• City Developments (SGX:C09)'s 3Q business updates were in line and showed continued pickup across all three market segments.
• City Developments’s strategy of deleveraging its non-core assets over last two years has placed it in a relatively better balance sheet position amid rising interest rates. Key earnings drivers continue to be its healthy unbilled sales from Singapore residential projects and hospitality segment recovery.
• Despite year-to-date share price outperformance (+22%), the stock remains undervalued at ~50% discount to RNAV.

Development Portfolio Well Positioned Despite Rising Rates and Cooling Measures

• Residential sales in Singapore projects remained strong with Copen Grand executive condominium (EC) (50% stake) fully sold out since its launch in October, adding an estimated ~S$0.5bn in presales revenue. With this, we estimate City Developments has unbilled residential sales revenue of ~S$5bn that can be recognised over the next three years.
• City Developments has also recently won another EC project at Bukit Batok West Avenue 5 in September, which should see similar strong demand considering the EC segment is relatively less impacted by cooling measures and interest rates (deferred payment options). It also has four residential projects (>1,000 units), which are expected to be gradually rolled out in 2023-2024.

Sharp Recovery in the Hospitality Segment to Continue in 4Q

• 3Q revenue per available room (RevPAR) for its hospitality portfolio jumped 89% y-o-y and was up 43% vs 1H, boosted by occupancy and room rate increase across all markets.
• The Singapore, UK, and US markets, which account for the majority of City Developments's hospitality portfolio, were the best performers with RevPAR (3Q) rising 167%, 165% and 60% y-o-y. Overall gross margins also rose 14ppts to 36.2% indicating that revenue growth well exceeded inflation pressures.
• Near-term outlook remains positive despite an anticipated slowdown in 2H23.

Fund Management’s Assets Under Management (AUM) Less Likely to Hit US$5bn Target by 2023

• City Developments's management noted that it has paused plans for a UK commercial REIT IPO in Singapore. With the sharp rise in interest rates, we see less chance of it being listed as a REIT by 2023.
• Fund management’s AUM as of 1H stood at US$2.9bn, and we believe it is challenging to achieve the US$5bn target by end-2023.
• On the balance sheet front, City Developments’s gearing has been lowered to 0.52x (including investment properties at a fair value) providing S$1-2bn debt headroom to tap into market opportunities arising from current market uncertainties.
• No changes to our earnings estimates for City Developments. City Developments is given ESG score of 3.3 out of 4.0 – based on our proprietary in-house methodology. As this ESG score is three notches above our country median, we apply a 6% premium to derive our target price.
• Stay BUY on City Developments with S$9.75 target price, 18% upside and ~2% FY23F yield.

Source: RHB Invest Research - 2 Dec 2022