CapitaLand - Caught in an ebbing tide

We have downgraded our rating for Capitaland to 3 from 2 after the government’s announcement (on 14 September) of measures to ensure a ‘stable and sustainable’ property market, including a surprise (in our view) withdrawal of the Interest Absorption Scheme (IAS). We expect CapitaLand’s shares, a proxy for the Singapore property sector, to be pulled down by the negative sentiment.

We see CapitaLand’s share-price driver as deal flow (capitalproductive announcements, including the possibility of monetising its China-mall assets or a major acquisition) and not the state of the Singapore residential market, although the company is poised to launch The Interlace next month. We have not changed our earnings forecasts.

We have lowered our six-month target price, to S$3.84, based on a reversion to its average premium to NAV (based on our estimates) of 29% over the past five years, from S$4.30 (based previously on one-half standard deviation above the average NAV premium). We have not changed our NAV estimate of S$2.98.

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CapitaLand Ltd: Gillman Heights development plan unveiled

Lowering our project profit estimation. While we previously assumed a project margin of 25% for this project, we have now lowered our margin assumption to 20% for this project and the average selling price could be around S$900 psf. On these new assumptions, we have now lowered CapLand's attributable share of profit contribution from this project by 32.8% from S$205.5m to S$138m.

Important step towards capital deployment but excitement dwindling. CapLand recently announced its plan to deploy the capital it raised during its Rights issue in Feb. Out of the proceeds of S$1.8b, S$1b will be deployed to 3 of its business units- CapitaLand China (S$500m), CapitaLand Vietnam (S$300m) and Ascott (S$200m). Although this is one step closer towards capital deployment, we think that the initial excitement over the potential value creation from the capital deployment is now dwindling as the strong recovery in the property markets in Singapore and China has now lowered hopes of distress acquisitions.

Maintain HOLD. Our RNAV estimate has been lowered marginally to S$3.72 (previously S$3.73) after lowering our estimated profit contribution from The Interlace. We continue to peg our fair value of CapLand at par to its RNAV and thus deriving a fair value of S$3.72 (previously S$3.73). Since our last report on 30th July, CapLand's share price had fallen closer to our fair value. Price looks fair but value has not yet emerged. We maintain our HOLD rating on CapLand. We continue to like CapLand's growth potential in developing countries like China and Vietnam but advise investors to wait to enter at more attractive valuation of at least 10% below our RNAV estimates for a better margin-of-safety. Investors may want to switch to other value property developers like UOL Group (BUY; FV: S$4.07) that is trading at 21.8% discount to our RNAV estimate.

CapitaLand - Revaluations and impairments result in reported loss

CapitaLand announced its first quarterly loss since 4Q03, reporting in at a loss of $156.9m for 2Q09, mainly due to net revaluation and impairment losses to the tune of $280.9m. Core earnings (excluding revaluations and impairments) actually improved by a strong 163% sequentially, due mainly to increased profit recognition from projects in Singapore and China.

CapitaLand handed-over 1,000 completed units this year. To-date, revenue from the Seafront on Meyer has not been recognised - we believe it would feature in the second half. CapitaLand has made a $49m-writedown for the former Char Yong Gardens site, in which it has a 50%-stake. We estimate that this results in a reduced breakeven cost of around $1,965 psf.

CapitaLand reiterated that it will be focusing on these four core markets going forward. The management believes that these markets are backed by strong fundamentals. China will remain as the biggest target market, as the Group aims to increase its asset allocation into China from the current 27% to up to 45% over the next 3-5 years.

CapitaLand just recently committed to subscribe for its portion of Australand’s rights issue to raise A$475m. For their 59% stake, it will require A$281.6m (~S$330m). CapitaLand believes that the residential market in Australia is under-supplied by between 50,000-70,000 units per year, and that the Australian economy is on the road to recovery.

Masked by non-cash writedowns, CapitaLand’s businesses are actually showing improvements operationally. We do expect results in 2H09 to continue to show operational growth. However, the current share price is close to our fair value of $4.29, pegged at a 10%-premium to our FY10 RNAV of $3.90. Downgrading to HOLD on valuation grounds, preferring re-entry at a price of $3.73 for a 15%-upside.

