• Residential, retail and lodging businesses impacted by COVID-19.
• Robust balance sheet with gearing of 0.64x as at end-1Q.
• Maintain ADD rating with lower Target Price of S$3.52.

CapitaLand 1Q20 Business Update

• In its 1Q20 business update, CapitaLand (SGX:C31) highlighted that its residential, retail and lodging businesses were adversely affected by the various COVID-19 containment measures in the markets it operates in while its office, business parks, logistics and multifamily properties have remained relatively resilient.
• Management expects its retail and lodging businesses are likely to continue facing headwinds in 2Q.
• At end-1Q, gearing was marginally higher at 0.64x, balance sheet robust with S$13bn in cash and available undrawn facilities, and interest cover healthy at 7x. Management indicated that it would adopt prudent cash management for now. That said, the group remains selective and opportunistic in evaluating strategic opportunities.

China Residential Activities Picking Up

• CapitaLand handed over Rmb340m worth of China residential properties and achieved Rmb869m in new sales in 1Q20. While there were some construction delays in 1Q, it targets to recognise another Rmb10bn worth of sales in the remainder of FY20F. Sales improved post the reopening of its sales centres in Mar, and it achieved Rmb869m worth of sales (408 units) in 1Q20.
• Residential sales in Singapore were affected by lower footfall due to increased social distancing and closure of sales offices during the circuit breaker period.
• It recognised S$28m sales in Vietnam in 1Q and is scheduled to hand over another S$238m worth of completed residential units in the rest of FY20F.

Retail and Lodging Businesses to Continue to Face Headwinds

• While China, Singapore and Japan retail occupancy stayed high, shopper footfalls and tenants sales fell 4-57% y-o-y in 1Q20. With the end of China's nationwide lockdown towards end-1Q, shopper traffic started to recover, although still lower y-o-y.
• The commercial, business parks and logistics properties across its geographic footprint performed better with occupancy exceeding 85% and enjoying positive rental reversion of 4-21%. That said, tenants remain cautious and we anticipate rental reversions to moderate ahead.
• In the lodging business, revenue per available unit (REVPAU) declined an average 22% y-o-y in 1Q20; 52 of its total 485 properties remained closed at end-Apr. This will likely continue to put pressure on occupancy and REVPAU.
• 1Q20 fee income expanded y-o-y and we anticipate it to remain largely stable in the near term, but slower asset recycling or asset value depreciation could adversely impact this revenue source.

Reiterate ADD Rating

• We lower our FY20-22F EPS by 4.9-17.7% as we bake in our latest estimates for its REITs and tone down our projections for its China retail and global lodging businesses. Consequently, our RNAV/Target Price decline to S$6.40/S$3.52, assuming an unchanged 45% discount to RNAV.
• In the longer run, we believe, CapitaLand’s resilience is enhanced through its diversified business model.
• Upside/downside risks: faster/longer-than-expected recovery from COVID-19 impact.

Source: CGS-CIMB Research - 4 May 2020