Putting the pieces in place. We recently visited a number of CapitaLand and CMA’s projects in Shanghai, Guangzhou and Shenzhen and walked away optimistic that the Group has put in place the necessary framework and is executing towards achieving a sustainable ROE of 8-12%. We believe the CapitaLand group currently has a competitive edge over its competitors in China, particularly with integrated developments. Maintain BUY, TP unchanged at SGD4.10.

Full range of capabilities on display. During our visit, we saw a good mix of completed projects and projects under development. We visited the sites of Raffles City (RC) Changning in Shanghai and RC Shenzhen, which are prime examples of CapitaLand’s expertise in large-scale integrated developments. We also visited the Datansha site in Guangzhou, which showcases CapitaLand’s master planning abilities and paves the way for more similar G2B co-operation in the future.

Consolidating China residential business. CapitaLand’s China residential business is now consolidated under CapitaLand China, including the projects formerly under CapitaValueHomes and Surbana. Post-consolidation, 90% of its landbank will be focused on the mass market segment, targeting first-time homebuyers and upgraders. We view this positively as end-user demand remains underpinned by growing affluence and urbanization, while the policy direction also remains fairly accommodative for this segment.

Prospects for malls remain healthy. We noted that shopper traffic at the 10-year old RC Shanghai and CMA’s Hongkou Plaza remains very healthy (occupancy rates of 100% and 97.6% respectively). In addition, CMA’s most recent acquisition in Baiyun, Guangzhou, appears to be well-positioned to serve an affluent population catchment of at least 1.1m residents, as well as the office workers at the upcoming corporate HQs of China Southern Airlines and the Guangdong Airport Authority.

China key to achieving ROE target. To achieve its ROE target, CapitaLand aims to allocate 65-75% of its long-term capital to commercial developments, 50% of which will be for mixed developments. We believe most of these opportunities lie in China. Part of the remaining capital will be for residential development in China, which will provide the ROE upside.  

Source: Maybank Kim Eng Research - 2 Dec 2013