

Being exposed to the relatively stable healthcare sector, Plife REIT has shown resiliency in the recession. The inflation linked revenue model ensures revenue is downside protected. We revised up our revenue forecast to factor in the growth from the annual revision of the Singapore hospitals and from the Matsudo property. Our FY09F DPU remains unchanged at 7.59 cents while FY10F DPU rises from 7.56 cents to 7.71 cents. Fair value revised upward from $1.19 to $1.21.

Ascendas REIT: Mild dilution; sturdier balance sheet

Private placement to raise S$302m. A-REIT has announced a private placement for 185m new units at an issue price between S$1.63 and S$1.70 per unit to raise at least S$301.6m. The issue price range represents a 4% to 8% discount to VWAP on 7 Aug 09. Price target of S$1.72 remains, but stock downgraded to NEUTRAL (from BUY) given recent price rise. Our DDM-backed fair value is based on a cost-of-equity of 8.7% and 1.5% terminal growth rate.

58% of proceeds to fund SingTel BTS. A-REIT plans to utilize S$175.4m of the gross proceeds to fund the development of the hi-tech built-to-suit facility for SingTel. In May 09, A-REIT secured from SingTel the purchase of a site at Kim Chuan Road for the development of a 9-storey Built-To- Suit (BTS) hi-tech industrial building. SingTel will lease the entire property for an initial tenure of 20 years with annual rental escalation and an option to renew for another 10 years. The project is slated for completion in 1QCY10. Total development cost (incl. land cost, construction cost, electrical and mechanical enhancements) is S$175.4m, implying S$496/sqft for the 353,727 sqft GFA site. The remaining S$120.6m or 40% will be used partly or wholly fund potential acquisition of income-producing properties and built-to-suit development opportunities in the pipeline.

Mild DPU dilution but sturdier balance sheet with leverage below 30%. Pending the deployment of the net proceeds (totaling S$296m) to repay debt facilities, A-REIT’s gearing is expected to decline from S$1.64b to S$1.35b, resulting in the decline in leverage to 29.3% from 35.7%. We estimate annual interest expense savings of S$11m (~3.75% interest cost) on the back of a 10.9% increase in new units. The overall ramification from the placement works out to be mildly DPU dilutive of 0.3% to 5.6% between FY10-13. Stock currently trades at FY10 yields of 7.5%. We advise investors not to accumulate at current levels.

Parkway Life - Steadily Improving

PLife is one of a handful reits / business trusts to report a useful y-o-y increase in DPU: +13.9% to 1.89 cents from 1.66 cents a year ago, albeit unchanged from Q1. On an annualized basis, which is being conservative given the adjustment to revenue from the 3 Singapore hospitals for the next 12 months from Aug 23 rd , the yield is still an attractive 7%.

(The minimum guaranteed rent form Mt Elizabeth, Gleneagles and East Shore is set to increase by 4.6%, albeit lower than 6.25% for the current 12 months to Aug 22nd, following the 3.36% CPI in the past 12 months. The 3 Singapore hospitals presently account for 80% of total revenue of PLife.)

Gearing remains among the lowest at 22%, ie to reach 40%, debt headroom is $308 mln. (PLife was one of the few smart enough to make good use of the initial low gearing to make acquisitions in Japan via borrowings, specifically P-Life Matsudo for S$35 mln in May ’08, and at which it has just completed the first round of asset enhancement initiatives , converting a utility space to device manufacturing room for sub-lessee Inverness Medical Japan, at a cost of S$2.56 mln.)

We maintain BUY.

City Development - Weaker hotels offset by strong presales

In line. 2Q09 core net profit of S$128m forms 27% and 26% of our FY09 forecast and consensus respectively. 1H09 core net profit of S$211m forms 44% of our fullyear number. While property presales were strong, we believe accretion from recent presold projects such as Volari and the Gale have yet to be booked.

Strong property presales. 2Q09 revenue inched up 1% yoy to S$787m. Property presales continued to drive the topline with The Arte (98% sold) and Livia (more than 80% sold) released in 1H09. This segment’s revenue grew 56% yoy to S$343m in 2Q09. The momentum is likely to be sustained by Volari, The Gale and potential new launches in the Hong Leong Gardens site, The Quayside isle and the former Albany site at Thomson in 2H09.

Offset by weaker hotels. A blemish was the hotel segment (M&C). Revenue and PBT fell 25% and 60% yoy to S$365m and S$25m respectively in the quarter, as RevPAR fell globally and the sterling pound weakened. We believe the results could have been worse if not for cost-saving measures. However, management is starting to see stability in Singapore, New York and London. The decline in the sterling pound is also starting to ease. M&C continues to trade at a trough P/BV of 0.5x.

Balance sheet and cash flow. Net gearing remained relatively low at 0.45x, still based on cost accounting of its investment properties. Operating cash flow stayed in positive territory and is expected to remain so on impending presales. In 2Q09, CityDev paid out S$190m for its share of convertible notes subscription to finance the development of South Beach. Management remains positive on the project. No impairments were made for development in the quarter.
Maintain Outperform. We retain our FY09-11 EPS and RNAV estimates for now. Our target price, still based on a 20% premium to RNAV, is kept at S$11.76. This set of results continues to highlight the group’s balance-sheet strength even as other developers aggressively mark down their asset values this season. We maintain our Outperform rating.

Bukit Sembawang Estates - Verdure, Luxus yet to contribute

1Q FY10 PATMI of S$1.4mn (-84% y-y, -102% q-q) meets 73% of our full-year forecast of S$1.9mn. The variance to our forecast is, in our view, principally on account of the treatment of property development-related other operating expenses and interest costs - 1Q FY10 other operating expenses of S$0.2mn and interest costs of S$0.7mn meet just 3% and 4% of our full-year forecasts. The firm has suspended the capitalisation of these expenses for deferred projects and we have taken this into account in our forecast – for instance, 1Q FY10 cash interest paid of S$4.67mn meets 25.9% of our FY10F interest expense forecast of S$18mn and is in line with our expectation, despite the P&L discrepancy.

While 1Q FY10 revenue of S$6.4mn (-72% y-y, +32% q-q) meets just 12% of our full-year forecast of S$54.3mn, we expect the sales of Verdure and Luxus Hills Phase 1 to be recognised in subsequent quarters this FY and help full-year numbers meet our forecast. In addition, we are likely to raise our forecast to reflect better-than-expected sales at the two projects. As at end-June, Verdure had 69 out of the total 75 units sold, vs the 62 units inputted in our model. In essence, only the six strata villas in the project remained unsold. We understand that Luxus Hills Phase 1, which was launched in July, already has 75 out of the total 78 units sold, vs the 70 units assumed in our model. Further, the achieved selling prices were apparently higher than our assumption of S$544psf of build-up area, at circa S$583-683psf.

While the management gave a conservative guidance (“management remains cautious during this expansionary period”), we think some projects could be brought forward to capitalise on the current window of opportunity. Potential candidates include cluster housing project Watercove Ville and Luxus Hills Phase 2, which could provide further upside to our estimates.

KSH Holdings: Earnings dilution from warrants conversion

KSH’s 1QFY10 revenue was weaker on a YoY basis due to the timing of completed of projects. Moving forward, as the existing projects move into the later stages of construction, we expect sequential top and bottom line growth to gain momentum on the back of resilient orders. But the positives are watered down by the dilutive impact of its warrants conversion. Maintain NEUTRAL with target price of S$0.33.

Projects’ completion affected 1QFY10 revenue. Revenue was down 29.6% YoY on the back of completion of four projects which more than offset the increase in revenue from on-going projects. These include Tampines 1, Forte, Platinum 28 and The Coast at Sentosa Cove. However, construction’s gross margin improved from 7.6% in 1QFY09 to 12.2% in 1QFY10, attributable to cost control management. Consequently, PATMI was up 16.4% YoY from S$2.4m to S$2.7m.

