CapitaLand. Singapore Company Guide. BUY Last Traded Price ( 16 Feb 2017): S$3.45 (STI : 3,096.69) Price Target 12-mth: S$3.

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1 Singapore Company Guide Version 9 Bloomberg: CAPL SP Reuters: CATL.SI Refer to important disclosures at the end of this report DBS Group Research. Equity 17 Feb 2017 BUY Last Traded Price ( 16 Feb 2017): S$3.45 (STI : 3,096.69) Price Target 12-mth: S$3.85 (12% upside) Potential Catalyst: Better-than-projected pre-sales & redeployment Where we differ: Estimates generally more conservative Analyst Derek TAN derektan@dbs.com Rachel TAN racheltanlr@dbs.com What s New Acquires properties in Japan to bulk up portfolio to S$2.5bn Stable returns, supported by low carrying cost, clear exit strategy through a REIT/fund in medium term BUY with TP of S$3.85 Price Relative S$ Relative Index Feb-13 Feb-14 Feb-15 Feb-16 Feb-17 (LHS) Relative STI (RHS) Forecasts and Valuation FY Dec (S$ m) 2015A 2016A 2017F 2018F Revenue 4,762 5,252 5,561 4,668 EBITDA 2,325 2,374 1,881 1,953 Pre-tax Profit 1,839 1,907 1,590 1,428 Net Profit 1,066 1, Net Pft (Pre Ex.) 1,066 1, Net Pft Gth (Pre-ex) (%) (8.2) 11.7 (32.9) 5.6 EPS (S cts) EPS Pre Ex. (S cts) EPS Gth Pre Ex (%) (8) 12 (33) 6 Diluted EPS (S cts) Net DPS (S cts) BV Per Share (S cts) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Bulking up on recurring incomes Improving earnings quality. Despite the recent run-up in share price, we continue to see good value in Limited (CAPL), trading at an attractive 0.8x P/NAV and 0.7x P/RNAV. Our TP of S$3.85 is based on a 20% discount to RNAV (vs 25% before) given the projected completion of major projects in 2017 which will lift NAVs upwards. Coupled with opportunistic asset recycling of mature assets into its listed REITs/funds, we see re-rating opportunities going forward. BUY! announced the acquisition of a portfolio of commercial properties in the greater Tokyo region for JPY49.7bn (S$620.1m). A key question is why now after years of asset reflation in Japan which have lifted asset values higher. The key investment rationale in our view will be to add to a stable recurring income base and it is also an ROE-enhancing deal at close to 10%. There is also upside to returns ( % yield vs entry yield of 4.1%) with active property management. We reckon that there is also a clear exit strategy in the form of an income fund or REIT to be launched in the medium term given an enlarged portfolio size of S$2.5bn to be a banner year for the group. The group s various business units are expected to deliver strongly in Noteworthy are (i) S$161m in one-off gains to be recorded in 1Q17 post the bulk-sale of The Nassim in Singapore, (ii) launching of 7,000 units in 2017 in China which will add to the unrecognised RMB8.9bn in sales, and (iii) the completion of close to 1 million sqm of retail GFA through the year which is expected to contribute significantly to recurring revenues. Valuation: Our target price of S$3.85 is based on a 20% discount to our adjusted RNAV of S$4.81/share. Key Risks to Our View: Slowdown in Asian economies. The risk to our view is if there is a slowdown in Asian economies, especially China, which could dampen demand for housing and private consumption. At A Glance Issued Capital (m shrs) 4,237 Mkt. Cap (S$m/US$m) 14,619 / 10,318 Major Shareholders (%) Temasek Holdings Private Ltd 41.1 Free Float (%) m Avg. Daily Val (US$m) 21.8 ICB Industry : Real Estate / Real Estate Earnings Rev (%): 0 1 Consensus EPS (S cts): Other Broker Recs: B: 18 S: 0 H: 3 Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P ed: TH / sa: JC, PY

