AMFraser - Singapore Property 2 Dec 2014 PDF

Singapore Property

NEUTRAL (Initiating coverage)
Monday, 24 October 2011
02 December 2014

REALTY BITES
We initiate coverage of the Singapore property sector
with a NEUTRAL rating. Even though developer
stocks are generally cheap by historical standards,
we urge caution as we see limited upside catalysts to
drive share price performance. Our top picks are
Keppel Land (TP:S$4.50) and Wing Tai (TP: S$2.30),
which in our view are trading at attractive deep value.
Expect further residential price correction. The

Singapore residential sector remains a major bugbear.
Barring a black swan event, we expect further property
price declines of 15-20% by end-2016, mainly as the
spike in physical completions is likely to coincide with a
rising (albeit mildly) interest rate environment. We expect
mass market private property prices to show more marked
declines in the coming quarters.
Office sector’s lustre may not last. Singapore office

rents bottomed out in 2013, mainly as new office supply of
late has not been excessive. However, the supply glut in
2016 remains a real threat in the foreseeable future and
we believe too much optimism has been baked into the
sector amid the temporary reprieve landlords are
enjoying.
Source: HDB Retail should remain resilient amid challenges. Faced

with a manpower crunch and weakened consumer
confidence, some retailers in Singapore face a war of
attrition. Nonetheless, history has shown that
professionally-managed and well-located malls,
particularly suburban ones, remain resilient even during
Stock Shr px Mkt cap TP Rec economic downturns. We believe retail plays may prove
(S$) (S$ m) (S$) to be the “safe haven” of choice should global
Developers: uncertainties mount.
CapitaLand 3.320 14,138.4 3.82 BUY
Seeking diversification. Faced with various challenges
Keppel Land 3.370 5,207.2 4.50 BUY
on the home front, developers have been actively
Wing Tai 1.720 1,355.0 2.30 BUY diversifying out of Singapore, some earlier than others.
UOL 6.730 5,297.0 7.51 BUY We like CapitaLand and KepLand’s early forays into
CityDev 10.060 9,147.6 9.40 HOLD China, particularly on the commercial front (e.g. CMA’s
retail portfolio of 52 operational malls). The property
REITs: market in Vietnam could also be an interesting turnaround
CapitaMall Trust 1.980 6,853.6 2.23 BUY story in 2015.
CapitaCommercial
Trust 1.685 4,951.7 1.76 HOLD Be selective. Our top picks for developer stocks are
* Prices as at 28 Nov 2014 KepLand and Wing Tai. Besides the prospect of generous
dividends after the divestment of MBFC Tower 3,
KepLand continues to build up its portfolio of commercial
properties regionally. Wing Tai, while largely a Singapore
Wilson LIEW, CFA play, will be one of the biggest beneficiaries if/when the
WilsonLiew@amfraser.com.sg government relaxes on the ABSD for foreigners. Both
+65 6236 2538 stocks are trading at attractive deep value, in our view.
Please see important disclosures at the end of this publication

Singapore Property Tuesday, December 02, 2014

Investment Thesis
We initiate coverage of the Singapore property sector with a NEUTRAL
rating. While property stocks are mostly inexpensive, we foresee that the
local markets will face more headwinds with few near-term positive catalysts
to re-rate stock prices significantly. We advocate stock-picking and prefer
companies with more diversified operations and trading at deep valuations.
Keppel Land is our top big-cap pick (TP: S$4.50) for its geographically-
diversified exposure and the prospect of generous FY14 dividends, while
Wing Tai is our top mid-cap pick (TP: S$2.30) for its deep value.
Residential market poised for more downside. The main bugbear for
Singapore property developers and investors, we foresee little end in sight
for the current muted state of the Singapore residential market. We expect
further price declines of 15-20% by end-2016, premised on waning
upgraders’ demand, reduced affordability as interest rates rise and most
importantly, the impending oversupply situation once physical completions
catch up with the market. Nonetheless, the stock market has already priced
in more than a 20% ASP reduction, in our view.
Office party may end in 2016. The Singapore office sector has been the
only bright spot in recent times, as landlords enjoy more pricing power
amidst the temporary supply squeeze for prime office space in the CBD.
Conditions are likely to remain favourable for landlords over the next 12
months as the supply situation remains benign. We foresee that the
dynamics will change as 2016 approaches, given the massive supply wave
of 3.7m sq ft of prime Grade A space expected in that year, which we
believe will then lead to downward pressure on rents. We initiate coverage
on CapitaCommercial Trust - the best proxy to the Singapore office sector in
our view, with a HOLD recommendation and TP of S$1.76.
Retail to remain resilient, despite challenges. Faced with manpower

shortages and increased competition from e-commerce, the Singapore retail
scene is coming to terms with the headwinds, although attrition by weaker
retailers looks inevitable. Nonetheless, well-located and professionally
managed malls are still seeing healthy occupancy rates and shopper traffic,
as landlords proactively adapt to stay relevant. Suburban malls, in
particular, should extend their resilience as consumption is still largely
underpinned by necessity spending. We initiate coverage of CapitaMall
Trust with a BUY recommendation and TP of $2.23.
Look further afield. The recent policy moves by the Chinese government
to stimulate the economy is likely to prove beneficial for developers with
sizeable operations in China, such as CapitaLand and KepLand. There are
initial signs of a turnaround in the Vietnamese property market, where
CapitaLand and KepLand also have significant presence. A recovery in
these markets will mitigate further headwinds faced by the companies in
their home market, Singapore.
Fig 1: Valuation summary of property developer stocks under coverage
* Prices as at 28 Nov 2014
Source: Bloomberg, AmFraser estimates
AmFraser Securities Pte Ltd Page 2


Table of Contents
Page
The Singapore Property Quagmire ...................................................... 3
All Eyes on the Impending Housing Supply ....................................... 4
Office Reprieve Could Be Short-Lived .............................................. 14
Size Matters in Retail .......................................................................... 20
Silver Linings Beyond Our Shores ................................................... 25
Company Notes ................................................................................... 27
CapitaLand ........................................................................................ 29
CapitaCommercial Trust .................................................................. 33
CapitaMall Trust ............................................................................... 39
City Developments Ltd .................................................................... 44
Keppel Land ...................................................................................... 48
UOL Group ........................................................................................ 53
Wing Tai Holdings ............................................................................ 58
Appendices .......................................................................................... 62


The Singapore Property Quagmire
Property stocks have generally underperformed the wider market over the
past two years, after having fallen out of favour since the government rolled
out a slew of property cooling measures and implemented the Total Debt
Servicing Ratio (TDSR). While the residential sector has been the most
impacted, headwinds are also present for the other sub-segments, such as
the office and retail front.
While property stocks are mostly inexpensive, we see few near-term

catalysts for share prices to re-rate significantly from current levels. In fact,
we expect the physical markets (especially residential) in Singapore to likely
deteriorate further, which may continue to pose as an overhang on share
price performance. (We will delve into the various sub-segments in more
detail in the following sections.)
In our opinion, property stocks are likely to continue to trend in line with the
broader market, barring any major macro shocks. As such, we adopt a
NEUTRAL view on the sector, and prefer to pick stocks that are better
positioned for the next few years.
Our top big-cap pick is Keppel Land, mainly on its attractive valuations of
0.72x P/B and 0.56x P/RNAV. Having recently announced the proposed
divestment of MBFC Tower 3 to Keppel REIT, shareholders can look
forward to more generous dividends this year. We have a target price of
$4.50, suggesting a 33.5% price upside.
Wing Tai is our top mid-cap pick. It is currently trading at deep valuations of
0.46x P/B and 0.49x P/RNAV. While the market is currently not conducive
for its high-end projects in Ardmore Park, namely Le Nouvel Ardmore and
Nouvel 18, we believe the stock is very compelling on a risk/rewards basis,
backed by an estimated dividend yield of ~3% p.a. Our TP of $2.30 offers a
potential upside of 33.7%.
Fig 2: Two-year relative price performance of property stocks vs STI Index
Source: Bloomberg


All Eyes on the Impending Housing Supply
End of the bull run. The Singapore residential sector is a closely-watched
market, given the high home ownership rate in Singapore of 90.5% as at
end-2013, and that residential property assets make up a significant 41.4%
of the average household’s net worth.
With so much at stake, the Singapore government has been trying to steer
the housing market into a soft landing, after its spectacular trough-to-peak
run-up of 62.3% from 2Q09 to 3Q13, as measured by the URA’s Private
Residential Property Price Index (PPI).
Since Sep 2009, the government has rolled out seven rounds of cooling
measures (see Appendix A) and introduced the Total Debt Servicing Ratio
(TDSR) framework to temper the market, and the effects have been telling
with the TDSR appearing to be the straw that broke the camel’s back. For
10M14, developers sold 6,884 units (excluding ECs), or barely 50% of the
units sold in the same period last year. The PPI is also in its fourth
consecutive quarter of decline as at 3Q14, although the correction from
3Q13’s peak has been rather mild at 3.8% thus far.
Fig 3: URA Private Property Price Indices vs HDB Resale Price Index
Source: URA, HDB
Early days yet for multi-year correction. Despite the much softer market
conditions today, we believe it is still early days in this latest down-cycle. We
expect primary sales activity in the private residential segment to remain
tepid at 8,000-10,000 units (excluding ECs) p.a. in 2015 and 2016 - similar
to the level expected for the whole of 2014, as compared with 14,948 and
22,197 units sold in 2013 and 2012 respectively. Price-wise, we forecast a
further 15-20% decline by end-2016, led primarily by the mass market
segment.