Healthy order books provide some visibility... KSH’s order books stand at S$439m as at Jun 09, of which a significant proportion would be carried out in FY10. According to Building and Construction Authority’s (BCA) forecasts, public sector’s construction demand is expected to make up at least 60% of total forecasted construction demand of S$18-24b. While the public sector is driving construction demand currently, things may be looking up for private sector construction demand. URA Statistics indicate that developers sold 1,825 units of new homes in Jun, up from 1,673 units in May, with a monthly take-up rate surpassing the high of 1,731 units recorded in Aug 07.

... but EPS will be diluted. We understand from management that they have been busy recently tendering for projects (~S$750m in 1QFY10), with approximately 70% of the tender projects coming from the private sector. This is in line with the current pick up in private sector sentiment that has been reported in the media recently. While we have kept our earnings unchanged, we have now conservatively assumed full conversion of the warrants in FY10 (versus 33% previously) as only 38% of the warrants issued in April are outstanding. KSH’s construction peers are trading at 8.3x current year P/E. Ascribing a P/E multiple of 8x FY10 earnings, we arrive at a target price of S$0.33 (S$0.29 previously). Maintain NEUTRAL.

Singapore Land: Core earnings in line

Operational earnings in line with estimates. Singland reported a 2Q09 net loss of $344.7m due to a $492.1m devaluation haircut (-9%) from its investment properties. As a result, book NAV declined to $8.59/share. Excluding this, core earnings would have grown by 16% yoy to $51m thanks to higher rental and associate income, which more than offset lower hotel and carpark contributions.

Office rentals still reverting positively. Rental revenue continued to improve yoy to $63.6m as current rents are still above preceeding levels while lower operating expenses provided another bottomline-boosting impact. This more than made up for lower hotel contributions, -33.1% yoy to $20.6m, largely from Pan Pacific Singapore, which was adversely affected by lower Revpar and F&B revenue. Associate income also enjoyed the impact of progressive billings from ongoing projects such as One Amber and Sixth Avenue Residences, which offset the income vacuum from Marina Mandarin and Mandarin Oriental Hotels.

The office segment appears to have stabilized, with a moderation in decline of rental rates. However, outlook remains uncertain due to the large incoming supply. The recovery in the residential segment would enable the group to generate positive returns from its Himiko Court enbloc parcel, with an estimated breakeven cost of $1200-1300psf while the anticipated recovery in the hospitality industry should lead to positive Revpar growth.

Approximately 80% of Singland’s RNAV is derived from office assets. Singland’s share price appears to have priced in the deflation in office market, at an implied c$1100psf of office space. However, near term catalyst remains lacking. Our target price of $5.01 is premised on a 30% discount to RNAV of $7.16, in line with its long-term average discount to asset backing.

Hongkong Land - Expect further re-rating on potential bottoming of Hong Kong office rents

Rental reversion was in line: Hongkong Land (HKL) posted 16% Y/Y growth in core net profit to US$281 million, up 16% Y/Y. The results were 15% below our estimates and were at the mid-range of consensus. Core EPS rose 19% Y/Y to US$0.125. The lower earnings were due to lower-than-expected development earnings originating from MCL Land, while positive rental reversion of 25% Y/Y and 7% H/H in 1H09 was in line with estimates. The board proposed an interim dividend of US$0.06, same as 1H08. HKL’s self appraised NAV (adjusted for deferred tax) was US$5.64/sh, down 5% from end Dec-08 levels (US$5.92/sh).

Office market is getting better: We are more bullish on the office market as rental decline is decelerating and rents beat our expectation, while capital value has recovered from the 1Q09 lows due to substantial cap rate compression. We upgrade our Dec-09 NAV by 38% to US$6.1 based on office and retail cap rates of 4.5% and 5.25%, respectively, and expect rental to stabilize from now though upside is capped by the spaces to be surrendered from upcoming relocations.

Upgrade to OW, Jun-10 PT US$4.6: The stock is trading at 0.7x end Jun-09 P/BV and 35% discount to NAV. This compared to 0.7-0.8x P/BV when office rental was on the rising trend, and 27% long-term mean NAV discount. We expect the stock’s NAV discount to revert to the long-term average as we believe there are clearer signs of office rental bottoming out. We thus set our Jun-10 PT at US$4.6 based on 25% discount to Dec-09/10 NAV, which translates into 0.77x end FY09E P/BV. Given the 16% upside potential, we upgrade the rating of the stock from Neutral to Overweight. Major risks to PT are weaker-than-expected office/retail demand and hence rental rates, delay of economic recovery as well as interest rate risks and hence cap rate fluctuations.

Keppel Land - positive on the housing market

Mgmt is positive on the housing market and plans to launch Madison (56 units) and The Promont (15 units) soon. Comparable prices are ~ S $1,700psf and S$2,000psf respectively. The 168 units in Caribbean @ Keppel Bay currently held for investment could also be released for sale this year. Recent resale transactions at $1,100-1,200psf implies gross rental yield of ~5%. Mgmt is likely to time the launch of Marina Bay Suites and the later phase of Reflections closer to the opening date of the 2 IRs.

There are signs of increasing leasing activity in the S'pore office market . Mgmt comments that no tenants have given up pre-committed space thus far and believes that the worst of rental declines could be over and the market could be approaching the trough. Current carrying cost of BFC & OFC is conservative due to low land cost and could see a revaluation surplus at year end.

In offshore markets, trends continue to be positive. In China, sales have picked up strongly with ~1,020 units sold in 2Q (vs 420 in 1Q). While prices were initially trimmed ~5% on 1Q, they have been raised again to pre-2009 levels and mgmt believes they are on track to sell around 2,000 units this year. In Vietnam, it has sold 50 units in Estella with prices maintained at US $2,000-2,200psm. Mgmt plans to accelerate launches in China, Vietnam and other markets (2,194 planned units).

Balance sheet has been significantly strengthened post rights-issue with gearing at a conservative 0.23x. Mgmt is comfortable gearing up to 0.5x which gives them around S$1bn of acquisition firepower. Mgmt is actively looking to replenish its landbank, focusing mainly in S'pore and in China, especially in cities where it has existing operations.

Fraser Commercial Trust - Revenue in 2Q09 came off 17.9% from a year ago

Fraser Commercial Trust (FCOT) reported results for 2Q09. FCOT recorded gross revenue of $22.7 million (-17.9% yoy, -5.4% qoq), net property income of $17.7 million (-18.0% yoy, -5.2% qoq) and distributable income of $5.6 million (-67.6% yoy, +2.8% qoq). DPU for the quarter is 0.73 cents (-69.6% yoy, flat qoq). FCOT will be paying out a 1H09 DPU of 1.44 cents.

Portfolio performance. Revenue in 2Q09 came off 17.9% from a year ago. We can also observe the trend of revenue. It can be observed that much of the decline came from the Australian properties. From 1Q08, Australia contribution dropped 24.7%, Singapore contribution dropped 17.8% and Japan contribution dropped 14.5%. The main reasons for the dismal performance from Australia were due to the termination of income support of Central Park in 3Q08 and also the unfavorable foreign exchange movement of the AUD. For Singapore, contribution was affected in 2Q09 due to the cessation of income support of Key Point in 2Q09. Japan contribution was affected in 2Q09 because of underperformance of Cosmo Plaza. Revenue contribution by percentage for 2Q09 is 42.8% (Singapore), 40.6% (Australia) and 16.6% (Japan).
After the recapitalization, gearing will be reduced to 38.5%. NAV per share is diluted to approximately $0.26. $179 million from the rights issue will be used to repay existing debt. The remaining balance of debt will be refinanced with two new facilities for a further 3 years. Total debt after refinancing is approximately $804 million.

Valuation and recommendation. The recapitalization exercise has shown the commitment of a strong sponsor backing FCOT in rebuilding its balance sheet. We expect to see a stabilization of revenue from the portfolio. The addition of Alexandra Technopark, which is under a master lease, will provide a stable rental income to FCOT. Together will China Square Central, gross rental income under master leases is approximately 38%. We revise our assumptions to account for the recapitalization and also make changes to our revenue forecasts. We forecast FY09F DPU to be 2.3 cents and following full dilution in FY10F, DPU falls to 1.2 cents. We believe the transformation of FCOT undertaken by the management will take time to crystallize.