2 WHAT S NEW Acquiring Japan portfolio What has happened? (CAPL) invested JPY49.7bn (S$620.1m) in a portfolio of office and retail assets in Greater Tokyo area of Japan. The agreed consideration is in line with independent valuers (Tanizawa Sogo Appraisal and Cushman & Wakefield Kabushiki Kaisha). The portfolio was valued at JP 49.8bn. The portfolio consist of two office buildings in Yokohama (Yokohama Blue Avenue and Sun Hamada), one office building in Tokyo (Kokugikan) and one shopping mall in Saitama (Seiyu & Sundrug). Initial property yield is estimated at 4.1% but is expected to rise to % in the next two to three years driven mainly from (i) renewing lease expiring for the shopping mall at Saitama, and (ii) bumping up occupancy rates at Yokohama blue office building (78%). Investment expected to be funded through debt (estimated to close to 1% for close to 95% of the acquisition cost); implying an IRR of close to 10%. Investment Rationale Stable returns. Management believes that the acquisition will add to the stable of recurring revenues for the group. Portfolio estimated to contribute c.s$25m in cashflows annually to the group and deepens their exposure in a developed, transparent and liquid real estate market. Deepens exposure. This will also enlarge s exposure in Japan from S$1.8bn to S$2.5bn; well diversified across asset classes of shopping malls, offices and serviced residences. Accretion. ROE of close to 10% for the deal expected. A big question is why now? We believe investors will be asking "Why now?" This is because prices have remained elevated after years of quantitative easing in Japan which led to a reflation in asset prices. In addition, the group has generally taken a very conservative view on adding to its Japan portfolio given lower returns. A recent report that we saw from JLL also indicated that rents and capital values growth are moderating but should be on a steady uptrend given high competition for assets putting downward pressure on yields in the coming year. This might allay investors concerns that the group is investing at towards the last leg of asset reflation story in Japan. What are future plans; in our view Future plans could involve a launch of an income fund or Japan-focused commercial REIT which adds to Capitaland s fund management business in the medium term. This will also tie in with the group's longer-term US$8-10bn AUM target for its fund management business. So in summary, stable yields, low carrying cost, and a clear exit strategy pushed the group to invest in Japan once again. Page 2

3 Target Portfolio Source of all data: Company, DBS Bank Page 3

4 CRITICAL DATA POINTS TO WATCH Earnings Drivers: Growing recurring revenues from retail mall portfolio and Ascott. While trading properties (residential development and strata offices) account for 24% of assets, we see continued strength from CMA (CAPL s retail mall division) and commercial integrated developments, including Ascott Group, its successful serviced residence brand, which form a significant 76% of total assets and is expected to contribute to growing recurring income for the group. CapitaMalls Asia (CMA) continues to perform steadily despite ongoing operational headwinds. There are 87 operating properties across Asia (56 of them in China). For 2016, the group s shopping malls continued to record steady sales and occupancy rates. Portfolio tenant sales remained healthy at 2.6% for Singapore and 10.2% in China on the back of improving traffic. Shopper traffic and tenant sales generally performed better on a y-o-y basis. CAPL will be completing a substantial 1m sqm of retail GFA in 2017, a majority coming from China (Suzhou Center Mall) and three raffles city projects (Raffles City Changning, Raffles City Hangzhou and Raffles City Shenzhen) which have seen strong pre-leasing interest with committed rates of north of 80% as of 30 December The Ascott Limited remains on the fast track to achieve its 80,000-unit target by year 2020 and will add another 770 units by 4Q16. Ascott s investment in China s largest and fastestgrowing online apartment sharing platform, Tujia has yet to bear fruit meaningfully but we continue to believe in its longerterm synergies and ability to leverage on Tujia s platform to reach out to a wider addressable market in the medium term. Residential sales see strong uplift. CAPL continue to see strong momentum in its residential division in both Singapore and China. In Singapore, the group has substantially sold most of its available development projects and will book a one-time gain of close to S$161m post the bulk-sale of The Nassim in 1Q17. In addition, China sales momentum remains strong and the group will look to launch another 7,000 units in In addition, the group has close to RMB8.9bn in unrecognised revenues which will be booked in Launch of new PE funds. CAPL remains on track to reach its S$8-10bn AUM target by We think that by tapping on third-party capital, CAPL would be able to leverage on larger economies of scale, better capitalise on market opportunities and at the same time de-risk its property level exposure. The group launched the US$1.5bn Raffles City China Investment Partners III (RCCIP III) aimed at prime integrated developments in gateway cities in China which will likely be seeded by their properties. 6, , , , , , , , , S$'m Revenue (S$ m) 13A 14A 15A 16A 17F 18F Singapore China and CMA Ascott Financial - S$'m EBIT (S$ m) 13A 14A 15A 16A 17F 18F AUM breakdown (%) : S$44.2bn as of Dec 16 Ascott 16% CapitaMalls Asia 30% Others 4% RNAV Ca pitala nd Singapore 24% Capitaland China 26% Singapore Capitaland China CapitaMalls Asia Ascott Others RNAV of S$'bn Value of Singapore 7,331.8 Value of China 9,819.4 CapitaMalls Asia 17,399.3 Ascott 4,237.1 Others GDV of CAPL Group 39,642.6 Less: Net Debt (11,552.3) Less: devt capex (7,709.0) RNAV of CAPL 20,501.3 Total Shares 4,258.6 RNAV per share 4.81 Discount to RNAV 20% Target price 3.85 Source: Company, DBS Bank Page 4

