Review of CapitaLand 3Q18 Results

CapitaLand has just released its 3Q18 results this morning.

All in all it is a good set of numbers as expected.

PATMI increased by 13.6% to $362.2 M.

Due to higher operating PATMI and assets recycling.

Operating PATMI increased by 13.3% to $233.7 M.

Due to contributions from newly acquired and opened investment properties.

EBIT increased 0.2% to $796.3 M.

Due to recurring income from investment properties and contributions from development projects, fair value uplift and portfolio gains from divestments.

Topline for the quarter fell 16.9% to $1.26 B.

Due to lower contributions from development projects in China and Singapore, partially mitigated by higher rental revenue from newly acquired and opened properties as well as consolidation of revenue from three entities.

$4.0 B of assets are divested YTD and recycled into $6.1 B of new investments including higher yielding assets that are immediately incoming producing.

Gearing stands at 0.51x (2018 YTD)

Notable Points

1) RMB6.36 B and more than S$71.2 M of sales will be recognised in 4Q18 from China and Vietnam markets.

2) CapitaLand / GIC JV's acquisition of Shanghai's tallest twin towers along the north bund. This iconic landmark will be CapitaLand's 3rd Raffles City in Shanghai and 10th globally.

Property construction is expected to be completed by next June.

3) There is 44% drop in portfolio gains comparing YoY. I need to spend some time to further understand this. Nonetheless is still a gain not a loss.

Thoughts

No matter how I look this is a decent set of results from CapitaLand. However it does not seems to provide the catalyst for the uplift of its share price. Same as with previous cases.

In fact CapitaLand was among the top institutional selling last week.

Perhaps the big boys deemed this to be not good enough. Or perhaps there is a deliberate attempt to push down the share price.

My feel is that CapitaLand is always on the radar of the institutional players and therefore will always be subject to the effects of the big boys trade.

With a slew of developments in the pipeline (e.g. new acquisitions, malls management, coliving, coworking, dormitories, etc) the outlook for CapitaLand is exciting to look forward to.

At this point of writing, CapitaLand is trading at an attractive level. Will continue to add.

Takeaways from CapitaLand AGM 2018

CapitaLand AGM 2018

Date: 30/04/2018

Duration: 10.00 am - 12.20 pm

Turnout: ~40%

Even before the AGM starts, while people are still strolling in to get seated, the screen is already playing a video presentation with catchy music on CapitaLand's (CPL) developments.

And it's my first time seeing two rows of company representatives on stage for an AGM.

First row comprises of the board members while the second row comprises of CEOs of the various CPL business units.

 No wonder they chose Stars Theatre as the venue.

Great.

You know the AGM is a serious business when it starts with a briefing on the emergency evacuation route (I thought I am back to my army days).

That is followed by a presentation on the group's overview, business updates and what's looking ahead for them.

After that comes the usual Q&A. I took the questions and replies until my pen ink ran out.

Questions from the floor

Q: Is the group going global apart from the areas they are in now?

A: Yes. Ascott is now in Europe, USA, Australia, Ghana, etc.

For the retail unit, CPL is looking at managing beyond CPL's own portfolio. In other words they are expanding to manage other companies' malls too.

Q: Is CPL's operating platform not going for acquisition?

A: The operating platform will stay asset-light. Instead they will leverage on technology to deliver what the retailers and customers want.

But for the investment platform, yes they are looking out for suitable asset classes.

Q: How did CPL achieved the 50% gross profit (G.P.) and is that sustainable?

A: Consolidation of the trusts.

At the G.P. level there are many contributions from the associates and subsidiaries.

Q: CPL is currently undervalued and its share price seems to be under performing compared to City Developments's. What is the board's take on that?

A: CPL do share buyback to enhance share holders' value.

CPL cannot be compared to City Developments as the business profile is different.

Q: Can the dividend payout ratio increase from the current 33%?

A: CPL will give dividend on a sustainable basis.

Q: How does CPL defend itself against Wechat and Alibaba in China on the online space?

A: CPL wants to stay in both online and offline spaces. Currently they have 5.8 M users on the Capita Stars platform.

CPL works with Wechat and Alibaba as well to leverage on their payment system and to provide a seamless experience.

Q: Township development by CPL.

A: CPL has been doing that in China. Other than that CPL is also into master planning.

They will continue to do that and that is one way they acquire land bank in China.

And importantly this is a way they build up reputation and network with the who's who in China.