A Case for More Downside
Evidence 1: Diminishing wealth effect. Most of the transactions in recent

years have been dominated by the mass market segment, represented by
the Outside Central Region (OCR), which has on average accounted for
57% of all transactions in the last ten quarters.
Within the OCR, buyers with HDB addresses make up on average 55% of
the transactions in the last 2.5 years, suggesting a significant portion of the
demand has been from upgraders. This is not surprising, considering the
fact that the HDB Resale Price Index had doubled in the period of 1Q05 to
3Q13, resulting in significant wealth effect and underpinning stronger
confidence for HDB owners to upgrade to private properties.
Fig 4: Transactions in the OCR by buyers’ address types
Source: URA
We believe that the wealth effect has already begun to diminish, given that
the HDB Resale Price Index has declined by 6.0% from the recent peak in
2Q13. This was a consequence of increased new HDB Build-To-Order
(BTO) launches, as well as more stringent measures targeting public
housing introduced in Jan and Aug 2013, such as the implementation of the
Mortgage Servicing Ratio (not to be confused with the Total Debt Servicing
Ratio) and the requirement for Permanent Residents (PRs) who buy private
properties to dispose of their HDB flats within six months.
Fig 5: Summary of regulatory changes pertaining to HDB flat ownership
Before 12 Jan 2013 After 12 Jan 2013 After 27 Aug 2013
Mortgage Servicing Ratio (MSR)*
for HDB loans 40% 35% 30%
MSR for loans by financial
institutions (FIs) N/A 30% 30%
Max. loan tenure of HDB loans 30 years 30 years 25 years
Max. loan tenure for loans by FIs 35 years 35 years 30 years
Subletting of whole flats owned Disallowed. Only subletting
by PRs Allowed with HDB consent of rooms allowed Unchanged
Retention of HDB flats owned by HDB flats must be disposed
PRs after purchasing private Allowed, after meeting within 6 months of private
property Minimum Occupation Period property purchase** Unchanged
* MSR is ratio of monthly instalment (based on medium-term interest rate) over borrower's gross monthly income
** Or within 6 months of granting Temporary Occupation Permit or Certificate of Statutory Completion for uncompleted property
Source: MAS, HDB


Wages have not risen as strongly. Wage growth has yet to catch up with
the rapid rise in property prices over the last decade, despite the recent
softening in prices. Fig 6 below shows the breakdown of the average
monthly household income for resident employed households over the ten-
year period between 2003 and 2013.
We deem the segment of households under the “HDB 5-Room & Executive
Flats” category as the best proxy to upgraders demand in the private mass
market segment. Households in this category saw their average monthly
household incomes grow at a CAGR of 4.8%. However, the rise in the PPI
for the OCR (1Q04 - 1Q14) was much faster at 7.4%. Assuming household
income growth remains at 4.8% p.a. through till 2016, we estimate that the
mass market prices have to either decline by another ~10% over the next
two years or approximately 13% in 2015 to at least match income growth.
Fig 6: Avg monthly household income from work (incl. employer CPF contributions)
HDB 5-Room & Condominiums & Other
Year HDB 4-Room
Executive Flats Apartments
2003 $4,655 $7,013 $12,182
2004 $4,592 $6,767 $12,149
2005 $4,872 $7,295 $12,711
2006 $4,981 $7,384 $13,011
2007 $5,395 $7,923 $14,494
2008 $6,069 $9,022 $16,086
2009 $6,135 $8,811 $15,730
2010 $6,483 $9,186 $16,315
2011 $7,220 $10,160 $18,025
2012 $7,626 $10,735 $19,026
2013 $7,974 $11,199 $19,340
CAGR 5.5% 4.8% 4.7%
Source: Department of Statistics
Evidence 2: TDSR is the main deal-breaker. To combat the flood of

liquidity in an environment of global Quantitative Easing, the Singapore
government has introduced seven rounds of property cooling measures
since Sep 2009, and instituted the Total Debt Servicing Ratio (TDSR)
framework in Jun 2013.
Comparing new homes sold by developers (excluding ECs) in 1H13 (pre-

TDSR) and 2H13 (post-TDSR), primary market transactions showed a
significant decline of 40%. For 10M14, new home sales registered a 50%
YoY fall to 6,884 units, underlining the efficacy of the TDSR.
Fig 7: New homes sold by developers (excluding ECs)
Source: URA


Besides capping debt liabilities at 60% of the borrower’s gross monthly
income, the TDSR requires banks to determine the loan quantum by using a
prescribed medium-term interest rate, which is currently set at not less than
3.5% for residential properties and 4.5% for non-residential properties.
From our conversations with developers and agents, many prospective

buyers today find it difficult to qualify for new home loans under the TDSR
framework. This could possibly be due to higher-than-affordable property
prices, or that many of the prospective buyers are already fairly well-
leveraged, either by owning multiple properties, or have poor financial
discipline in general.
As revealed by the MAS’ Financial Stability Review 2013 issued in Dec

2013, about 5-10% of the households in Singapore have monthly debt
obligations of over 60%, suggesting they are overleveraged. Should interest
rates rise by 3 ppts to more normalized levels, the MAS estimated that the
proportion of overleveraged households will rise to 10-15%. When these
households face greater difficulty in servicing their outstanding debt
obligations, we expect greater downward pressure on property prices as
they embark on a painful de-gearing process.
According to the Financial Stability Review 2014, borrowers with multiple

housing loans accounted for as much as 30% of new housing loans in 2011,
before declining to 15% in 3Q14. This suggests that investment demand
has reduced significantly in the past 2.5 years, especially now with the
TDSR limiting loan quanta.
The MAS has stated clearly that the TDSR is meant to be a permanent
framework to ensure that banks remain prudent in their lending (vis-à-vis
cooling measures which may be relaxed or removed when the market
conditions allow for it). With the TDSR here to stay, we expect transactional
volumes to remain muted over the next 12-24 months, as things stand.
Fig 8: Share of new housing loan borrowers with Fig 9: Sensitivity test on mortgage servicing burden—
existing housing loans MSR could rise to 81% for marginal borrowers
Source: MAS


Evidence 3: Be prepared for the deluge of completed units. Following
very robust developer sales of 84,029 units between the years 2009 and
2013, the pipeline of completed private residential units in the next few years
will naturally surge. 2016 will see the peak supply of completed units,
currently estimated at 23,459 units - more than double the pre-2014 yearly
average of 10,015 units. The number of completed HDB flats will also
accelerate, as the government has been rolling out > 22,000 new flats p,a,
since 2011.
The increase in completed supply on its own may not warrant concern, if it is
underpinned by higher demand of similar magnitude. Looking at population
growth, we noted that the Singapore population grew by 1.2m from 4.4m in
2006 to an estimated 5.47m in 2014 - a 24.3% increase in the period.
Fig 10: Completion schedule of private residential
properties
Source: URA, AmFraser estimates
Not all non-residents add to incremental demand for homes. While the
population may have grown substantially, the bulk of the increase (0.72m)
can be attributable to the non-resident population, consisting largely of
transient workers. In fact, Work Permit Holders and Foreign Domestic
Workers make up a hefty 59% of the total non-resident population of 1.6m
people as of 2014. Given the nature of their jobs, these segments of the
population are not expected to add to incremental demand for dwelling units.
Fig 11: Breakdown of Singapore’s population (Jun 2014)
Source: National Population and Talent Division



Is the supply surge necessary ominous? To further ascertain
fundamental demand, we modeled the total number of households against
the expected total number of completed dwelling units, comprising HDB
flats, ECs and private properties. The assumption is that the market is
efficient enough such that new households will be neutral on the type of
dwelling units they live in, as long as there is a roof over their heads.
As mentioned previously, not all new non-residents lead to incremental

household formation and hence residential demand. Foreign Domestic
Workers, for example, live within their employers’ households. Similarly,
Work Permit Holders, which are predominantly construction workers, are
likely to be housed in workers dormitories. We estimate an annual
household formation of ~21,000 households, of which ~18,000 are resident
households, in line with the ten-year average of 18,550 p.a.
Based on our estimates, there was an intrinsic undersupply for the most part
of the last decade, as physical completions lagged household formation. The
largest deficit of over 70,000 units was experienced in 2010, which was also
when the PPI experienced the sharpest rise. The situation is expected to
reverse in 2016, which could see a surplus of around 26,000 units. The
surplus is likely to swell to 44,000 in 2017, which is about two years’ worth of
demand, unless household formation grows faster than we expect.
Fig 12: Projection of total household formation in Singapore
Source: HDB, URA, Dept of Statistics, AmFraser estimates
Fig 13: Comparison of number of households vs total number of dwelling units in Singapore
Source: HDB, URA, Dept of Statistics, AmFraser estimates


Implications for a potential oversupply. With more dwelling units than
households, we expect vacancy rates to rise to ~10%. Homeowners with
investment properties are likely to face keener competition for tenants, which
may exacerbate the current slide in rents. Upgraders’ demand for mass
market properties will also be impacted as buyers looking to rent out their
HDB units face the prospect of lower rental income which is typically used to
offset their mortgage payments on their private properties.
As of 3Q14, the URA Private Sector Rental Index has already slid by 2.5%
YoY. The SRI HDB Rental Index indicates that HDB rents have fallen by 9%
from the peak in Jan 13.
Coupled with the prospect of normalizing interest rates, we expect the over-
leveraged investors to offload some of their properties to reduce their
exposure, perhaps even before the supply surge in 2016. Hence, we expect
to see a more significant property price correction possibly by mid-2015.
Fig 14: Non-landed Private Property Rental Index by Segments
Source: URA
Fig 15: SPI HDB Rental Index
Source: Singapore Real Estate Exchange (SRX)


What Happens When Interest Rates Rise?
Marginal homebuyers feel the hardest pinch. Mortgage rates today are
still very cheap at ~1.5% p.a. or less for the first year. To see how a rise in
interest rates will impact monthly loan payments, we use the example of a
S$1m loan, 30-year loan. At 1.5%, the monthly payments works out to
S$3,451. However, when interest rates rise to 3.5%, which is the policy rate
used under the TDSR framework, monthly interest payments will rise to
S$4,490 - a 30.1% increase. The additional out-of-pocket payment of
~$1,000 per month may be quite substantial for the marginal homebuyer.
Fig 16: Monthly loan payments for a S$1m loan— Fig 17: Effects of higher interest rates on our base
base case at 1.5% case example of S$1m loan
Source: AmFraser estimates
Affordability based on Mortgage Servicing Ratio (MSR). We further

analysed the MSR of properties in the OCR to determine affordability levels.
We compared the average household income (excl. Employer CPF
contribution) for 5-room and EC dwellers against the mortgage payments
based on median new sale prices in the OCR on a 30-year loan tenure.
Our analysis results in an implied MSR of 25% for the OCR - well within the
one-third rule as guided by conventional financial wisdom. This is due to the
low market interest rates and the downsizing of units by developers.
However, if we retrospectively impute a minimum mortgage rate of 3.5% (as
per TDSR), then the MSR will rise to 31% as at 3Q14, suggesting that prices
are just on the cusp of affordability. Given that our analysis uses the
average income rather than median income (which tends to be lower),
affordability could generally be lower than we estimated.
Fig 18: Implied MSRs based on market rates and TDSR prescribed rates
Source: URA, Dept of Statistics, AmFraser estimates



