CapitaLand - Introducing The Interlace

CapitaLand unveiled designs for The Interlace last Friday, its latest project to be developed on the former Gillman Heights. Designed by Ole Scheeren from The Office of Metropolitan Architecture (OMA), The Interlace has an avant-garde design and will comprise 1,040 units on a site of 871,884 sq ft. CapitaLand has a 60%-stake in the project.

The Interlace is scheduled to be launched in October, and the management has stressed repeatedly that pricing would be affordable. Its construction costs are expected to be between $250-270 psf, lower than the $320 psf we had assumed earlier. We correspondingly lower our estimated breakeven price to $703 psf, while keeping our ASP unchanged at $900 psf.

For The Interlace, a $660m 5-year project financing loan has been secured from seven banks (DBS, UOB, StanChart, OCBC, Bank of Tokyo Mitsubishi UFJ, Maybank and HSBC). We estimate the all-in borrowing cost to be about 4.2%.

Besides The Interlace, CapitaLand is also preparing to launch the 165-unit Urban Suites, on the site of the former Char Yong Gardens. We reckon that its launch is closer to the year’s end. Lowering our cost of construction assumption by 10% to $360 psf, the estimated post-provisioning breakeven cost for the project is $1,925 psf. We maintain our ASP assumption at $2,300 psf.

We have lowered our construction costs assumptions for the other projects in CapitaLand’s landbank, and pegged the associated companies to market value. Pegged at a 15%-premium to our FY10 RNAV of $3.98, we have raised our target price to $4.57. The stock has been a relative laggard compared to its peers. Upgrading to BUY.

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CapitaLand - The new-design launch of the former Gillman heights

CapitaLand’s much awaited project launch of The Interlace (former Gillman Heights) in October is expected to receive a warm response and further boost the sales volume in the already buoyant residential segment.

We recently attended the design launch of The Interlace. Located at Alexandra Road/Depot Road, it is one of the largest and much awaited residential developments jointly developed by CapitaLand and Hotel Properties. The design presentation was followed by a media/analysts Q&A session.

Unique architecture. The Interlace has 1,040 units designed by world renowned architect Ole Scheeren, Partner of the Office for Metropolitan Architecture (OMA). The design breaks away from the traditional normal cluster of vertically stacked tower residential apartments into a stacked interlocking hexagonal arrangement comprising 31 apartment blocks with an expansive and interconnected network of communal spaces. The project aims to present a radically new approach to contemporary living in a tropical environment.

Project ASP could set new benchmark levels. The 81,000sqm site was acquired at S$548m or S$363psfppr. Management estimates construction cost at S$250-270psf which works out to a breakeven cost of around S$750psf. We expect average ASP levels of around S$1,000psf, a new benchmark in the area considering the highest resale prices of S$517psf and S$817 psf for Gillman Heights (former site) and Normanton Park (closest comparable) respectively. The average ASPs of some of other comparable projects cited by management in nearby locations are S$900-1100 psf at One North Residences, S$900-1000psf at Rochester, S$800-1,400 psf at Caribbean and S$1,500-1,700psf at Reflections at Keppel Bay.

The sale of the 1,040-unit project could well boost the transaction volumes in the already buoyant mass- and mid-tier segments and set new price levels for future projects. We estimate that the project could bring in S$262.5m in pretax profits or 5.8 cents a share in pretax profits. We expect strong demand for this project considering the attractiveness of the location and recent buying interest.

Project financing completed. The total development cost for the project is around S$1.4b and CapitaLand has made arrangements for a 5-year S$660m project financing from seven leading bankers at an attractive interest rate of 3.48%. Management said construction for the project would begin soon and is close to awarding its construction contract work to local construction and building group.

CapitaLand - Ready for asset acquisition

CapitaLand has allocated S$1bn to increase the capital base of its China, Vietnam, and Ascott businesses. This is positive and signals management’s appetite to take on risk. We believe asset acquisition could happen within 3-5 months and is a price catalyst. We think CapitaLand would remain residential-focused and would buy sites in Shanghai, Beijing, and Ho Chi Minh City.