Q: What is the impairment on page 77 of the annual report?

A: This is actually a write back related to 2 projects with previous impairments but which are not used eventually.

Q: What is the chairman's feel about Singapore's property market?

A (by the CEO): The property market is a proxy to the economy.

Basing on the Q1 preliminary data, the market looks good. And going forward the next 3, 4 quarters are optimistic too.

Comment from one of the share holders: CPL is quite well covered in many areas and in recurring income streams. Hope the board can consider a more generous dividend payout than 33%. That will give confidence to the share price too.

Another share holder concurred and commented the board should give share holders the money and they do the share buyback themselves.

A: The board will take that into consideration.

Resolutions: All passed.

Observations

CapitaLand's AGM is one of the AGMs that I was looking forward to attend this year. And it didn't disappoints ~ in another way.

Drama unfolded early into the Q&A. Better than the Taiwanese soap operas on TV. Stars Theatre indeed.

Two shouting uncles wasted time by talking about irrelevant things and asking irrelevant questions so much so that they were booed by others from the floor with shouts of "Don't waste time" and "Get out" heard from several quarters.

One of them the legendary Mr Sunny, even turned aggressive this time when the security officers came up to him. I've seen him shouting at several AGMs before but this is the first time I have seen him on the verge of turning violent.

To be fair to him, he did gave a good suggestion which is for the board to implement a 'floating system' for directors' fees. In bad times board takes a lower fee or in the form of shares and vice versa for good times.

I find that worth consideration.

Summary and my thoughts

2017 is a record year for CapitaLand in several aspects.

Its total PATMI achieved $1.55 B. The highest since 2008. It's also a record year for them in Vietnam which is a very fast growing market. Malls in China achieved 8.6% NPI growth.

I am personally very looking forward to the opening of Raffles City Chong Qing in the near future.

Ascott is also on track to achieve 80,000 serviced residence units by this year. On this front they have also made their first foray into Africa, Ghana.

CPL is gunning for $100 B AUM by 2020. This is another mile stone worth looking forward too.

Previously I have also written about CPL's online mall on Lazada and their venture into e-payment which is their StarPay platform.

On the social responsibility front, CPL donates up to 0.5% of their net profit yearly to Capital Hope Foundation to help under privileged children.

You might recall I have mentioned in other posts that one of the aspects I look out for in a company is the quality of its management.

I have always been a fan of Mr Lim Ming Yan, Group CEO and President of CapitaLand.

In CPL's board of directors, quality is in abundance as well.

Chairman Mr Ng Kee Choe is the former vice chair of DBS. Few of the other directors are chairman-calibre in their own right such as Ms Goh Swee Chen (Chairman of Shell Singapore) and Mr Stephen Lee (Chairman of SIA Engineering).

It would be too long winded to write about the other board members but you can flip the annual report or go into CPL's website to read through their extensive experience.

With $6.1 B cash, CPL has sufficient head room to grow and to grow big. This will serve them (and the share holders) well in the years to come.

Despite all the good points stated above, there are aspects that I have reservations about CPL too.

It seems like the management is very cautious about acquisitions and expansion. So much so that it seems to be the limiting factor in their growth story. I have said many times that something seems to be stopping CPL from realising its full potential. Perhaps this is the reason.

However I'm not complaining since it appeared to serve them well so far.

Another aspect is the dividend payout which definitely has room to grow. However the payout amount has been growing for the past 5 years so kudos to them too.

If you aren't a share holder of CapitaLand yet, perhaps it's time to seriously think about it now considering it is still trading below its net tangible asset value of $4.20.

In fact half way through the Q&A I was already calculating my average price if I were to add more now at a particular price and the impact to my dividend yield against cost.

Good luck and cheers always!

City Developments vs CapitaLand

The recent release of CapitaLand's latest financial results sent the share price downwards despite it being a decent set of results.

As I was thinking about this, it led me to the next questions.

Why is it that City Developments can be trading in the region of S$12+ while CapitaLand continues to languish at S$3+ and what are the differences between the two companies?

It piqued my interest as I have never delved into City Developments before and I set to find out more.

The comparisons gave me a big surprise.

 Overview of City Developments (CDL)

City Developments Limited has a history of more than 50 years since their beginning in a small rented office in Amber Mansions on 7th September 1963.

They have since evolved into a Singapore-listed international real estate operating company with presence in 26 countries including Singapore, Australia, China, Japan, UK and rest of Europe.

