Capitaland - Revals and impairments mar 2Q09, but China offers promise

2Q09 core PATMI marginally under expectations, but maintain BUY on China factor. CapLand’s 2Q09 results were mainly dragged by S$280.9m of revaluations and impairments. Although 1H09 core PATMI is marginally under our expectations, we are leaving our estimates unchanged due to expected improved performance across all segments in 2H09. Looking forward, residential and retail segments in China and Singapore should continue to drive

CapLand’s earnings. Recent successful capital raising activities and asset writedowns have bolstered the balance sheets of all listed subsidiaries, thus removing any overhang of further capital input from CapLand. Management’s optimal gearing range of 0.50 – 0.75x (0.43x currently) implies further debt capacity for land acquisitions, on top of S$4.2b cash. Incorporating updated prices for its listed subsidiaries, our target price inches up to S$4.37 (previously S$4.22), pegged at 20% premium to end-FY10 RNAV. Maintain BUY.

Revals and impairments dragged 2Q09, but residential sales impressed. CapLand posted a 2Q09 net loss of S$156.9m, mainly due to S$280.9m of revaluations and impairments. Excluding these one-off items, 2Q09 PATMI would have risen 163% QoQ to S$124.0m. 1H09 core PATMI of S$171.0m accounted for 42.5% of our FY09 estimates of S$402.7 (vs. consensus’ S$406.4m). There were also lower contributions from development projects (mainly Singapore and Australia) and serviced residences, and the lack of rental income from commercial properties divested in FY08. Its China Residential and Retail segments were the top performers, recording a 45% YoY and 19% respectively in terms of topline contribution. Residential sales impressed, mainly in Singapore (183 units sold) and China (703 units sold).

China residential and retail to be key drivers. Helped by the Government’s economic stimuli amid improved affordability and rising urbanisation, CapLand expects to sell over 2,000 homes this year in China. Despite its huge 2.9m sqm landbank, it intends to acquire more sites. Given its S$4.2b of cash and a new RMB 25m credit limit allocation from two Chinese banks – BOC , availability of funds should not be an issue. However, with competition for land heating up, we deduce CapLand could focus on already-exposed cities (i.e. Beijing, Chengdu and Foshan) to avoid overpaying. Retail income should stay resilient, with additional contribution from seven new completed malls by end-09.

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