CapitaLand - 1H09: Well-capitalised

CapitaLand reported a net loss of S$156.9m in 2Q09 mainly due to the booking of S$280.9m in revaluation losses and impairment charges, the bulk of which came from its subsidiaries and associates in Singapore and Australia. Excluding the revaluation losses and impairments, 2Q09 PATMI declined 75% yoy to S$124m, bringing 1H09 PATMI to S$171m, down 55% yoy. The results were in line with our expectations with 1H09 PATMI representing 46% of our full-year forecast. Overseas operations accounted for 61% of the EBIT with China (40%) being the major overseas contributor, closely followed by Australia (34.5%).

Capitalising on the recovery in the Singapore residential segment. Residential sales in 2Q09 picked up with CapitaLand managing to sell 94% of 173 units in its Wharf residencies at a median price of S$1,200psf and a few units at the Orchard residences above S$2,787psf levels. CapitaLand is working to get the Gillman Heights site ready for launch in 2H09. This is to be followed by the Char Yong site that has been written down by S$49m to S$ 364m, or S$1,200psf.

Positive contribution from ION Orchard to boost 2H09 earnings. ION Orchard opened its doors on 21 July and is 96% leased, covering a total area of 650,000sqf with a total of 335 shops, out of which over 80 are new-to-market brands and new concepts. It is currently valued at S$3,800psf with potential to be revalued upwards considering that the Wisma Attria next door has received a valuation of S$5,000 psf. The annual revenue for ION Orchard is expected to be around S$200m.

Beneficiary of supportive policy initiatives in China. The residential market in China saw a major boost in 2Q09 following the government’s stimulus measures. In 1H09, CapitaLand sold a total of 1,163 units, nearly 1.5 times the entire 782 units sold during FY08 and revenue also jumped 49% yoy. It has aggressive expansion plans in China with a target to enlarge the asset base from the current 27% to 45% of total asset base in the next five years.

CapitaLand to raise additional S$1.1b via convertible bonds. The Group plans to raise funds worth S$1.1b through convertible bonds due in 2016 with a conversion premium of around 20% (conversion price S$4.79) with a 2.875% coupon to refinance its existing debt and to finance new investments. While we do not see the need to raise additional capital as it has a strong cash position of S$4.2b, we believe it is a capital management initiative to capitalise on the recovery of the credit markets and be even better prepared to take advantage of opportunities. It is expected to improve to improve further from 0.43x to 0.32x. The RNAV is adjusted marginally by 3cents/share to S$4.08.In addition, Capitaland has also secured a credit line of Rmb25b from BOC and ICBC to support its long-term expansion plan in China.

CapitaLand is well-positioned to capitalise on the improved market sentiment with a stronger balance sheet. We maintain our BUY recommendation with a marginal increase in the target price from S$4.85 to S$4.90, pegged at a 20% premium to revised 2009 RNAV of S$4.08/share.

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.

CapitaLand Ltd: 2Q09 results marred by fair value losses

Results marred by fair value losses. CapitaLand (CapLand) reported its 2Q09 results and revenue for the quarter fell 27.9% YoY but increased by 21.4% QoQ to S$591.1m. The YoY decline was attributable to lower contributions from development projects and serviced residences operationsand also the absence of revenue from divested commercial properties. Net revaluations and impairment charges of S$280.9m were also recognized in 2Q09 and these largely came from revaluation losses from investment properties and sponsored REITs and provisions made for its development projects in Australia and Singapore (Char Yong Gardens site: S$49m impairment loss) but was partially cushioned by the S$358m revaluation gain from ION Orchard. Reported PATMI for 2Q09 plunged into the red with a loss of S$156.9m but excluding fair value losses, PATMI would have increased by 163% QoQ to S$124m.

Still on track to meet our forecasts. Excluding the revaluation and impairment losses, 1H09 PATMI of S$171m met ~35.2% of our revised FY09 PATMI target of S$485.8m but we remain confident that CapLand will be able to meet our full year expectation. We expect CapLand to deliver a better 2H09 performance, on the back of contribution from ION Orchard, higher contribution from The Seafront on Meyer and The Orchard Residences, and strong home sales in China. Operating performance of its business units had turned around in 2Q09 and could surprise on the upside in 2H09 if regional economies continue to recover.

Raising our ASP for China projects. In China, CapLand sold 703 units in 2Q09, an increase from the 460 units sold in 1Q09. Prices had also been raised by 10%-15% in 1H09. We reiterate our positive view that the China property market will continue to see sustainable demand driven by urbanization and we have now raised our average selling price (ASP) assumptions for CapLand's China projects by 10%.

