Yahoo Finance 
Investor CentralCity Developments Ltd - Do offshore markets hold the key – which of the brokers is right?
26/8/2013 – City Developments' plan to focus on overseas markets – in particular China and London – has not helped its stock price, since it announced earnings on August 6.
The stock is hanging on to S$10 a share. If it slips below this, it could reach levels not seen since May last year.
CityDev says the residential property cooling measures are the most effective so far, and hopes that government will relax some of them in coming years.
It has low inventory of mass market homes, avoiding any overhang for now, but this will likely change next year.
1. What representations has CityDev made to the government, to ease the cooling measures?
No wonder analysts have applauded its overseas strategy.
But they differ on how effective it will be.
CityDev also announced it was going to become more active in the private equity area, which it entered some years ago, although this would take time to bear fruit.
2. What steps will it take in this area?
3. Is this because it can't do much in the home market?
4. How long before this strategy bears fruit? How will it measure success?
The company reported these financial results for Q2 FY13 on August 6:
Revenue: +1.8% YoY to S$801.6 mln
Net Profit: +43.8% YoY to S$246.7 mln
Cash flow from operations: S$293.8 mln vs S$226.6 mln
Cash Reserves: S$2.49 bln vs S$2.16 bln
Final Dividend per ordinary share: 8 cents vs 0 cents
Analysts surveyed by Reuters have an average HOLD call with a price target of S$11.07.
Bullish analyst report
OCBC Investment Research says the results were within expectations, but the outlook for residential property is "dimmer".
City Developments' Q2 FY13 net profit increased 48% to S$203.8 mln, mostly due to disposal gains from an industrial site at Pasir Panjang.
Together with the first quarter, net profit now cumulates to S$341.5 mln, which makes up 49% of its full-year forecast.
Q2 FY13 topline came in at S$801.6 mln – marginally up 1.8% – as contributions from all three segments - property development, hotel operations and rental properties - remained stable.
Recent launches of D'Nest (912 units), Bartley Ridge (868 units) and
Jewel@Buangkok (616 units) are currently 91%, 75% and 49% sold.
In the second half of the year, the 380-unit Lush Acres EC project and a mixed development at MacPherson/Upper Serangoon Rd consisting of 266 residential and 28 retail units are scheduled to be launched.
Hotel subsidiary Millennium & Copthorne's Q2 FY13 net profit decreased 17.7% due to challenging conditions in Singapore and Seoul, and enhancement works which meant it lost out on selling 181,000 rooms nights.
Recent property cooling measures by the Singapore government could lead to lower sales and prices in the second half, cautions the analyst.
Management also says there could be oversupply in 2014.
OCBC suggests City Developments could look into land-banking over FY13-FY14.
City Developments currently has 1.2 bln sqft Gross Floor Area in its domestic residential land-bank, having sold 1.9 mln sq ft GFA in 1H13 alone.
This could point to a slower sales rate.
5. Will CityDev use the lull to build up its land bank?
It maintains a HOLD call with target price fair value of S$11.38, down from S$12.04.
CIMB Research says Q2 core earnings came below expectations at 13% of its full-year estimate (1H13 at 31%) and 11% of consensus, on weaker hotel earnings.
Q2 FY13 net profit was propped up by disposal gains of S$136 mln.
Excluding this, core earnings per share would have fallen 50%.
The hotels segment recorded a 22% fall in pre-tax profit because there are now more hotels in Singapore, leading to stiffer competition for corporate business; as well as rising labour costs and room closures overseas due to renovation works.
6. Concretely, what has been the impact on room rates from long-term competitive threats?
CIMB says the focus should now be on offshore markets since the domestic residential market is currently haunted by high land costs, policy pressures and a risk of oversupply.
City Developments' current inventory of 3.5 mln sq ft of GFA (46% of total) is one of the lowest seen in recent years.
It is turning more positive on the office sector, though recent enquiries for its South Beach project at around S$9 psf suggest yields of below 4% for this segment, says the broker.
Management reiterated London was an investment target, with around £250-300 mln set aside for potential deals.
Meanwhile, key near-term objectives include managing costs and restoring hotel revenue growth.
CIMB also says it likes City Developments' strong balance sheet as it offers scope for acquisitions.
But near-term catalysts remain out of sight.
CIMB's call is also HOLD with a price target of S$11.19.
Bearish analyst report
Maybank Kim Eng says expectations were not met.
Excluding one-off items, City Developments' core net profit for Q2 was S$73.9 mln, down 50%).
Together with Q1, the total for 1H13 was only 28% of the total full year's forecast.
Management says there could be more resistance ahead in 2H13 for its residential segment and it will look into diversifying out of the Singapore market.
Having said that, 2H13 is expected to see stronger residential profit recognition.
City Developments enjoyed stronger pre-sales in 1H13 at S$2.2 bln from 2,114 units sold.
This figure is up from 1,299 units sold in the same time last year for S$1.2 bln.
Furthermore, the mixed development at Tai Thong Crescent has been set for launch in September this year.
This should contribute further to unit sales.
But developers in Singapore face even more challenges, even as the government's cooling measures were necessary to sustain the property sector.
The first challenge is the Qualifying Certificate (QC) policy for foreign developers, which incidentally includes all listed developers.
Punitive QC restrictions have made land acquisition from the private market difficult and this may have led to aggressive bids in the Government Land Sales (GLS) programme, giving developers further undue risks with potential declining profit margins.
Management hopes the government will look into reversing this for listed developers.
Total Debt Servicing Ratio (TDSR) implementation poses yet another hurdle.
Private property sales volume is more measured and mass market property prices are expected to moderate as bank loans are tightened.
City Developments has highlighted it has limited inventory of unsold mass market units and will be cautious in its land replenishment strategy.
City Developments also notes that home demand is largely sentiment-driven.
As there is a time lag between physical completion and projected demand, the risk of oversupply threatens especially if global and domestic economies remain sluggish and curbs on foreign buyers are not reviewed.
Maybank says SELL and maintains its target price of S$8.85.
We have sent these questions to the company to invite them for an on-camera interview, and/or seek their written response.
Sofar, we have not had a reply (which is why you are seeing this message).
©2013 Investor Central® - a service of Hong Bao Media