We think CapitaLand’s issuance of S$1.2bn convertible bonds is a cost-efficient way of refinancing and securing long-term capital ahead of an acquisition. The debt maturity duration is now over 6 year from 4.4 as of December 2008. CapitaLand’s share price has lagged its Hong Kong peers by up to 20%. We thinkthere is scope for the performance gap to narrow as the company commences its capital deployment.

CapitaLand reported an H109 loss of S$114.1m due to net revaluation losses. Excluding one-offs, core Q209 PATMI was S$124m (+163% QoQ) on the back of contributions from China and Singapore residential property.

We include the non-cash revaluation losses into our model and reduce 2009E headline EPS by 60% to 5cts (from 13cts) with normalised EPS of 13cts. We increase our RNAV estimate to S$4.35 (from S$4.25) due to a 15% increase in expected launch prices for Singapore projects (in line with our residential forecast upgrade), mark-to-market listed REITs, and update our earnings forecast for Australand.

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.

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.

CapitaLand - Above expectations: Good core earnings offset by S$1.1 bn CB

CAPL reported a 2Q09 net loss of S$157 mn, its first headline quarterly loss since 4Q03, with the bottom line weighed down by net exceptional losses of S$281 mn. Core net profit came in at S$124 mn (+163% qoq), above our 2Q09 estimate of S$92 mn, as China residential led growth. For the quarter, key positives include: 1) strong China residential, 1,163 units sold in 1H09 (780 units in 2008), 2Q EBIT up 4X qoq; 2) soft opening of ION Orchard in July, 96% mall occupancy and higher-than-expected revaluation, S$3,800 psf; 3) deleveraged B/S post-rights issue in 1Q09; gearing at 0.43X. Key negatives include: 1) Singapore office portfolio marred by downward asset revaluations, and 2) AustraLand’s operations remain challenging, 1H09 operating profit ex. revaluations fell 11% hoh. CAPL also announced a S$1.1 bn convertible bond issue, coupon 2.375% and YTM of 2.875%, with a conversion premium 20%-25% above the prevailing share price. If converted, this would account for around 5% of the current share base.

We believe the focus should be on stabilizing core operations and the FY2010 outlook. While 1H09 core profits constitute 41% of FY09 estimate, we think profit recognition from SG resi will be more meaningful in 2H09. In Singapore, up to 1,165 units will be launch-ready by 2H09 from Gillman Heights and Char Yong Gardens. In China, the group is committed to an additional capital injection of S$500 mn (a 25% increase) in the short term. On the bond issue, this would mark CAPL’s fourth successful bond issue; while seen as strengthening its long-term financing and debt maturity, the narrow premium and potential dilution may be a near-term overhang on CAPL. Maintain Buy (Conviction List) and RNAV-based 12m TP of S$3.90.

CapitaLand - Expect some deck clearing in 2Q09 results

CapitaLand’s 2Q09 headline results to be dominated by “exceptional” writedowns and write-ups. Group 2Q09 results are to be released before market opens on 30 July 09, and we expect a headline loss after tax and minority interest of S$250million (2Q09E loss per share of S5.9cts), comprising core PATMI of S$50million, up modestly Q/Q but substantially below 2Q08’s S$345million excluding revaluation gains. Adjustments to FRS40 should allow some offsetting of impairment charges in 2Q09 amounting to S$600million on our estimates, with a net “exceptional” loss of S$300million booked for the quarter. We expect end 2Q09E book value to be S$2.78/share.

Looking for a strategic update. Economic prospects have improved markedly in a number of the key markets to which the group is exposed, and we would expect some management guidance on whether the group’s risk appetite has changed, particularly with respect to the available liquid capital the group has at the corporate level (S$7.1billion as at end 1Q09, likely still to be around S$6.3billion as at end 2Q09).

Specific stock catalysts should be from strategic M&A options. We expect CapitaLand to trade like a liquid proxy on Asian real estate sectoral growth, with specific stock catalysts dependent on the deployment of the group’s available capital in key geographies, a re-acceleration of growth in real estate assets under management or a re-rating of the group’s China business.

