• We deem CapitaLand’s 1H20 core net profit of S$261.2m broadly in line at 24% of our FY20F forecast as we project a back-end loaded 2H residential pick up.
• We expect strong China residential handover in 2H20F.
• We reiterate our ADD call with a lower Target Price of S$3.42.

CapitaLand's 1H20 Results Highlights

• CapitaLand (SGX:C31) posted a 4.9% y-o-y decline in 1H20 revenue to S$2,027.4m due to tenant rental rebates as well as lower retail, residential and lodging contributions. This was partly offset by higher residential handover in Vietnam and new contributions from the Ascendas-Singbridge (ASB) portfolio.
• However, total PATMI fell 89% y-o-y to S$96.6m (EPS 1.9 Scts, -90.5% y-o-y) due to revaluation deficits recorded by its retail and commercial REITs. Excluding this, core PATMI came in at S$261.2m, down 27.7% y-o-y.

Strong China Residential Profit Recognition Expected in 2H20F

• CapitaLand handed over Rmb1.6bn worth of China residential properties and achieved Rmb5.6bn in new sales in 1H20 as sales rebounded with the reopening of sales centres. It targets to recognise another Rmb12.7bn worth of sales in 2H20F.
• In Vietnam, it handed over S$124m worth of sales in 1H20 with a further S$234m of sales due to be billed in 2H20F.
• In Singapore, it achieved S$60m of residential sales and has about 1,800 units remaining in its launch pipeline.

Retail and Lodging Businesses Remain Challenging

• China, Singapore, Malaysia and Japan retail footfall declined by 27-45% in 1H20 while tenant sales in these countries fell 19-42% in 1H20. While shopper traffic and tenant sales are starting to recover, operating environment is likely to remain challenging in the near term.
• The commercial, business parks and logistics properties across the group’s geographic footprint performed better with occupancy in excess of 85% and largely positive rental reversion.
• In the lodging business, REVPAU decline 43% y-o-y in 1H20. While lodging revenue fell 27.5% y-o-y, EBIT fell 98.6% y-o-y as margins were impacted.

Strong Balance Sheet

• CapitaLand’s net debt/equity ratio was 0.64x at end-1H20, with potential debt headroom of S$2.4bn (based on a 0.7x net debt/equity level) as well as cash and available undrawn facilities of S$14bn. The group also targets to reduce operating costs and discretionary capex by 20%, resulting in S$200m savings for FY20F.
• CapitaLand maintains its asset recycling target of S$3bn for FY20F (S$702m announced YTD). In terms of capital redeployment, it remains on an active lookout for countercyclical opportunities.

Reiterate ADD

• We lower our CapitaLand's FY20-22F EPS by 3.5-7.0% to tone down our projections for the retail and global lodging businesses. Our RNAV/Target Price is lowered to S$6.22/$3.42 (45% discount to RNAB) to factor in an expansion in share base following establishment of its scrip dividend scheme.
• In the longer run, we believe that CapitaLand’s resilience is enhanced through its diversified business model.
• Re-rating catalyst/downside risks: faster/longer than expected recovery from COVID-19 impact.

Source: CGS-CIMB Research - 7 Aug 2020