Positives priced in; maintain HOLD. Our RNAV estimate has now been raised to S$3.73 (previously S$3.34) after raising our ASPs and markingto- market the valuation of CapLand's listed subsidiary and associates. Our fair value has now been raised to S$3.73, pegging to our RNAV estimate. While we remain positive on the prospects for CapLand, we think that much of the optimism has already been priced in as CapLand is now trading at a Price/Book of 1.4x and Price/RNAV of 1.1x. Current macro-economic environment still warrants some cautiousness and we caution against overpricing the optimism and prefer to accumulate at more attractive valuations. We maintain our HOLD rating on CapLand and will turn buyers at S$3.20-S$3.30.

CapitaLand 2Q09 Results Flash: PATMI of S$124.0m in line with expectations excluding revaluations and impairments

CapitaLand reported a PATMI of S$124.0m in 2Q2009 (excluding revaluations and impairments), a 163% increase compared to 1Q2009. Including aggregate losses on revaluations and impairments totalling S$280.9m taken in 2Q2009 related to the Singapore office portfolio (including CapitaLand's share of CapitaCommercial Trust's revaluation losses), real estate assets in Australia and the former Char Yong Gardens site in Singapore, the Group posted a 2Q2009 net loss after tax and minority interest of S$156.9 million. The 2Q09 PATMI of S$124.0m is in line with expectations excluding excluding revaluations and impairments.

Revenue and Earnings before Interest and Tax (EBIT) in 2Q2009 benefitted from higher sales in China and Vietnam. In China, the Group saw healthy sales of its residential projects, including the new launches in Beijing, Chengdu and Foshan. This contributed significantly to the 163% quarter-on-quarter increase in PATMI. In Vietnam, the Group continued to recognise sales for The Vista, a residential development in Ho Chi Minh City. These mitigated lower sales revenue from development projects in Australia and Singapore, absence of rental revenue from commercial properties which had been divested and lower operating performance of serviced residence properties.

CapitaLand - Capital-productive deals expected to drive outperformance

We have upgraded our rating to (Outperform) from (Hold) and expect the successful resumption of monetising portions of its China-mall portfolio into CRCT, possibly with other capital-productive announcements, to trigger share-price outperformance.

CapitaLand’s business is diversified across several property segments and geographic locations. With the possible exception of the China market, property markets are generally subdued compared with conditions before the global financial crisis, although the risk of a property-market collapse has been averted.

Singapore property risks are receding rapidly, and the magnitude of possible impairment charges for certain projects in CapitaLand’s landbank are also diminishing. If the property-market momentum carries strongly into 2010 (we believe this is highly uncertain), CapitaLand might take significant market share with the successful launch (or re-launch) of its mid-to-high end projects. Landbank replenishment is an issue, but this would be adequately addressed if the company were to acquire attractive sites (part of the capital-productive announcements).

We have raised our six-month target price to a 60% premium to NAV (from NAV and a target price of $$2.43 previously), one standard deviation above the average premium to NAV, on our revised NAV estimate of S$2.64.

Bulk of cash calls from Capitaland's REITs completed

CapitaCommercial Trust (CCT, 34% owned by CapitaLand) has announced a 1 for 1 rights issue to raise approximately S$828mn. Approximately 1.4bn rights shares will be offered at S$0.59 per rights share (44% discount to last traded price). CapitaLand (CAPL) will subscribe to its pro rata entitlement (~S$282mn). Our current forecasts are already factoring in a S$1bn cash outlay for funding of sponsored REITs (including the previously announced CMT equity raising).

CCT revalued its portfolio downward by 10.1% to S$6.0bn. On an individual asset basis, valuation declined between 3-16%. Cap rates used by valuers remained largely unchanged. These revaluations will be reflected in CAPL’s 2H09 reported earnings (-S$232mn asset revaluation at associate level), however will have no impact on our core earning forecasts. We expect the downward revision of CCT’s portfolio will be offset by an upward revaluation of Orchard Ion. Our forecasts account for -15% decline in CAPL’s sponsored REITs’ NAVs.

CAPL’s two largest REITs, CMT and CCT, have now come back to the market for equity. We are confident that REIT balance sheets are now strong enough to withstand this downturn and that they will not need to return to the market for equity. We maintain our Buy rating on CAPL and PO of S$4.50/share (10% premium to RNAV of S$4.10/share). CAPL remains our preferred exposure to the Singapore property sector as we believe it has the greatest potential to re-rate in an upturn.