We retain our S$3.80/share Dec-09 price target, based on the average through the cycle 18% discount to our S$4.69/share RNAV estimate. Key risks to our investment case lie in a reversal in the current buoyant liquidity and loose monetary conditions resulting in a rise in the cost of Asian real estate capital; weaker than anticipated growth that limits cap rate compression in the key asset classes to which the group is exposed, or value-destructive M&A by the group.

CapitaLand and Ascott

It was confession time as Group CEO Liew Mun Leong said the Ascott Group will become a real estate company active in buying, investing in and trading serviced apartment properties, because hospitality operations are a “laborious” way to profits.

It was Ascott’s less-than-satisfying performance that we believed was the real reason why C-Land privatized Ascott in early 2008, offering $1.73 per share, which represented:

- 43% premium over Ascott’s undisturbed priceof $1.21 before the offer announcement.
- 2.37x price-to-book of 73 cents per share.

The numbers were simply not there, despite Ascott being built up to be the world’s largest serviced residence operator outside the US, if exceptional trading profits were excluded.

While now academic, we believe Ascott could well have performed even worse than Ascott Residence Trust (ART) during the current crisis. ART fell from $2.14 in Mar ’07 to 35 cents on Feb 25th this year, despite a generous yield, which Ascott shares did not offer.

Yet we believe investors may well welcome Mr Liew’s “confession”, which we believe, may also mean that it is a matter of time (albeit likely later than sooner) before C-Land privatizes ART as well.

After all, C-Land’s focusing on trading of properties owned by Ascott implies cutting off the source of assets that are intended to be spun off to ART, as was the stated intention at the time of the establishment of ART in early 2006. (Then, Ascott sold 12 initial properties to ART for $662 mln, payable $63 mln by cash, and the balance via issuance of 454 mln new units in ART. Units were then offered to shareholders of Ascott on the basis of 200 ART units for every 1000 Ascott shares, at 68 cents per unit. C-Land presently owns 46.64% of ART.)

It is also useful to note that ART’s Singapore assets are probably the easiest to dispose of, being located in prime residential locations:

- Somerset Grand at Cairnhill; and
- Somerset Liang Court at River Valley.

The following price levels are useful reference points for ART:
- latest book NAV is $1.51 per unit;
- initial entry price for unitholders of ART was 68 cents;
- Mar ’07 preferential offering of 47.9 mln new units at $1.88 each; and
- Mar ’07 placement of 55 mln new units, as well as 100 mln vendor units by C-Land at $1.90 each. We have been recommending ART, partly as a likely candidate for privatization.

CapitaLand - China business remains under-recognised

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

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

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

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

CapitaLand - Sell: Overvalued

Raising RNAV to S$2.93, target S$2.20 — We raise our RNAV from S$2.74 to S$2.93 to reflect: 1) higher clearing prices for residential prices; we expect the luxury segment to eventually fall by 10% rather than 20% assumed previously; and 2) higher residential prices for its China properties on higher clearing prices for its residential projects. We continue to ascribe a 25% discount in deriving our target as core earnings remain weak.

Launched The Wharf successfully — CapitaLand has launched and sold over 90% of The Wharf Residences at S$1,100-1,400psf. Limited projects for immediate launch — CapitaLand plans to launch Gillman Heights next, likely at the end of the year. There are a limited number of projects that CapitaLand can capitalize on given that it bought most of its landbank towards the later stages of the last cycle.

Stock looks expensive — The stock is trading at a hefty 33% premium to its estimated RNAV and a 09E P/B of 1.3x. On a P/E basis, it is also the most expensive property stock in our coverage, trading at over 50x FY09E and over 30x FY10E earnings. The stock is expensive compared to the market average P/E of 15x and its ROE is also relatively low at 2.4% compared to the market’s 10%.

