City Developments - 1H09: Residential sales momentum going strong

City Developments is well positioned to capitalise on the sales recovery in the residential segment. We continue to see good value in the company and maintain our BUY call with a target price of S$12.70. Maintain BUY.

City Developments (CDL) reported 2Q09 PATMI of S$140.0m (-15.3% yoy), bringing 1H09 PATMI to S$223.1m, in line with our expectations and representing 50.1% of our full-year forecast. The Group reported a higher revenue of S$787m (+0.8% yoy) primarily due to a higher contribution from the property development segment which continues to be the largest contributor, accounting for 60% of pre-tax profit of S$197.9m. However, this segment’s pre-tax profit declined 19.4% yoy due to the weaker margins for recently-launched projects. Hotel operations, notably in Singapore and Australia, continued to suffer due to the economic slowdown, which resulted in a decline in the Group’s overall RevPAR. Revenue from rental properties increased 12.5% yoy to S$69.2m, mainly due to the locking in of higher rental rates for long-term office rental leases.

Residential property sales to remain key growth driver. CDL continues to benefit from the strong momentum set in developer sales volume in 2Q09. The Arte @ Thomson is nearly sold out at an average selling price (ASP) of S$950psf and Volari, which was launched in early- July, is more than 96% sold at an ASP of S$2,000psf. In the mass market segment, the Group received a good response for its Gale @ Pasir Ris with over 90% sold at an ASP of S$650psf, and for its 724-unit Livia at Pasir Ris. In 2H09, the Group is planning to launch 396 residential units at the former Hong Leong Garden site at West Coast, a 160-unit project at the former Albany site, and 100 units at The Quayside Isle @ Sentosa Cove. We expect strong demand for these projects as well, considering their good locations and the recent upswing in sales momentum, which should help boost CDL’s bottom line in the coming quarters.

Hotel occupancy rates to stabilise with opening of IRs. The hotel segment suffered the most in 1H09 due to the economic downturn with occupancy rates touching 66.7% (-8.7% yoy) in Asia and 59.8% (-6.7% yoy) in the US. Going forward, we expect occupancy rates to improve in Singapore in 2H09 with the expected increase in tourist arrivals due to major events like the APEC conference, F1 Grand Prix and the opening of the integrated resort at Sentosa. Overall, these factors should contribute to revenue in 2H09.

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 Development - Perfect Timing, What’s Next?

We maintain our Underweight on CDL, given the 37% downside risk to our base case price target of S$6.20 (end-09 NAV of S$5.61, fully diluted). Taking into consideration the upside risk of an asset bubble due to the excess liquidity, we recently stretched our bull case further to a super bull case scenario. The latter not only assumes a V-shaped residential price recovery back to the 2008 peak levels, but also assumes higher sales take-up rates as residential launches are brought forward. Despite the difficulty in seeing an improvement in the non-residential segments, in this scenario, we have optimistically assumed that their valuations will fall no further from current levels. From this analysis, our super bull case suggests amongst the big cap developers that we prefer the 22% upside offered by CapitaLand vs. CDL’s and KepLand’s 16% and 30% upside, respectively, given the less favored office exposure.

CDL reported 1H09 results that were 10% below our operating and net profit estimates, the difference being due to the timing of its residential recognition. We applaud management’s perfect timing on its residential launches. Having sold 142 units in 1Q09, CDL sold 370 units in 2Q09 alone, and since July has sold a further 506 units. CDL is looking to launch three more residential projects (total units: 786) for the remainder of 2009. While this is all positive, we believe it has been well reflected in its share price performance since the end of March, outperforming the STI Index by 41%. We struggle to find further upside catalysts for CDL, as even our super bull case NAV of S$11.38 only presents 16% upside at best. We continue to believe that risk on its non-residential exposure, particularly office, presents further downside risk.

Our base case thesis is that previous premiums to NAV and BV valuations experienced in 2006-07 are difficult to justify in this cycle, as, at present, the only bright spot appears to be the residential segment.

CDL - 2Q09 results: above expectations

2Q09 net profit of S$140 mn (-15% YoY, +68% QoQ) was above our expected S$135 mn and consensus’ S$120 mn. This brings 1H09 net profit to S$223.1 mn (+32% YoY).