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.

CapitaLand - Well-poised for new acquisitions

Upgrade to BUY at S$4.22. We continue to like CapitaLand’s (CapLand’s) enviable cash hoard of S$5.2b (post CCT’s rights take-up) and low net gearing of 0.34x. This should pave the way for NAV expansion as it looks for acquisition targets in core markets of Singapore, China and Australia. Despite its 12.9% MoM surge in share price, we believe successful landbank acquisitions could further push up its current share price. Coupled with an improving Singapore residential outlook, maiden income from Orchard Residences and The Seafront should help to mitigate possible landbank provisions for its Farrer Court and Char Yong Garden sites. CapLand trades at 1.23x 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$3.52. Upgrade to BUY at S$4.22.

NAV expansion with cash hoard. Among its peers, we reckon CapLand’s substantial cash hoard puts it in pole position to grow NAV when more opportunities for landbank expansion surface in 2H09, especially in China, Singapore and Australia. Concerns over NAV erosion from landbank provisions and revaluation losses would also be effectively solved.

Lure of China. The 17.5% YoY climb in Jan – Apr 09’s sold GFA (to 176.25m sqm) in China provides a genuine indication that buying sentiments have ameliorated. With 2.9m sqm of undeveloped residential landbank remaining, we believe CapLand is well-positioned to benefit from the improved dynamics and strong real estate fundamentals within China’s lower-upper tier cities. Its retail portfolio (28 completed and 10 additional malls in FY09) should also contribute stable income in the event that residential take-up for selected projects fails to take off.

Debt obligations addressed for subsidiaries/associates. Recent successful capital raising and refinancing activities by CapLand’s subsidiaries (Australand: S$350m debt refinanced) and associates (CMT: S$1.2b rights issue, CCT: S$828.3m rights issue and S$160.0m debt refinanced) have removed the need for it to subscribe for more than its pro-rata entitlement. More importantly, this affords it excess cash for acquisition purposes.

China to be CapitaLand’s saviour?

CapitaLand posted a PATMI of $42.9m in 1Q09, down sharply by 83% yoy, 42% qoq. It was off the mark from full-year consensus estimate of $479.4m. While 1Q08 PATMI was boosted by divestment and forex gains, core earnings still fell by 65.5% yoy. Its topline also showed a 23% yoy-decline. No writedowns of its landbank has been made this quarter. Income from property sales slower than expected.

EBIT from the Singapore residential SBU fell by 50% yoy to $20.0m, with the rate of profit recognition from sold projects being slower than expected, and hardly any new units sold in the first quarter. For the rest of FY09, income will be predominantly contributed by The Seafront on Meyer and The Orchard Residences.

CapitaLand Financial is the only SBU to improve yoy, as its EBIT increased by 58% to $29.2m. The Ascott Group’s core EBIT declined by 27% due to the poor economic climate. Its China SBU plunged by 67% yoy in the absence of fair value and divestment gains, but core earnings remained relatively flat. In fact, CapitaLand China managed to sell a total 460 units in 1Q09, including about 60% of 546 newly launched units sold.

The ability to sell 460 residential units in China in 1Q09 could signify that the property market there is picking up. With the Singapore property market likely to remain lackluster for the rest of the year, CapitaLand may double its efforts to drive its sales there. With the proceeds raised from the recent rights issue, CapitaLand is in the position to capitalize on the current market condition to replenish its landbank in China.

Adjusting to a conservative launch schedule and some ASP assumptions, we have slashed our FY09 and FY10 forecasts by 44% and 38% respectively. We still like the management’s business acumen, and the current downturn could provide CapitaLand with lots of opportunities for growth in the next cycle. Maintain BUY, with a target price of $2.93, pegged at a 10%-discount to RNAV.

CapitaLand: Starting The Year Slowly

1Q09 under expectations. CapitaLand (CapLand) reported an 82.7% YoY plunge (-45.0% QoQ) in 1Q09 PATMI to S$42.9m, which were off our estimates and the Street’s (8.5% and 7.8% of DMG’s and Consensus’ FY09F projections respectively). The subdued performance was largely attributable to a lack of divestment gains, absence of income from monetised assets, weaker operating performance from The Ascott Group and slowing residential sales. Stripping away non-recurring items (i.e. divestment gains, forex and MTM losses from hedging instruments), we estimate core operating income would have eased at a more acceptable 2.1% YoY (-29.0% QoQ)to S$139.8m. CapLand’s Financial Business Unit was the quarter’s star performer, posting a 57.9% YoY (+111.9% QoQ) surge in EBIT to S$29.2m.

