• 1Q19 PATMI jumped 133.8% YoY
• Growing footprint in China
• Future value to be unlocked

1Q19 results in-line with our expectations

City Developments Limited (CDL) reported its 1Q19 results which exceeded our expectations. Revenue declined 29.5% YoY to S$746.2m, but PATMI jumped 133.8% to S$199.6m, forming 37.8% of our FY19 forecast. This was boosted by the realisation of a S$144.3m pre-tax gain from the divestment of Manulife Centre, which is in connection with the Group’s second Profit Participation Securities (PPS) structure developed in 2015. During 1Q19, CDL sold 173 residential units in Singapore with sales value of S$516.3m, and 113 residential units and one villa in China with sales value of RMB358.8m (~S$72.0m).

Acquiring stake in Chinese developer Sincere Property Group

CDL also announced that it would step up its presence in China with the agreed investment of a ~24% effective stake in Sincere Property Group (Sincere), an established real estate developer in China (ranked as one of China’s top 100 developers by China Real Estate Association). The estimated purchase consideration works out to a total of RMB5.5b (~S$1.1b). Furthermore, CDL has entered into an agreement with Sincere to acquire a 70% stake in Shanghai Hongqiao Sincere Centre (Phase 2), a prime commercial property in the heart of Shanghai’s Hongqiao CBD, for RMB1.2b (~S$247m). Thereafter, CDL’s geographical presence in China will be expanded from 3 to 20 cities, while its portfolio allocation in China will be bumped up from 9% to 15%.

Future economic benefits to be reaped  

Although the acquisition of Sincere is expected to be EPS dilutive by 4.3% on a pro forma basis, this is largely due to the realignment of accounting policy with the reversal of net revaluation gains and including depreciation for Sincere’s investment properties. We believe future value can be unlocked in the form of i) potential monetisation given CDL’s funds management platform, and ii) strong contracted sales target of RMB50b, RMB80b and RMB100b in 2019, 2020 and 2021, respectively, versus RMB24b achieved in 2018. On the flip-side, Sincere has a net gearing ratio of ~200%, which we believe is on the high side relative to most listed Chinese developers. CDL has set a gearing limit of 250% for Sincere. We maintain our fair value estimate of S$10.68 on CDL. Maintain BUY.

Source: OCBC Research - 16 May 2019