2Q’s strong 68% sequential growth was due mainly to property development (60% of earnings) where pre-tax profit jumped 74% QoQ. The Arte, 98% sold in 2Q09, was at an advanced 30-55% completion stage. Hotel pre-tax profit also improved 41% QoQ while pre-tax of rental properties (mainly office) fell 17% QoQ.

Market has improved again over the past seven weeks, during which it sold almost as much as it did in 1H09 to bring YTD sales to 1,031 sold, amounting to about S$1.34 bn. In 2H09, it plans to launch 400 units in three projects, across low, mid and high end.

We raise our FY09-11 EPS forecasts by 33-50%, as we raise selling prices to reflect market conditions. We have also adjusted office and hotel values to reflect improving sentiments. Raise RNAV to S$9.82 (from S$8.13), and with strong momentum likely to continue, we peg a 10% premium to derive its target price of S$10.80.

City Developments - stability for the developer with the track record

2Q09 core PATMI of S$140million in line: City Developments’ 2Q09 earnings were 15% lower versus corresponding period last year on higher 0.8% revenues as hotel contributions (via subsidiary M&C) fell 60% Y/Y. Progressive recognition of profit from Singapore residential developments sustained group earnings, with development PBT declining only 19% Y/Y whilst investment property income rose 25% Y/Y. Book value as at end Jun 09 was S$6.18/share (no revaluations as the group holds its investment properties on its books at depreciated cost), and net gearing on that basis is 46%.
Improvement in markets likely to buoy earnings: We have raised our earnings estimates for FY Dec 09E by removing our previous assumptions of inventory writedowns amounting to S$109million, and boosted our FY10E and FY11E estimates significantly (by over 100%) to take into account higher sales volumes and some stability in hotel contributions from FY10E onwards. With increased sales volumes our cashflow estimates increase and hence our FY10E RNAV estimate has been increased from S$11.23/share to S$11.51/share (+2.5%).

Successful launch of Quayside Isle could be the next thing to watch: The group is readying to launch 400 residential units in 2H09, 100 of which are at the Quayside Isle project in Sentosa Cove, which is pitched at the high-end segment. Over 26% of the group's gross asset value is in high-end segment, a re-rating of which would have the most impact on our RNAV estimates for the stock. A 10% increase in ASP assumptions for Singapore property alone would boost our RNAV estimate by 5%.

We raise our end Jun 10E target price to S$10.80/share (S$7.40 previously), based on a 6% average through-the-cycle discount to RNAV. Key risks to our view: a reversal in the momentum of housing demand, especially at the high and mid-end segment could reduce ASP growth expectations and widen the discount at which the stock trades to our RNAV estimates.

City Developments Ltd: Good results; upgrade to HOLD

Results were above expectations. City Developments' (CDL) 2Q09 results came in above our expectations due to better performance from its property development segment. Revenue increased by 0.8% YoY and 26.4% QoQ to S$787m and the strong performance was aided by the property development segment which saw maiden contribution from The Arte at Thomson and Livia. Hotel operations turned in weak results as expected, with revenue declining 25.2% YoY but grew 5.8% QoQ. PATMI fell by 15.3% YoY but jumped 68.3% QoQ to S$140m due to strong performance from the property development segment.

Impressive sales achieved for the year to date. For the year to date, CDL has sold 1,031 residential units that amount to ~S$1.34b. Sales momentum picked up strongly during the last 2 months as CDL sold 494 units amounting to S$675m since July. This is expected to increase in the coming months with new project launches.

New launches in the pipeline. CDL is expected to launch the former Hong Leong Garden site, a 396-unit mass market project in West Coast area next month. With nearby projects achieving average selling prices (ASP) of ~S$750 psf in the secondary market, we expect CDL to launch this site at ASP of S$800-S$850 psf. We have now raised our ASP assumption for this project from S$700 psf to S$850 psf. The former Albany and Thomson Mansion sites located next to The Arte is expected to be launched in 4Q09. The Quayside Isle Collection could also be launched depending on market conditions and this project could potentially bring about a positive surprise to our earnings estimate as construction has already been started and CDL could book in more profits from the sales, based on the advance stage of construction.