China continues to deliver. On top of the 390 transacted units from 1 Jan - 22 Mar 09, CapLand sold another 70 units in China before 1Q09 ended. We note that this healthy take-up trumped the 13 units sold in Singapore, as well as the 348 and 55 units sold in 1Q08 and 4Q08 respectively. With 8,011 unlaunched and launched but unsold units, as well as 2.9m sqm in GFA of residential landbank in China, we believe CapLand should be well-poised to benefit from the country’s improving home-buying sentiments. This would also mitigate the current subdued appetite for domestic mid-prime projects, of which CapLand is highly exposed to. On the Retail front, CapLand’s 28 operational suburban retail malls should continue to chip in resilient cashflows given their product offerings of recession-proof basic necessities.

Contribution from Hospitality and Australand trimmed. In light of the deteriorating global hospitality sector, we are paring down topline contribution from serviced residences by 5 - 10% in FY09F – 10F. We have also reduced Australand’s revenue by a further 15% to reflect management’s forecasts of a 30% decline in FY09F operating profit. FY09F and FY10F EPS thus drop by 6.6 – 24.3% to S$0.09 and S$0.14 respectively. Going forward, we reckon CapLand would be less reliant on asset monetisation to drive earnings given the credit markets’ still-constrained condition. As such, it would be more dependent on recurring income from its Financial Business Unit. This will be supported by maiden contributions from two indigenous residential projects (The Seafront and Orchard Residences), as well as new rental income from ION Orchard beginning Jul 09 and the opening of 10 additional Chinese malls in FY09. Maintain NEUTRAL at S$2.36. CapLand’s share price has corrected back to our previous fair value of S$2.60 following our downgrade to NEUTRAL in the report “1Q09 > Half of 2008” dated 16 Apr 09. While we still view CapLand’s balance sheet strength (net gearing: 0.32x and cash: S$5.5b) and financial flexibility positively, and Australand’s recent S$350m debt refinancing exercise has eliminated any near term cash call, we do not envision any tangible catalysts for the counter at the moment. Our revised fair value of S$2.36, at 30% discount to FY09 base case RNAV of S$3.37 (previously S$3.71), assumes latest market values and revised fair values for its listed entities. Maintain NEUTRAL.

CapitaLand - 1Q09 results: In keeping with the narrative, no surprises

1Q09 results weak but expected: CapitaLand’s 1Q09 PATMI of S$42.9 million was above our expectations (and little below consensus) but there was little in the quarterly results announcement that showed deviation from recently flagged trends. Lower revenues (-23% Y/Y) were mainly due to lower development project sales and reduced rental income, whilst headline PATMI fell 83% Y/Y as divestment gains recorded in 1Q08 were not repeated.

Group cash balances at end 1Q09 were S$5.5billion: The group reported net debt to equity ratio of 0.32x as at end Mar-09, and total corporate treasury liquidity of S$7.1 billion (S$4.0 billion in treasurycash balances, S$877 million of short-term debt facilities and the balance in the untapped portion of a Medium Term Note Programme).

China residential development sales momentum picking up towards the end of 1Q09, and this should flow through into 2Q09: Residential development sales in China (in Foshan and Chengdu) have picked up momentum particularly in Mar-09, and this positive pick-up should underpin an improvement in the group’s China revenues.

2Q09 valuations should be the next marker. The group undertakes semi-annual valuations of its investment properties, and 2Q09 results (announced likely in July or early August 09) are likely to be an important marker on the asset value front. Our full year FY09 net earnings estimate includes S$248 million for the group’s share of writedowns to the investment property portfolio.

We maintain our end Dec-09 price target of S$3.30/share, based on a 30% discount to our RNAV estimate of S$4.70/share. Key risks to our rating and target price: (1) prolonged period of depressed risk appetite for Asian real estate, and (2) weaker-than-expected property demand which lowers asset valuations.