The first phase of transformation is now completed. The second phase would be the rebalancing of the investment portfolio and we think the management team has the experience and expertise to execute their stated strategy. Our post-rights fair value is $0.125. At the previous day closing price of $0.195, we think market has not factor in the dilution due to the rights units. Maintain sell recommendation.

CapitaLand - Net loss of S$114mil from revaluation and impairment

CapitaLand Ltd (CapLand) reported 1HFY09 revenue of S$1.1bil, meeting 42% of our previous FY09F forecast. It was 26% lower YoY due to lower residential sales in Australia and Singapore, lacklustre serviced residences takings and foregone rental of divested commercial properties in 2008. Residential sales would have been lower if not for higher sales in China and Vietnam. 1,163 units were sold in China during 1HFY09, exceeding 782 homes for whole of FY08.

CapLand suffered a net loss of S$114mil for 1HFY09, a reverse from S$763mil in 1HFY08. Net losses from revaluation and impairment totaled S$285mil. It turns out better than our estimates due to booking of S$358mil revaluation gain on ION Orchard. ION Orchard is valued at S$3,800 psf. Char Yong Gardens site has also been written down by S$49mil against our estimates of S$70mil. Excluding revaluation and impairment losses, CapLand would have made S$171mil profit for 1HFY09. Due to timing of recognition for development projects, CapLand is expected to recognise substantial profit contribution from The Seafront on Meyer and The Orchard Residences in 2HFY09F.

CapLand is likely to launch two projects in 2H 2009, in our opinion. The first being 64-unit Urban Resort Condominium (URC) with its showflat situated adjoining 127-unit Latitude’s showflat along River Valley Road. Looking into latest caveats lodged of neigbouring projects, Cairnhill Crest and The Light @ Cairnhill, they were transacted at average selling price (ASP) of S$1,736 psf and S$1,642 in June and July 2009 respectively. We believe URC may be priced around S$2,100 psf, 20% premium over the above five-years old projects. The second is the proposed development of 1,000 lifestyle apartments at the former Gillman Heights Condominium site in Alexandra. CapLand has a 50% stake in the 99-LH project and a low estimated breakeven cost of S$650 psf. With keen interest surfacing in nearby Redhill vicinity, the project should command ASP of S$1,000 psf, in our opinion.

Selling of Latitude has also resumed after a one year break. It was relaunched at S$1,650 psf with an estimated 24% take-up rate. Competition is expected to be stiff with projects within River Valley vicinity such as The Cosmopolitan going for S$1,380 psf.

An estimated 5.4mil sq ft of retail space is expected to surface within 2009F - 10F in Singapore. Approximately 30% or 1.7mil sq ft of retail space will be added to Orchard Road. Recently, two newly opened malls - Orchard Central and ION Orchard have reported healthy occupancy rates of 80% and 96% respectively. ION Orchard is a joint venture between CapLand and Hong Kong’s Sun Hung Kai Properties. It was better than expected as we had previously forecast only 85% occupancy rate for ION Orchard.

Net gearing stands at 0.43x with S$4.2bil cash as of 1HFY09. We think CapLand may embark on aggressive acquisition with its focus on four key markets, China, Singapore, Vietnam and Australia. It has also guided for an acceptable gearing level of 0.5x - 0.75x, last seen in FY04. However, retail assets recycling in China is unlikely to happen soon, taking close to six years to build and stabilize malls which it had first embarked in 2005.

We are revising our forecast taking into account management guidance of 10% - 15% price increase for China residential properties. n Our revised RNAV estimate stands at S$4.65/share. Using a 20% discount to our RNAV estimate, we have obtained a fair value of S$3.72/share. Share price is currently trading at S$3.99/share, 7% above our fair value. We maintain our HOLD rating.

Suntec REIT - has no near term refinancing concern

Suntec REIT reported gross revenue for 2QFY09 of $64.5 million (+8.9% y-o-y, flat q-o-q)), net property income was $48.7 million(+6.2% y-o-y, flat q-o-q). Distributable income was $47.7 million(+13.5% y-o-y, +2.9% q-o-q). DPU for the quarter was 2.977 cents (+6.3% y-o-y, +2.0% q-o-q).

Office portfolio reversionary rent continues to show a downward trend. It has fallen 38.9% from a year ago at $13.50 to 8.24. Occupancy of the office portfolio has also been sliding down from 1Q08 at 99.8% to 94.8% in 2Q09. These reflect the office sector is still reeling from the effects of recession. The retail portfolio is more resilient with occupancy maintaining above 98%. The office portfolio accounts for 47% of total revenue while the retail portfolio contributes 53%.

As previously announced, Suntec has no near term refinancing concern. It has successfully secure $825 million of term loan in April 2009. The next loan maturity is in 2011 with loan amount of $532.5 million. The current gearing is 34%.

Valuation & recommendation. We believe that demand for office space will take time to pick up following the nation’s exit from recession in the last quarter. We make no changes to our assumptions and have a FY09F DPU forecast of 10.05 cents which translates to a dividend yield of 9.5%. Fair value remains unchanged at $0.94 and retain our Hold recommendation.

CRCT - An uninspiring 2Q09 result

CRCT reported 2Q09 distribution income of S$12m, 1.94 S cents DPU; +14.2% YoY, -9.7% QoQ. Including S$0.8m retained for payout later in the year, distribution income was S$12.8m, S$2m ahead of our estimates. We maintain Underperform with a slightly higher target price of S$0.48.

2Q09 NPI slightly below estimates: Net property income was S$19.4m, S$1.4m or 6.7% below our estimates, due to higher-than-expected property expenses. The distribution income was ahead of our estimates as interest expense was S$3.3m lower, due to interest savings from the cross-currency interest rate swap in respect of its S$88m 2-year term loan facility.

Leasing conditions challenging, rent reversions flat: Portfolio occupancy dipped 1.0ppt QoQ to 95.7%. Challenging leasing conditions in Beijing led to lower occupancy at Xizhimen Mall (-0.3ppt to 95.4%) and Wangjing Mall (-1ppt to 98.8%). Saihan Mall’s occupancy (-10.5% ppt QoQ to 86.2%) was impacted by extensive asset enhancement activity, which would be completed by end 2009. In balancing rentals and maintaining occupancy, rent reversions were flat at -0.3% over preceding rentals. Xizhimen Mall registered negative reversions of 6.5% but this was mitigated by Xinwu Mall’s strongly positive 38.9% reversions.

Mild decline in property valuations, gearing stable: The mid-year portfolio revaluation saw a 4.6% (or S$57m) decline in property values from the December 2008 valuation of S$1.25bn. In Rmb terms, the valuation was marginally lower by 0.9%. Gearing was stable at 33.6% with a healthy interest cover of 7.3x and an average cost of debt of 2.3%.

Acquisitions now possible but still challenging: Share price action over the past 3 months lowered CRCT’s trading yield from more than 10% to 7%, making accretive acquisitions a possibility. However, the lack of third-party assets at reasonable prices could mean CRCT might have to wait on potential dispositions from CapitaLand’s private equity funds, which may not happen in the near term, as most of the malls are greenfield and require time to stabilise. Earnings and target price revision

We raise our DPU forecast for FY09 by 6% and for FY10 by 8%, factoring in interest savings from the cross-currency interest rate swap in respect of its S$88m 2-year term loan facility. We thus lift our target price slightly to S$0.48 from S$0.45.

12-month price target: S$0.48 based on a DCF methodology. Maintain Underperform. We prefer SREITs with higher yields, such as AREIT (9.0% yield; AREIT SP, S$1.68, OP, TP: S$1.85, upside: 10%) and CapitaCommercial Trust (7.9% yield; CCT SP, S$0.89, OP, TP: S$1.08, upside: 21%).

Pan Hong Property Group - Higher earnings visibility

We believe the operating environment and developers’ fundamentals, including earnings and cash flows, have improved considerably, thanks to the government’s supportive role.

As domestic developers have resumed land acquisitions at more aggressive pricing over the past few months, concerns are mounting over rising land costs and developers’ cash flows. However, we believe Pan Hong is well-positioned to capture growing demand for private housing, particularly in second/third-tier cities in China, where land cost increases still trail the larger developed cities.