Fair value raised to S$9.26; Upgrade to HOLD. Our RNAV estimate for CDL has now been raised to S$9.26 per share (previously S$8.20), reflecting the lower cost of capital used (6.57%), increase in market value of Millennium and Copthorne and increase in our estimated surplus from the South Beach project. We expect the completion schedule of the South Beach project to coincide with the expected recovery in the office sector in 2013. We continue to peg our fair value of CDL at par to our RNAV estimate. As such, our fair value has now been raised to S$9.26 (previously S$8.20) and we are now upgrading CDL from SELL to HOLD.

City Development - Still The Best Proxy

Net profit fell 15% y-o-y in Q2 to $140 mln, consistent with the performance of other property companies.

Like other developers, City Dev has done well in recent months - after selling 537 new homes in the first half for $665 mln (or $1.24 mln average), the group sold 494 units in the last 7 weeks for $675 mln ($1.37 mln), bringing the total sold in the year to date, to 1,031, valued at $1.34 bln ($1.3 mln). This would include the 329-unit joint-venture project The Gale, which is >90% sold, and the 85-unit Volari @ Balmoral, which is almost sold out.

In the remaining months of the year, City Dev plans to launch the 396-unit Hong Leong Garden in the west coast, and the 162-unit Albany, which is next to the almost sold-out Arte at Thomson, but on a superior site.

On the holiday Sentosa island, City Dev is expected to launch The Quayside Isle Collection to coincide the opening of the Sentosa IR early next year. Construction has already started, suggesting meaningful recognition of profit soon after the launch, much as what City Dev had done with Arte (ie construction began before the launch), which made its maiden contribution to the bottom-linein Q2.

On the South Beach development, having secured refinancing in June, including additional $195 mln from City Dev and $205 mln from a new partner (privately-owned Nam Fung of Hong Kong), the consortium is presently moving towards “refining the design plans and value engineering” before construction commences, and targeting to complete by the deadline in 2016.

City Dev’s balance sheet remains one of the strongest in the sector (excluding the cash-rich Wheelock), with gross gearing of 72%. Interest cover is a strong 10.1x, albeit lower than 11.7x a year ago.

Being the largest local developer (with land bank yielding 7.5 mln sf of gross floor area), City Dev remains one of the best proxies to the sector. While it has done well since March ’09, and appears to be encountering technical resistance at the $10 level, we remain comfortable with City Dev, taking a medium-term view.

Maintain BUY.

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.

City Development - Residential titan

Best proxy to improving domestic residential sector. City Developments’ (CDL) massive yet broad-based residential exposure (37% of RNAV) makes it the best proxy to the improving domestic residential market. Going forward, we expect CDL to ride on the mass-mid market buoyancy and clear inventory. An expected return of interest in prime properties should also benefit the company. While the commercial property sector continues to weaken, we draw comfort from healthy occupancies (>90%), recent rent reversions still higher than passing rents and zero devaluation risks given its prudent accounting policy. Our target price of S$12.00 (previously S$12.34) is pegged at 20% premium to end-FY10 base case RNAV of S$10.00 (previously S$10.28) and incorporates latest market prices for its listed subsidiaries. Reiterate BUY.

Mass-mid market buoyancy mitigates hospitality weakness. For the Mar – May 09 period, CDL sold 426 units from four mass-mid projects (i.e. Botannia, Ferraria Park, Livia and The Arte), exceeding the 368 units transacted for 2008. Progressive revenue recognition from these projects within the next two years should mitigate a drop in contribution from its Hotel segment. We expect CDL to leverage on the sustainable mass-mid market buoyancy, through clearing its unsold inventory for Livia and The Arte, as well as launching new projects such as the Albany and Hong Leong Garden sites within the next six months.

Prime projects to gather interest. Management is seeing increased enquiries and demand for its prime projects, evidenced by the sale of four units of St. Regis Residences over the past three weeks. We expect interest here to pick up along with the mass-mid market, which should benefit CDL given its healthy stable of prime projects, i.e. Cliveden, One Shenton and Shelford Suites.