CapitaLand - Asset allocation into China to increase to 40-45%

At the recent launch of the Raffles City brand in Ningbo (formerly known as Capital Plaza), CapitaLand’s management announced its intention to increase the Group’s asset allocation into China to between 40-45% over the next few years, up from 26% in FY08. The Group remains on the lookout for distressed assets in China.

To support funding needs for new and existing projects in China, CapitaLand also signed cooperation agreements with Bank of China and Industrial and Commercial Bank of China to obtain a credit limit allocation of up to RMB25b (S$5b) to fund CapitaLand’s various business operations across China. We view this as positive accreditation of CapitaLand’s presence in the Chinese market.

CapitaLand’s launches in Foshan and Chengdu this year have been well-received, with small ASP increments with subsequent launches. CapitaLand is looking at replenishing its landbank in Shanghai and Beijing. According to the Straits Times, CEO Liew Mun Leong believes that Tianjin and Changsha also present a lot of opportunities.

CapitaLand had increased its stake in Gillman Heights from 50% to 60% in mid-May, and could possibly launch the new project for sale by 2H09. With construction costs easing, we estimate the breakeven price to be around $753 psf, with an ASP of about $900 psf. CapitaLand may also re-launch Latitude at Jalan Mutiara at an ASP of about $1600 psf.

We view the move to increase its asset allocation into China positively, as CapitaLand already has a 15-year track record in the ever-growing Chinese market. Even sentiments in the Singapore residential property market have improved, suggesting the possibility of more sales in 2H09 and 2010. We reiterate our BUY recommendation, with a target price of $4.24, pegged to a 10% premium to our RNAV of $3.85.

CapitaLand Ltd: Leveraging on China's growth story

Secured RMB25b credit lines from Chinese banks. Earlier this week, CapitaLand (CapLand) announced that it had secured RMB25b (S$5b) of credit lines from two Chinese banks - Bank of China and Industrial and Commercial Bank of China. New credit lines will give CapLand direct access to a significant amount of RMB funding which will help to support CapLand's growing operations in China. As at end 1Q09, assets in China accounted for 28.2% of CapLand's total assets (ex-cash) and with the funding support, CapLand is well-positioned to achieve its targeted 40%-45% of total assets from China. Recent improvement in the China property market could also be sustainable, as backed by China's improving economy, urbanization trend and supportive government policies and CapLand should benefit with its significant exposure in China.

Acquisitions needed for re-rating. While the securing of new credit lines is positive for CapLand's China operations, we believe that CapLand's strong balance sheet and strength in capital management have already been reflected in its share price which is currently trading at a premium to its peers. With credit market thawing, there is now less incentive to hoard cash, which generates low returns to shareholders. We are now looking beyond the strength of CapLand's balance sheet and focusing our attention on the value that CapLand can generate through the deployment of its funds. At current price level, we believe that accretive acquisitions will be the key for re-rating of CapLand's shares.

Maintain HOLD. We have raised our RNAV estimate of CapLand from S$2.95 to S$3.34, on the back of improved valuations of its listed investments and lower discount rate that is in line with the higher risk appetite for equities. While recent buying sentiment in the Singapore property market has improved, we think that it is still early for us to raise our selling price assumptions for CapLand's landbank, which has a significant exposure to the high-end segment, as the bulk of the sales had come from the mass market segment and had also been largely driven by aggressive price cutting by developers. Nevertheless, we are now removing our RNAV discount on CapLand (previously 30% discount), on the back of better outlook for its China operations. As such, our fair value of CapLand has now been raised from S$2.43 to S$3.34. We maintain our HOLD rating on CapLand and will turn buyers of CapLand at price level of S$3.00 to S$3.10.

CapitaLand and Australand in A$300m redevelopment deal

Through a joint venture with Australian property group, St Hilliers, Australand will be embarking on a A$300m (S$347.3m) public housing redevelopment project in Carlton, Victoria, that spans 7.5 hectares across three sites. The project will involve replacing 192 old walk-up flats with over 240 public and social housing apartments and 500 inner city residential homes. Marketing of the homes will begin in mid-August, and prices will start from high A$200,000, and the project is expected to bring in sales of over A$300m.

