Future-proofing for steadier growth. We reiterate our BUY recommendation on KepLand, as we believe there will be more avenues for KepLand to increase its exposure to investment-grade commercial properties in China via its tie-up with China Vanke. By growing its portfolio of high-quality commercial assets, future income variability from residential property development may be mitigated, which we believe will be positive for KepLand.

Building up commercial portfolio. In February, KepLand partnered its property fund management arm Alpha Investment Partners to acquire an 80% stake in Lifehub@Jinqiao, an operational mixed-use development in Shanghai, at a price of ~RMB3.3b. In addition, KepLand is already building a 100,000-sqm predominantly office project in the heart of Beijing’s Chaoyang CBD and Phase 1 of Seasons City in Tianjin Eco-city, comprising office and retail GFA of 20,000 sqm each. When all completed in 2016, we estimate KepLand’s share of the net property income from these three properties at ~SGD33m per annum.

Partnership with Vanke may accelerate commercial ambitions. KepLand’s latest partner, China Vanke, may be most well-known for being China’s largest residential property developer, but it has also been diversifying into large-scale integrated-developments commonly known as HOPSCA (hotels, offices, parks, shopping, convention centres and apartments). We believe that there will be opportunities for KepLand to participate as a co-investor for such projects in future given their capital-intensive nature, allowing KepLand to grow its own commercial property portfolio faster than if it were to go it alone.

The end-game: a China-focused commercial REIT? Even without divesting its stake in MBFC Tower 3, KepLand has additional debt headroom of SGD1.3b for new acquisitions before its net gearing exceeds 0.5x, giving it the capacity to nearly triple its China commercial property portfolio. This may eventually provide the basis for a future China-focused REIT listing. Maintain BUY, target price increased marginally to SGD4.82, pegged to a 20% discount to RNAV.

Source: Maybank Kim Eng Research - 22 May 2013