Ammunition behind peers, but landbank ahead. While CDL’s S$577.1m cash lags the post-rights position of KepLand and CapLand, we believe its landbank of 7.4m sqf in GFA (Mass: 73%, Mid: 5% and Prime: 22%) does not warrant a salient need for further replenishments. Risks of provisions also appear low given low land acquisition costs. Current net gearing of 0.49x should be sufficient to tide through the current period, sweetened by recent refinancing secured for South Beach project.

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 - Residential Versatility

Upgrade to BUY at S$12.34. Despite its reasonable exposure to Singapore’s deteriorating office sector (35% of RNAV) and weakening global hospitality industry (16% of RNAV), we believe the market continues to view City Developments (CDL) as the best proxy to the domestic residential market (35% of RNAV). From this angle, we think there is still upside re-rating potential for the counter, notwithstanding a 13.0% MoM (vs. Sector’s +20.8%) jump in share price. We reckon CDL’s versatile residential portfolio allows it to benefit during periods of downcycle and upcycle. With an expected shift in buying sentiments towards mid-prime projects, we believe CDL should benefit from launching and re-launching projects within these two segments. CDL trades at 1.22x P/B during the initial phases of property recovery cycles. We thus peg our new target price for the stock at a 20% premium to our new base case RNAV of S$10.28. Upgrade to BUY at S$12.34.

Best proxy to improving domestic residential sector. With a residential portfolio spanning the mass, mid and prime segments, CDL remains the best proxy to the domestic property sector. We view management’s ability to time its launches to good effect (during both downcycle and upcycle periods) positively. This is best evidenced by its recent buoyant sales for The Arte (we estimate > 80% sold to date) at a time when buying sentiments remain tepid. This can be best compared to its launch of The Sail during the last downcycle. Aside from continuing to benefit from the mass market interest, we reckon CDL could also begin looking at soft launching some of its mid-prime projects to tap the growing interest within this segment. Risks of provisions also appear low as its undeveloped land bank was mostly acquired at relatively low prices.

Strong balance sheet. While we admit that CDL’s balance sheet is not as strong as KepLand and CapLand, we view a net gearing of 0.49x as healthy enough to tide through the current period. With already 6.2m sqf in GFA (Mass: 3.7 sqf, Mid-Prime: 2.6 sqf) in its residential stable, landbank expansion does not form a salient need for CDL, in our opinion.

City Developments - Back to Fundamentals

Quick Comment: CDL is currently trading at 1.3x 2010E P/B (BV/S: S$6.11), which we find difficult to justify in a property down cycle. To be accumulators of property stocks at these levels, we believe one has to assume a V-shaped recovery in Singapore residential prices and office rents in the next 12 months. In our view, a best-case scenario sees prices and rents stabilize at current levels for a while. We maintain our Underweight rating on CDL and price target of S$4.02 per share fully diluted (basic: S$4.45), pegged to its end-2009E NAV.

What's new: CDL’s 1Q09 operating and net profit were ~7% below our full-year estimates. In addition to lower hospitality earnings, our 2009 forecasts assume higher sales and construction progress from the Wilkie Edge, Shelford Suites, and Livia projects. While the construction progress will likely meet our forecasts, sales at mid-end projects Wilkie Edge and Shelford may fall short of our expectations. However, the shortfall could be offset by upcoming contributions from Arte at Thomson, which was successfully launched above our expectations. On a positive note, in addition to Arte, the re-launch of low-end project Livia led to the sale of 189 units in April alone versus 159 units sold in 1Q09. Encouraged by the low-end segment, CDL is preparing to launch its West Coast project – the former Hong Leong Garden Condominium – in 4Q09. Meanwhile, illustrating the tough office market, CDL’s office portfolio’s occupancy has weakened from 94% in 4Q08 to 91% currently. In addition, pre-leasing for the remaining ~25% of retail space at City Square Mall which is due to open in 4Q09, remains challenging.

Worst Not Behind Us Yet, hence fundamentally, we believe current sector valuations are unjustified. In our view, property stocks could trade down in tandem with the downward momentum in office rents and residential prices. For the rest of 2009, we would look to switch into higher-yielding S-REITs, with our S-REIT sector top pick CapitaCommercial Trust (CACT.SI, EW, S$1.02).

