• 2Q19 was down -19.3% YoY due to timing difference of residential handovers in China and Vietnam (back-ended into 2H19, Figure 1 and 2).
• Gradual relaxation of the price caps in China led to a 19% QoQ increase in sales price for 2Q19 – sales momentum remains healthy.
• Expanding recurring income stream through fund management platform and management contracts via Lodging segment (Ascott).
• Deleveraging a near-term focus. Aggressive divestment of non-core assets will help CAPL achieve 0.64x gearing ahead of 2020 target.
• Upgrade to BUY with higher TP of S$4.20, due to incorporation of CAPL-ASB merger.

The Positives

+ Deleveraging on track. Post CAPL-ASB combination gearing reached a historical high of 0.73x (FY17/FY18 0.49x/0.5x), in line with management expectations. The management has set forth a plan to deleverage to 0.64x net debt/equity by end-2020 through their annual asset recycling target of S$3bn. Total divestments for 1H19 reached S$3.4bn, of which $1.2bn have been completed. CAPL is on track to reach their 0.64x gearing ahead of the end-2020 target. Divestments net of investments, on an effective-interest basis, for YTD 8M19 was $1.2bn. Capital recycling efforts have unlocked $135mn ($171mm excluding ABS-related transaction costs of $36mn) in capital gains.

+ NPI-growth driven revaluation gains. 2Q19 revaluation gains contributed $346.5mn (60%) to total PATMI, however these revaluation gains were operationally driven – 10 properties of the properties (Figure 3) accounted for c.58% of the revaluation gains reported higher NPI yields. Average portfolio NPI yield for 1H19 was 4.5%, an increased from 4.2% in FY18.

The Negatives

– China sell-through rates for units launch in 2Q19 deteriorated to 80% (1Q19 c.90%). However, overall sales rate remained healthy at 93% of all launched units and management commented that the demand from upgraders and first-time owners is still strong. CAPL strategy to pace their launches to wait out the easing of price caps has yielded 19% QoQ increase in sales price for 2Q19.This is after the 53% QoQ growth in sales price in 1Q19. On a half-year basis, units sold and sales values were 73% and 31% higher YoY.

Outlook

The outlook is positive. The gradual relaxation of the price caps in China has yielded 53%/19% QoQ increase in sales price for 1Q19/2Q19. We remain optimistic about the remaining 3,078 units to be launched in 2H19.

In Singapore, CAPL achieved healthy sell-through rates of 72.5% (or 27% of total project) at the launch of One Pearl Bank in July 2019 and will be launching the Sengkang Central mixed-use development (JV with CDL) in 3Q19.

CAPL’s recurring income portfolio continues to be grounded on healthy operating metrics and will increasingly be the bedrock of its earnings. The merger with ABS increased the number of private funds from 17 to 23. Fund assets under management grew 28.1% from S$55.1bn to S$70.6bn.

The signing of c.7,100 keys YTD19 brings the number of keys under management to 107,154. If the signing momentum persists, CAPL’s Lodging segment will be on track to achieve its 160,000 key target by 2023. The Lodging segment made up 14.4% of 1H19 EBIT ($291mn/$2,061mn), of which 41% ($118mn) was attributed to recurring fee income from management contracts. Currently, 44% (47,480 units) are still under development and do not contribute fee revenue. We expect the Lodging segment to play an increasingly important role in supporting CAPL’s recurring income and as more units come online. The management previously guided that upon stabilisation, every 10,000 keys will generate c.S$25mn of fee income.

Apart from the potential redevelopment of Liang Court, together with CDL and the two listed trusts, ART and CDLHT, CAPL mentioned that the group will be looking into the possible rejuvenation of the industrial assets in the Jurong area.

Upgrade to BUY with higher TP of S$4.20 (prev. S$4.00).

We update our forecasts to reflect the incorporation of ASB and raise our TP to S$4.20. Our target price translates to a FY19e P/NAV ratio of 0.75x.

Source: Phillip Capital Research - 19 Aug 2019