Higher earnings visibility in 2010-11. Pan Hong’s earnings visibility is much improved, thanks to record sales in Jan-June and revenue deferred from FY08-09.

In fact, most developers we track have bagged 47.7-97.2% of our estimated revenue for FY09 and 5.5-35.2% of our FY10 revenue. Higher earnings visibility and stronger-than-expected sales may lead to more earnings upgrades in the following months and underpin developers’ share-price performances.

In line with Hong Kong-listed peers, we expect developers’ RNAV discounts to narrow. We now tag a 10% RNAV premium to first-tier China property developers, instead of parity earlier. We also reduce RNAV discounts from 20% to 10% for second-tier developers and from 50% to 25% for smaller developers.

Stock price has rallied from its low in Mar 09, but investors’ interest has yet to wane, lifted by the current euphoria in the sector.

We ascribe a 25% RNAV (S$0.82/share) discount for the stock, leading to a target price of S$0.61. Our above-consensus RNAV reflects: 1) our revised price assumptions; 2) our revised completion schedule; and 3) a lower discount rate. We resume coverage of Pan Hong with a BUY recommendation.

Frasers Centrepoint Trust - Positive Surprise in 4QFY09

Results in-line with consensus — FCT reported DPU of 1.94 cents in 3QFY09. In addition to the 3.53 cents paid in 1HFY09, 9MFY09 DPU amounted to 5.47 cents. This is about 75% of consensus estimates and 68% of our estimates. However, we think the Street is neglecting the impact of the NPI contribution from Northpoint AEI.

Positive surprise in 4QFY09 — The AEI for Northpoint (NP) was completed as of Jun-09 but will only be fully operational by Jul/Aug this year. Management has conservatively guided that the NPI for the quarter will be about $4.5m. For 3QFY09, reported occupancy for NP rose just 3%pts qoq (72% to 75%), but NPI rose 35% qoq. As at Jun-09, 97% of NP is leased or under advanced stages of negotiation. In addition, 4QFY09 has seasonally been the strongest, as it coincides with the Great Singapore Sale. FCT has also progressively added a GTO component to most of its leases.

Issued $75m notes — In Jun-09, FCT has issued $75m 4.8% fixed rate notes due in 2012 under its MTN programme. Some $22.5m short-term loans were refinanced during the quarter with the proceeds, with the remainder used to pay down the $57.5m outstanding in 4QFY09. Gearing ratio rose to 32.7% as at end-Jun but will revert back to below 30% post the repayment in 4Q.

Maintain Buy — We maintain our above consensus estimates for FY09E and view that 4QFY09 could surprise the Street on the upside. We like its exposure to the resilient suburban malls. At current price, FCT still offers yields of over 8%, higher than CapitaMall Trust.

Suntec REIT: No surprises

2Q09 DPU at 2.98cts. Suntec reported a set of in line results with revenue rising 9% yoy to $64.5m but marginally down qoq. NPI remained relatively flat qoq at $48.8m while distributable income came in 2.8% higher to $47.7m. Annualised yield works out to be 11.2%. No revaluation was done for the quarter.

Office more of the same. As expected, average office renewal rents dipped to $8.24psf/mth vs $9.90psf/mth in Q1 but still resulted in positive rental reversions. Office portfolio occupancy dipped to 95% in Q2 and is expected to stabilize at this level for the rest of this year. The retail component remained relatively flat. Looking ahead, office rents is expected to continue to dip, but at a smaller pace. Current asking rents is still at about $8psf.mth. The group has a remaining 4.5% of NLA to be renewed in FY09 and another 26% in FY10. To improve connectivity from the upcoming opening of the Circle Line station at Suntec Mall, some minor enhancement works are planned over the next few months but capex should remain small.

Maintain Buy. Suntec's valuations are undemanding at FY09 and FY10 DPU yield of 10.1% and 8.3% and P/bk NAV of 0.53x. Suntec's balance sheet is healthy at 33.9% gearing and no refinancing needs till 2011. Maintain Buy with revised TP of $1.18.

Ascendas REIT - Raising funds through private placement

Embark on equity fund raising. Ascendas REIT (A-REIT) has launched a private placement of 185m new units at S$1.63 to S$1.70 per unit, or 3.8% to 7.8% discount to the volume-weighted average price on 7 Aug 09. This is the second private placement this year. The equity fund raising exercise is expected to raise gross proceeds of S$301.6m, which will be used in the following manner:

• S$175.4m will be used to fund the development of the hi-tech built-to-suit facility for Singapore Telecommunications (SingTel),
• S$120.6m will be used to fund potential acquisition of income-producing properties and built-to-suit development opportunities in the pipeline, and
• Balance to be used for general corporate and working capital purposes.

The book building process started yesterday and is expected to be completed by 12 Aug 09. Gearing will be reduced from 35.7% to 29.3% after completion of the private placement. There will be an advanced distribution based on distributable income from 1 Jul 09 to the day before the new units are issued.

Improved financial flexibility. A-REIT will redeem Commercial Mortgage Backed Securities (CMBS) of €144.0m (about S$300m) to be completed by 19 Aug 09. The CMBS is secured by the cash flows and mortgages on 17 properties. Fourteen of the 17 properties worth about S$944m will be released from the security. Financial flexibility is enhanced with A-REIT having 30 unencumbered properties worth S$1,868.5m.

Developing built-to-suit facility for SingTel. A-REIT will develop a ninestorey hi-tech industrial building with a gross floor area of 353,600sf at Kim Chuan Road at a cost of S$175.4m. SingTel will lease the completed building for an initial tenure of 20 years with annual rental escalation and an option to renew for another 10 years on expiry. The building is expected to be completed and operational in 2Q10.

We have cut DPU forecast for FY11 by 6.7% to 11.2 cents. We have also factored in contributions from the built-to-suit facility for SingTel starting 1QFY11.

Downgrade to HOLD. Share price has gained 29.4% ytd. Upside is limited after factoring in dilution from the private placement. Our fair price of S$1.81 is based on the dividend discount model (required rate of return: 7.7%; growth: 2.5%).

Pan Hong - Recovering property sector sweetened by new acquisition

Recovering property sector sweetened by new acquisition, reiterate BUY. We met up with Pan Hong Property Group’s (Pan Hong) CEO to discuss its strategy ahead and recent acquisition of a warehousing facility in Shanghai’s strategic petrochemical port. Management is now seeing more concrete signs of recovery and improved buying sentiments in several lower tier cities, best evidenced by its 256 units sold in 52 days. Aside from business diversification, management is looking at the recent acquisition as an additional stream of recurring income. Looking forward, management intends to focus its business on lower tier cities and increase recurring income streams. At present, its landbank remains massive at 2.4m sqm across five cities, which should ensure healthy medium-long term profits. Balance sheet remains strong with net gearing of 0.17x. Our new fair value of S$0.50 (S$0.43 previously) assumes new achieved prices for Hua Cui Ting Yuan, pegged at a lower 20% (30% previously) discount to RNAV due to more concrete signs of a recovering property sector.

New acquisition to boost recurring income. Pan Hong recently paid RMB 47.5m to a government agency for the acquisition of a 226,102 sqm site, which would be used to develop warehousing facilities for the storage of ~ 1.5m tons of petroleum and petrochemical products. Strategically located at the Dushan Port area (Zhejiang province, Pinghu city), the site is connected to Jinshan Port – Shanghai’s biggest oil and petrochemicals port. China’s oil reserves base, the Shell Group as well as other major global petrochemical companies are located in this port zone. Other Chinese enterprises, i.e. Hua Chen Energy Co. and China Aviation Oil Petrochemicals Storage and Transportation Co. are also situated within the vicinity. At RMB 210 psm, we believe Pan Hong has again demonstrated its ability to secure prized assets at comparatively attractive costs. Aside from business diversification, management is looking at the proposed warehousing facilities as an additional stream of recurring income. While execution risks are present given Pan Hong’s lack of expertise in this area, we believe these could be mitigated should it secure a partner with relevant expertise.