Are Cooling Measures Still Needed?
The short answer is “Yes”. The current state of the residential market is
testament to the efficacy of the TDSR, which is not a property cooling
measure per se, but a permanent framework put in place to ensure proper
financial discipline by the financial institutions. As a consequence, the
relevance of the cooling measures, such as the Additional Buyer’s Stamp
Duty (ABSD) and the Seller’s Stamp Duty (SSD), may be in doubt.
The government has, as recently as October 2014, reiterated that the

cooling measures are not likely to be relaxed soon, before a “meaningful
correction” is achieved. In our view, we believe that the government is
comfortable with a gentle correction of ~10% p.a., in line with our earlier
estimate of how much mass market prices have to correct to match wage
growth at current levels.
With mortgage rates still as low as 1.5%, we concur that it is too early to
remove the cooling measures to avoid another bout of irrational exuberance.
In particular, specific measures like the SSD continue to be relevant in
preventing speculative activity such as flipping, as long as the low interest
rate environment persists. Lower LTVs for borrowers with outstanding home
loans also work in tandem with the TDSR to ensure that investors are not
overleveraged in pursuit of possibly declining yields. (Refer to Appendix A
for the full history of property cooling measures.)
Possible room for slight tweaks. Even though the cooling measures will
likely stay for some time, we opine that there is scope to tweak the current
ABSD structure to unlock the stalemate in the high-end segment. The high-
end segment has been the most impacted since the first introduction of the
ABSD in end-2011, because demand in this segment had traditionally been
supported by wealthy foreigners who now face the highest ABSD at 15%.
The longer this drags on, Singapore may potentially lose its sheen and thus
its ability to attract the wealthy and financially savvy investors who may
eventually choose to settle down in Singapore.
We think that a tweaking of the ABSD such that it becomes less punitive for
foreigners buying high-end units (e.g. >S$5m per unit) could help unlock the
high-end stalemate, given that the underlying prices of high-end properties
are relatively attractive compared with other global gateway cities.
Such a move is likely to have limited impact on the other segments. Prices in
the mass market segment will continue to be dictated by the affordability to
local upgraders and middle-income PRs, while the government will continue
to manage the pricing of public housing, which accounts for 81.9% of
resident households.
Fig 19: Property cooling measures that are currently in force
Source: URA


Implications of a Sustained Slowdown
Marginal impact. In spite of the aversion to Singapore property developers

mainly on concerns over the current state of affairs in the residential sector,
the truth is that most developers’ have significantly reduced their reliance
and exposure on the Singapore residential segment. Faced with rising land
costs, diminishing pricing power and policy risks, most developers have
been diversifying their operations, mostly by looking at overseas markets, or
acquiring more commercial assets for recurrent income.
Of the stocks under our coverage, Wing Tai is the most exposed to the
Singapore residential sector in terms of its RNAV sensitivity to ASP
changes. If property prices fall by 20%, we estimate that Wing Tai’s RNAV
would fall by 7.3% from our base case RNAV to S$3.28/share. However, the
stock is trading at a steep 49% discount to that bear-case RNAV, which
suggests that there is huge mispricing.
Impact on big-caps is less than 5% each. The big-cap stocks are naturally
better diversified. CDL has the largest Singapore residential landbank, but
based on our estimates, its RNAV would decline by only 3.6% to $12.09/
share, if ASPs fall by 20%. The RNAV impact on KepLand, CapitaLand and
UOL are even more immaterial, at -0.8%, -1.2% and -2.3% respectively.
Fig 20: RNAV sensitivity to ASP changes


Office Reprieve could be Short-Lived
Temporary supply-demand mismatch favours landlords for now. Office
rents have staged a mini-rally after bottoming out in 3Q13, with prime Grade
A rents climbing by 18.7% YoY to $11.94 psf as at 3Q14, according to data
by JLL. The rebound was driven largely by favourable supply dynamics -
there has not been additional Grade A supply in the CBD since the
completion of Asia Square Tower 2 in 3Q13.
The supply pipeline is expected to be chunky. The next wave of new Grade
A supply in the CBD will come with the completion of CapitaGreen (700,000
sq ft) and South Beach (~520,000 sq ft) by end-2014, before another dry
spell of more than four quarters without any new completions in the CBD.
However, 3.7m sq ft of new supply will come onstream in 2016, with the
completion of Marina One, DUO, V on Shenton, Guoco Tower and the
redevelopment of International Factors Building and Robinson Towers.
Under such circumstances, landlords have been seizing the opportunity to

inch up rents, particularly for leases up for renewal, or tenants seeking
additional space for business expansion. However, most of the deals
concluded have been for spaces of less than 30,000 sq ft each and a large
proportion of the deals involved landlords backfilling vacated space.
Fig 21: Nett demand and supply of Singapore office space (Central Area)
Source: URA, JLL, AmFraser estimates
In the tight market, there still are various options. We estimate that Asia
Square Tower 2, with an NLA of 775,000 sq ft, has a committed occupancy
rate of just ~70% despite it being over a year already since obtaining its
TOP. Of the impending supply, CapitaGreen has secured pre-commitment
for ~40% of its NLA from MNCs such as Cargill and Jardine Lloyd
Thompson.
Over at South Beach, lease commitments for ~33% of the office space have
been secured, with Rabobank and Bain & Company amongst the tenants.
CDL revealed that negotiations for another 50% of the space is being firmed
up and is confident of achieving ~90% commitment by end-2014.


Assuming no new take-up until the end of the year, we estimate the
available space from these three developments alone would add up to
~1.0m sq ft (or about a year’s worth of demand).
In addition, DTZ estimates that there is ~550,000 sq ft of shadow space in

the market, on top of the ~1m sq ft of secondary space that will become
available when tenants move out of their existing locations. For example,
DTZ estimates that Standard Chartered Bank may release 60,000-80,000 sq
ft of shadow space at MBFC Tower 1 next year, while CapitaLand is
vacating its premises at Robinson Point as the group consolidates its
operations under-one-roof at Capital Tower.
In short, the supply situation may not be as tight as it seems.
Decentralized locations may come to the fore. As part of the

government’s drive to promote regional commercial hubs such as Jurong
Lake District and Woodlands Regional Centre, firms will have more options
to house their operations, especially if there is no business need to be
paying premium rents just to be located in the CBD.
For example, the newly-completed Westgate Tower offers 305,000 sq ft of

Grade A office space at an estimated asking rent of ~$6.50 psf/month—a
fraction of asking rents in the CBD. Tenants that have pre-committed at
Westgate Tower include CPG Group (83,000 sq ft), Lockheed Martin, MEA
Technologies and Joss Offshore.
Fig 22: View of the recently completed Westgate Tower
Source: RSP Architects
No lack of future supply. Even though 2015 is expected to be relatively

subdued with regards to new office supply in the CBD, the market will have
to absorb the massive wave of ~3.7m sq ft of Prime Grade A office space
that is set to hit the market in 2016, with the completion of Marina One (1.9m
sq ft), Guoco Tower (900,000 sq ft), V on Shenton (285,000 sq ft) and DUO
at the CBD fringe (570,000 sq ft). This will be followed by the 645,000 sq ft
development at Cecil Street by Frasers Centrepoint, expected to be
completed in 2017. In between, there will also be some 450,000 sq ft of
office supply within the CBD from new strata-titled developments, although
these are less likely to cater to MNC demand.


Even though the supply pipeline currently lacks visibility beyond 2017, we
believe sites will be progressively made available via the Government Land
Sales programme. In fact, the URA has set aside enough land in Marina Bay
for at least another one million sqm (~10.7 m sq ft) of prime office space.
That is equivalent to almost another four Marina Bay Financial Centres!
Fig 23: Singapore office supply pipeline
Source: JLL, AmFraser estimates
Fig 24: Ample “White sites” around Marina Bay for future developments
Source: OneMap


Where will the demand come from? Based on the leasing activity YTD,
demand for office space has been brisk, mainly coming from a diversified
mix of tenants from sectors such as Technology, Insurance, Energy and
Fast Moving Consumer Goods (FMCG).
Banks, which were traditionally the largest occupiers of office space, have
been largely inactive. In fact, some of them continue to rationalize space to
cut costs in tandem with headcount cuts. An increasing proportion of back-
office operations are being relocated to lower-cost emerging markets, such
as India. Labour practices in Singapore have also been tightened this year,
with companies now required to advertise jobs for professionals locally first,
before seeking people from abroad.
We believe that the structural problems plaguing global banks are likely to
persist in the medium term, crimping their demand for additional office space
in Singapore. As a result, landlords are going to have to attract a wide
variety of tenants to keep their properties filled.
Business environment likely to remain stable. Global markets have been

roiled recently over fears that the global economy is far from being on the
mend. In October, the IMF shaved its global growth forecasts for 2014 and
2015 to 3.3% (from 3.4%) and 3.8% (from 4%) respectively. Even in
Singapore, growth remains tepid with the government expecting GDP
growth of 3% in 2014, after earlier narrowing its growth forecast for 2014
from 2-4% to 2.5-3.5% in August. Growth in 2015 is expected to be between
2% and 4%. Nonetheless, most firms in Singapore are expecting positive
business prospects for the period of Oct 2014-Mar 2015, with the exception
of real estate companies.
We think Singapore remains an attractive and conducive place for MNCs to

locate their regional headquarters in. Huge investments are being put in to
ensure that Singapore remains competitive. These include beefing up the
public infrastructure such as extending the road and rail networks, as well as
to eventually doubling Changi Airport’s passenger capacity by c.2025 with
the completion of Terminal 5.
On balance, we believe that there will be enough business activity to

generate demand for office space in and around the CBD of 0.9-1.0m sq ft
per annum on average, suggesting that the 3.7m sq ft of new office space
slated for completion in 2016 may still take close to four years to be
absorbed.
Fig 25: General business outlook for Oct 2014—Mar 2015
Source: Department of Statistics