5 Balance Sheet: Balance sheet remains strong. We forecast debt/equity ratio to remain stable, at below c.0.6x over the coming years. Debt maturity profile remains long at 3.5 years (as of 3Q16) with an average cost of 3.4%. Approximately 70% of the interest cost is hedged into fixed rate debt. Share Price Drivers: De-risking its Singapore residential exposure to replenishing land bank. CAPL has been actively de-risking its Singapore residential exposure through active marketing of its unsold units and is now substantially sold.. Looking ahead, while the group has not been an active investor in Singapore s residential market, winning any new land tenders will imply improved confidence in the outlook for Singapore s residential market in the medium term. Relaxation of government policies. Expectations of policy relaxation (especially cyclical measures like the Buyers and Sellers stamp duties) may improve buyers market sentiment and spark a revival in transactional volumes in the Singapore residential market. This is also expected to lift sentiment on property stocks, which we believe will enable CAPL to close the gap between its stock price and NAV. Leverage & Asset Turnover (x) A 2015A 2016A 2017F 2018F Gross Debt to Equity (LHS) Asset Turnover (RHS) Capital Expenditure S$m A 2015A 2016A 2017F 2018F Capital Expenditure (-) 7.0% 6.0% ROE (%) Asset recycling into listed S-REITs/funds. CAPL will continue to demonstrate its ability to crystallise value through strategic divestments of mature assets to its listed REITs, which are market leaders in their respective subsectors of retail, office and hospitality. The ability to recycle capital efficiently will enable the group to free up capital, improve its balance sheet position and deploy capital to projects with higher returns. Key Risks: Slowdown in Asian economies. The risk to our view is a further slowdown in Asian economies which could dampen demand for housing and private consumption expenditure and retail sales. This in turn could result in slower-than-expected projections. Company Background (CAPL) is one of Asia s largest real estate companies headquartered and listed in Singapore. Its two core markets are Singapore and China; while Indonesia, Malaysia and Vietnam have been identified as new growth markets. 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 2014A 2015A 2016A 2017F 2018F 20.4 Forward PE Band (x) (x) sd: 16.6x sd: 14.8x Avg: 13x sd: 11.2x sd: 9.3x 8.4 Feb-13 Feb-14 Feb-15 Feb-16 (x) 1.3 PB Band (x) sd: 0.97x +1sd: 0.89x Avg: 0.81x 1sd: 0.73x 2sd: 0.64x 0.5 Feb-13 Feb-14 Feb-15 Feb-16 Source: Company, DBS Bank Page 5

6 Segmental Breakdown FY Dec 2014A 2015A 2016A 2017F 2018F Revenues (S$m) Singapore 1,242 1,229 1,192 1, China 638 2,039 2,376 2,005 1,641 CMA 1, ,128 Ascott , Others Total 3,925 4,761 5,252 5,561 4,668 Income Statement (S$m) FY Dec 2014A 2015A 2016A 2017F 2018F Revenue 3,925 4,762 5,252 5,561 4,668 Cost of Goods Sold (2,543) (3,287) (3,654) (3,465) (2,489) Gross Profit 1,382 1,475 1,598 2,096 2,179 Other Opng (Exp)/Inc (513) (431) (435) (444) (466) Operating Profit 869 1,044 1,163 1,652 1,713 Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc (382) (422) (401) (386) (459) Exceptional Gain/(Loss) Pre-tax Profit 1,997 1,839 1,907 1,590 1,428 Tax (238) (344) (403) (257) (257) Minority Interest (599) (430) (314) (373) (328) Preference Dividend Net Profit 1,161 1,066 1, Net Profit before Except. 1,161 1,066 1, EBITDA 2,444 2,325 2,374 1,881 1,953 Growth Revenue Gth (%) (16.1) EBITDA Gth (%) 7.4 (4.9) 2.1 (20.7) 3.8 Opg Profit Gth (%) Net Profit Gth (Pre-ex) (%) 32.7 (8.2) 11.7 (32.9) 5.6 Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x) Boosted by bulk-sale of The Nassim. Boosted by close to RMB8.9bn of unrecognised revenues as of 4Q16, of which 60% to be recognised in Source: Company, DBS Bank Page 6

