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Property – Singapore

Valuing CLI Prior To Its 20 Sep Listing; Positive News for CDL

With CLI listing on the SGX on 20 September, we establish a sum-of-the-parts valuation for the company of S$3.64. This implies a 29% upside from CAPL’s valuation of CLI of S$2.823 as part of the consideration in its scheme of arrangement. We like CLI for its scalability through fee-related earnings and growth potential in its funds management
business. In other news, CDL announced that it had finally jettisoned its troubled Sincere investment for US$1.00 to an unrelated party. Maintain MARKET WEIGHT.

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WHAT’S NEW

• The end of the road for CAPL but the start of the journey for CLI. With CapitaLand (CAPL) having been delisted on 9 Sep 21, we establish a fair valuation of S$3.64 for CapitaLand Investments (CLI) prior to its listing on the SGX on 20 Sep 21. This implies a 28.9% upside from CAPL’s own 1x P/NAV valuation of CLI of S$2.823 which it used as part of the valuation consideration during the scheme of arrangement to delist. Our fair valuation uses a sum-of-the parts valuation methodology for CLI (see full valuation table overleaf).

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• City Developments’ (CDL) de-risking in China. Last week, CDL reported that it had sold its entire stake in Sincere to Sure Spread, an unrelated party registered in the Seychelles, for US$1.00. In addition, it announced that it had received an additional 15.4% stake in Shenzhen Tusincere Technology Park (STTP) as partial payment of a loan that is due to
CDL. Post the two transactions above, CDL now has zero interest in Sincere, and instead has a 100% stake in STTP which owns 65% of the Shenzhen Tech Park (a China state-owned enterprise owns the remaining 35%). Based on our estimates, CDL’s loan exposure to Sincere has declined by S$30m-35m to S$82m-87m after receiving the 15.4% stake in STTP as partial payment. Recall that CDL had previously written down its equity stake in Sincere to zero.

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ESSENTIALS

• Our SOTP for CLI uses global comparable companies for the investment management and lodging segments. For the investment management segment, the comparables include Charter Hall, Goodman Group, Stockland, Mirvac, Home Consortium, Lendlease, ESR Cayman, Brookfield and Blackstone while lodging comps include Marriott, Hilton, Hyatt,
Wyndham, Choice, Accor and Whitbread. Our valuation for CLI’s listed REITs use a combination of UOB Kay Hian target prices and market prices, while the valuation for the company’s property investment segment and unlisted funds utilises adjusted RNAV and carrying value respectively as at end-1Q21.

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• Comps are admittedly difficult during this period of earnings uncertainty; however, we do not believe that the multiples that we have used are egregious as they are similar to those seen prior to COVID-19. Within the investment management segment, our 2022F PE multiple of 18.4x is a slight premium over the 17.9x average in 2019 (ie pre-COVID-19); while for the lodging management segment, our 2022E EV/EBITDA multiple of 13.5x is a 25% discount to the 17.9x sector average seen in 2019.

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BACKGROUND

• As a recap, the implied consideration for CAPL shareholders was S$4.10. For every one CAPL share, eligible shareholders received: a) one CLI share which was valued at S$2.823, b) S$0.951 in cash, and c) 0.155 units of CapitaLand Integrated Commercial Trust (CICT) units.

• New CLI structure sharpens strategic focus. The privatisation of CAPL’s capital-intensive development business will allow it to focus on developing longer gestation projects and incubating new businesses that require more ‘patient’ capital. In addition, the company believes that listing its investment business will increase scalability through Fee Related Earnings (FRE) and Funds Under Management (FUM) growth.

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• The FRE business comprises fund management and lodging management with FUM totalling S$78.0b as at end-20 and an 11% five-year CAGR. In terms of geography, CLI will focus on Asia Pacific real estate and REITs and business trusts. On the lodging side, CLI is a leading global serviced-residences manager (c.80% of managed units are owned by third-parties), with a target to grow its units by 30% to 160,000 units by 2023.

• CLI’s real estate investments business comprises listed and unlisted funds as well as investment properties. As at 16 Sep 21, the value of its stakes in listed funds totalled S$7.9b, using a combination of UOB Kay Hian target prices and market prices. This unit is underpinned by stable distributions from CLI’s listed REITs and BTs with sponsor stakes
ranging from 16-35%. CAPL disclosed that its stakes in 25 unlisted funds had a carrying value of S$5.9b and FUM of S$26b as at end-20.