• CAPITALAND (SGX:C31)'s 2Q/1H19 core EPS of 4.3/8.7 Scts formed 19%/37% of our FY19 forecast, deemed in line.
• Expect better 2H on higher residential and ASB combination.
• Maintain ADD with an unchanged Target Price of S$4.15.

CapitaLand 2Q19 Results Highlights

• CapitaLand reported 2Q19 PATMI of S$579.8m, -4.2% y-o-y, on a 19.3% decline in revenue to S$1.08bn. The results did not include contributions from Ascendas-Singbridge (ASB) but took into account the one-off transaction cost of S$36.1m.
• Excluding one-off items, PATMI would have grown 1.7% y-o-y due to higher gains from asset recycling and revaluations partly offset by lower contributions from residential projects. Operating PATMI came in at S$179.5m, -8.4% y-o-y.
• CapitaLand's 1H19 core EPS of 8.7 Scts made up 37% of our FY19 forecast, which we deem in line, with the inclusion of ASB contributions in 2H.

More Vietnam and Singapore Residential Contributions in 2H

• 2Q operating EBIT for Singapore, Malaysia, Indonesia (SMI), Vietnam and International, was up 3.4% y-o-y thanks to contributions from newly acquired properties in the US and Germany, partly offset by lower Singapore residential and rental income.
• In Vietnam, CapitaLand handed over S$19m worth of residential sales in 2Q. 2H19 contributions are likely to be underpinned by additional handover of S$196m of Vietnam residential sales.
• The recent launch of One Pearl Bank in Singapore has generated a 26% take-up rate to date.

Slower Residential Handover in China in 2Q

• China 2Q operating EBIT, excluding S$125.1m of divestment gains from the sale of two commercial properties and three shopping malls, was 25% lower y-o-y at S$167.5m due to moderated handover of Rmb2.26bn worth of residential units. The group has a much larger Rmb9.2bn of residential sales to be settled in 2H19.
• CapitaLand sold 1,807 units in 2Q19, bringing 1H19 sales to 3,025 units (Rmb6.4bn). Sell-through rate continues to be good at 93% of units launched.

Focus on Capital Deployment

• The ASB transaction was completed on 28 Jun 2019. CapitaLand’s 2H19 financials would reflect the combined entity. CapitaLand’s enlarged AUM is at S$129.1bn and is well spread out between the different subsectors including business parks/logistics/industrial (13%), retail (31%) and lodging (26%).
• Gearing rose to 0.73x at end-2Q. Management targets to lower gearing to 0.64x by end-2020.
• YTD, CapitaLand has divested S$3.4bn worth of assets, of which S$1.2bn was completed in 1H19. Gains from the completion of the remaining divestments are likely to be felt in 2H. Furthermore, it has made S$3.35bn of new investments.
• It would also continue to look for opportunities to trim non-core assets, extract value from existing properties or recycle assets into its REITs and fund platforms.

Maintain ADD

• We tweak our FY19-21F EPS marginally post results and maintain our Target Price of S$4.15, pegged to a 35% discount to RNAV. See attached PDF report for the RNAV breakdown.
• Re-rating catalyst would come from accelerating growth across its expanded platform while downside risks include a slower macro outlook should lead to slower recycling activities.

Source: CGS-CIMB Research - 7 Aug 2019