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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City Developments - Management prudent in acquiring landbank.

New launches in 2H09. City Developments (CDL) will be launching 396 units at the former Hong Leong Gardens site (Hundred Trees condominium) in the last week of September at indicative average selling price (ASP) levels of above S$900psf. This will be followed by the launch of The Albany at indicative prices of S$1,100-1,200 psf. The much-awaited Quayside Isle project at Sentosa Cove is expected to be launched in 1Q10 in the price range of S$1,800-2,200 psf after the opening of the Sentosa integrated resort.

Management prudent in acquiring landbank. Management is comfortable with the current landbank of about 4.5m sqf and will acquire more land only if it feels the price is right. CDL is interested in the recent land releases from the government’s Reserve List and is the top bidder for the Chestnut Avenue site with a top bid of S$129.1m (S$280psf ppr), but feels that the reserve price of Laguna Park (S$844psf ppr) is quite high.

Construction work for South Beach to begin by 2010. CDL has completed financing arrangements for the South Beach project and is finalising the design. Construction work is expected to begin by 2010. Management expects to see some write-downs from the project in the current financial year mostly due to the decline in the value of office space.

Hotel occupancy likely to firm up. Advance room bookings in relation to Formula One races are rather disappointing. However, management expects occupancy levels to pick up as the event draws closer and to remain healthy in 2H09/2010 with other events like the APEC conference, opening of the integrated resorts and the Youth Olympic Games.

Maintain BUY; target price raised to S$13.50. We continue to see good value in CDL and maintain our BUY recommendation with a revised target price of S$13.50 pegged at a 15% premium to our 2009 revised RNAV of S$11.73.

City Developments - Beware when government steps in

We have downgraded our rating for City Developments (CDL) to 4 (Underperform) from 3 (Hold) after the government announced, on 14 September, measures to ensure a ‘stable and sustainable’ property market, including a surprise (in our view) withdrawal of the interest absorption scheme (IAS).

We expect the shares of CDL, one of the biggest developers with a significant portion of its earnings and NAV exposed to the Singapore residential market, to be adversely affected.

We believe the environment is not conducive to owning property-developer shares, with the government set on pumping more land available for development from 1H10 and unlikely to reinstate, if ever again, the IAS until at least the next propertymarket bottom.

We have raised our six-month target price, based on a sum-ofthe- parts (SOTP) valuation, to S$9.52 from S$9.26 due to the increase in market value of its listed hotel operations. We have not changed our earnings forecasts because we do not expect CDL’s immediate pipeline of project launches to be hit badly.

City Development - Fully valued

City Dev reported 2Q09 net profit of S$140.0m, 14.7 S cents EPS, ahead of our S$85m estimate. We raise our target price to S$8.37 (S$8.25 previously), accounting for presales at recent launches as well as planned launches in 2H09. Its share price has risen 24% in the past month, and is trading at a 6% premium to our RNAV of S$9.30. Maintain Underperform.

The key variances were higher operating profit from the faster pace of profit recognition of residential projects (S$21m – some profit from The Arte was recognised this quarter), lower finance cost (S$17.3m), as well as lower tax (S$6.6m) and minority interests (S$10.5m). Residential development contributed 60% to earnings, whilst the 15% contribution from rental properties was slightly ahead of hotel earnings contribution, reflecting weak operating conditions. Net gearing was slightly lower at 46% on healthy interest cover of 10.1x. Adjusting for fair value gains on its investment properties, its gearing ratio would fall to ~35%.

Millennium and Copthorne (M&C) reported 2Q09 headline net profit of £16.4m, up from the £9m in 1Q09 reflecting strong cost initiatives in the face of flat hotel revenue. Overall occupancy rate was 67.6% versus 73.3% in 2Q08 with average room rate of £78.40 versus £79.38 over the same period last year. RevPAR as a result slipped 9% YoY to £53. RevPAR in July remains weak at an 18.3% YoY contraction, although signs of improvement are seen in Singapore and New York. We have already factored in a stronger 2H09 in our estimates.

The group plans to launch several projects in 2H09, including Hong Leong Gardens condo (396 units), the former Albany/Thomson Mansion sites (160 units) and possibly The Quayside Isle at Sentosa Cove, suggesting management is more positive than a quarter ago.

