• Boost Quest stake from 20% to 80%
• On track to exceed 80k units by 2020
• Four landmark openings in China this year

Acquires additional 60% stake in Quest Apartment Hotels

CapitaLand recently announced that its serviced residence segment, The Ascott Ltd, will acquire for A$180m (S$191m) an additional 60% stake in Quest Apartment Hotels (Quest). This will boost CapitaLand’s stake to 80% after which the group will become the largest serviced residence provider in Australasia. In addition to entrenching Ascott’s presence in Australia, the acquisition will boost Ascott’s portfolio by over 11k units to more than 67k units. Management believes that they will be able to leverage on Quest’s established brand and highly scalable business format franchise systems as a driver of growth.

We understand that, since Ascott’s acquisition of a 20% stake in 2014, Quest’s network revenue has grown at an annual average rate of 6%, which has resulted in healthy annual profits from recurring fee income. We take a favorable view on the acquisition as Ascott continues to execute on its growth plan and expands its presence worldwide, and the group remains on track to exceed its target of having 80k units in its portfolio globally by 2020.

Four Chinese Integrated Developments Opening in 2017

CapitaLand will also be marking a milestone in its integrated development strategy this year with four integrated resorts openings in China, which are Raffles City Shenzhen, Raffles City Changning, Raffles City Hangzhou and CapitaMall Westgate in Wuhan. Excluding car park area, these four developments comprise over 1 million sq meters in GFA and will provide significant recurring income for the group.

Management indicates that they currently have over 6.2m sqm of GFA in terms of integrated development exposure in China, of which more than half is under development. As the green-field component of the group’s portfolio gets developed and becomes operational, CapitaLand will be well positioned to expand its recurring income base and improve its ROE.

As at end 1Q17, 77% of the group’s total assets contribute to recurring income and 44% of the group’s total assets is currently attributed to China. Maintain BUY with an unchanged fair value estimate of S$4.07.

Source: OCBC Research - 7 Jul 2017