Need to moderate medium-term rental outlook. We expect prime Grade
A office rents to average ~$12.25 psf by end-2014 - an increase of 16.5%
YoY, led by bite-sized deals signed for smaller spaces, while the pre-
committed leases at the upcoming CapitaGreen and South Beach are
reportedly still under $10.00 psf. This should lead to a ~14% rise in the
overall CBD average rent to $10.50 psf in the same period.
Looking ahead, we estimate that prime Grade A rents can still rise by 5% in
2015 to $12.90 psf, due to the temporary supply squeeze, before
plateauing in 2016 and falling by ~8% per annum in 2017 and 2018 to
$10.90 psf as at end-2018, as the market absorbs the expected supply glut
from new prime Grade A developments.
The Grade B sub-segment in the CBD has been surprisingly resilient, but
we expect more companies to take advantage of the lower priced
decentralized locations to move into higher-spec buildings (e.g. Westgate
Tower), which should lead to greater downside pressure on rents at the
older Grade A or Grade B buildings within the CBD. We forecast overall
CBD rents remain flat at $10.50 psf in 2015, before falling by 10% per
annum to average at $7.65 psf by end-2018.
Fig 26: Rental trend for Singapore office space
Fig 27: Artist’s impression of Marina One Offices
Source: www.marinaone.com.sg


Capital values likely to have peaked. Capital values for en-bloc office
space (i.e. not strata-titled) are likely to soften slightly in 2015, on
expectations of gently rising interest rates, partially supported by the mildly
positive short-term rental outlook. Nevertheless, we believe the market will
increasingly adopt a more cautious outlook from 2016 on the back of the
impending supply glut and progressively demand higher cap rates going
forward.
Consequently, we expect the average capital value of prime Grade A office

space to decline by 4% YoY in 2015 to $2,555 psf, before falling to ~$2,095
psf by end-2018 on the back of softer rents and higher cap rates.
Fig 28: Capital value of Grade A en-bloc office space
Optimism largely priced in. We initiate coverage of CapitaCommercial

Trust (CCT), which in our view is the best proxy to Singapore’s office sector.
CCT has an attributable office GFA of ~3.0m sq ft from its portfolio of ten
properties, with nearly 90% of it being Grade A space in Singapore’s CBD.
Nevertheless, CCT has already outperformed the broader market YTD on
the back of the short-term optimism surrounding the office sector. We think
current valuations are fair and we initiate coverage with a HOLD
recommendation and a target price of S$1.76.


Size Matters in Retail
Retail sales growth challenging. Singapore is a world-renowned shopping
paradise, but recently, retailers have not been enjoying the best of times.
Since Feb this year, the Retail Sales Index (excluding motor vehicles) has
shown seven consecutive months of YoY declines at constant prices, before
stabilizing in Sep. This could partly be attributable to dimming optimism on
global economic recovery in general, which has resulted in subdued
consumer confidence.
Besides tepid consumer sentiment, retailers are also faced with two
challenges, namely coping with the ongoing manpower shortage, as well as
staying relevant in the face of e-commerce threat.
Fig 29: YoY change of Retail Sales Index by industry (at constant prices)
Source: Dept of Statistics
Labour shortage woes well-publicised. The most immediate problem

faced by retailers is the service sector labour crunch. As announced in
Budget 2013, the Ministry of Manpower has raised foreign worker levies and
cut the foreign worker quotas (Dependency Ceilings) for both S Pass and
Work Permit holders with effect from Jul 2013, with further levy increments in
July 2014 and July 2015. This is part of the government’s ongoing
campaign to promote productivity growth and reduce companies’ reliance on
foreign workers.
Restaurants likely to be worst hit. Anecdotally, the traditionally labour-

intensive restaurant trade appears to be worst off among retailers.
Singaporeans tend to shun waiting and kitchen jobs and as a result,
restaurant operators have to balance between providing a minimally-
accepted level of service with a smaller workforce.
Retail landlords, on the other hand, cannot do without their F&B tenants.
F&B offerings have now become a major differentiating factor among malls,
so the landlords have to increasingly work closely with these tenants to
optimize their use of space and maximize revenue on a per square foot
basis. Eventually, struggling restaurants may have to come up with new
concepts or make way altogether for new entrants.


Singapore’s a laggard in e-commerce. While e-commerce as a global
phenomenon is not new, Singaporeans have been relatively slow in
embracing online shopping until more recently. A key reason was that brick-
and-mortar malls are easily accessible in Singapore, hence shoppers can
conveniently drop by their nearest mall either by car or public transportation
to touch and feel the wares (or wearables) before buying them on-the-spot.
Consumers in other countries may not have such luxury. Particularly for
people living in the suburbs or rural areas, e-shopping is the most hassle-
free method for them to purchase items which are not easily accessible to
them.
Nonetheless, Singapore has seen increased ownership of smartphones and

tablets in recent years. According to a Nielsen report dated Jan 2014,
Singapore and Hong Kong have the highest rate of smartphone penetration
in Asia Pacific at 87%, while tablet ownership stood at 47%. This has
resulted in more Singaporeans taking to online shopping, as prices are fast
becoming more competitive than brick-and-mortar shops which face
overheads such as rent and manpower.
Local online fashion start-ups such as Zalora and Reebonz have been
gaining traction steadily. Online payment firm PayPal estimates that the
online shopping market here is set to quadruple from S$1.1b in 2010 to
S$4.4b in 2015.
Fig 30: Proportion of online shoppers in Singapore Fig 31: Online shoppers by age group, 2012
Source: Infocomm Development Authority of Singapore
If you can’t beat them, join them. The segment of retailers most under
threat by e-commerce is likely to be fashion and apparel. We expect some
of the smaller labels to be squeezed out of the market, but large
international fast-fashion brands such as H&M and UNIQLO should continue
to perform well with their competitively-priced, high-quality merchandise.
Some international retailers like UNIQLO are adopting a two-pronged

strategy of maintaining both an online shop and brick-and-mortar outlets,
otherwise known as omni-channel marketing. This allows them to capture all
segments of consumers, with the physical presence crucial in building and
maintaining brand awareness. If implemented properly, we believe the
physical and virtual stores will be complementary and provide growth
synergies. In UNIQLO’s case, despite having just recently launched its
Singapore online store in September, physical expansion continues with the
recent opening of new stores in Kallang Wave (at the Sports Hub) and
Jurong Point. Its 21st store will be opened soon at OneKM Mall.
We believe this underscores the point that size does matter, as these large
international retailers can reap economies of scale, such as tying up
strategically with third-party logistics providers and adopting multiple
platforms for marketing and customer communications.


For landlords, size matters too. Despite the general challenges faced by
retailers today, retail malls with the right tenant mix and shopping experience
will continue to play an integral role in Singaporean lifestyle. Therefore, a
successful landlord needs to have a strong and wide tenant network which
allows it to pick and choose the right tenants for its malls. This also enables
the landlord to minimize vacancy rates by having more alternatives.
Large and established retail landlords are likely to be the winners should
tenant attrition intensify, while smaller malls and strata-titled ones may
struggle. With a selection of well-located malls for both local and international
retailers to choose from, landlords like CapitaMalls Asia (CMA) and Frasers
Centrepoint may act as strategic partners to help retailers grow by offering
retailers more locations for their phased expansion. One example is the
popular dim-sum restaurant Tim Ho Wan, which first opened in Singapore in
CMA’s Plaza Singapura. Today, Tim Ho Wan has five outlets, three of which
are in CMA’s malls.
Chasing the tourist dollar. Based on JLL’s estimates, the average prime
retail rent along the prime shopping area stood at $37.99 psf as at 3Q14,
slightly higher than the $28.29 psf for prime space in suburban malls. With
the opening of Orchard Gateway and the reopening of Shaw Centre post-
refurbishment this year, the rejuvenation of Orchard Road is mostly
complete, with no more significant retail additions along the prime shopping
belt expected in the foreseeable future.
Orchard Road malls continue to attract top retailers and a gamut of F&B
offerings, catering to both locals and tourists. It is natural for many new-to-
market brands to open their first Singapore outlets in an Orchard Road mall.
The most recent case in point is Suitsupply from the Netherlands, which
opened a 5,500 sq ft store in ION Orchard in September.
Due to heavier reliance on the tourist dollar, Orchard Road retailers may
have been more impacted by the recent slowdown in visitor arrivals. As of
2Q14, Singapore’s overall visitor arrivals fell by 6% YoY, while tourism
receipts fell by 7% YoY. They were dragged down by the reduction in tourists
from China - a result of China’s tourism law implemented in Oct 2013, as well
as an avoidance of travel to the region following the MH370 incident.
Nonetheless, we expect the phenomenon to be temporary and we believe

that Singapore remains an attractive travel destination for business and
leisure, driven by MICE activities and international mega-events, such as the
recently concluded WTA Finals and the annual Singapore F1 Grand Prix.
Fig 32: Tourism Receipts by Major Components for Top 10 Markets, Jan to Jun 2014
Visitor Tourism
2014 Tourism
Arrival (% Receipts (%
Receipts (S$m)
Δ YoY) Δ YoY)
Hong Kong 12% 40% 15% 33% Hong Kong 279 16% 14%
USA 10% 43% 20% 27% USA 298 -2% -2%
Thailand 22% 41% 14% 23% Thailand 320 5% 2%
Philippines 18% 44% 15% 24%
Philippines 339 -2% -8%
Malaysia 29% 23% 10% 38%
Malaysia 426 -2% -2%
Japan 16% 35% 13% 37%

Japan 449 -2% 9%
Australia 515 -3% 3%
Australia 14% 32% 16% 39%
India 615 -1% -3%
India 13% 38% 16% 33%
PR China 1,364 -30% -11%
PR China 46% 24% 8% 22%
Indonesia 1,420 3% -5%
Indonesia 25% 19% 8% 47%
Overall 8,685 -3% -2%
Overall 24% 30% 13% 34%
0% 20% 40% 60% 80% 100%

Shopping Accommodation F&B Other Components Source: Singapore Tourism Board


Suburban malls epitomise stability. 2014 will see the addition of about
1.1m sq ft of retail space in the suburbs, mainly from malls such as One KM,
The Seletar Mall and the refurbished Eastpoint Mall.
Of the upcoming retail supply of ~2.8m sq ft (13.1% of island-wide stock by

end-2014) expected between 2015 and 2018, 2.1m sq ft will be sprouting
from the suburbs. However, of that 2.1m sq ft, only 1.9m sq ft will be from
organized retail (as opposed to strata-titled space), predominantly from
Waterway Point (expected 2015 TOP) and Northpoint City and
Jewel@Changi, both expected only in 2018.
We think the upcoming space is certainly not excessive. Given the ongoing
push to develop regional hubs like Punggol and Jurong Lake District, retail
space in these areas will be instrumental in promoting that growth. Suburban
malls in close proximity to residential areas and transportation nodes cater
particularly to necessity shopping, which underpins their resilience and
stability. To improve tenant mix, landlords have also been introducing more
“affordable luxe” offerings which target the middle-income families.
Fig 33: Pipeline of new retail supply in Singapore