FY09 and FY10 EPS raised by 12% and 14%, respectively, updating for 1H09 results and presales at recent launches. We raise our target price to S$8.37, based on unchanged 10% discount to RNAV of S$9.30. The shares are factoring in more than 20% rise in residential prices over the next 12 months. It is fully valued, in our view, as the stock is trading at a 6% premium over our RNAV of S$9.30.

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.

City Developments: Singapore Smorgasbord

A Stamp of Confidence. Attracting one of the strongest client interests at our 'Pulse of Asia' conference, City Dev stamped its confidence in the demand fundamentals underlying the mass and mid-tier residential market, even if the high-end segment may take a couple more quarters before seeing a re-ignition of interest. It continues to be business as usual for City Dev, as it readies new launches with an array of projects catering to every market segment.

Something For Every Appetite. Having already sold 500 units in 1H09, it is poised to sell another 500 units in 2H09. On the menu are high-end Volari in Jul/Aug (former Garden Hotel at Balmoral Road), a mass-mid market project at the former Hong Leong Garden in Sep, and two mass-market sites ? The Gale in July (33% stake, at Upper Changi) and another Pasir Ris project at year-end. And if buying appetites aren't sufficiently sated, high-end Quayside at Sentosa is launch-ready.

BUY, 27% Upside to TP of S$10.67. After adjusting ASPs for Hong Leong Garden and marking-to-market its listed entities, our RNAV is revised up to S$8.90 (from S$8.79). We keep a 20% premium on the stock, which is close to historical +1SD levels, for a TP of S$10.67 (prev S$10.55) giving a 27% upside. Reiterate BUY on our top big-cap pick for the property developers.

City Development - Expediting more launches

Q109 S$83.1m PATMI comprise 16% of UBS FY09e and 18% of consensus. Though results were 18% below our forecast, we think it was a decent set of numbers given the challenging global backdrop. The variance was due partly to timing on residential project recognition, and a S$7.2m loss from the group’s non-core segment. There were no major surprises otherwise. Q109 snapshot gearing at 48%. Management is optimistic on the outlook and is prepping for more launches.

We believe Q109 GDP contraction of 11.5% YoY marks the trough and subsequent quarters could post incremental recovery. Large cap property stocks have consistently been a key performing sector in a bounce and provided the best proxy for the improved sentiment.

Our RNAV assumes peak to trough decline of 41% for prime residential prices and 24% for mass-market. The MLC stake is valued at GBP225p versus its GPB581p book value. We estimate for every 10p increase in MLC’s share price above GBP225p, CDL’s RNAV would increase by S$0.04.

We believe many investors are underweight property and may continue to seek exposure in a pullback. Coupled with improving macro fundamentals, we believe this could lead blue chip property stocks to trade at a premium to RNAV.

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

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

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

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

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

CityDev - weaker hotel margins and deferrals of prime projects

1Q09 net profit of S$83.1 mn (-50% YoY, -17% QoQ) was CIT’s lowest since 2Q06. It came in at 14-18% of our and consensus’ FY09E, due mainly to lower profit margins, higher taxes and loss of S$7.2 mn mainly from share of loss of 52.5%-City e-Solutions’ education services (MindChamps, which was sold by March 2009).

Net gearing remains healthy at 0.47x. Management is encouraged by pent-up demand at the low to mid-end residential segment, as it sold 330 units at The Arte, Livia and Botannia YTD, but may defer pre-sale at prime Quayside Isle @Sentosa to completion in 2011.

FY09-11E earnings have been cut 11-23% on lower hotel earnings and slower takeup at ongoing prime projects. End-2009-RNAV was raised to S$5.53 (from S$5.18) on currency adjustments, and The Arte achieving higher-than-expected pricing and sales. With reduced risk aversion, we peg our target price to 1x RNAV (from 0.8x).

Its stock price has run ahead of the still-weak fundamantals as it almost doubled since bottom in March, implying return-to-peak residential prices and M&C doubling in value, which we believe is unlikely.

City Development - results below forecast- hotels a drag

1Q09 PATMI of S$83m (-5% YoY, -17% QoQ) came in below forecast on weak hotel earnings and slowing devt profit booking. PBT on hotel ops and property devt fell 60% and 56% YoY to S$21m and S$69m respectively, while rental properties performed better on positive rental reversions (PBT +47% YoY) although occupancy rates have fallen from 94% to 91%. Projects such as City Square, Botannia , Solitaire and One Shenton con tributed.

