CapitaLand reported 2Q15 net profit of S$464m (+6% year-on-year). Stripping out revaluation gains and portfolio losses, CapitaLand’s core operating profit came in at S$256.1m (+88% year-on-year). MER attended CapitaLand’s results post-briefing and here are the key takeaways:

Core profit boosted by FV gains from asset reclassification. In the second quarter, CapitaLand reclassified ‘The Paragon Tower 5 & 6’ (residential) and ‘Raffles City Changning Tower 3’ (commercial) in Shanghai from held-for-sale to investment properties. Under the accounting rules, FV gains were booked as core profits. Stripping those out, core profit was unexciting at S$130.2m (-5% year-on-year).
 
During the meeting, management clarified that ‘The Paragon’ residential project has been selling well since launch in 2011 (less than 30units left unsold). However, given the softer market/weak sentiment (in China, CapitaLand thinks that converting to a rental apartment and delaying sales would make economic sense. Since conversion, the apartments have approximately 50% occupancy at 195 RMB/sqm/month.
 
Soft results due to development business. Lower contribution from China (only 702 units handed over/recognised in 2Q15 vs. 4,985 in 2Q14) and Singapore residential offset higher recurring income from mall business. 4Q15 to 1H16 should see a recovery in China development earnings given the strong residential sales in 1H15 (7,843 units, +190% year-on-year).
 
Not in a hurry to replenish Singapore land bank. CapitaLand currently has approximately 1,200 unsold units in Singapore and is not looking to replenish land bank at current land prices. Instead, management thinks now is the right time to invest and deepen its presence in China’s Tier 1/2 cities.
 
China retail malls resilient. CapitaLand’s malls are largely geared to necessity shopping, which has been resilient so far. On a same-mall net profits interest basis, 1H15 China: +9.1% year-on-year. Tenant sales and shopper traffic was up +11.9% year-on-year and 4.5% year-on-year. CapitaMall 1818 and SKY+ are on track to open in 4Q15 and pre-commitment rates are at 60% and 70%. 9 more malls are still on track to be opened in 2016.
 
Earnings and target price revision

• No change.

Price catalyst

• 12-month price target: S$4.09 based on an RNAV methodology.

• Catalyst: Asset recycling. Higher than expected resi price growth in China

Action and recommendation
Reiterate Outperform. CapitaLand shares are trading at 0.8x price-to-book ratio, below their recent 3-year historical average of 0.87x. MER has a 12-month target price of S$4.09 on CapitaLand.

Source: Macquarie Research - 11 Aug 2015