Encouraging 1H13 operations. Operationally, CapitaLand enjoyed an encouraging 1H13 as home sales and retail tenants’ sales enjoyed healthy YoY growth both in Singapore and China. We expect much of the momentum to be carried into 2H13, but its two scheduled residential launches in Singapore will be keenly watched in view of potential headwinds. Maintain BUY for its diversified business and undemanding valuations. TP set at SGD4.10, pegged at a 20% discount to RNAV.

Results in line; more back-end loading expected. Excluding revaluation and portfolio gains, CapitaLand’s 2Q13 core PATMI came in at SGD108.0m (-19% QoQ; +20% YoY), including a SGD27.7m loss from the repurchase of convertible bonds with the intention of extending debt maturity and reducing future interest expense. 1H13 core PATMI makes up 31% of our full-year forecast, but we expect more back-end loading with the expected handover of ~1,900 homes in China in 2H13.

Eyes on 2H13 launches. In 1H13, CapitaLand sold 164% and 58% more homes in Singapore and China respectively than a year ago. We expect the sales momentum in China to be sustained by demand from first-time buyers and upgraders in 2H13. In Singapore, it is preparing to launch the 124-unit Marine Point (est. SGD1,800psf) and the 694-unit project at Bishan St 14 (est. SGD1,500psf). Management however conceded that some moderation in prices and sales volume can be expected in the Singapore residential market in the coming months.

Australand stays, for now. Following its strategic review, Australand remains a key investment, underpinned by its stable recurring income. While still an attractive investment, we see little synergy with the rest of the CapitaLand group and we think that management could revisit the potential divestment should a compelling offer come along in the future.

Quantifying ROE target. Management quantified that it is targeting an ROE range of between 8% and 12% on a sustainable basis, premised on income from an optimal mix of operating assets and projects under development (~2:1 mix). While management stands by its capital recycling model, there are no significant funding needs at present.

Source: Maybank Kim Eng Research - 26 Jul 2013