CITY DEVELOPMENTS - Confidence of The New Investor

City Dev and its 2 partners: Dubai World and El-Ad, have secured refinancing for the South Beach project: $800 mln 2-year term facility from DBS, OCBC, UOB, HSBC, and Sumitomo Mitsui Bank; $400 mln 5-year convertible notes issued to City Dev: $195 mln, and Nan Fung (HK): $205 mln.

Land cost for the South Beach development, secured in a land tender in 2007, is $1,688.8 mln (reported to be $500 mln lower than the top bid). It was funded by $1.2 bln bridging loan and $489 mln equity from the 3 partners. The development, designed by Norman Foster (HSBC Building in HK), has to be completed by 2016.

Nan Fung is a privately owned company, founded by the 86-year-old Ningbo-born Chen Din Hwa, who is ranked the 9th richest man in HK. Nan Fung is reported to hold equity stakes in HK-listed Sino Land, Lai Sun, and has a joint venture with Metro Holdings.

1. We believe the refinancing is positive news, largely because the new investor, an old hand in properties, is prepared to invest literally at the “original” land cost of $1.7 bln. Nan Fung will end up with about 23% equity stake upon conversion. (City Dev will see its stake increased to 40% from 33.3%. The stakes of Dubai World and El-Ad will drop to a combined 37%.)

2. This should more than offset the negative aspect that Dubai World and El-Ad have scaled back their investment. Recall earlier market speculation of either, or both had wanted out of the venture.

3. The only people who therefore appear to have a bit of cold feet are the bankers, whose exposure drops to $800 mln from $1.2 bln, representing 70% of land cost. But this could very well have been necessitated by the recent credit crisis. (Only Bank of Tokyo has dropped out of the consortium.)

4. With oil prices close to doubling from the low of US$34 per barrel, it is a relief that Dubai is still in, as is El-Ad now that the financial crisis is well past its worst.

5. We further believe there is still room for flexibility or manouvre, given there are 7 years to mandatory completion, and the project needs no more than 3-4 years to complete. City Dev, which is taking charge of the development estimated to cost $2.5 bln including land, has indicated plans to commence work by end 2010.

6. We have a BUY on City Dev.

City Developments: South Beach Project Secures S$1.2b Refinancing

South Beach Consortium secures S$1.2b refinancing. The South Beach Consortium (SBC), equally owned by City Developments (CDL), Istithmar and El-Ad, has secured an S$800m syndicated 2-yr bank loan and S$400m 5-yr convertible notes. Both loans are secured loans and will refinance the S$1.2b bridge loan (Jun 09 expiry) for buying the South Beach Project land parcel in Sep 07. DBS, OCBC, UOB, HSBC and Sumitomo Mitsui are the syndicated loan’s providers, while CDL and Hong Kong property developer Nan Fung Group will subscribe for S$195m and S$205m of the convertible notes respectively. Interest cost was not revealed, but we estimate all-in margin to range from 3.0 – 3.5%, based on REITs’ recent debt refinancing exercises.

Refinancing risks removed, but concerns remain over two foreign partners. The refinancing of another substantial loan (after Suntec REIT: S$825m, CDLHT: S$350m and CCT: S$160m) further indicates that credit markets have eased, which is good news for the real estate sector. While we view the refinancing exercise and introduction of a new established foreign investor positively for CDL, concerns remain over the possible exit of Istithmar and El-Ad. Earlier this year, Istithmar was reported to be looking at offloading assets to generate cash for its parent – Dubai World to help pay its debts. During 2H08, El-Ad had also deferred the construction of Plaza casino-Hotel in Las Vegas and deferred payment of an S$625m loan used to buy its land. To date, both companies have yet to provide clear indication of their financial status and priority of projects under their portfolio.

Minimal impact, reiterate BUY on CDL. Net gearing of CDL would only inch up to 0.49x (currently 0.47x) upon subscription of the S$195m convertible notes, which is still healthy in our view. CDL’s 33% stake equates to S$0.15 per share (assuming project completes by end-2016), accounting for only 1.5% of our S$10.28 base case RNAV. We continue to favour developers with sizeable Singapore residential exposure. Reiterate BUY on CDL at S$12.34, pegged at 20% premium to base case RNAV.