CDL's portfolio consists of residences, offices, hotels, serviced apartments, integrated developments and shopping malls.

One of their most recognised brands is the Millennium & Copthorne hotels chain.

CDL's core markets are UK, US, China, Japan and China.

Overview of CapitaLand (CPL)

CapitaLand group is a property company created from the merger of Pidemco Land and DBS Land in November 2000.

Since then CPL has grown to become one of Asia's largest real estate companies. Based and listed in Singapore, it is an owner and manager of a S$85 billion portfolio comprising integrated developments, shopping malls, serviced residences, offices, homes, REITs and funds in over 30 countries.

It is also one of the largest investment management businesses in Asia with 14 real estate private equity funds and 5 REITs worth over S$47 billion in assets under management.

CapitaLand acquired Raffles Holdings and The Ascott Group in 2006 and 2008 respectively and the latter is the world's largest international serviced residence owner-operator.

Singapore and China remain the two core markets of CPL, totalling 82% of the group's total assets.

Comparison of the Financial Figures

As mentioned earlier I have never studied CDL before. But inferring from the share price I expect the scale of their business to be much bigger than CapitaLand.

However this is exactly the opposite.

No matter which metric you look at - cash holding, revenue, PATMI, assets or AUM, CapitaLand is clearly the bigger player.

Exception is the EPS where CDL is slightly higher than CPL.

Note: Figures are from the 3Q17 financial reports of both companies.

Valuation

I then did some quick calculations for the latest P/E and P/B ratios as a gauge of their valuation.

Again CPL is the winner here. In fact CPL is currently trading under book value whereas CDL is trading slightly above book.

Future Growth of City Developments

In 2016 CDL acquired 20% stake in mamahome - China's fast-growing online apartment rental platform.

In 2017 CDL acquired 24% stake in Distrii - China's leading operator of co-working space.

These synergistic acquisitions are a move away from their traditional sources of income and it's nice to see this forward-looking direction of the management.

In the near term, CDL has several upcoming local residential projects including New Futura, a Tampines Ave 10 project and South Beach Residences.

Upcoming overseas residential projects include 1 in China, 7 in UK and 1 in Japan.

CDL also embarked on 2 projects in Australia for luxury retirement village development with expected completion in 2020 and 2021.

CDL is also actively engaging in asset enhancement initiatives for various Millennium & Copthorne hotels in New Zealand, UK, KL and Singapore.

Future Growth of CapitaLand

CapitaLand has over 8,000 residential units with a value of RMB 13.8 billion sold in China and expected to be handed over from 4Q17 onwards. 10% of the value is expected to be recognised in 4Q17 and 70% in 2018.

On the shopping mall front, CPL opened their largest mall - Suzhou Centre Mall three days ago on 11th Nov 2017.

CPL is also set to continue their expansion in markets such as Vietnam and Indonesia. Their residential project in Vietnam - d'Edge is close to 100% sold.

SingPost Centre opened on 12th Oct 2017, is CPL's first managed mall in Singapore under management contract.

Apart from the above, CPL has 6 management contracts in China to date as well.

CPL also launched CapitaLand online mall on Lazada on 16th Oct 2017.

It's good to see these new initiatives from CPL which show that the management is actively looking for new income sources.

On the serviced residences front, Ascott is on track to achieve their target of 80,000 units under management by 2020.

Summary and Conclusion

Beside the fact that both are real estate companies, City Developments and CapitaLand are also similar in terms of assets composition, development type and geographical composition.

In terms of business scale, CapitaLand is much bigger with significantly higher top and bottom lines compared to City Developments.

However in terms of share price, City Developments is the clear winner. Since January this year, share price of CDL has rose 50% while share price of CPL has increased by 18%.

Shareholders make money either through dividends and / or capital appreciation.

Since both CDL and CPL are not fantastic dividend counters I will look at capital appreciation instead.

For capital to appreciate, the share price must appreciate. Simple.

Based on the basic valuation metrics, CapitaLand share price has much room for appreciation.

However since the share price has dropped after the release of 3Q17 results, is it because shareholders feel that the results are not comparable to the previous year?

Comparing Y-o-Y revenue, latest 3Q indeed fell by 0.1%.

However Y-o-Y, profit increased by ~70%, EPS increased from $0.179 to $0.302 and ROE increased to 4.97% from a negative figure.

This is what perplexes me. The company is earning more and generating more returns on the shareholders' investment but the market feels otherwise.

Can anyone enlighten me please?