The redevelopment project will be delivered in seven stages over the next eight years to enable the consortium to re-use capital as stages are completed, to enhance capital efficiency. Construction is scheduled to start in November and the redevelopment project should be ready in 2017. The impact on Australand's share price is about two Australian cents a share. The impact on CapitaLand's RNAV and target price is minimal.

CapitaLand - Asset-light strategy hard to execute in this downturn

We are initiating coverage on CapitaLand Ltd (CapLand) with a SELL rating. Fair value is S$3.17/share, based on 30% discount to our RNAV estimate of S$4.53/share. Investment properties account for 54% of gross asset value followed by development assets at 24%. CapLand is an expert in executing asset-light strategy by capital recycling through selling investment assets or ploughing them into a REIT.

It has stakes in five listed REITs and 17 private equity real estate fund with AUM over S$25bil. Despite recent run up in market we opine it may still not be opportune to recycle capital with surpressed asset values and time needed to stabilise assets before divestment through REITs.

CapLand may face risk of landbank writedown with the tepid high-end residential market in our opinion. Char Yong Gardens was purchased in June 2007 at S$1,788 psf ppr, a whopping 62% premium over neighbouring Urban R.C. CapLand may want to make provisions as such. Our estimates are for CapLand to take a S$70mil haircut in FY09F based on 30% write-down in the 50:50 joint venture.

Our forecast are for earnings to decline 42% to S$726mil in FY09F and reverse with a 13% increase to S$818mil in FY10F. Sharp drop in FY09F earnings is due to absence of gains from disposal as we perceive FY09F be much tougher to extract value from existing assets. In addition, we have also assumed 10% revaluation loss on investment properties for FY09F - 10F. Contributions from associates will partially mitigate decline.

We expect Capland to recognise progressive development profit from The Orchard Residences (77% sold) and Rihan Heights (82% sold). Commencement of rental income from ION Orchard, Wilkie Edge and Sembawang Shopping Centre will also provide further boost.

CapLand is likely to forge ahead in China with retail operations being its wild card. Rental income will get a boost from its 21 retail malls - with an estimated 5.5 million sq ft NLA currently under construction - upon completion. China’s contribution to CapLand’s FY09F earnings and RNAV are estimated at 21% and 34% respectively.

Liquidity remains ample having raised S$1.8bil via rights issue in Februaury 2009. Funding pressure further relieved on group via rights issue by units CMT and CCT. We project net gearing of 37% and 40% in FY09F - 10F. With cash buffer of S$5.5bil as of 1Q09, CapLand will actively pursue acquisition opportunities in our opinion.
Share price has doubled from low of S$1.78/share in March 2009 and trades at 12% discount to our RNAV estimates. Even though it warrants a premium by virtue of its size, valuation seems stretched at this juncture.

CapitaLand - Adding to presence and financial capacity in China

CapitaLand to add another Raffles City project in Ningbo, China. The group over the weekend announced another Raffles City integrated development project in Ningbo, a major port city in Zhejiang province, China. The complex is expected to be completed in 2012, with a 97,900sqm of GFA comprising a 50,000sqm shopping mall, a 30,000sqm office tower and a 20,000sqm tower with serviced residences. The site on which this project will be built was acquired in 2005 and is in the heart of Ningbo, adjacent to the group's Summit Residences project, an 850-unit development expected to be completed in 2010.

Group has signed credit allocation agreements with Bank of China and ICBC of up to RMB25billion (S$5.3billion) that would give CapitaLand China Holdings and its subsidiaries and affiliates such as the 9 managed real estate private equity funds, CapitaRetail China Trust and Ascott Residence Trust (collectively “CCH group”)access to onshore debt funding in RMB. Terms and conditions of loans to CCH group under the credit allocation agreements would be mutually agreed before the loans are drawn down, but these agreements ensure CCH group access to debt funding for at least the next 3 years.