53% take-up and higher-than-expected transacted price for new project. 16 out of the 30 launched units in Jun 09 were sold for Hua Cui Ting Yuan (HCT) Phase 1 (Zhejiang province, Huzhou city), which consists of 184 units. Achieved average price was RMB 8,180 psm, representing a 33% hike over initial forecasted prices of ~ RMB 6,000 psm. Nonetheless, a healthy take-up of 53% should not only pave the way for a reasonable take-up for remaining units and Phase 2, but also instill confidence into Pan Hong’s strategy of replicating HCT’s townhouse concept in other suburban projects, from our view. Buyers comprised of Hong Kongers and Chinese, who were attracted by the project’s integration of Chinese culture into architectural villas, as well as the potential of nearby Taihu Lake resort.

Another 240 units sold in 52 days. Over the last two months, Pan Hong successfully sold another 240 units from three existing projects, including 220 from Phase 2 of Nanchang Honggu Kaixuan. More importantly, selling prices were largely unchanged since the projects’ initial launch from 3QFY08 to 5QFY09, which we deduce is to avoid dampening the buying sentiments amid a recovering property market.

Focus remains on lower tier cities. Looking ahead, management intends to focus its property development business on lower tier cities in Southeastern China, where it has successfully built up strong brand equity over the past 20 years and offers better opportunities for acquisition of land at lower cost. Targeted buyer profile remains genuine owner-occupiers. Additionally, to increase Pan Hong’s recurring income, management is actively fine-tuning its asset portfolio to increase exposure to investment properties, which consist of an existing 18,139 sqm of commercial properties, on top of another 64,465 sqm in the pipeline.

Cambridge Industrial Trust - 2Q09 results - Above expectations

DPU above expectation. 2Q09 results are in line with consensus forecast but 6% above our expectation. Distribution of S$10.7m (-13.8% yoy) and DPU of 1.35cts (-13.8% yoy) form 31% of our FY09 forecasts. 1H09 DPU of 2.64cts represents 60% of our full-year forecast. The yoy decrease in distribution can be traced to higher management fees paid in cash and higher borrowing costs. Net property income of S$16m was flat (-0.3% qoq), while portfolio occupancy was stable at 99.5% (+0.3% pt qoq) as at Jun 09.

Assets devalued by 9%. In 2Q09, the manager commissioned a full valuation of CREIT’s assets, with a 9% fall in asset value to S$880.3m. This was mainly due to higher cap rates and lower rents used by the valuers. After the valuation, asset leverage rose to 43.8% from 39.9%, while NAV/unit decreased to S$0.62 from S$0.73cts. Management anticipates flat valuation by the end of the year.

Private placement of S$28m diluted DPU by 8%. On 27 Jul, management announced a private placement of 71.1m units to raise gross proceeds of S$28m. This represented 9% of the units in issue as at 31 Dec 08. Assuming no other changes, DPU would be diluted by 8%. About 23% of the privately placed units will go to its sponsors NAB (19%) and Oxley (4%). Units issued to NAB and Oxley will be priced at S$ 0.399/unit, based on the adjusted volume-weighted average price (VWAP) of units for the full market day on 24 Jul 09. Units issued to other investors will be priced at S$0.392, a 5% discount to VWAP.

Changes to our estimates. We reduce our rental decline assumptions for CREIT in FY09 to -2% (from -5%), in view of the stable performance in 1H09. Additionally, we adjust the number of units to factor in the private placement, and add back the amortised loan transaction cost to distributable income. The net result for our FY09-11 DPU forecasts is an upgrade of 12-18%.

Maintain Outperform; higher target price of S$0.52 (from S$0.48). Our target price rises in tandem with our increased DPU forecasts to S$0.52 (from S$0.48), still based on DDM-valuation (discount rate 9.4%). We maintain our Outperform rating given its shareprice upside potential and forward yields of 12%.

ParkwayLife REIT: 2Q briefing highlights

Earnings highlights. ParkwayLife REIT (PLIFE) posted S$30.2m in 1H09 net property income, up 32.1% YoY. 1H DPU increased 15.1% YoY to 3.78 S cents. For 2Q09, NPI was up 27.9% YoY to nearly S$15m while DPU rose 13.7% YoY to 1.89 S cents. The manager says at least 96.0% of PLIFE's total portfolio has downside revenue protection.

Uplift from rent review & completed AEI. PLIFE has secured a minimum rent review of +4.36% for Singapore hospital properties (CPI + 1%) for 23rd Aug 2009 to 22ndAug 2010. All else equal, this translates to an uplift of at least 3.5% for the total portfolio according to the manager. PLIFE has completed its maiden asset enhancement initiative on a Japanese asset. It spent roughly S$2.56m on the works, which are expected to add 0.042 S cents to overall DPU.

Growth plans. After the manager's reorganization, PLIFE says it has a renewed focus on asset management and investments. It expects to launch more AEI projects and is already in discussions with operators. PLIFE says it has a new "clustering" approach to investments. The manager wants to build scale and depth in one or two countries rather than haphazardly investing everywhere at the same time. Four core target markets currently are: Singapore, Malaysia, Japan and Australia.

Debt. PLIFE is currently geared at 22.7% debt-to-assets. Its long-term target gearing is 40% but in the current environment, it says it is comfortable gearing up to 35% at most. PLIFE has secured a S$50m three year revolving Islamic credit facility from Islamic Bank of Asia. The amount is small but this is a way "for them to get to know us and our assets better". The facility is a 'back-up' in case the S$34m loan due in 2H 2010 is unable to be refinanced. If the refi is successful, these funds would be used towards building a war chest for opportunistic acquisitions. The credit market seems to have improved and the manager says it is getting several reverse enquiries. The cost of the new S$50m facility is at "sub 200 basis points" (margin only) versus existing loans priced at +160 basis points.

Keppel Land - signs of increasing leasing activity

Mgmt is positive on the housing market and plans to launch Madison (56 units) and The Promont (15 units) soon. Comparable prices are ~ S $1,700psf and S$2,000psf respectively. The 168 units in Caribbean @ Keppel Bay currently held for investment could also be released for sale this year. Recent resale transactions at $1,100-1,200psf implies gross rental yield of ~5%. Mgmt is likely to time the launch of Marina Bay Suites and the later phase of Reflections closer to the opening date of the 2 IRs.

There are signs of increasing leasing activity in the S'pore office market . Mgmt comments that no tenants have given up pre-committed space thus far and believes that the worst of rental declines could be over and the market could be approaching the trough. Current carrying cost of BFC & OFC is conservative due to low land cost and could see a revaluation surplus at year end.

In offshore markets, trends continue to be positive. In China, sales have picked up strongly with ~1,020 units sold in 2Q (vs 420 in 1Q). While prices were initially trimmed ~5% on 1Q, they have been raised again to pre-2009 levels and mgmt believes they are on track to sell around 2,000 units this year. In Vietnam, it has sold 50 units in Estella with prices maintained at US $2,000-2,200psm. Mgmt plans to accelerate launches in China, Vietnam and other markets (2,194 planned units).

Balance sheet has been significantly strengthened post rights-issue with gearing at a conservative 0.23x. Mgmt is comfortable gearing up to 0.5x which gives them around S$1bn of acquisition firepower. Mgmt is actively looking to replenish its landbank, focusing mainly in S'pore and in China, especially in cities where it has existing operations.

Ascott REIT – Travellers are returning to Singapore

ART declared 2Q09 DPU of 1.79 cts, bringing 1H09 DPU to 3.55 cts, a 21% decline yoy. Annualized DPU is above our forecast by 4.4%. There was qoq pick-up in revenue and distributable income in 2Q09, thereby mitigating the yoy decline of 1H09 numbers. Hospitality industry showed signs of stabilizing and the management expects a stronger 2H09.

The Singapore and China markets were main contributors to the yoy dip in revenue. However, profitability across the portfolio was maintained. Beijing and Shanghai properties in 1H09 were negatively impacted by travel restrictions due to China communist party’s 60th anniversary. Tianjin was the only bright spot (occupancy ~70%). Vietnam, Philippines and Japan continued its growth.