Expecting more of the same. We expect the retail property segment to
remain resilient in the foreseeable future. We are forecasting Orchard Road
rents to experience mild pressure of -3%-0% in 2015 as the market
continues to adjust for the decline in spending by tourists from China, before
remaining flat in 2016.
As for suburban retail space, we expect rents to track inflation, with mild
growth of ~2% p.a. for 2015 and 2016 as their respective catchment areas
mature. We also expect the malls managed by established landlords to
outperform strata-titled ones which have no central management to control
tenant mix and quality.
Fig 34: Artist’s impression of the iconic Jewel @ Changi, with retail NLA of ~576,000 sq ft
Source: CapitaMalls Asia
Retail REITs - a safe haven pick. We initiate coverage of CapitaMall Trust

with a BUY recommendation and TP of $2.23. CMT offers investors the best
exposure, in our view, to matured suburban malls in Singapore. Its portfolio
has a strong track record of resilient operations since its listing in 2002, with
the average portfolio occupancy consistently above 98%. With an estimated
FY15F DPU yield of 6.0%, we believe it is an attractive safe haven pick for
cautious investors amid the current global uncertainties.
We recently also initiated coverage of Frasers Centrepoint Trust (BUY, TP

$2.24), which offers similar stability and exposure through its portfolio of six
suburban retail properties.


Silver Linings Beyond Our Shores
Look for companies with first-mover advantage. Faced with rising land
costs at home and a lack of positive catalysts on many fronts, Singapore
developers have increasingly deployed their capital overseas, particularly in
China, Vietnam and Malaysia. CapitaLand and KepLand are already well-
established in China, each with ~20 years’ of presence. CapitaLand’s China
business spans across all its business segments, namely residential, retail
(under CapitaMalls Asia), serviced apartments and mixed developments
under the Raffles City brand. KepLand is mainly focused on residential
(including townships) and commercial developments.
Still keen on China. We like CapitaLand and KepLand’s China exposure,

accounting for 40% and 43.5% of each company’s assets respectively.
Despite near-term growth concerns and a significantly cooled market on the
back of Home Purchase Restrictions (HPR), there have recently been signs
of policy easing, with the Chinese government relaxing some of the housing
curbs.
For instance, on 30 Sep, the central bank eased mortgage rules for
homebuyers who have paid off existing loans. All but five of 46 cities that had
imposed HPR have removed or relaxed such limits in recent months.
Subsequently on 21 Nov, the PBoC added further stimulus by cutting its
benchmark rate by 40 bps to 5.6%. In one week, Chinese property stocks
(represented by the SHPROP Index) have risen by 12.1%, whereas
CapitaLand and KepLand have only risen by 1.5% and 1.2% respectively.
We believe that in the medium to long term, demand for high-quality

affordable homes will continue to be key earnings drivers, and CapitaLand
and KepLand will benefit from the brand recognition they have established
over the years.
It’s not all about housing. CapitaLand’s retail mall business (under
CapitaMalls Asia) continues to enjoy growth in China, with 52 operational
malls by year-end and another ten under construction. CapitaLand is also
looking at increasing its portfolio of mixed-developments, such as the eight
Raffles Cities (four still under construction) it currently holds. Management
intends to leverage on its competitive advantage and has targeted to develop
another six new integrated developments there.
KepLand has also been building up its own commercial portfolio, with the
acquisition of Life Hub@Jinqiao Mall in Shanghai in Feb 2013, and
developing another 376,000 sqm of commercial GFA in Beijing, Shanghai
and Tianjin. In time, these properties will boost KepLand’s recurrent income
to mitigate earnings volatility from the residential business.
Fig 35: CapitaLand’s residential sales in China Fig 36: KepLand’s residential sales in China
Source: Company Source: Company


Vietnam - the next turnaround story? The Vietnamese property market
has been in the doldrums for the most part of 2008 to 2013, plagued by high
interest rates used to combat high inflation and a devalued currency (the
VND devalued by >10% between 2010 and 2011). However, recent signs in
the market have been encouraging, suggesting that the property market
there may have already bottomed.
According to CBRE’s Market Insights, the average lending rate of home

loans stood at 13.1% as of 3Q14, much lower than the 15-20% experienced
between 2011 to mid-2013. Together with stronger economic confidence,
CBRE noted that developers have already launched more condominium
units (8,393 in Ho Chi Minh City and 6,829 in Hanoi) in 9M14 than the whole
of last year.
Last week, on 25 Nov, Vietnam’s National Assembly passed the amended

Housing Law, which loosens the restrictions on foreign ownership of
properties. The new law, which takes effect from 1 Jul 2015, will allow
foreigners who have been granted visa to Vietnam to buy all kinds of
residential properties (previously condominiums only). Foreign ownership
within each condo complex will be limited to 30% of the units, and the tenure
will be limited to 50 years, with the possibility of renewal. We see this as a
positive move which may drive renewed interest in the residential sector.
Both CapitaLand and KepLand are going to be beneficiaries if the

turnaround is sustained and the early indications are positive. CapitaLand
sold 1,022 units worth S$135.2m in 9M14, from the projects Vista Verde,
The Vista and Mulberry Lane. KepLand sold ~140 units in 9M14 worth
>S$40m, mainly from The Estella and Riviera Point.
Fig 37: Condominium transactions rising in Ho Chi Minh City
Source: CBRE Vietnam
Fig 38: Condominium transactions in Hanoi
Source: CBRE Vietnam


Company Notes

CapitaLand CAPL SP; CATL.SI
Last Close : S$3.32

BUY (Initiating coverage) Fair Value : S$3.82
02 December 2014

Financials REPOSITIONED FOR THE NEXT WAVE

YE Dec (SGD m) 2013 2014F 2015F 2016F
Revenue 3,977.5 3,196.4 3,839.5 4,121.1 We initiate coverage of CapitaLand with a BUY
Gross Profit 1,085.8 1,438.4 1,735.5 1,792.7
recommendation and TP of $3.82, pegged to a 25%
discount to its RNAV. With its more streamlined
PATMI 849.8 960.0 736.5 918.8
structure, we believe CapitaLand is well-poised to
Core PATMI 527.7 649.8 736.5 918.8
respond to new trends in the markets, with China
Core EPS (SG cts) 12.4 15.3 17.3 21.6 still a key area of focus and growth. Valuations are
Core EPS grth (%) -7.2 23.1 13.3 24.8 undemanding at 0.65x P/RNAV.
Core P/E (x) 26.8 21.8 19.2 15.4
DPS (SG cts) 8.0 8.0 8.0 8.0 Well-diversified portfolio. CapitaLand is well-
Div Yield (%) 2.4 2.4 2.4 2.4 established across various asset classes, namely
BVPS (SG cts) 378.3 392.8 402.1 415.7 residential, retail, commercial and integrated
P/B (x) 0.9 0.8 0.8 0.8 developments and serviced apartments. We believe
such diversification is important, particularly with the
EV/EBITDA (x) 19.4 9.7 10.8 9.8
cyclicality associated with the various property sub-
segments. CapitaLand looks set to benefit from the likely
Key Operating Statistics turnaround in China and Vietnam.
2013 2014F 2015F 2016F
Gross Margin (%) 27.3 45.0 45.2 43.5 Reorganised for swifter market response. CapitaLand
Core Net Margin (%) 13.3 20.3 19.2 22.3 privatized CapitaMalls Asia in July to assume full control
ROE (%) 5.3 5.7 4.3 5.2 of what may be their crown jewel business, given its
ROA (%) 1.9 2.3 1.7 2.1 strong recurrent income contributions. Management
Net Gearing (%) 43.4 55.6 73.9 68.2 feels that the group can now better respond to
opportunities in integrated developments, which it sees
Stock Data as a key market trend going forward, particularly in
China.
Issued Shares (m) 4,258.6
Market Cap (S$m) 14,138.4
Sufficiently de-risked from the Singapore market. In
52 week lo / hi $2.68 / $3.48 view of the slowing residential market in Singapore,
Ave Daily Traded Vol / Val (3-Month) 8.8m / $28.1m CapitaLand has been proactive in adjusting its strategies
Free Float 60.5% to reduce inventory risks. Of the 4,780 units from its
Major Shareholders Temasek Hldgs 39.5% launched projects, CapitaLand has already sold 3,953
Blackrock 6.0% units (or ~83%). The group still has a pipeline of 501
units, with the most immediate launch likely to be Marine
Blue at Marine Parade.
12-Month CAPL SP (Blue) vs. FSSTI Positioned to reap future rewards. Management has
8.90
set a target to achieve ROEs of 8-12%, which entails a
3900 long-term capital allocation of 25-35% into residential
7.90
3700 6.90 developments, and the rest into shopping malls, serviced
3500 5.90 residences and offices. We believe the new streamlined
4.90 structure and its sound balance sheet (net gearing of
3300
3.90
3100 0.6x, cash of S$2.6b) should allow the group to reach its
2.90
2900 1.90
target in a few years’ time.
Jul-13
Jul-14
Jan-13
Sep-13
Nov-13
Jan-14
Sep-14
Nov-14
Mar-13
May-13
Mar-14
May-14
BUY, on undemanding valuations. Currently trading at

0.9x P/NTA and 0.65x P/RNAV, valuations are
Source: Bloomberg undemanding, in our view.
Wilson LIEW, CFA

WilsonLiew@amfraser.com.sg
+65 6236 2538

CapitaLand Tuesday, 02 December 2014

China pivot to pay off. Having been in China for around 20 years,
CapitaLand has built up a sizeable presence there with its various business
units, namely residential, retail (under CMA), serviced residences (under
The Ascott Limited) and integrated developments (mainly under the Raffles
City brand). Together with home market Singapore, China today is one of
CapitaLand’s key markets, accounting for 39% of its asset allocation.
Fig 39: CapitaLand’s asset allocation (% of total ex-cash assets) as at Sep-2014
Source: Company, AmFraser estimates
Various expertise under one roof. CapitaLand privatized its retail

development arm, CMA, in July this year, and is set to benefit fully from the
improved contributions from its malls in China as more of them come online.
In addition, management has identified integrated developments as the
emerging trend as China urbanises and intends to undertake 12 more of
such projects, half of which will be in China. We see this as a positive move
to harness its expertise in the various asset classes to achieve economies
of scale and gain a competitive edge over its less diversified rivals.
Beneficiary of recent policy moves. In a move to spark its domestic

economy and to loosen its stranglehold on the property market, China’s
People’s Bank of China (PBoC) eased mortgage restrictions in September
by lowering downpayment requirements for second-time borrowers who
have already paid off any existing home loans.
More recently in November, the PBoC went on to cut one-year benchmark

lending rates by 40 bps to 5.6%, following concerns that local governments
are struggling to manage high debt burdens. The markets took it positively,
with the SHPROP Index gaining 7.5% in the two days following the
announcement. With a launch pipeline of ~4,000 residential units,
CapitaLand looks set to benefit from any recovery in the housing market.