Capitaland - Massive asset write-down risk; downgrade to REDUCE

Downgrade CapitaLand to REDUCE. As much as we believe in its asset turnover and management of multi-asset classes, it cannot escape an erosion of shareholder value, which is tied to the cyclical property market. This is especially true for CapitaLand, due to potential impairment provisions on land purchased at the peak in 2007, together with asset devaluation risk of its large property investment portfolio.

Although CapitaLand’s direct investment property portfolio shrank due to a SGD3.3b asset divestment in 2008, it is still vulnerable to asset devaluation, largely to its holdings in listed associates such as CCT SP (31.1%-owned), CT SP (29.6%), CRCT SP (26.6%) and ART SP (47%).

The revaluation surplus/deficit is recognised as earnings contribution, according to its stake in the associate. Some revaluation deficits were already registered in its 4Q08 results: CCT (SGD242m), ART (SGD94m) and CRCT (SGD17m). It also recognised a deficit of SGD59m in its direct portfolio in 4Q08 (the first deficit since 4Q05). We believe this trend has just begun, and that a 10% fall in its listed portfolio valuation would result in BV erosion of 4.9%.

Our provision test on its Singapore land bank shows that large absolute provisions amounting to SGD470m are needed. These provisions come from the three land parcels it bought in 2007 – Char Yong Garden, Gilman Heights and Farrer Court. These impairment provisions represent 4.4% of its BV. Further provisions might be required on its sizeable overseas exposure in Australia, Vietnam and China.

With the fast deteriorating valuation across all asset classes, we believe CapitaLand’s large portfolio will not be spared from a massive asset write-down. As a result, we expect a further deterioration to its current BV. We downgrade to REDUCE with a TP of SGD1.88, pegged at a 40% discount to our RNAV estimate of SGD3.13. We prefer City Development and Keppel Land, which have low impairment and asset devaluation risks.

CapitaLand - Looks fairly-valued now

Strong recovery in share price. The recent market rally had seen the share price of CapitaLand (CapLand) staging a significant recovery. While the STI has now gained 23.7% after hitting its 52-week closing low of 1,456.95, CapLand has surged 43.6% over the same period. With no catalyst in sight for a sustainable recovery in the property market, we believe that the recent spike in share price is largely sentiment-driven, rather than fundamentally-driven one.

Rights issue completed. Since our last report in February, CapitaLand has completed its Rights issue and with that, it had successfully raised gross proceeds of S$1,835.5m. For CapitaMall Trust's (CMT) Rights issue, CapLand subscribed for a total of 446.1m Rights units and the capital commitment for the subscription amounted to S$365.8m. Upon the completion of its Rights issue and its subscription for CMT's Rights shares, CapLand now has a cash hoard of ~S$5,698.1m and its net gearing has fallen from 0.46x to 0.3x. Focus will now be on the deployment of the funds raised, which could be a potential catalyst to the re-rating of CapLand's shares.

Limited impact on landbank write-down. As the property market continues to deteriorate, we are seeing increasing risks of write-down in landbank, especially those acquired during the later stage of the property upcycle. For CapLand, its acquisition of Char Yong Garden (at S$1,788 psf ppr) and Farrer Court (at ~S$780 psf ppr) could be at risk of write-down. Taking into consideration CapLand's effective stakes in these two acquisitions (50% in Char Yong Gardens and 35% in Farrer Court), CapLand's total exposure is ~S$877m and the exposure on CapLand's book value is limited as these account for ~6.3% of CapLand's book value.

Downgrading to HOLD on valuations; Fair value S$2.51. To reflect the increase in market valuation of its listed REITs and investments, our RNAV estimate of CapLand has now been raised to S$3.06 (previously S$3.00). At current share price of S$2.57, CapLand is trading at price/ book of 0.87x and price/RNAV of 0.84x. We maintain our 30% discount on our valuation of CapLand's development profits and investment properties and no discount for its listed investments. Our fair value of CapLand has now been raised to S$2.51. While fundamentals remain solid, valuation looks rich now. Purely on valuation, we are now downgrading CapLand to HOLD.

Capitaland - Worst appears priced in for Singapore residential market

Firepower for new investments: Post rights, gross cash balance of CAPL increases to ~S$6.1bn, of which ~S$4.8bn is at the corporate treasury level. Gearing is reduced from 0.47x to 0.27x. Once we impute ‘worst case’ 2009E B/S downside of ~S$2.7bn (assuming REIT funding S$760mn, asset impairment S$1.4bn and capex S$0.5bn), CAPL would still have ~S$1.3bn to plough into investments while maintaining leverage below 0.5x. This gives us confidence that CAPL will not need to raise further equity in this cycle.