With its marketing efforts, the management expects the average occupancy rate to increase to 80% by year-end from the current high-60%. However, business travellers are signing up for shorter length of stay of 1-3 mths, and ART sees heightened competition due to the presence of newer serviced residences (SR) for guests to choose from.

Renovations will be done at its Singapore apartments over the next two years, estimated at S$20-30m (debt-funded), with a payback period of 3-4 years. Higher discount rates by valuer led to S$60m writedown mainly for its Japan and China assets. NAV/unit declined to $1.36 from $1.51, bringing its gearing up to 41%. Near term acquisitions seem more unlikely.

The management re-emphasized its preference for refinancing its loans over a rights issue. With our forecasts largely unchanged, prospective DPU yield of 7.2% is not enticing. However, we still like ART’s solid brand and large acquisition pipeline in the longer term. We are downgrading ART to HOLD in view of its spectacular surge in share price recently (+85% ytd). The ex-date for its DPU is on 29-Jul, and payment date is on 28 Aug.

Frasers Centrepoint Trust - suburban mall resilience continues to shine

FCT reported 3Q FY09 DPU of 1.94 cts (+3% YoY, +4% QoQ), bringing 9M09 DPU to 5.47 cts, in line with our and consensus’ full-year forecast of 7.3-7.6 cts. With AEI at Northpoint completing, we expect more contribution in 4Q FY09.

Suburban mall resilience continues to shine as: 1) FCT achieved 14% rental reversion over preceding rents on renewals; mainly from CWP; 2) revenues increased 2% YoY to S$21.2 mn and NPI margins improved on cost control; 3) occupancy remains steady at 93% despite ongoing AEI at Northpoint, 4) occupancy costs remain healthy at 14-16%, well within market benchmarks.

Recently-issued MTN should bring gearing to below 30% and push out refinancing needs till July 2011. Acquisition growth from sponsor’s strong pipeline could be a medium-term catalyst.

We have fine tuned our FY09-11 DPU forecasts by -1-0% to adjust for slower Northpoint AEI completion but better margins. We raise DDM-based target price to S$1.18 (from S$0.77) on lower cost of equity. Trading at 0.8x book of S$1.23, and 7.5% DPU yields.

CapitaRetail China Trust - Only a matter of time

CapitaRetail China Trust (CRCT) announced its 2Q FY09 results on 23 July. The distribution-per-unit (DPU) of 1.94¢ for the quarter (up 13.9% YoY) was 2.4% above our estimate.

On the possibility of acquisitions, CEO Wee Hui Kan told us that his team monitored the market constantly. He gave us no firm indication of an acquisition, but said that after the recent unit-price recovery, acquisitions would certainly be more feasible now (compared with six months ago). The management also noted that the credit markets (onshore and offshore) had improved.

2Q FY09 net-property income (NPI) was 1% below our estimate, due almost entirely to the depreciation of the Renminbi against the Singapore dollar (compared with 1Q FY09). A much lower-than-expected finance cost was the positive swing factor for the bottom-line, as the average cost of debt declined to 2.3% from 2.9% for 1Q FY09.

Our six-month target-price, based on our RNG valuation method, of S$1.32, is unchanged. We have revised down our core-operating distribution forecast for FY10, and have adjusted down our (long-term) cost-of-debt assumption to 4.2% (from 4.5%). The target-price to June 2009 NAV (of S$1.16) would be 1.14x.

We have revised down our DPU forecasts by 2.7% for FY09, 2.9% for FY10, and 2.5% for FY11, after fine-tuning our NPI forecasts for each of the assets.

We maintain our 2 (Outperform) rating, and believe a DPU-accretive acquisition announcement (within the next six months) would trigger unit-price outperformance, especially if the equity and credit markets continue their recovery in 2H09.

KepLand - Strong residential property sales boost 2Q09

2Q09 within expectations. KepLand’s 2Q09 PATMI rose 10.4% YoY, helped by strong residential sales. While 1H09 PATMI of S$95.1m accounted for 53.0% of consensus estimates, it formed 40.9% of DMG’s FY09 projections. Nonetheless, we expect 2H09 to account for a higher proportion of FY09F earnings, on the back of recovering property sectors in Singapore and China. Looking ahead, we expect land acquisitions in Singapore, while its good blend of township and mid-high projects in China should ensure steady profits. Management is also seeing stabilising signs within the office sector and increased leasing enquiries for MBFC. Recent rights issue has improved KepLand’s net gearing to 0.23x, making it the best-capitalized blue-chip developer. We have an unchanged target price of S$2.98, pegged at parity to base case end-FY10 RNAV. Although KepLand is a BUY (17.3% price upside), our top pick is CityDev (S$9.49 TP: S$12.00).

Solid residential sales boost 2Q09. KepLand posted a 10.4% YoY rise (+57.7% QoQ) in 2Q09 PATMI to S$58.2m, chiefly due to a 68.3% YoY (+60.6% QoQ) surge in Property Trading’s contribution, which resulted from solid sales of local and foreign residential projects (i.e. The Tresor, Park Infinia and The Botanica), as well as progressive recognition of projects such as Marina Bay Residences, Reflections and Sixth Avenue Residences. Helped by K-REIT’s improved profits, higher renewal rates from Ocean Towers and Equity Plaza, PATMI from Property Investment jumped 33.2% YoY (+4.3% QoQ).

Rosy residential sales in China, a key platform looking ahead. Over 1,440 homes were sold in 1H09 (420 units in 1Q09), assisted largely by Central Park City and The Botanica, which attained monthly sales of 100 units for the past few months. We believe the strong take-up for these two township projects should inject optimism into KepLand’s recent 55% stake in a 36.8 ha site within Tianjin Eco-City. Equipped with 2.97m sqm of saleable area, which spans a good blend of affordable township projects and mid-high end properties, KepLand should continue to benefit from China’s improving property sector and rising urbanization.

Tat Hong - Preference Share Issuance Is A Positive

Reiterate Buy — We view the CRPS issuance positively: 1) provides additional capital to embark on a more aggressive M&A strategy in China and Australia, leveraging on TAT’s M&A execution capability; 2) good record of AIF Capital identifying value and growth in its investment commitments; 3) terms of the agreement suggests AIF Capital’s shareholding commitment is not short term.

Details — TAT is raising net proceeds of S$63.5mn from the issuance of 65mn Convertible Redeemable Preference Shares at S$1.00 each to AIF Capital. ~80% of the proceeds will be used for expansion of its Australian and China businesses. The agreement is structured such that the net impact to ordinary shareholders is quite similar to that of undertaking a private placement, but without the requirement of mark-to-market accounting by TAT or AIF.

Background — AIF Capital is an independent private equity firm headquartered in HK, and oversees a broad-based investment portfolio. Established in 1994, AIF has received investor commitments for its funds, including co-investment, in excess of US$1.5bn. While performances of its private equity investments are unavailable, its investments in Singapore-listed companies suggest a good record in identifying value and growth investments.

Impact – We factor in 11.4% EPS dilution for TAT resulting from the CRPS issuance, ceteris paribus. Our TP is unchanged despite our lower EPS est. as we raise our FY10E PE multiple from ~10x to ~11x (above the historical average PE since 2001), justified by more aggressive M&A strategy. Assuming all CRPS are converted, management will still control TAT with a 51% majority.

K-REIT Asia - Sell: Outlook Remains Challenging

Reported 2Q DPU of 2.64 cents — Together with the 1Q DPU of 2.38 cents, 1H09 DPU amounted to 5.0 cents and was some 12% higher than our and consensus estimates on an annualized basis. Despite revenue rising just 18.2% yoy and 4% qoq, NPI managed to register a commendable improvement of 34% yoy and 14% qoq on the back of lower expenses. In particular, 1H09 marketing expenses were some $0.4m lower than 1H08.

Occupancy showing signs of stabilizing — While portfolio occupancy continues to fall on a quarterly basis (from 95.8% to 94.4%), it appears to be stabilizing. Both Prudential Tower and Bugis Junction saw their occupancy unchanged from a quarter earlier, while ORQ remains fully occupied. Only Keppel and GE Towers reported a fall in occupancy (from 95.9% to 93.3%).

