City Developments Ltd: Avoid the exuberance

Mass market boom. Recent mass market launches continued to perform above our expectations. At Optima, a 297-unit mass market project at Tanah Merah by TID, was fully sold within days at an average selling price (ASP) of S$790 psf, while at Ang Mo Kio, Far East Organization has launched Centro Residences, a 329-unit residential project, at an average price of S$1,150 psf, an unprecedented level for a project in the Outside Central Region.

Avoid pricing in the exuberance in mass market segment. Strong sales of mass market properties are positive for City Developments (CDL) which has a significant landbank exposure (~53% of attributable GFA) to the mass market. However, we caution against pricing in the exuberance that mass market projects are seeing right now. We have raised the ASPs for CDL's mass market projects to S$685 psf for Upper Changi Road North sites (previously S$600 psf) and S$650 psf for Pasir Ris land parcels (previously S$618 psf). ASP for Thomson Road site has also been raised from S$880 psf to S$1,000 psf. These are levels that we believe, are sustainable over the long term.

Weak hotel results expected but outlook improving. The hotel segment is likely to turn in weak results for 2Q09 as we expect operations to be negatively affected by the fall in international tourist arrivals, declining REVPAR and impact of the global outbreak of Influenza A (H1N1) virus. On a positive note, the pace of decline in international tourist arrivals is expected to soften for the remainder of the year as the global economy stabilizes. According to UN World Tourism Organization, the YoY decline in international tourist arrivals is expected to fall to between -6% and -4% for May-August and between -5% and -3% for September-December.

Fair value raised to S$8.20; Maintain SELL. Our RNAV estimate for CDL has now been raised to S$8.20 (previously S$7.72) after raising our ASP assumptions and the valuation of Millennium and Copthorne (markedto- market). In light of the recovery in property market and improving outlook for hotel operations, we have also removed the 30% discount previously pegged to our valuation. As such, our fair value of CDL has now been raised to S$8.20 (previously S$5.69). CDL is currently trading at Price/ RNAV of 1.26x and its valuation premium is the highest among peers. While we recognized its strong track record and management, we caution against paying too high a premium as there is still uncertainty in the macro environment. We maintain our SELL rating on CDL and advise investors to accumulate at levels closer to our RNAV target.

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