City Developments 1Q09 Results flash - Net profit down 50% yoy to S$83.1m, in line with expectations

1Q09 results in line with expectations. PATMI declined 49.6% yoy to S$83.1m while turnover fell 18.0% yoy to S$622.5m. Excluding provisions the results are in line with our expectations but below consensus expectations. Results came in weaker primarily due to lower contributions from the property development segment and hotel operations. Against the backdrop of a severely weakened economy, PBT for the property development segment and hotel operations fell 56% and 60%, respectively, on a yoy basis.

DPS payments received. The Group stated that almost all requisite payments in relation to residential units that have obtained Temporary Occupation Permits (TOP) have been received, including those under the Deferred Payment Scheme (DPS).

Mass and mid market projects enjoy success. During the quarter, response to mass and mid market projects gained traction due to pent-up demand and lower developer prices. The selling prices for Livia were marginally adjusted 5% downwards to shore up the demand and it was met with good response with total sales crossing over 400 units. The Arte at Thomson, which was officially launched in April has also been well received, and more than 250 units of the 336-unit project has been sold to date.

Hotel operations suffers. 53.5%-owned Millenium & Copthorne Hotels plc saw worsening demand across all regions, particularly in the US markets. Global RevPAR declined by 1.9% based on reported currency and 18.2% on a constant currency basis.

Stronger office rentals partially mitigate weaker results. Office occupancy fell from 94% in 4Q08 to 91% in 1Q09. However, PBT for the rental properties segment came in 47% stronger yoy due to better rental reversion rates that were secured before sharp declines took place.

City Development - Property development still the main earnings contributor

CDL posted a 1Q09 net profit of $83.1m (50%-yoy and 17%-qoq decline). Excluding one-off items from 4Q08, core earnings improved by about 12% qoq. However, the 1Q09 results were below our expectations, accounting for 16% of our FY09 estimate due to slower-than-expected recognition of its development profits.

Pre-tax profit from property development of $68.7m accounts for 58% of total PBT, but this was a 56%-yoy decline. Income was recognized from projects such as The Solitaire, Cliveden at Grange and Tribeca. We expect Livia and The Arte (which is already under construction and about 75% sold) to contribute to its full-year earnings.

Millennium & Copthorne (M&C) continues to suffer from the economic meltdown, as its RevPAR (on a constant currency basis) declined by 18%, while EPS slumped by 52%. Despite the challenging business environment, M&C is remains cashflow generative, and is lowly-geared at 16%.

Demand to CDL’s launches at Livia and the Arte this year has been encouraging. The former Hong Leong Garden site could be launch-ready by 4Q09. While the construction of The Quayside at Sentosa Cove is expected to be completed by 2011, CDL may only launch it near/after completion to achieve better returns. We estimate the project’s breakeven cost to be $820 psf.

CDL’s landbank of about 5m sq ft in GFA gives the Group tremendous flexibility in timing its launches depending on the demand it sees in the market, and sales have been encouraging year-to-date. FY10 earnings may even surprise on the upside if the market recovers in 2H09. Reiterating our BUY recommendation with a target price of $9.30, pegged at parity to its RNAV.

City Developments: Weak M&C earnings a prelude to CDL 1Q09 results

M&C pre-tax earnings down 50% YoY in 1Q09. Millennium & Copthorne (M&C), the hotel subsidiary of City Developments (CDL), reported its 1Q09 yesterday. Revenue declined by 1.9% YoY to £50.7m but on a constant currency basis, it would have fallen 18.2% YoY. Hotels in New York and Singapore were the underperformers in 1Q09, as RevPAR fell by 37.8% and 30.6% YoY respectively. Headline operating profit before tax plunged 50% YoY to £11m. On a constant currency basis, it was down 58.6% YoY. For April, RevPAR continued to deteriorate sharply, falling by 22.9% YoY.

Weak GBP-SGD exchange rate could further weigh on results. We believe that the weakness in M&C's 1Q09 results could be further compounded on the financials of CDL due to the weakness in Pound sterling (GBP) (M&C's reported currency) against SGD (CDL's reported currency). During 1Q09, GBP was trading at a band of S$2.0734-S$2.2510 per £, which was 17.5%-27.5% lower than the band of S$2.7289-S$2.861 per £ in 1Q08. On a QoQ comparison, GBP stayed weak against the SGD in 1Q09, trading at the lower half of the GBP-SGD band of S$2.0709-S$2.5701 per £ in 4Q08.