Track record of delivering returns: From our perspective, CAPL has established a track record of delivering shareholder returns through the cycle. We believe that management will redeploy cash by pursuing distressed assets and/or companies. With the holding power to ride through the cycle, we believe acquisitions will reward the group via divestment gains in future periods.

Worst appears priced in for Singapore residential market: Singapore property stocks trade with a high correlation to the domestic residential market. In past cycles, property stocks bottomed in line with troughs in transaction volumes. In 4Q08, residential transactions hit 10 year lows. While we think pricing will take another 9-12 months to correct, we believe downside from the residential market is already reflected in share prices.

Weak global economic outlook: Macro shocks to the Asian region, which may damp consumer sentiment and undermine property markets in general.

Further weakening of regional property markets: Further deterioration in outlook of regional property markets will hit CAPL, given its exposure to China, Australia and various other markets.

CapitaLand - Cold realities present opportunities; upgrade to Buy,

We upgrade CapitaLand to Buy (from Neutral) and add it to our Conviction List as we see its wide discount to NAV of 38% vs. City Dev of 21% (Sell) as attractive given its diversified business model and strong balance sheet (better positioned today than during the 1998 down-cycle when its gearing was 0.95X vs. 0.27X currently). Moreover, its decision to step up efforts to dispose investment assets (S$7bn in two yrs) to raise cash has positioned it well to reinvest for the next cycle. We believe CapitaLand could look at potential acquisitions once macro conditions improve, enabling it to generate above-sector NAV growth in the next 3 years.

Our stress tested valuation (further 10ppt below 1998 prices) shows that the stock has moderate downside, at 7% below current prices. Also, stressed tangible BVPS post write downs and provisions is S$2.36 (-16% erosion). While we expect news flow on the sector to be dominated by DPS risk, this should be offset by CapitaLand's defensive mix. We identify the following share price drivers: 1) a war chest of S$6bn, and allocation of cash would be a catalyst when markets stabilize; 2) provisions on its residential land bank, as early as 1H09 results. Any kitchen sinking would accelerate the earnings adjustment process, leading to potential share price recovery (similar to 2001); 3) good take up of CapitaMall’s (Neutral) rights issue would free up capital commitments; 4) China’s property market stabilizing by late 2009E, before Singapore in mid ‘10.

38% disc to NAV is at the low end of its historical range. We cut our 09E-NAV 5% to S$3.35 and write down Ascott. We cut our 12-m TP to S$2.68 from S$2.81; we maintain our 20% disc to RNAV. We cut ‘09-10E core EPS by 5-25% on weaker prices and raise ‘11E by 12% on a pick up in residential contribution. Residential cycle bottoms out earlier than our expectations (of mid 2010).

CapitaLand – Market leader at a bargain. Maintain BUY

Ahead of the potential plethora of upcoming rights issues, CapitaLand’s is substantially completed, with yesterday being the last day of acceptance or renunciation for the rights shares. The rights shares are expected to start trading from 23 Mar, and we think that the share price should stabilise soon.

During China’s 2009 National People’s Congress Annual Sessions, the government pledged to stabilize the property market and promote a steady and orderly development. Other than building low-rent houses for poor families, few details were given on how the government would reform the broader urban housing system, which would impact on CapitaLand’s exposure in China. We expect more details and initiatives to be announced in the coming months.

CapitaLand has not made any provisions for its residential landbank. We think that its landbank is largely profitable, owing to the relatively low costs of acquisition and declining construction costs. However, we estimate that Urban Suites (former Char Yong Gardens), may have to be written down by about $44m, assuming an ASP of $2,000 psf.

Following the rights issue, CapitaLand is well ahead of its peers in terms of its cash horde of $6bn ($5.3bn if it takes up 60% of CMT rights). It also has access to another $3bn via undrawn short-term debt facilities and the unused portion of its Medium Term Note Programme. We believe that the management would be looking for distressed assets mainly in China.

We are lowering our ASP assumptions by up to 20%, thereby reducing our FY09 and FY10 forecasts by 4.1% and 10.5% respectively. We think that valuations are very attractive for this market leader and we reiterate our BUY recommendation with a target price of $2.70, pegged to a 15%-discount to RNAV.