City Developments - Strong fundamentals this time round

Selective landbank acquisition strategy. Management mentioned that the current landbank of about 4.5m sqf (65% in the mass market to mid-tier segments and 35% in the high-end segment) is quite healthy and that it would acquire more land only if the price is right. It believes the reserve price of S$844psf ppr is high for the Laguna Park collective sale site. CDL was recently awarded the Chestnut Avenue site from the government reserve list for its top bid of S$280psf ppr, which makes it the fourth highest bidder out of 13 bids in total put in for the just-announced Dakota Residences site. Management noted good interest in two other sites (Yio Chu Kang Road and Serangoon Avenue 3 sites) that were triggered for launch from the Government Land Sales programme.

Upcoming projects. CDL will launch 396 units in the former Hong Leong Gardens site during the last week of this month with indicative average selling prices (ASP) of above S$900psf. Following this, it will launch 160 units at The Albany in 4Q09 with indicative ASPs of S$1,100-1,200psf. Management has been receiving inquiries from many foreign buyers for its high-end 228- unit The Quayside Isle project at Sentosa Cove and will be launching this in 1Q10 soon after the opening of the Sentosa integrated resort (IR) with indicative ASPs of S$1,800-2,200psf, depending on market conditions.

Strong fundamentals this time round. Management highlighted that the recovery in the residential segment is sustainable with buying interest filtering up from the mass market and mid-tier segments to the high-end segment compared with the top-down filtering seen during the previous property boom. It believes current demand is well supported by fundamentals, with pent-up demand, low interest rates, Asian growth story and turnaround in market sentiment acting as the key catalysts. It expects demand to remain strong for the rest of the year. It also added that speculation levels are not high enough at the moment for the government to take drastic measures.

Hotel occupancy levels expected to improve in 2H09. CDL said hotel occupancy levels have been picking up slowly after 2Q09, although advance booking for F1 games has been slightly disappointing. It expects demand to pick up as the event draws closer. Management expects hotel occupancy levels to firm up with marginal improvements in average daily rate (ADR) supported by the IR openings and other events like the APEC conference.

Positive rental reversion seen in commercial segment. Revenue and profits from the commercial segment increased 17% and 25% respectively due to positive rental reversions despite the steep fall in office rentals as passing rentals were still below spot rentals. The occupancy levels for its Grade A space are still above 90% and management expects occupancy levels to remain healthy for the current financial year.

Construction work for South Beach project to begin by 2010. CDL has completed its financing arrangement for its much-awaited South Beach project in June and is finalising its design. The project will comprise of 40% office space and 30% hotel space, and the remaining 30% will be white space with primarily residential developments. Management noted that construction costs have eased and expects to award the construction contract next year. There could be some write-downs booked towards the end of the year due to declines in the overall property value mostly in the office segment.

Easing financing concerns. Management noted that with the property market looking up, banks are more than willing to lend again. CDL is able to finance its loans at an attractive interest rate of 3.25%. The company’s net gearing came down to 0.46x in 2Q09 and has a healthy interest cover ratio of 10.1x.

We continue to see good value in CDL and maintain our BUY recommendation with a target price of S$12.70 pegged at a 15% premium to 2009 RNAV of S$11.04.

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