Fig 40: CapitaLand’s competitive advantage in integrated and mixed-use projects
Source: Company
Fig 41: CapitaLand’s RNAV breakdown



CapitaCommercial Trust CCT SP; CACT.SI
Last Close : S$1.685

HOLD (Initiating coverage) Fair Value : S$1.76
02 December 2014

Financials PROACTIVE OFFICE REIT

YE Dec (S$m) 2013 2014F 2015F 2016F
Revenue 386.9 264.9 277.3 283.5 As the best proxy to the Singapore office sector, in
Net Property Income our view, we initiate coverage of CapitaCommercial
296.5 209.3 218.7 223.6
Trust (CCT) with a DDM-derived TP of $1.76. While
Distributable Income 234.2 258.4 269.7 292.8 we like CCT for its steady DPUs and strong
DPU (SG cents) 8.1 8.7 9.1 9.8 management, current valuations are relatively
DPU growth (%) 1.2 7.0 4.1 8.2 unattractive with better yields to be had elsewhere.
DPU Yield (%) 4.8 5.2 5.4 5.8 HOLD.
Net asset 4,912.7 5,077.3 5,087.3 5,097.4
Borrowings 1,218.3 1,273.0 1,261.1 1,260.3 Quality Singapore-based portfolio. CCT has a
BVPS (SG cts) 170.7 171.1 171.0 170.9
portfolio of ten properties, including CapitaGreen, a
Grade A office development built on the site of CCT’s
former Market Street Car Park. Total attributable NLA for

its office space stood at ~3.0m sq ft, with Grade A office
Key Operating Statistics space making up 89% of that, including CapitaGreen,
2013 2014F 2015F 2016F which will be ready by year-end.
NPI Margin (%) 76.6 79.0 78.9 78.9
ROE (%) 4.3 5.3 5.5 5.8 Strong operating performance. Other than Bugis
ROA (%) 3.4 4.2 4.3 4.5 Village, which only contributes 3% of total NPI, CCT’s
Gearing (%) 29.1 29.8 29.7 29.6 completed properties are all operating at >97%
Price / Book (x) 1.0 1.0 1.0 1.0 occupancy. Despite the cessation of One George
Street’s income support in Jul 2013, CCT still enjoyed
Stock Data
steady growth in its office passing rent over the past two
years to $8.42 psf per month in 3Q14 - a two-year high.
Market Cap (S$m) 4,962.1 CapitaGreen to provide growth. CCT has a 40% stake
52 week lo / hi $1.38 / $1.73 in CapitaGreen, which is currently 40% pre-committed
Ave Daily Traded Vol / Val (3-Month) 6.8m / $11.2m and completing in end-2014. We estimate that the
building will be fully occupied by 2H16, by which CCT
Free Float 64.8%
may exercise its option to acquire the remaining 60%
Major Shareholders CapitaLand 31.6% from CapitaLand and Mitsubishi Estate. For now, we
CBRE Clarion 5.9% estimate that CapitaGreen contributes ~1 S cent/unit to
the DPU p.a. on a stabilized basis for its 40% stake.
Well-managed capital structure. CCT’s gearing is low

at 30.2%, with a long average term to maturity of 4.0
12-Month CCT SP (Blue) vs. FSSTI years of which 80% is on fixed rates. With a debt
3700 headroom of S$1.2b before gearing hits 40%, we
2.40 estimate that it would be sufficient for CCT to acquire the
3500
2.10
remaining 60% stake of CapitaGreen from its JV
partners, should it exercise its call option within three
3300 1.80 years of completion.
3100 1.50 Solid, but nearly at fair value. While we like CCT for its
quality portfolio and sound management, the REIT is
2900 1.20
Ma…
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Jul…
No…
Ja…
Ja…
trading close to our fair value of S$1.76. FY15F DPU

yield is relatively unattractive at 5.4%. Initiate with
Source: Bloomberg HOLD, with sister REIT CapitaMall Trust (CT SP; BUY;
TP:S$2.23) a more attractive proposition, in our view.
Wilson LIEW, CFA

+65 6236 2538

CapitaCommercial Trust Tuesday, 02 December 2014

Centrally-located quality commercial portfolio. CCT holds a portfolio of
ten quality commercial assets, offering ~3m sq ft of NLA. The properties are
all well-located within Singapore’s Central Business District, with occupancy
rates in excess of 95% (portfolio occupancy is a high of 99.4%).
CCT’s office properties have benefitted from the current tight supply, which
has allowed CCT’s average office rent to increase by 4.9% YoY to S$8.42
psf per month. CCT owns a 40% stake in CapitaGreen, which is a 700,000
sq ft prime Grade A office development set to complete by the year’s end.
Currently, ~40% of the space has been committed at estimated rents of
~S$9.50 psf per month.
Fig 42: CCT’s portfolio of centrally-located properties
Source: Company
Fig 43: CCT’s portfolio occupancy
Source: Company


Proactive landlord. With the exception of 2011, CCT has been able to
maintain DPU growth despite having divested two properties, namely
Robinson Point and StarHub Centre. Meanwhile, the manager is proactive
in trying to improve yields at some of its properties, such as the S$85.8m
phased AEI at Six Battery Road and the ongoing S$40m AEI at Capital
Tower. Its latest development, CapitaGreen, is also a redevelopment of its
old property Market Street Car Park, allowing CCT to beef up its overall
prime Grade A exposure.
Fig 44: CCT’s strong track record of DPU growth
Fig 45: CCT’s office lease renewal profile - manageable proportion in 2016/17
Source: Company


Conservative balance sheet. CCT has a relatively low gearing of just
30.2%, with an average term to maturity of 4.0 years. 80% of the borrowings
are on fixed rates, providing ample buffer against future increases in interest
rates. Assuming 40% gearing, CCT has debt headroom of S$1.2b for new
acquisitions.
One reason for the conservative balance sheet is to keep its powder dry to
eventually acquire the remaining stake in CapitaGreen. As part of the deal
for the redevelopment of Market Street Car Park, CCT’s JV partners for
CapitaGreen, CapitaLand (50%) and Mitsubishi Estate (10%), have granted
CCT a call option for the 60% CCT does not own, with the purchase price
pegged to market valuation, but subject to a minimum of development cost
compounded at 6.3% p.a. The call option is valid for three years, beginning
from the time the property is completed (end-2014). We estimate that CCT’s
current debt headroom is likely to be sufficient to fully fund the acquisition
without the need for an equity fund raising.
Fig 46: CCT’s debt maturity profile
Source: Company


Valuation
Trading at fair value. Using the Dividend Discount Model (DDM), we derive
a target price of S$1.76. We have assumed (i) a risk-free rate of 2.70%; (ii)
a market risk premium of 5.5%; (iii) beta of 0.75; and (iv) a terminal growth
rate of 1.0%. We believe the terminal growth rate is reasonable, taking into
account the potential impact of future supply and the REIT manager’s track
record.
Fig 47: DDM model for CCT
Fig 48: DDM’s sensitivity to terminal growth rate and cost of equity



CapitaMall Trust CT SP; CMLT.SI
Last Close : S$1.98

02 December 2014

Financials SOUND AS A POUND

YE Dec (S$m) 2013 2014F 2015F 2016F
Revenue 637.7 654.4 666.4 673.5 We initiate coverage of CapitaMall Trust (CMT) with a
Net property income 436.0 452.7 460.5 465.0 BUY recommendation and a DDM-derived target
price of S$2.23. As Singapore’s leading landlord for
Distributable income 305.3 379.0 403.1 418.7
suburban retail malls, CMT has a well-established
DPU (SG cents) 8.8 10.9 11.6 12.0
history of strong occupancy rates, steady DPUs and
DPU growth (%) -6.7 23.9 6.1 3.6 successful asset enhancement initiatives.
DPU Yield (%) 4.5 5.5 5.9 6.1
Net asset 6,008.7 6,164.3 6,164.5 6,164.1 Catering to your bread and butter needs. CMT was
Borrowings 3,153.7 3,083.2 2,860.6 2,933.5 the first REIT to be listed in Singapore and currently the
BVPS (SG cts) 173.7 177.8 177.3 176.9 largest by asset size (S$9.6b). CMT has a portfolio of 16
retail properties located at all corners of the island,
Key Operating Statistics comprising predominantly suburban malls.
2013 2014F 2015F 2016F
Strong track record of resilience. 73.6% of the
NPI Margin (%) 68.4 69.2 69.1 69.1
portfolio (by gross revenue and asset value) caters to
ROE (%) 5.0 6.4 6.5 6.7 necessity shopping, which is less vulnerable to
ROA (%) 3.3 4.1 4.2 4.4 economic cycles. Well-located near MRT stations and
Gearing (%) 34.2 32.0 30.4 30.9 serving large catchments, CMT’s malls consistently
Price / Book (x) 1.3 1.2 1.2 1.2 enjoy >98% occupancy rates. The average occupancy
cost for its tenants stood at 15.8% in 2013, which is a
Stock Data very healthy level (typically 16-20%).
True pioneers of retail innovation. CMT has delivered
consistent growth for its unitholders, with DPU growing
52 week lo / hi $1.80 / $2.09
at a CAGR of 3.8% between FY09-13, while distributable
Ave Daily Traded Vol / Val (3-Month) 7.3m / $14.3m
income grew even stronger at 18.6% CAGR from 2003
Free Float 65.1% to 2013. Besides rental reversions, a key growth driver is
Major Shareholders CapitaLand 28.0% value creation via Asset Enhancement Initiatives (AEIs).
Nomura Asset Mgt 7.7% Currently, AEIs requiring CAPEX of S$85.5m are
NTUC Enterprise 5.7% ongoing at JCube, IMM, Tampines Mall and Bt Panjang
Plaza, with expected ROIs of 8% or more.
Sound capital management. Gearing for CMT is at a

