DBS Research: Upside Potential For CapitaLand If China Plans Succeed

DBS Research analysts see “strong catalysts” that will drive up share value of CapitaLand Limited (CAPL) (SGX: C31) with a new target price that has been increased upwards to $4.33.

Here’s a peek into the analyst’s minds to discover why they are confident of CAPL’s growth.

Strong rising trend in 2017

With the steady increase in share price starting in late Dec 2017, CAPL’s shares rose by 18.9% from $2.97 on 22 Dec 16 to its current share price of $3.54, with analysts forecasting further upwards potential.

DBS Research analysts have maintained its buy position with a target price of $4.33, signalling a further 22.3% increase may be in sight for the stock.

2017 has seen the completion of several of CAPL’s integrated developments and retail malls which will help CAPL achieve it’s goal of increasing the proportion of recurring income to 72% of its assets.

Furthermore, close to eight major properties were opened and starting to stabilise. That will be a helpful boost in increasing revenue for the company.

Bringing the Raffles City name abroad

With the huge success attained by the Raffles City project in Singapore, CAPL has ventured into China with the Raffles City brand name.

CAPL’s expansion into China may be starting to bear fruits with four of its integrated resorts opening in several cities in China including Shanghai, Wuhan, Hangzhou and Shenzhen.

Several of the projects are directly connected to metro services, and analysts report “robust foot traffic” at CAPL’s malls.

Furthermore, a majority of CAPL’s recently completed properties have already been pre-leased before its completion, with three of its malls reporting 97-99% of committed shop space, helping to ensure a higher percentage of recurring income.

Changes to compositions of tenants

As e-Commerce competes with malls for revenue, CAPL has adapted to the changing business environment and has been developing new retail concepts to remain relevant.

For example, F&B tenants are making up a larger percentage of tenants in the China malls, taking up about 35-40% as compared to 20-25% a decade ago.

With the introduction of new concepts to their shopping mall, DBS Research opines that “retail is not dead”, and that “CapitaMalls Asia is taking steps in the right direction”.

Potential downside

Not everything is pink and rosy, and there are bound to be risks involved.

Slowing down of Asian economies, especially in China, will cause a reduced demand in housing and private consumption which will hit CAPL hard. That’s particularly so if CAPL sees a larger proportion of its revenue becoming dependent on China’s consumers.

Furthermore, the possibility of other sovereign nations following US Fed’s lead in increasing interest will also dampen demand for properties, driving down asset prices.

If CAPL can achieve success with its integrated developments in China, however, we will expect to see a much higher revenue base with higher stable and recurring income. Investors will benefit as the current trading price is likely to increase, in DBS Research’s view.