Revise estimates by 2-5% — We revise our DPU estimates by 2-5% on betterthan-expected results and lower property expenses. Our TP is raised slightly to 55 cents. However, we expect 2H09 to remain challenging.

Sell: Cautious on office sector — According to Jones Lang LaSalle, as at 2Q09, pre-commitments for future supply are as follows – 10E: New Construction: 2.2m sq ft, 51% pre-committed; 11E: New Construction: 2.3m sq ft, only 1% pre-committed. JLL estimates some 0.8m sq ft of shadow space, including precommitted space in the market. With passing rentals currently at $8.13psf, we expect negative reversion to hit in 2010, where 20% of the space leased will expire. We expect prime grade A rentals to drop to $5psf. YTD’09, the stock has also outperformed the REITs sector by 15%.

Fortune Real Estate Investment Trust - Steady operational performance, waiting for liquidity discount to narrow

1H09 results largely in line with expectations: Fortune REIT announced a 1H09 DPU of HK$0.196, up 5.9% Y/Y, and just 1.1% below our estimate. Gearing was a healthy 25.7%. Despite the tough environment, rental income remained fairly stable in Fortune REIT’s portfolio. Investment properties were revalued up by 3.5%, mainly on cap-rate compression of around 50bp (cap rates at 5.25-6%).

We turn slightly optimistic about the retail rental market outlook: With early signs of stabilization in the retail market, and a slightly better economic outlook for 2010, we now only assume a 6% decline in FY09 spot rents and a 3% recovery in FY10 (compared to -10% in FY09 and 0% in FY10). As a result, we tweak our DPU forecast by -1% for FY09 to account for higher maintenance costs alongside some renovation projects, while we raise our FY10 DPU forecast by 6%. Our NPV also increases by 22.5% as a result of the higher DPU estimates, higher longterm growth rate (from 0.1% to 0.2%) assumption, and lower discount rate (from 7.72% to 6.95%) assumption.

Valuation still looks appealing: The stock is still trading at a clean yield of 8.3% for FY09E-FY11E, which is still high relative to other Hong Kong REITs which are trading at an average clean yield of 5.6%. We believe there is room for further re-rating of the stock in the current low-interest-rate environment. The yield spread between Fortune REIT and 10-year HK Exchange Fund notes is wide at 680bp versus its longterm average of 384bp since its listing in 2003. We believe the liquidity discount on Fortune REIT should gradually narrow.

Maintain OW, raise our Dec-09 PT to HK$4.9: We increase our Dec-09 PT by 22.5% to HK$4.9, on par with our DDM-based NPV estimate. We used a discount rate of 6.95% and a long-term growth rate of 0.2%. Risks to our PT include sharper-than-expected rental declines, higherthan-expected vacancy rates, and a prolonged economic recession.

Suntec REIT: Acquires 20% of Suntec Convention for S$25m through JV

ARA Asset Management had acquired the Suntec International Convention & Exhibition Centre for S$235m from Suntec City Development Pte Ltd (independent valuation: S$240m). Suntec Convention has approximately 1m square feet of floor space spread over six levels. The investment will be owned through the ARA Harmony Fund. The buy is targeted for completion by 3Q09, upon which ARA will be appointed as the asset manager and convention & exhibition service provider. Suntec REIT will own a 20% stake in the Harmony Fund, while the rest will be held by private investors. Suntec's contribution is S$25m, funded through external borrowings, which is equivalent to just 0.5% of the REIT's total assets. The transaction jibes with Suntec's approach of increasing its ownership of the Suntec complex, as seen in previous strata office space buys. The transaction itself is small but could help support DPU through a rough reversion cycle. Potential strategic and synergistic benefits also exist. In a Business Times interview, ARA CEO John Lim said Suntec couldn't purchase the entire centre "at the moment [as] the convention centre is an operating business [and] the REIT cannot buy an operating business because the income fluctuates". We believe this implies intentions of hiving off the asset to Suntec at a later date as the business matures. Maintain HOLD and S$1.00 fair value.

Stamford Land - 1Q10 results in line

Revenue in 1Q10 withdrew 10.2% YoY to S$54.4m due mainly to lower occupancy rates and exchange rates. As stated in our previous report, we believe that impact of global economic crisis and on-going H1N1 virus concerns will continue to plague hotel occupancy of Stamford Land. The top-line result is much in line with our adjusted forecast since FY09.

However, overall operating expenses were better contained in 1Q10 as management implemented tighter cost controls including reduction of manpower. This resulted in a stronger operating profit margin of 9.2% on a QoQ basis (a loss in 4Q09), but still way below the higher 16.9% in 1Q09.

On a QoQ basis, we reckoned an improvement in Stamford Land’s property development and investment business segment. Operating profit from this business turned black as the 14 apartments unloaded at The Stamford Residences Auckland in 1Q10 helped lift some profit.

Given also much lesser deferred tax charge in 1Q10, Stamford Land managed to be profitable again in 1Q10 as compared to 4Q09, recognizing S$3.2m net profit VS a loss of S$6.8m in 4Q09.
1) Occupancy rate will continue to be under strong pressure;
2) ASP for The Stamford Residences Auckland (< 50% sold) will maintain only at near breakeven pricing in the shortterm;
3) Main contributing catalyst, The Stamford Residences & Reynell Terraces in Sydney (> 80% sold), will only be recognized in FY11 and FY12 upon completion;

Considering the above factors, we maintain our RNAV forecast of S$0.67. An illiquidity discount of 50% fixed our target price at S$0.34. Should liquidity of the stock be better, we believe that Stamford Land could potentially be a highly undervalued stock. Maintain HOLD with target price of S$0.34.

CapitaLand - Australand announces asset write-downs and 7-for-10 rights issue; CAPL results preview

Australand Monday announced 1H09 net loss of A$268.8 mn, after writing down A$235 mn at its investment properties and A$93 mn development and JV inventory impairments.

Simultaneously, Australand announced a 7-for-10 non- renounceable rights issue of stapled securities in Australand to raise a fully underwritten A$475 mn. This is at an issue price of A$0.40 (S$0.47) per new stapled security, representing a 20% discount to the closing price on 24 July 2009.

Capitaland has cash hoard of S$5.5 bn and net gearing of 32%. This is more than enough for CAPL to subscribe to its entitlement at ALZ.

With most of its listed entities/REITs results out last week and Monday, we expect CAPL's 2Q09 and 1H09 results to be a net loss as most of its listed entities recorded write-downs. We believe investors should look beyond the accounting technicalities and recommend accumulating on dips. Maintain OUTPERFORM on a target price of S$4.21, based on parity on RNAV.

CSC Holdings: Solid Foundation

CSC Holdings, Singapore’s largest piling contractor, have seen better days. Its order book currently stands at S$110m, which appears to be anaemic compared to a record S$448m during the mega infrastructure boom in 2007. But things seem to be turning around, as the taps for government contracts are being turned on. We estimate orders to more than double by FY11, which should set the stage for a re-rating of the stock. Moreover, its valuation, at 9.1x FY10 P/E, is attractive compared to its historical average of 16.6x. Initiate with BUY.

Major contracts in the offing. We expect CSC to bag some S$213.5m in piling contracts for at least three major projects, namely the MRT Downtown Line II, Marina Coastal Expressway and the Singapore Sports Hub by FY11. In addition to the public projects, there are many residential projects slated to be offered in the coming two years, a result of a massive number of en-bloc sales done in 2007. Many projects were delayed in 2008 due to the tepid economy, but the recent buying frenzy has prompted developers to launch their projects, opening up opportunities for CSC.

High probability of project wins due to size, expertise. We believe that CSC has a better shot at winning the bids, given that it is the region’s largest foundation player with a fleet size that is twice that of its nearest competitor in Singapore. It is also the only domestic player to offer the complete range of piling solutions. These give it the advantage of being able to target projects that are more complex, which typically commands higher margins.