7 Quarterly / Interim Income Statement (S$m) FY Dec 4Q2015 1Q2016 2Q2016 3Q2016 4Q2016 Revenue 1, ,132 1,374 1,853 Cost of Goods Sold (1,359) (615) (828) (950) (1,261) Gross Profit Other Oper. (Exp)/Inc (28.4) (89.3) 10.8 Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc (97.1) (108) (102) (101) (90.1) Exceptional Gain/(Loss) Pre-tax Profit Tax (84.7) (51.6) (82.1) (61.2) (208) Minority Interest (147) (69.6) (101) (74.1) (69.0) Net Profit Net profit bef Except EBITDA Growth Revenue Gth (%) 61.7 (48.6) EBITDA Gth (%) 28.6 (22.4) 29.6 (16.6) 64.9 Opg Profit Gth (%) 14.4 (19.9) 35.3 (12.5) 80.3 Net Profit Gth (Pre-ex) (%) 28.5 (11.9) 34.7 (15.8) 73.9 Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%) Balance Sheet (S$m) FY Dec 2014A 2015A 2016A 2017F 2018F Net Fixed Assets 1, Invts in Associates & JVs 12,781 12,858 12,617 12,924 13,237 Other LT Assets 18,705 20,760 20,577 21,882 22,382 Cash & ST Invts 2,941 4,257 5,067 4,868 4,352 Inventory Debtors 963 1,424 1,859 1,854 1,556 Other Current Assets 7,676 6,945 4,839 3,958 4,139 Total Assets 44,113 47,053 45,741 46,365 46,644 ST Debt 3,469 2,246 2,373 2,373 2,373 Creditor 3,070 4,064 4,685 3,850 3,111 Other Current Liab LT Debt 12,517 13,812 12,479 13,229 13,729 Other LT Liabilities 1,386 1,373 1,233 1,233 1,233 Shareholder s Equity 16,758 17,905 17,605 18,140 18,560 Minority Interests 6,451 7,032 6,696 6,912 7,053 Total Cap. & Liab. 44,113 47,053 45,741 46,365 46,644 Non-Cash Wkg. Capital 5,107 3,685 1,343 1,335 2,000 Net Cash/(Debt) (13,045) (11,801) (9,785) (10,735) (11,750) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) N/A N/A N/A N/A N/A Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%) Z-Score (X) Gearing to remain stable. Source: Company, DBS Bank Page 7

8 Cash Flow Statement (S$m) FY Dec 2014A 2015A 2016A 2017F 2018F Pre-Tax Profit 1,997 1,839 1,907 1,590 1,428 Dep. & Amort Tax Paid (256) (145) (350) (300) (300) Assoc. & JV Inc/(loss) (970) (726) (708) (164) (174) Chg in Wkg.Cap ,264 2, (622) Other Operating CF (161) 0.0 Net Operating CF 999 2,466 3,305 1, Capital Exp.(net) (127) (64.0) (75.2) (164) (164) Other Invts.(net) (1,357) (718) (575) (1,144) (500) Invts in Assoc. & JV (200) (200) Div from Assoc & JV Other Investing CF (102) Net Investing CF (339) 154 (71.4) (1,177) (804) Div Paid (705) (727) (752) (581) (610) Chg in Gross Debt 177 (212) (809) Capital Issues Other Financing CF (3,746) (274) (901) Net Financing CF (4,272) (1,213) (2,462) 169 (110) Currency Adjustments (153) Chg in Cash (3,557) 1, (516) Opg CFPS (S cts) Free CFPS (S cts) Source: Company, DBS Bank Target Price & Ratings History S$ mth S.No. Date of Report Closing Price Target Rating Price 1: 16 Feb BUY 2: 18 Feb BUY 3: 02 Mar BUY 4: 16 Mar BUY 5: 18 Apr BUY 6: 20 Apr BUY 7: 27 May BUY 8: 31 May BUY 9: 09 Jun BUY : 05 Aug BUY 11: 16 Sep BUY : 30 Sep BUY Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 13: 18 Oct BUY 14: 24 Oct BUY Note : Share price and Target price are adjusted for corporate actions. 15: 07 Nov BUY 16: 10 Nov BUY 17: 14 Nov BUY 18: 16 Nov BUY 19: 21 Nov BUY 20: 25 Nov BUY 21: 06 Jan BUY 22: 09 Jan BUY 23: 16 Jan BUY 24: 06 Feb BUY 25: 13 Feb BUY 26: 16 Feb BUY Source: DBS Bank Analyst: Derek TAN Rachel TAN Page 8

9 DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends Completed Date: 17 Feb :23:12 (SGT) Dissemination Date: 17 Feb :38:06 (SGT) GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the DBS Group )) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. 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