Management comments that for the 439 units completed in 1Q09, almost all buyers have paid up including those on DPS. Mgmt is fast-tracking the launch of the mass-mid range sites where demand remains firm and plans to launch the former Hong Leong Condo by 4Q09, while the launch of Quayside could be deferred until TOP (by 2011). For the South Beach project (which targeted completion has also been deferred to 2016), the JV partners are in the final stage of negotiations with the consortium banks on re-financing of the land. Mgmt expects construction cost to decline further and are refining development plans for the site.

We have revised down our FY09-11E earnings by ~9% to reflect weaker earnings contribution from M&C, and forecast a 20% decline in FY09 PATMI to S$450m. FY09E earnings should be underpinned by progressive profit recognition from projects approaching TOP (Botannia , Tribeca, Oceanfront). We estimate around 161 units sold in 1Q09 vs just 8 units in 4Q08. Take- up has hit 74% and 55% for The Arte & Livia while profit recognition has yet to commence. RevPAR for Apr continues to be weak (-23% YoY) and there could be downside risk to hotel earnings. Stock is currently trading at a 5% disc to RNAV of S$8.45.

City Developments - Sell: Stock Ahead of Fundamentals

1Q09 Results Look Light — City Dev reported 1Q09 net profit of S$83.1m, down 50% yoy and 17% qoq. This makes up about 15% of our FY09 estimates and 18% of consensus. The decline was largely attributed to the property development segment and hotel operations. Share of after-tax profit from associates fell 69% due to completion of St Regis Residences and The Sail.

Property Development Main Contributor — Property development accounts for 58% of 1Q09 PBIT of $119.3m despite falling 56% vs. a year back. Projects that contributed include City Square Residences, Botannia, One Shenton, Cliveden & Tribeca. PBIT from hotel operations fell 60% yoy at the back of slump in RevPar, while PBIT from rental properties managed an increase of 47% on improvement in occupancy and rental rates from a year earlier. However, portfolio occupancy has fallen from 94% in 4Q08 to 91% as at 1Q09.

Project Updates — More than 250 units of the 336-unit The Arte have been sold to-date and City Dev will prepare to launch the former Hong Leong Garden Condominium by 4Q09. On the South Beach development, City Dev & its JV partners are said to be in the final stages of negotiating for re-financing of its land and will review and refine plans given its 2016 completion timeline. Construction costs are expected to ease as well.

Sell, TP S$6.28 — Stock has run a massive 98% from its Mar-09 trough and is now trading at a 35% premium to our RNAV of S$5.98 and at 32% to its latest book value of S$6.11. We think a hefty premium is not justified until some pricing power on the physical market returns. Maintain Sell, TP S$6.28.

City Development and Nan Fung Group invests in South Beach project

Hong Kong developer Nan Fung group has emerged as an investor in Singapore's South Beach project. It will subscribe to $205 million of five-year secured convertible notes under a refinancing exercise for a $1.2 billion loan on the 3.5-hectare site. The plot was sold for almost $1.69 billion in 2007 during the property bull run to South Beach Consortium - a joint venture company equally owned by subsidiaries of City Developments Ltd (CDL), El-Ad Group and Dubai World.

A fully owned unit of CDL will subscribe for $195 million of the notes, with entities associated with the Nan Fung group of companies taking the rest. The notes may be converted into equity in the joint venture company any time during their five-year duration, subject to conditions and terms that have not been disclosed. If CDL converts its notes, it will emerge as the leader of the consortium. And if Nan Fung follows suit, it will become a shareholder in the consortium.

The $800 million secured term-loan facility announced yesterday has been provided by a syndicate comprising DBS Bank, United Overseas Bank, OCBC Bank, The Hongkong and Shanghai Banking Corporation and Sumitomo Mitsui Banking Corporation (Singapore Branch). These five banks plus Bank of Tokyo Mitsubishi provided the initial $1.2 billion bridging loan facility.

The project, designed by London-based Foster + Partners, will comprise two tower blocks and four conserved buildings housing offices, luxury hotels, retail space and residences. In late 2007, CDL said that the project would cost some $2.5 billion in all, including the land cost. CDL will take a leading role developing the South Beach project, which is on track to be completed by 2016, yesterday's statement said. Talk surfaced last year that El-Ad and Dubai World were keen to offload their stakes in the project. However, the two yesterday confirmed their commitment to South Beach. The consortium's winning bid of $1.69 billion for the plot in the public tender worked out to $1,069 per square foot of potential gross floor area and was reported to be about $500 million lower than the top bid, which was not even short-listed under the two-envelope evaluation system.

