SI Research: CapitaLand – Strategic Alliance With Alibaba; A Relook At Valuations

On 23 August, CapitaLand announced that it has entered into a strategic alliance with Asia’s largest e-commerce powerhouse Alibaba. Without disclosing any commercial terms, CapitaLand stated that the new agreements involve managing Alibaba’s new Shanghai headquarters and launching an online mall on Lazada Singapore (Lazada).

Alibaba holds a majority stake of 83 percent in Lazada, which the latter is Southeast Asia’s largest e-commerce player. Alibaba have invested over US$2 billion in Lazada.

Alibaba’s new Shanghai headquarters comprises four office towers and a retail podium and CapitaLand would oversee the pre-opening and management of the shopping podium and one of the four office towers. The collaboration marks CapitaLand’s drive to enhance and reinvent modern retail through the integration of offline and online offerings.

For Lazada, CapitaLand will launch a shop-in-shop aggregating offerings of retailers in its Singapore malls on the e-commerce platform, with the option for consumers to collect purchases in CapitaLand malls.

Transformation To Brick-And-Click

The onslaught of e-commerce, particularly from Amazon and Alibaba, has disrupted and decimated retailers globally and CapitaLand – Singapore’s largest owner of shopping malls – was not spared.

The deal should help tenants in CapitaLand’s malls adapt to the changing retail landscape and aggregate offerings and reward points of CapitaStar programme on Lazada, should help retailers boost revenue by tapping on the growth potential of e-commerce.

That said, an online-only model would not be sustainable in the long run. This is because while digital channels provide convenience, consumers still need physical avenues for experience. Thus, malls with a blend of physical and digital channels would likely draw higher shopper traffic.

A Relook At Valuation

The good news came shortly after CapitaLand’s splendid 1H17 earnings announcement. Revenue was 6.7 percent lower as a result of lower contribution from development projects in Singapore, but the group posted net profit that rose 88.6 percent to $966 million, on the back of revaluation gains and divestments. Its subsidiary CapitaLand Mall Trust’s saw shopper traffic reversing upwards to 0.4 percent in 1H17 from a decline of 0.5 percent in 1Q17.

Despite a general recovery in the property sector and increasing flow of good news from CapitaLand, the group’s shares are still trading at undemanding valuations. Currently changing hands at $3.75 per share, CapitaLand is trading at a trailing 12-months price-to-earnings (P/E) multiple of 10.4 times, compared to City Developments’ 18.4 times and UOL Group’s 19.6 times.

Meanwhile, its current price-to-book value is about 0.9 times or at about 10 percent discount to its book. With continued improvement in shopper traffic and brighter economic outlook, CapitaLand may record more fair value gains on its properties in coming quarters that will boost its book value. As such, at its current valuation, we think CapitaLand would be a compelling investment to make.