comfortable 34.1%, with average cost of debt at 3.6%.
While this is not the lowest by industry standards, CMT
12-Month CT SP (Blue) vs. FSSTI can count on having the longest average term to
3600 2.50 maturity of 4.7 years, with well-spread out maturities to
as far as ten years. As much as 99.7% of its borrowings
3400 2.30
are on fixed rates, providing certainty of cash flows when
3200 2.10 interest rates eventually rise.
3000 1.90
2800 1.70 Market leader at attractive price. We forecast stable
2600 1.50 forward yields of ~6% p.a. Together with our DDM target
price of $2.23, unitholders stand to reap potential total
Jan-13
Jul-13
Nov-13
Jan-14
Jul-14
Nov-14
Mar-13
May-13
Sep-13
Mar-14
May-14
Sep-14
returns of 18.5%. Possible future acquisitions from its

sponsor include the remaining 70% stake in Westgate,
Source: Bloomberg as well as Bedok Mall. Initiate with BUY.
Wilson LIEW, CFA

+65 6236 2538

CapitaMall Trust Tuesday, 02 December 2014

Well-located and resilient portfolio. As Singapore’s largest REIT by
market capitalization and asset size, CMT holds a portfolio of 16 assets
across Singapore, with a total NLA of 5.6m sq ft. All its properties are
strategically-located near transport nodes and cater to sizeable population
catchments. In addition, since many of the malls are located in the suburban
areas, nearly three-quarters of the portfolio caters to necessity shopping,
which has proven to be resilient throughout economic cycles.
Fig 49: CMT’s portfolio occupancy
Source: Company
Fig 50: CMT’s exposure to necessity shopping
Source: Company


Solid track record speaks for itself. With eleven years of listing history,
CMT can be proud of its stellar record of consistent DPU growth. This has
been largely attained through active tenant and lease management to drive
positive rental reversions, innovative optimization of space usage through
AEIs to drive value creation, and making astute acquisitions along the way
(e.g. The Atrium@Orchard and Bugis+).
While managing such a big asset portfolio, CMT’s capital management has
been exemplary. Gearing is a at comfortable 34.1%. Even though the
average cost of debt is higher than its peers at 3.6%, that is largely due to
its long average term of maturity of 4.7 years, with CMT being one of the
very few S-REITs that has issued bonds with tenure as long as ten years.
As much as 99.7% of its borrowings are on fixed rates, underpinning DPU
stability when interest rates eventually rise.
Fig 51: CMT’s strong track record of DPU growth
Fig 52: CMT’s well-spread debt maturity profile
Source: Company


Valuation
Fairly attractive for stable yields. Using the Dividend Discount Model
(DDM), we arrive at a target price of S$2.23. We have assumed (i) a risk-
free rate of 2.70%; (ii) a market risk premium of 5.5%; (iii) beta of 0.75; and
(iv) a terminal growth rate of 1.5%.
We believe the terminal growth rate is reasonable, considering the ability of

the REIT manager to enhance value via AEIs, impressive history of active
lease and tenant management and potential acquisitions. It is also
conservative when compared with Singapore’s ten-year average inflation
rate of 2.5%.
Fig 53: DDM model for CMT
Fig 54: DDM’s sensitivity to terminal growth rate and cost of equity



City Developments Ltd CIT SP; CTDM.SI
Last Close : S$10.06

HOLD (Initiating coverage) Fair Value : S$9.40
02 December 2014

Financials LACKING IN NEW CATALYSTS

YE Dec (SGD m) 2013 2014F 2015F 2016F
Revenue 3,162.1 3,456.5 2,944.0 2,931.5 We initiate coverage of City Developments Ltd (CDL)
Gross Profit 1,502.0 1,745.5 1,569.1 1,583.0
with a HOLD rating on fair valuations, based on a TP
of S$9.40. With its relatively large Singapore
PATMI 683.0 577.5 564.6 700.0
residential exposure, CDL faces the prospect of
Core PATMI 516.9 577.5 564.6 700.0
slower sell-through rates for ongoing launches. It
Core EPS (SG cts) 56.8 63.5 62.1 77.0 will also take time for its recent efforts to diversify
Core EPS grth (%) -4.3 11.7 -2.2 24.0 overseas to bear fruit.
Core P/E (x) 17.7 15.8 16.2 13.1
DPS (SG cts) 16.0 16.0 16.0 16.0 Good times did not last. CDL impressed with the
Div Yield (%) 1.6 1.6 1.6 1.6 relative success of its mass market launches from its
BVPS (SG cts) 850.3 896.3 941.0 1,001.5 legacy landbank in Pasir Ris and Tampines. Having
P/B (x) 1.2 1.1 1.1 1.0 depleted most of this high-margin landbank, CDL now
faces inventory risks from its luxury projects, as well as
EV/EBITDA (x) 12.5 10.4 10.5 10.3
poorer take-up rates at projects launched after the
implementation of the TDSR. We expect pre-tax margins
Key Operating Statistics to compress to <20% for the more recent projects (e.g.
2013 2014F 2015F 2016F Commonwealth Towers and Venue Residences) going
Gross Margin (%) 47.5 50.5 53.3 54.0 forward with softer ASPs.
Core Net Margin (%) 16.3 16.7 19.2 23.9
ROE (%) 6.7 5.5 5.3 6.3 Overseas projects need time to contribute. Cognizant
ROA (%) 3.8 3.1 3.1 3.8 of the need to reduce reliance on the Singapore market,
CDL entered the Chinese market in 2010, and the UK
Net Gearing (%) 25.2 33.1 30.0 28.4
market in 2013. While we see this as a positive move to
diversify, these overseas projects will take time to
Stock Data contribute to earnings. It may also take more effort to
Issued Shares (m) 909.3 build up scale in China to strengthen brand recognition.
52 week lo / hi $8.57 / $11.14 Hospitality business showing signs of stabilizing.
Ave Daily Traded Vol / Val (3-Month) 0.9m / $8.4m CDL’s hospitality operations are mainly conducted via its
Free Float 28.3% UK-listed subsidiary, Millennium & Copthorne (M&C).
Major Shareholders Kwek Hldgs (deemed) 48.4% M&C’s 3Q14 PATMI improved by 10.6% YoY and 47.9%
Aberdeen 22.0% QoQ to £35.5m, mainly due to additional income from
two newly acquired hotels. Operationally, M&C enjoyed
YoY improvements in 3Q RevPAR across its various
geographies. It even managed to eke out a 0.8%
12-Month CIT SP (Blue) vs. FSSTI RevPAR improvement in the soft Singapore market, with
3700 20.00 improved occupancy at the expense of lower room rates.
18.00
3500
16.00 Better value elsewhere. While we applaud CDL’s
3300 14.00 historical sales execution, we feel that the stock’s
12.00 valuations are not cheap, trading at a 20% discount to
3100 RNAV. With local headwinds and longer gestation for its
10.00
2900 8.00 overseas projects, we initiate coverage of CDL with a
HOLD rating and TP of S$9.40, pegged to a 25%
Jul-13
Jul-14
Jan-13
Mar-13
Sep-13
Nov-13
Jan-14
Mar-14
Sep-14
Nov-14
May-13
May-14
discount to RNAV.
Source: Bloomberg
Wilson LIEW, CFA

+65 6236 2538

City Developments Ltd Tuesday, 02 December 2014

Slimmer pickings on the horizon. CDL has been one of the major
beneficiaries of the robust demand for residential property during the pre-
TDSR days (i.e. before Jun 2013). Strong execution and attractive price
points especially for projects launched from its legacy landbank in
Tampines and Pasir Ris allowed CDL to capture a good part of the market
share in those years, and still benefit from healthy margins (>20% pre-tax).
However, its high exposure to the same residential sector may pose more
of a stock overhang than anything else going forward. While the group will
continue to recognize earnings from its successful launches in the past,
projects launched after mid-2013 have been impacted by the TDSR.
For example, The Venue Residences at Tai Thong Crescent has achieved
a sell-through rate of just 28% so far, despite having been launched more
than a year ago. Similarly, the 845-unit Commonwealth Towers was
launched in May 2014, but has achieved ~33% sales to-date. Dragged
down by the slow sales, we can also expect margin compression of the
more recently acquired sites to ~18%. Based on our sensitivity analysis, we
estimate that CDL’s RNAV would be negatively impacted by 3.6% if
Singapore residential ASPs fall by 20% from current levels.
Fig 55: CDL’s exposure by estimated Gross Development Value
Fig 56: CDL’s Singapore landbank


Efforts to diversify would take time. Recognising the need to reduce
reliance on the Singapore residential sector, CDL has embarked on a
diversification trail, although belatedly in comparison with its peers.
In 2010, CDL announced its entry into China in a substantial manner. To

date, CDL has two development projects in Chongqing and a mixed
development called Hong Leong City Center in Suzhou. Based on our
estimates, China will account for 10% of CDL’s portfolio by Gross
Development Value. However, earnings contributions will take time as the
projects are still under construction and profits from overseas projects can
only be recognized upon full completion. In addition, we also expect CDL to
take some time to build up its brand recognition and develop a bigger
presence in China.
Leveraging on ground knowledge from its hotel operations via Millennium &
Copthorne, CDL has acquired six freehold sites in Greater London over the
past 15 months at a cost of £157m. Despite recent signs of cooling in the
market, CDL is still keen to explore more opportunities in the UK and avoid
over-paying for acquisitions. For now, we value the UK investments at cost
in the absence of planning details.
Valuations are not cheap. CDL is trading at a mere 20% discount to our
RNAV, much richer than the peer average discount of 35%. Despite strong
execution and a sound balance sheet, we believe the premium valuations
are no longer justified given the headwinds in the Singapore residential
market. Initiate with HOLD, with a TP of S$9.40, pegged to a 25% discount
to RNAV in line with its peers.
Fig 57: CDL’s RNAV breakdown