Influenza H1N1 virus. The hospitality industry had already been badly affected by the financial crisis and economic slowdown. With the recent outbreak of Influenza H1N1 virus, the hospitality industry could sink into deeper woes as we expect to see a further decline in global travel if the virus outbreak worsens. In a situation whereby the virus outbreak turns for the worse from current status, CDL's earnings could be negatively affected as it has significant exposure to the hospitality segment (63.4% of FY08 revenue and 29.4% of FY08 pre-tax profit coming from hotel operations). This was evident during the SARS period in 2003 when M&C reported pre-tax loss of £6.3m for 1H03.

Downgrading to SELL. As CDL is announcing its 1Q09 results next Monday, we are now keeping our earnings estimates unchanged for now. Its share price has now surged 85.2% from its March low of S$4.05 and base on yesterday's closing price of S$7.50, CDL is now trading at Price/ Book of 1.26x and Price/RNAV of 0.99x, which is already at the upper band of its historical downcycle Price/RNAV band. We are keeping our fair value of S$5.53 unchanged, implying a downside potential of 26.3%. While we still like CDL for its strong balance sheet and prudent management, we are now downgrading CDL from HOLD to SELL on its heightened risk profile and valuation concerns.

City Dev CDL - Downgrade to Underperform from Outperform on valuations

Valuations have run ahead. CityDev’s share price has improved substantially from its low in early March. It is now trading at 1.0x CY09 P/BV vs. 0.8x on average during the last plateau in 2003-04. While we continue to like its management and robust balance sheet, we believe valuations now provide little upside.

Large inventory and unbilled presales put CityDev ahead of the curve. Take-up for The Arte has been good with over 90 units sold at ASPs of S$880psf. Margins remain healthy, thanks to its low land cost. We believe CityDev has enough lowcost land bank to meaningfully participate in the current mass-market rally. Cash flows remain strong with management expecting unbilled presales to last till end-FY10. However, its stake in South Beach remains a concern. Including others, we estimate total provisions could exceed S$500m or 7% of total book value.

Resilient commercial book values but little upside in the mid-term. CityDev’s commercial properties are booked at cost and write-downs are unlikely soon. However, with new supply of office space expected in the next three years, commercial rents for its older buildings could face further downward pressure. Anecdotally, we observe that cap rates have risen from 3% in 2007 to 5.8%.

Downgrade to Underperform from Outperform on valuations. We lower our FY09-11 core EPS estimates by 3-26% as we now peg selling prices closer to the last down-cycle in 2003-04. Our end-CY09 RNAV estimate has been lowered from S$7.32 to S$5.92. Our target price, however, has been raised from S$5.90 to S$5.92 as we now peg our target at parity to RNAV (previously 20% discount for further downside potential in selling prices). We believe our estimates adequately capture downside risks in capital values. Downgrade to Underperform from Outperform on valuations.

City Developments (CDL) - Uncertainty over green iconic project

Based on the URA’s flash estimates, private residential property prices in Singapore fell by 13.8% in 1Q09. More specifically, prices of non-landed private property in the Core Central, Rest of Central and Outside Central regions dived by 15.2%, 17.2% and 7.5%, respectively. With a landbank of about 5m sq ft of residential GFA, this is likely to affect CDL’s launch prices for its new projects.

We believe that CDL’s large landbank has projects suited for the entire spectrum of homebuyers. Over the past week, about 60% of the units previewed at the Arte (a mid-end development) have been taken up, at an ASP of $880 psf. This price is, however, 7.4% lower than our expected ASP of $950 psf. Judging from recent demand patterns, there seems to be a greater latent demand for mass market projects; thus, CDL may continue to drive sales at Livia.

CDL has deferred the South Beach development indefinitely, citing high construction costs as the reason. Based on today’s capital values, South Beach development would barely break even at our estimated cost of $2.6b. We believe that CDL will defer its development until general economic conditions improve. However, as capital values are expected to fall further, CDL may potentially have to take an impairment charge of about $130m in FY10.