S$6.5billion of capital employed in China, 26% of group assets at end 08 book value, but this could rise towards 40-45% of group assets within the next 2-3 years (as management have guided) as large scale projects such as the Raffles City complexes (now 5 in China: Shanghai, Beijing, Chengdu, Hangzhou and Ningbo) add to the total. The group’s 58 retail malls (operational or under development) in China would also contribute to this growth in the exposure and capital employed.

CapitaLand - Taking only its pro-rata share of CCT's proposed rights issue

CapitaCommercial Trust (CCT) rights issue impact on CapitaLand: 31.4%-owned CapitaCommercial Trust is proposing a 1-for-1 rights issue to raise S$828million. CapitaLand has undertaken to subscribe to its pro-rata entitlement, but unlike CapitaMall Trust’s (CMT) rights offering earlier in the year, the group is not undertaking to subscribe to CCT units in excess of its proportionate 31.4% stake. At the rights issue price of S$0.59 each, CapitaLand's share of the rights issue comes to S$260.4million.

To record proportionate share of CCT’s and CMT’s property devaluations: As part of the rights issue process, CCT (and indirectly CMT for its share of the Raffles City complex) have conducted property valuations as at May 09. We calculate CapitaLand’s share of the property devaluations from CCT and CMT would amount to S$231million to be recorded in the group's 2Q09 results. Note that we have already assumed S$1.6billion of asset impairment charges to be recognized over our forecast period FY Dec 09E-11E.

Writedowns offset by accounting changes. The asset devaluationswould be offset in part by potential revaluation gains from investment properties currently under development (following adjustments to FRS40 coming into force in FY09). We have assumed S$125million of revaluation gains primarily from the group's 50% share of ION Orchard retail mall to be recognized, possibly in the 2Q09 results.

Raising our end Dec 09E price target of S$3.80/share (S$3.30/share previously), now based on a 20% discount to our S$4.70/share FY09E RNAV estimate, similar to the share price discounts to NAV at which the Hong Kong developers are currently trading. Key risks to our rating and price target include: (1) a reversal in the current buoyant sentiment to high-beta equities and (2) weaker than anticipated property demand which lowers asset valuations.

Transactions pick up but supply to cap price growth. BUY CapitaLand.

Home prices are set to stabilise after the correction in 1Q09, but growth is unlikely given the large supply pipeline and the absence of foreign demand. After three months of good growth, we expect residential primary transaction volumes to ease through 2009. The price correction has reached our fundamental 40% peak-to-trough expectation and, with higher volumes and improving affordability, we are now removing the additional 10% cushion built into our estimates.

Better numbers in April. Singapore developers sold 1,207 private units in April, down 1% MoM. This brings total YTD primary sales to 3,858 units, or 88% of total 2008 annual sales. This is the third consecutive month where sales have crossed 1,000 units/month. Monthly sales volume is set to decline through the year as pent-up demand wanes. However, the annual figure should still exceed the historical average of 7,000 units.

Demand moving in from the mid-segments too. In contrast to February and March, April sales volume was driven by demand in the mid-end and high-end segment, as sales in Core Central Region (CCR) and Rest of Central Region (RCR) accounted for 57% of total sales. Furthermore, units transacted at over S$1,200/sf accounted for 18% of the total (1% in March), suggesting an increasing risk appetite for homebuyers.

Changing price estimates. April sales also illustrated that MoM pricing is stabilising. This concurs with our channel checks in the secondary market across Singapore. We had been expecting a 50% peak-to-trough correction in Singapore residential prices - 40% based on fundamentals and another 10% in “overcorrection”. With affordability factors improving and buyers showing more interest, we have eliminated this additional 10%, and we now expect prices to stabilise following the correction in 1Q09.

New RNAV estimate for developers. As such, we have raised our RNAV estimate for CapitaLand (CAPL SP - S$3.11 - BUY) by S$0.11 to S$3.20/share, while also raising our estimate for City Developments (CIT SP - S$7.78 - U-PF) by S$0.54 to S$7.38. Upward movement in residential prices is unlikely given the large supply pipeline, absence of foreign demand and the weakening rental market.