Initiate with a BUY. We believe that the inflow of the government’s mega projects would create an upswing in earnings momentum for CSC from 2010. Thus, we have ascribed a P/E of 12x FY11 earnings, the level it was trading at in 2005 just before its earnings recovery. This works out to a target price of S$0.29. Initiate coverage on CSC with a BUY rating.

Tat Hong - Investment in Sino-foreign Joint-Venture

Taking of 53.8% stake in joint venture (JV). One day after Tat Hong’s announcement of AIF’s S$65m investment, the Company announced the formation of a JV with Yong Mao and Mr Yuan Zheng. Mr Yuan’s company, Guangzhou Hailin Resource, manages around 113 mid– to largesize tower cranes and is a well-regarded player in the southern and south-western provinces with various awards under its belt.

Mutually-beneficial arrangement for all parties. For Tat Hong, the opening up of the prosperous southern PRC market by partnering with an experienced hand excites us. Mr Yuan will inject relevant assets comprising tower cranes (valued at about RMB90m) and finance leases into the JV for a 30% stake. He benefits with Tat Hong’s injection of nearly RMB70m of fresh funds in 2 tranches into a bigger entity and the possibility of further expansion if the venture takes off. The third partner, Yong Mao, holds a 16.2% stake and is the exclusive tower crane supplier to the JV.

Adequate supervision through Board of Directors and Supervisory Committee. Following the establishment of the JV, the Company will have 3 directors on the Board and 1 member to the supervisory committee .

Big market in China. The JV increases Tat Hong’s tower crane fleet, which stands at 262 units as at 31 Mar 09, by nearly 50%. Even with this enhanced fleet, we expect them to be just a blip amidst strong demand for tower cranes from infrastructure and power sector projects in China. A financially-strong venture with established and well-connected people paving the way gets a healthy share of the rapidly expanding pie.

We raise our FV to S$1.39 and recommend to ACCUMULATE. Since yesterday’s announcement, we have been waiting for the trigger to revise our fair value upwards. We believe the JV is that trigger. Tat Hong did not achieve major headway in China for the past one year without a strong local partner and, from our chats with Management, we could feel they were still feeling their way around then. The JV potentially marks the start of the next phase in the Company’s venture into the huge China market. Furthermore, their investment in the JV of about S$15m is a small proportion of the S$50m the Company stated they would spend on expansion from AIF’s investment, suggesting perhaps more initiatives to come. In view of the above, we increase our growth assumption for the tower crane segment and overall gross margins to reflect a changing product mix that is more focused on the rental business. We arrive at a FV of S$1.39 vs our previous FV of S$1.07 and recommend investors to ACCUMULATE.

CDL Hospitality Trusts - above expectations

CDL Hospitality Trusts reported income available for distribution of S$17.4mn for 2Q09 (-31.5% yoy), bringing the income available for distribution in 1H09 to S$35.5m (-26.8% yoy) or 4.25 cents per unit. The income to be distributed per unit for 1H09 stood at 3.86 cents implying a payout ratio of 90%. The results are above our expectations with the 1H09 DPU respresenting 60% of our full year forecast.

The overall portfolio occupancy levels for Singapore Hotels for 2Q09 dropped 11.6% yoy to 75.5%,while the RevPAR declined 39.8% yoy to S$134 due to softer market demand situation and the global outbreak of Influenza(H1N1) in 2Q09 taking a toll on the tourist arrivals to Singapore.

Average daily rate for Singapore Hotels for 2Q09 was at S$178, down 30.2% due to intense price competition among hotel operators. Management has noted an improvement in demand in the months of June and July with both Corporate and leisure travel showing signs of an uptrend compared to the first five months of 2009.

Cambridge Industrial Trust - lower our rating from Buy to Hold

Cambridge Industrial Trust reported results for 2Q09. CIT recorded gross revenue of $18.5 million (+2.8% yoy, flat qoq), net property income of $16.0 million (+0.9% yoy, flat qoq) and distributable income of $10.7 million (-13.8% yoy, +0.04% qoq). DPU for 2Q09 is 1.345 cents.
Gross revenue is stable with slight growth over the quarters. Occupancy rate improves slightly from 99.2% in 1Q09 to 99.5% in 2Q09. Distributable income has however decreased since 1Q08 to 1Q09 before improving slightly in 2Q09. The main reason for the decrease is the progressively higher interest cost CIT paid on its loans. CIT has maintained a gross margin of approximately 0.9x. Distributable income margin dropped from 0.7 in 1Q08 to the 0.6x level. We expect it to maintain at this level as interest payment should not varies much for the remaining term of loan.

Property portfolio was revalued downwards by 9%. Portfolio value fell from $967.7 million to $880.3 million. Correspondingly, gearing rises from 39.8% to 43.8%. CIT single loan maturity of $390 million is due in 2012. A point of concern is that further portfolio valuation drop may starts to breach bank covenants. CIT needs to maintain a LTV ratio below 0.55 and interest cover above 2.2x. Currently CIT has a LTV of 0.46 and interest cover of 3.2x. We estimate portfolio value will have to fall a further 17% before the LTV covenant is breached.

Our revenue forecasts have assumed a portfolio vacancy of 3%. Portfolio performance in the last two quarters was lower than our assumptions. We thus revise our vacancy assumption to 1%, still slightly conservative compared to CIT actual occupancy rate. We have also revised down the management fee following the downward revaluation of the portfolio. We raise our DPU forecast from 4.73 cents to 4.93 cents. Fair value is raised marginally from $0.44 to $0.45. In view of the recent run-up in price, we lower our rating from Buy to Hold.

CapitaMall Trust - 2Q09: Trend reversal in the direction of credit spread

CMT’s management’s commented that credit spread for bank loans with maturity of five years has receded by 100bp, which indicates a recovery towards a normalised credit market. BUY CMT, the behemoth in retail.

CapitaMall Trust (CMT) reported distributable income of S$69.6m (+20.7% yoy) and DPU of 2.13 cents (-39.5% yoy) for 2Q09, in line with our expectations.

Sustaining full occupancy. Portfolio occupancy was 99.7% in 2Q09, a slight improvement from 99.5% in 1Q09. A total of 322 renewals and new leases involving net lettable area (NLA) of 392,961sf were signed in 1H09. Contracted rental rates were 1.5% higher than preceding rental levels, sustaining a slight positive rental reversion. Gross revenue locked-in for 2009 exceeds 98% of full-year 2008 gross revenue, based on existing committed leases as at Jun 09.

Valuation of investment properties. CMT has recognised S$276.2m or 3.9% decrease in valuation of its investment properties. Its assets in Singapore are currently valued at S$6.9b. Capitalisation rate has increased marginally by 5-10bp to 5.50-6.00%. NAV/share was thus reduced from S$1.65 to S$1.56.

Credit crunch has eased. CMT does not have any debt refinancing for the rest of 2009. It has borrowings of S$440m due in 2010, with the bulk of S$315m due in Apr 10. Current gearing of 33.4% will be further reduced to 30.3% when S$335m fixed rate term loan is repaid with proceeds from the rights issue in Aug 09. Feedbacks from bankers indicate that a credit spread has dropped 100bp for bank loans with maturity of five years. Management intends to stretch out its debt maturity profile to 7-10 years to improve capital management. Moody's Investors Service has reaffirmed a corporate rating of A2 for CMT, the highest among S-REITs.

Work on JEC to commence by end-09. Management targets to commence asset enhancement initiative (AEI) for Jurong Entertainment Centre (JEC) by end-09. The mall has been closed since Nov 08. CMT was granted an increase in plot ratio for JEC from 1.85 to 3.00, more than doubling net lettable area (NLA) to 209,700sf. The reconstructed mall will have an Olympic-sized ice skating ring. CMT has secured pre-committment from anchor tenants for 50% of NLA (cinema, food court and supermarket). Construction cost is estimated at S$150m and the AEI is scheduled for completion in 2H11.

We have kept our earnings/forecasts relatively unchanged as the results were in line with our expectations. Maintain BUY with a target price of S$1.70, based on a Dividend Discount Model (required rate of return: 7.2%, growth: 3.0%).