City Development - Successful refinancing, but increases company's involvement

Successful refinancing of a land-acquisition loan for South Beach removes some risk, but has seen City Developments (CDL) provide debt and (potentially) increase its equity stake. The stock already appears to be pricing in a strong recovery in the Singapore property market, limiting potential upside. The banks’ willingness to refinance a lesser amount than was originally made available to the project is another reminder of the weakness in the commercial property sector.

South Beach refinanced. City Development’s (CIT SP - S$9.1 - U-PF) 33%-held joint venture project, South Beach, has successfully re-financed its S$1,200m debt. The loan was originally taken to finance the project’s S$1,688m land-acquisition cost. A consortium of commercial banks is providing S$800m of the S$1,200m refinancing. This is less than the S$1,200m that the banks provided when the loan was first taken. The rest of the refinancing is funded through the issuance of S$400m worth of five-year secured notes convertible into equity in the project, with S$195m of these taken by CDL itself. The balance is being taken up by the HK-based unlisted property group, Nan Fung. The refinancing cost or convertible price related details have not been disclosed.

One of the better solutions. Investors had been worried about the success of this refinancing as the land transaction for this rather large project (project cost at S$2.7bn) was done at the peak of the property market. This refinancing structure is one of the better solutions, as CDL avoids taking the project on its balance-sheet (would have increased reported gearing substantially), and the project value has not be written down.

Higher CDL involvement. We note that this refinancing was possible with CDL having to increase its involvement in the project, currently by way of providing debt, and later by potentially increasing its equity stake, should the debt be converted into equity. Interestingly, the other two equity partners in the project, El-Ad Group and Dubai World, have not subscribed to the convertible note.

Reiterate Underperform rating. Overall, we reaffirm the view that CDL’s stock is already pricing in a strong recovery in the Singapore property market, limiting upside potential. See our Where is the upside note of 4 June for more details. That the banks are willing to refinance a lesser amount than what was originally made available to the South Beach project, is just another reminder of the weakness in the commercial property business.

City Developments: Weak results within expectations

Weak results within expectation. City Developments (CDL) reported a weak set of 1Q09 results that was largely within expectation. Revenue declined by 18% YoY and 13.2% QoQ to S$622.5m due to weaker revenue contribution from its property development and hotel operations. Notwithstanding the weak office market, its investment properties continued to turn in strong performances, as positive rental reversions drove revenue higher by 22.4% YoY and 6.4% QoQ to S$70m in 1Q09. Operating profit declined by 39.7% YoY and 20.7% QoQ due to weaker margins from hotel operations but was partially offset by lower salaries and rental paid to CDL Hospitality Trusts. Contribution from jointly-controlled entities fell sharply by 69.3% YoY to S$17.6m due to the completion of projects (St Regis Residences and The Sail). PATMI for 1Q09 declined by 49.6% YoY and 16.8% QoQ to S$83.1m.

Shifting focus to the mass market segment. CDL had been a beneficiary of the return in demand for mass and mid-market properties over the past months, selling more than 60 units in Livia and more than 250 units in its new launch, The Arte at Thomson. We believe that the current condition in the property market had prompted CDL to shift its focus towards the mass market segment. CDL is now planning to launch a new mass market project at the former Hong Leong Garden Condominium at West Coast Drive by 4Q09. At the same time, CDL could also be holding back the launch for its high end project- The Quayside Isle Collection at Sentosa Cove until the project is completed or near completion. Such moves demonstrate CDL's competitive advantage of holding a diversified range of landbank that provides flexibility to manage the challenging market condition.

Maintain SELL. We are now raising our FY09 revenue and PATMI estimates to S$2,667.9m (previously S$2,538.7m) and S$451.9m (previously S$444.5m) to factor in recent sales at Livia and The Arte. Our RNAV estimate has now been raised to S$7.72 per share (previously S$7.56). While sentiments in the equity market had improved considerably since March, we prefer to remain cautious at this point in time and maintain our 30% discount to development profits and valuation of investment properties. Key parameters to re-rating would include the sustainability of recent home buyers' demand and improvement in unemployment rate and wages. Our fair value of CDL has now been raised to S$5.69 (previously S$5.53) but we maintain our SELL recommendation on valuation grounds.

