• Enlarged CapitaLand group well positioned to scale up competitively.
• Development pipeline and fund management platform enhanced with wider geographic and sector reach.
• Maintain ADD with a higher Target Price of S$4.15, based on a 35% discount to RNAV.

Revving All Engines

• The CAPITALAND LIMITED (SGX:C31) and Ascendas-Singbridge (ASB) merger was completed on 30 Jun 2019. Post merger, the enlarged CapitaLand group will operate as a unified entity, with an enlarged S$123bn AUM platform, ranking it among the top 15 global and Asia leading real estate investment managers.
• More importantly, not only does the expanded size deepen the group’s size and scale in core markets such as Singapore and China, it also widened its footprint to the business parks, industrial and warehouses, via established platforms in Singapore, China and India, to cater to the growing new economy such as e-commerce and knowledge economies, as well as cater to urbanisation trends through township developments.

Diversifying Development Pipeline

• The enlarged CapitaLand will double its total development pipeline from 6.8m sqm to 13.9m sqm of GFA, the key additions being 1.46m sqm of GFA in China and 3.89m sqm of industrial and 2.36m sqm of biz parks/logistics spaces. Of the 13.9m sqm of development GFA, 44% are currently under development and the remaining 56% is landbank for future projects.
• CapitaLand would also achieve scale in new economy sectors with 10% of AUM derived from business parks and logistics spaces.

Deepening and Widening Core China Market Exposure

• The China is by 2571m sqm GFA. In a number of, some of the key projects are the 50% stake in the China-Singapore Guangzhou Knowledge City (CSGKC) as well as gaining 100% ownership of the Raffles City Chongqing development.
• Phase 1 of CSGKC consists of 627 sqkm and includes the OneHub developed by ASB. OneHub Phase 1 has been completed and OneHub Phase 2 (business parks and residential) has commenced. Phase 1 of CSGKC has a remaining developable GFA of 434,000 sqm. The group has also signed a MOU for Phase 2 of CSGKC.
• Other landbank within the CSGKC includes a 40% stake in the Tianjiao residential project. Potential contributions from these developments have not been factored into our current earnings estimates.

India Is a Strategy

• The other key CapitaLand is into Sing China India UK Australia. This segment form 28% of development pipeline and 13% of the group’s AUM.
• Of note is the India exposure, which makes up 35% of geographic GFA. There is a developable GFA pipeline of 5m sqm. Historically, the group had been able to achieve yields of mid to high teens on cost from its development activities. India has been growing its AUM by 10% CAGR since Mar 2017. Furthermore, India is a full value chain platform with development and fund management capabilities backed by deep local expertise. The group has a strong and proven track record of over 25 years in India. They are one of the first movers in the India IT parks space and have recently moved into the under-penetrated logistics sector through a joint venture with Firstspace.
• Listed ASCENDAS INDIA TRUST (SGX:CY6U) could benefit from a strong growth momentum over time, with monetisation opportunities within the group as well as from third parties. Apart from the two private equity funds in India – Ascendas India Growth Programme (AIGP) and Ascendas India Logistics Programme (AILP), CapitaLand has developments in International Tech Park Gurgaon (ITPG) SEZ1 and SEZ2 and ITP Chennai Radial Rd. There is also remaining developmental GFA of 18,616 sqm in ITP Pune.
• AILP’s investment objective is to deliver logistics and industrial real estate facilities across major warehousing and manufacturing hubs in Mumbai, National Capital Region, Pune, Chennai, Bangalore and Ahmedabad. It targets to develop a portfolio of 13-15m sqft of space. Temasek and ASB have committed S$400m of capital to this fund. Two seed assets have been identified offering 1.25m sqft of operational GFA and 4m sqft of development GFA pipeline.

Expanding and Fund Platform

• CapitaLand is one of the managers globally 8 listed REITs and more than 20 private funds with a total AUM of S$123bn. It comprises largely commercial, retail and lodging businesses, making up 78% of AUM while new sectors such as industrial/business parks/logistics account for another 13%. China and Singapore exposure has also increased to 75% of total AUM.
• In addition to the existing AUM under its listed REITs and private funds, it has a further S$1.8bn of undrawn committed capital for deployment, particularly from Ascott Serviced Residence (Global) Fund, Raffles City China Investment Partners III and CREDO I China. Based on proforma (CapitaLand FY18, Ascendas-Singbridge LTM Sep 18) numbers, the enlarged CapitaLand group’s REIT and fund management fees could jump by 40% to S$326m.

Financials

Deleveraging through asset recycling

• Gearing level of the enlarged CapitaLand is expected to increase to 0.72x, on the higher end of comparable peers’ net debt to equity ratio. The group intends to bring this down to 0.64x by end-2020, through asset recycling and generating operational cashflow.
• Based on our estimates, we reckon the group would likely need to potentially monetise cS$3bn-4bn worth of assets to achieve this objective. Some of the potential monetisation targets include industrial, retail, commercial and hospitality assets.
• CapitaLand had recycled S$485.6m of assets in 1Q19 and has since then monetised another S$2bn worth of assets and is on track to meet its S$3bn annual target. It also committed to S$764.7m worth of new investments in 1Q19.
• Our current core profit projections (excluding any divestment gains or revaluation surplus) translate to a conservative ROE of 5-6%. Hence, we believe, including potential divestment gains from capital recycling activities and revaluation upside, the group is well on track to achieve its ROE target of 10%.

Valuation & Recommendation

• We update our FY19-21F earnings and valuation to reflect the enlarged CapitaLand group as well as to take 862.3m new shares issued as part payment raised by 8.9-23.9% while our RNAV is adjusted to S$4.15, assuming an unchanged 35% discount to RNAV.
• We remain positive on CapitaLand and anticipate a more accelerated capital recycling schedule going forward.
• Potential upside catalyst could continue to come from accelerating growth across its expanded platform and continued asset recycling activities.
• Downside risk include slower macro outlook that could lead to slower recycling activities and integration execution risk.

Source: CGS-CIMB Research - 12 Jul 2019