We have lowered our ASP despite the rebound in share price assumptions for all its Thomson Road projects to $900 psf, as well as further adjusted our launch schedule assumption for its high-end projects to 2011 and beyond. Our FY09 and 10 forecasts are reduced by 9.1% and 12.1%, respectively. While we have trimmed our target price to $7.02, we think that there is still value to be mined despite concerns regarding South Beach. Maintain BUY.

City Developments : Still a gem among peers

Strong balance sheet to withstand turmoil. At the end of 4Q08, City Developments (CDL) has a cash holding of S$775.9m and total borrowings of S$4,146.7m, which translates to a net gearing ratio of 0.48x. If fair value accounting is used, the adjusted net gearing ratio of CDL would ease to 0.32x and this is comparable to the net gearing of CapitaLand after its rights issue and subscription of CapitaMall Trust's rights issue.

Potential beneficiary from the upgraders' market. In comparison with other property developers, CDL is better-positioned to benefit from the demand from HDB upgraders as it has exposure of ~52.5% of its attributable GFA of its landbank to the mass market segment. Some of these sites had been acquired at low prices and the low breakeven cost would give CDL the much-needed flexibility in pricing its new launches under current weak market condition.

Default risk under control. Only about 30% of their units sold by CDL were under the Deferred Payment Scheme (DPS) and CDL has a policy of collecting 20% as down payment from buyers under this scheme; DPS is not extended to sub-sales. We also think that it is unlikely for buyers to just walk away from their purchases as buyers would face legal action for breach of breach of their contractual obligations.

M&C remains financially self-sufficient. Subsidiary M&C's financial position remains strong, with net gearing ratio of 0.16x. With undrawn committed bank facilities of £188.6m and cash-generative operations, we believe that M&C can remain self-sufficient on its own without tapping on its parent, CDL, for additional resources.

Building up war-chest for acquisition. CDL had been active in building up its acquisition war-chest recently, having increased the limit of its Medium Term Note (MTN) Programme from S$700m to S$1,500m in December 08 and raised S$100m from its S$1,000m Islamic Trust Certificate (ITC) Programme in January. CDL is currently in the process of issuing the second tranche of the ITC and expects to raise another S$300m-400m from the programme.

Reinitiate coverage on CDL with HOLD. We ascribe a 30% discount to our valuation of CDL's development profits and investment properties. For its investments in M&C and City e-Solutions, we peg their valuations to their current market capitalizations without any discount. As such, our fair value of CDL is pegged at S$5.43. We believe that CDL is well-positioned to ride through this downturn but for now, upside to share price looks limited and we reinitiate coverage on CDL with a HOLD rating.

City Developments: No Rights Needed To Ride It Out

CDL net profit of S$581m was slightly below expectations, due to stronger SGD impacting M&C’s contribution when translated to Group level. Balance sheet remains healthy, and a rights issue is not on the cards for now. Final dividend of 7.5 cts/shr. Maintain BUY.

FY08 Slightly Below Expectations. City Dev (CDL) reported FY08 net profit of S$581m on revenue of S$2,945m. This was a 20% and 5% drop yoy respectively. The fall in earnings came primarily from lower contribution from 53.5%-owned M&C, due to consolidation impact from the weaker GBP. This was slightly under our below-consensus expectations, but credible given current economic conditions. CDL declared a dividend of 7.5 cts/shr, same as FY07, though the latter did see 22.5 cts/shr of special dividends.

Balance Sheet Stays Strong. CDL’s balance sheet remains healthy, with gearing unchanged yoy at 48%. Interest cover is at 11x (FY07: 10.5x). As CDL states its investment properties, hotels and interest in CDL HT at cost, its earnings is spared the volatility associated with revaluation of investment properties. If CDL adopted a revaluation policy, gearing would be 32%. Management also said a rights issue is not on the cards for now.

Maintain Buy, TP S$5.62. Good earnings visibility, a proven track record and a healthy balance sheet continue to be the key investment themes for CDL. It remains our top big-cap pick, with its diverse landbank able to take advantage of launch opportunities in the mid/mass market should these present themselves. Our RNAV is S$7.51 (from S$7.94) and we take a steeper 25% discount to RNAV (prev 15%) to account for stronger headwinds facing M&C. BUY, TP S$5.62.