City Dev upgrade to Buy

City Dev is the Singapore residential bellwether, and has the best leverage to volume recovery. In the current environment, we favor well capitalized residential developers with large land banks. Although the stock has risen considerably off its deep trough valuations earlier this year, we think that if transaction volumes can be sustained and we are indeed in the early stages of a gradual recovery, there is still substantial re-rating potential given stock still trades below mean P/B and slightly above its minus 1SD P/B range. Given City Dev’s large Singapore land bank, NAVs are sensitive to residential price changes. On our estimates, every 10% rise in residential prices increases NAV by 6%.

Since adding the stock to our Sell list on July 28, 2008, City Dev’s share price has fallen 26% vs. a 23% drop for the STI over the same time (12-month performance: -28% vs. -29%). City Dev was subsequently added to our Conviction Sell list on August 29, 2008 and removed on February 12, 2009, during which time the share price fell 47% vs. a 37% drop for the STI. We note that underperformance vs. the STI during both periods came amid an increasingly difficult operating environment for residential developers and negative headwinds for Millennium & Copthorne’s global hotel business. We believe that the risk/reward trade-off in the residential market has improved, justifying our upgrade to Buy.

We set our 12-month target price of S$10.0 at a 10% discount to our reset end-2010E NAV vs. a 30% discount previously as we think the residential sector is likely to lead the recovery. The key risk to our target price is the potentially negative news flow from City Dev’s S$1.69bn South Beach project which its Middle Eastern partners, El-Ad group and Istithmar, reportedly want to exit. We estimate that should City Dev acquire their stakes at a 25% discount, the all-in cost would raise the company’s gearing to 62% from 49% currently, which is not excessive in our view.

On its 1Q09 results, City Dev posted net profits of S$83m, down from S$165mn a year ago, mainly due to weaker contributions from property development and hotels. Results came in below expectations, registering 21% of full-year estimates (GS estimates are at the low end of consensus). The 1Q09 miss aside, the tone of the results was positive on the residential space, with the group announcing it would “fast track” its mass market project at the former Hong Leong Gardens condominium for launch in 4Q09. The results however continued to cast a shadow over the commercial space, in line with our more cautious tone for that segment, with office occupancy down to 91% compared to 94% as at the end of 2008.

City Developments: City Marathon, Not A Sprint

1Q09 Below Expectations. City Dev’s 1Q09 net profit of S$83.1m was down 50% yoy, and formed c.17% of our and consensus forecasts. This was primarily due to lower contributions from both property development and hotel operations, though the former continued to be the key earnings driver for the Group, contributing c.58% of 1Q09 PBIT. Hotel operations fell behind rental properties in PBIT contribution, as global economic conditions had a greater impact on the global hospitality market than what the industry had expected.

Sentosa Halted, West Coast Pushed Up. While the Group had earlier indicated that Quayside at Sentosa could potentially be launched this year, it has now decided to postpone this – possibly until close to or after project completion. It will instead fast-track its project at the former Hong Leong Garden condo, leveraging on the current interest within the mass-market segment.

Downgrade to HOLD, TP Raised to S$8.09. CDL has shot up c.64% since we reiterated our Buy call in February. We revise our RNAV to S$8.09 (prev S$7.59), with our new TP of S$8.09 based on parity to RNAV. We downgrade the stock to a HOLD, recommending investors take profit with an eye to buy on dips.

City Developments - What does it take for stock to reach S$10?

CityDev's share price has risen by over 88% since its lows of Mar 09 on improved transaction volumes in residential properties. While this is positive, the group is not a pure residential player, with 65% of its RNAV emanating from commercial and hotel assets. In a recovery phase, the stock typically trades at 1.8x P/BV. Our analysis indicates that bullish assumptions would be needed to justify this level. Physical values would basically need to revert to early 2007 levels. With physical supply looming and credit remaining tight, this prospect remains uncertain. We raise our FY09-11 core EPS estimates by 1-9% on more aggressive ASP assumptions. Our end-CY09 RNAV and target price (parity to RNAV) accordingly rise from S$6.81 to S$7.31. We are bearish on the stock at current valuations but would be buyers on any pullback. Maintain Underperform.