'Nimble and resilient' CapitaLand Investment restarting China activities: analysts

Lower target prices for CapitaLand Investment’s listed REITs weigh heavy on its own target price.

CapitaLand Investment (CLI) is catching up with a robust balance sheet for 3QFY2022 ended September and analysts are keeping positive on the stock.

In its 3QFY2022 business update, CLI continued to show operational resilience across all three of its growth drivers: fund management, lodging management and capital management, writes CGS-CIMB Research analyst Lock Mun Yee.

That said, lower target prices for CLI’s listed REITs weigh on its own target price. In a Nov 4 note, Lock is maintaining “add” on CLI with a lower target price of $4.50 from $4.59 previously.

“[CLI’s] balance sheet remains robust with net debt to equity ratio of 0.49x as at end-3QFY2022, interest cover of 4.2x and strong cash and undrawn facilities of $7.2 billion,” writes Lock.

Higher fee income and private fundraising is gaining momentum at CLI, she adds. “Fee-related (FRB) revenue grew 6.3% y-o-y to $101 million and 16% y-o-y to $339 million for 9MFY2022, supported by recurring income from listed funds and event driven fees from its private funds.”

Looking ahead, although funds under management (FUM) were unchanged q-o-q at $86 billion, CLI indicated that it has $6.1 billion of embedded FUM, which can be progressively deployed from 4QFY2022 to expand its FUM base. CLI has a FUM target of $100 billion by 2024.

Some of these new funds include its joint venture with APG, Netherland’s largest pension provider, to commit an initial equity investment of $570 million, with an option to increase the investment up to $1.14 billion, to acquire ExtraSpace Asia, one of the largest storage businesses in Asia and to further build an Asia-focused self-storage platform.

Private fund-raising also gained momentum with CLI establishing two more onshore Renminbi funds totalling RMB4 billion ($0.77 billion) to invest in business parks opportunities in China.

Year-to-date, CLI has divested a total of $2.37 billion, on track to meet its $3 billion target and gross investments of $4.24 billion.

Meanwhile, DBS Group Research analyst Derek Tan is maintaining “buy” on CLI with a target price of $4.30.

Tan points to CLI’s possible plans to restart China operations. “The launch of the two funds tapping onshore money in China is a positive signal in our view, securing new mandates from 10 new capital partners, raising close to $800 million. We understand that given the timing and returns was ‘a bridge too far away’ for CapitaLand China Trust (CLCT) to participate but the CLI will continue to review opportunities for all its listed/private funds to fuel growth in the medium term.”

Tan sees positive signs within China; CLI has acquired Borui Plaza, a grade A office in Beijing, for RMB2.04 billion in a court auction China at 30% discount to its September 2021 valuation, “highlighting the group’s ability to acquire opportunistically and with the on-the ground presence to take advantage of market stresses to conclude deals”.

In terms of operations, the group is expected to continue to render assistance to tenants on a case-by-case basis but overall operational performance should be an improvement on a q-o-q basis, adds Tan.

Finally, OCBC Investment Research analysts are maintaining “buy” on CLI with a lower target price of $3.74 from $3.89 previously.

The way OCBC sees it, CLI has emerged as “a more nimble and resilient entity” following its strategic restructuring. With that, OCBC analysts believe that it would operate with a more asset-light business model and strong focus on recurring income streams.

CLI’s FUM is expected to increase to $92 billion after taking into account the estimated embedded FUM from committed and undeployed capital for its private funds and announced REITs transactions which are not yet complete, note OCBC analysts.

Challenges are still apparent in China, as illustrated by the slight negative rental reversions for its retail and office portfolio in China and 4% y-o-y decline in revenue per available unit (RevPAU) for its China hospitality assets for 9MFY2022, note OCBC analysts. CLI’s overall group RevPAU was up 41% y-o-y.

“[That said,] management highlighted that activity levels are picking up, and there is still an appetite from onshore investors for investment opportunities, especially from the domestic insurance companies.”

As at 9.53am, shares in CapitaLand Investment are trading 2 cents lower, or 0.60% down, at $3.33.

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