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Resilient Operating Performance With A Better Outlook

CDL reported a resilient operating performance in 3Q21 with strong sequential momentum in its property development and hospitality businesses. However, slight speed bumps may appear in the form of resurgent COVID-19 infections especially in Europe. Strategically, given the jettisoning of its stake in Sincere in Sep 21, the outlook appears reasonably good heading into 2022. Maintain BUY. Target price: S$8.50.

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WHAT’S NEW

• Luxury residences driving strong sales. Over the weekend from 20-21 Nov 21, City Developments Limited’s (CDL) luxury development, Canninghill Piers (CDL: 50%, CapitaLand Developments: 50%), sold 538 (77%) out of the 696 units available. This generated total gross revenue of around S$1.18b with average prices around the S$2,800psf range. In addition, its other luxury offerings such as Irwell Hill Residences and Amber Park and its mid-market Sengkang Grand Residences sold 74%, 84% and 91%
respectively as of 16 Nov 21. This strong showing pushed ytd sales to 1,382 units with a total sales value of S$2.5b, surpassing 2020’s 1,318 units and S$1.8b sales value.

• Encouraging signs for the hospitality business as borders reopen. With the exception of Singapore’s occupancy rates which saw lower yoy numbers in 3Q21, CDL’s global hotel operations saw higher yoy occupancies and room rates (see charts overleaf). Global average room rates rose 41.4% yoy, led by the realisation of recovery prospects in the UK and New York, resulting in yoy RevPAR increases of 390.1% and 186.4% in Europe and the US respectively off low 3Q20 bases. Overall, the hospitality division saw a strong yoy and qoq demand recovery in 3Q21 and thus all regions were able to generate positive gross operating profit. With additions to the Vaccinated Travel Lane scheme going into the end of the year, we expect continued recovery to take hold in CDL’s hotel operations.

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• The end of the Sincere misadventure. On 10 Sep 21, CDL announced its divestment of its interest in Sincere. Additionally, it received a 15.4% stake in Shenzhen Tusincere Technology Park as partial payment of a loan thus putting CDL’s financial exposure to Sincere at only S$78m based on the estimated fair value of Shenzhen Tusincere. CDL currently has a 65% stake in the Shenzhen Longgang Tusincere Tech Park.

STOCK IMPACT

• Investment properties continue to register high occupancies as economic activities resume. The outlook in Singapore looks promising with a tight office supply in the coming years as well as a gradual recovery in retail tenants’ footfall as social distancing measures ease. The Group’s office portfolio as of 30 Sep 21 had a committed occupancy of 91.5%, exceeding the national average of 87.1%, while its retail portfolio had occupancy in excess of 93%, above the Singapore average of 91.9%. In China, CDL commented that the office leasing market has proved to be generally stable, offset by the negative impact on its retail assets due to recent policy changes regarding private tutoring which forced some tenants to terminate their leases prematurely.

• The wait continues for the potential IPO of CDL’s UK commercial assets via a REIT. CDL’s plans to establish a Singapore-listed REIT for its UK commercial assets have been delayed due to current market conditions, and thus the IPO is likely to take place only in 2022.

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EARNINGS REVISION/RISK

• Lowering earnings for 2021-23. We have downgraded our earnings forecasts for 2021-23 by 1-12% to take into account the slightly slower-than-expected resumption of travel which will have an impact on CDL’s hospitality business. With the northern hemisphere winter approaching and rising rates of COVID-19 infection in various parts of Europe, we decided to take on a more prudent outlook for 4Q21 and 1H22, despite the desire of governments to move towards treating the virus as endemic.

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VALUATION/RECOMMENDATION

• We retain our BUY rating on the stock and target price of $8.50. Our RNAV remains the same at S$13.50/share with discount to RNAV unchanged at 40%. We note that CDL disclosed during its 1H21 results briefing that its RNAV (excluding revaluation of its hotel portfolio) was S$14.22/share as at end-1H21.

• Inexpensive valuations. In our view, CDL’s valuations appear inexpensive: its 2022 P/B of 0.75x is 1.5SD below its 5-year P/B average of 0.92x while its 2022 PE of 15.1x is a 14% discount to the company’s past-five-year average of 17.5x. At our target price of S$8.50, CDL would trade at a 2021F P/B of 0.86x, which we view as fair.

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SHARE PRICE CATALYST

• Continued economic recovery from COVID-19 especially resumption of leisure and business travel.

• IPO of UK commercial assets.

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