Keppel Land KPLD SP; KLAN.SI
Last Close : S$3.37

02 December 2014

Financials AMASSING INVESTMENT PORTFOLIO

YE Dec (SGD m) 2013 2014F 2015F 2016F
Revenue 1,461.0 1,260.9 1,519.7 1,615.1 We initiate coverage of Keppel Land (KepLand) with
Gross Profit 413.9 422.4 501.5 533.0
a TP of $4.50 and a BUY recommendation. KepLand
is our top sector pick for its attractive valuations and
PATMI 885.9 573.1 404.4 475.2
the prospect of generous dividends for FY14F on the
Core PATMI 430.6 391.3 404.4 475.2
back of asset divestments. Capital is being
Core EPS (SG cts) 12.1 13.3 12.9 11.0 redeployed into new commercial projects, which will
Core EPS grth (%) -4.6 -9.1 3.4 17.5 provide recurrent income in the years to come.
Core P/E (x) 12.1 13.3 12.9 11.0
DPS (SG cts) 13.0 10.0 10.0 10.0 Active capital recycler. KepLand has been busy
Div Yield (%) 3.9 3.0 3.0 3.0 monetizing assets such as Equity Plaza and its one-third
BVPS (SG cts) 452.6 465.7 481.9 502.7 stake in MBFC Tower 3. Total net proceeds from
P/B (x) 0.7 0.7 0.7 0.7 divestments of S$969.7m will be redeployed into
investments such as Saigon Centre Ph 2 and
EV/EBITDA (x) 27.9 23.6 20.9 17.6
International Financial Centre Jakarta Tower 1. In all, a
total commercial GFA of 766,000 sqm is under
Key Operating Statistics development, which will provide a source of recurrent
2013 2014F 2015F 2016F income upon completion.
Gross Margin (%) 28.3 33.5 33.0 33.0
Core Net Margin (%) 29.5 31.0 26.6 29.4 China and Vietnam to rise to the fore. KepLand has
ROE (%) 12.7 8.0 5.4 6.1 >20 years’ experience in China, from township
ROA (%) 7.3 6.4 4.2 2.9 developments to mid– to high-end projects. These
Net Gearing (%) 41.0 40.3 37.5 32.2 projects will tap on demand for affordable, high-quality
housing in the medium term. In addition, KepLand is one
of the biggest foreign developers in Vietnam, with a
Stock Data
pipeline of close to 20,000 residential units for sale. With
Issued Shares (m) 1,545.2 recent signs of a turnaround in the Vietnamese market,
Market Cap (S$m) 5,207.2 KepLand could ramp up its sales launches there.
52 week lo / hi $3.07 / $3.67
Ave Daily Traded Vol / Val (3-Month) 2.2m / $7.2m Singapore residential exposure under control. Of the
Free Float 45.3% three ongoing launches, Corals at Keppel Bay is the best
Major Shareholders Keppel Corp 54.6% -performing, with ~50% of the 366 units already sold at
an average of S$2,200 psf. Sales at The Glades at
Tanah Merah have been slow, achieving a total sell-
through rate of 32% despite being launched over a year
ago. The 500-unit Highline Residences at Kim Tian
12-Month KPLD SP (Blue) vs. FSSTI Road got off to a good start, with 142 units sold when
launched in Sep. However, it remains to be seen if the
demand is sustainable in the current weak climate.
Reward for shareholders likely in the offing. KepLand

is trading at an attractive discount of 43.6% to its RNAV
of S$5.98. Our TP of $4.50, pegged to a 25% discount to
RNAV suggests a 33.5% upside. In addition, we
estimate that total dividends could be as much as
S$0.20 (~30% of net divestment proceeds), which
suggests an FY14F yield of ~6%. BUY.
Source: Bloomberg
Wilson LIEW, CFA

+65 6236 2538

Keppel Land Tuesday, 02 December 2014

Good proxy to regional growth markets. With three ongoing residential
launches in Singapore, KepLand’s Singapore residential inventory is fairly
manageable. Outside of Singapore, KepLand has an established track
record of developing properties in regional growth markets, and in
particular, China, Vietnam and Indonesia. KepLand is also renowned for its
expertise in township developments, providing high-quality and affordably-
priced housing to the masses.
Following the recent policy easing in China, we expect KepLand to benefit

from the continued urbanization push and growing middle-class. Including
its township developments, KepLand’s landbank in China comprises an
impressive 37,222 units with a GFA of 5.5m sqm. Based on current
indications, KepLand has 3,516 units ready to be launched in 2015.
The recent signs of a turnaround in Vietnam will also be positive for the
group. KepLand is one of the most established foreign developers in
Vietnam with a landbank of ~20,000 units with a GFA of ~2.8m sqm.
Actively recycling capital. The group has been actively monetizing

stabilized assets in recent years, predominantly office developments in
Singapore, such as Ocean Financial Centre, Equity Plaza and Marina Bay
Financial Centre.
In FY14 alone, KepLand will raise close to S$1b in net divestment

proceeds, which will then be ploughed into new investments such as
commercial developments in Ho Chi Minh City, Jakarta and Manila. In all,
KepLand is building up a new pipeline of regional commercial properties
with a GFA of ~766,000 sqm, which will provide a strong base of recurrent
income in the years to come.
Fig 58: KepLand’s development pipeline of regional commercial properties
Source: Company


Fig 58: KepLand’s asset allocation as at Sep-2014
Fig 59: KepLand’s Singapore residential landbank
Fig 60: Overview of Keppel Bay projects
Source: Company


Fig 61: KepLand’s RNAV breakdown



UOL Group UOL SP; UTOS.SI
Last Close : S$6.73

02 December 2014

Financials LEADING NON-REIT LANDLORD

YE Dec (SGD m) 2013 2014F 2015F 2016F
Revenue 1,058.6 1,315.9 916.7 1,045.1 We initiate coverage on UOL with a BUY
Gross Profit 522.0 618.5 430.8 459.9
recommendation and TP of $7.51, pegged to a 25%
discount to RNAV. UOL’s portfolio of resilient
PATMI 785.8 599.2 344.1 352.5
commercial and hospitality properties provides a
Core PATMI 344.2 456.5 344.1 352.5
strong base for recurrent income, buffering the
Core EPS (SG cts) 44.6 59.2 44.7 45.7 slowdown in the residential market. The privatization
Core EPS grth (%) -4.8 32.7 -24.6 2.4 of UIC could also be on the cards, strengthening
Core P/E (x) 15.1 11.4 15.1 14.7 UOL’s foothold in the commercial space.
DPS (SG cts) 20.0 15.0 15.0 15.0
Div Yield (%) 3.0 2.2 2.2 2.2 Sizeable landlord of commercial properties. A
BVPS (SG cts) 873.5 936.9 966.5 997.3 multidisciplinary property developer, UOL directly owns
P/B (x) 0.8 0.7 0.7 0.7 five key office developments with total attributable NLA
of ~890,000 sq ft. Together with the newly completed
EV/EBITDA (x) 15.3 10.8 13.8 12.9
retail mall OneKM at Paya Lebar and hotels under
wholly-owned Pan Pacific Hotels Group, recurrent
Key Operating Statistics income is projected to make up ~60% of adjusted
2013 2014F 2015F 2016F EBITDA annually, providing a solid recurrent income
Gross Margin (%) 49.3 47.0 47.0 44.0 base buffered against volatility from residential earnings.
Core Net Margin (%) 32.5 34.7 37.5 33.7
ROE (%) 11.6 8.3 4.6 4.6 Staying disciplined in Singapore residential. UOL
ROA (%) 7.5 5.2 2.9 3.0 has a relatively small exposure to the residential sub-
Net Gearing (%) 30.2 37.3 33.3 29.1 sector. It has been disciplined in acquiring land for
residential development in recent years with just two yet-
to-be-launched sites in its landbank. Including partially
Stock Data
sold projects, UOL’s attributable saleable area stands at
Issued Shares (m) 787.1 a manageable ~1.4m sq ft.
52 week lo / hi $5.57 / $6.84 UOL-UIC union a distinct possibility. After SingLand’s
Ave Daily Traded Vol / Val (3-Month) 0.9m / $5.7m privatisation, we believe that the next sensible step is for
Free Float 67.6% UOL to eventually privatise UIC too. UIC is one of the
Major Shareholders Wee Cho Yaw (deemed) 31.8% largest non-REIT commercial landlords and is now a
UOB 8.8% prized possession, with a number of well-located
properties in the CBD. One immediate hurdle is perhaps
UIC’s valuation – trading at 0.9x P/BV, UIC is not as
cheap as SingLand’s 0.75x when the latter was
12-Month UOL SP (Blue) vs. FSSTI privatised earlier this year. UOL currently holds a 43.9%
3500 8.00 stake, while John Gokongwei holds another 37%.
3400
7.00
3300 Solid balance sheet. UOL has a healthy balance sheet,
3200 6.00 with net gearing of just 0.37x and cash of SGD276.1m.
3100 5.00 In our view, UOL will remain prudent in bidding for new
3000 sites, while maintaining the optionality of eventually
4.00
2900
2800 3.00
launching an offer for UIC should the latter’s valuation
become more attractive.
Jul-13
Jul-14
Jan-13
Mar-13
Sep-13
Nov-13
Jan-14
Mar-14
Sep-14
Nov-14
May-13
May-14
Source: Bloomberg
Wilson LIEW, CFA

+65 6236 2538

UOL Group Tuesday, 02 December 2014

A commercial portfolio worthy of envy. UOL has a rather sizeable
portfolio of commercial properties for a non-REIT. The combined attributable
office NLA from Faber House, Odeon Towers, United Square and Novena
Square is 886,702 sq ft. While these properties are neither International
Grade A office buildings, nor are they located in the traditional financial
districts of Raffles Place or Marina Bay, they continue to enjoy high
occupancy rates of 95% or more.
Besides office space, UOL also has exposure to ~690,717 sq ft of

attributable retail NLA in Singapore. Its retail exposure is derived from United
Square shopping mall, Velocity@Novena Square, the recently-completed
OneKM at Paya Lebar and its 22.7% stake in Marina Square.
Its hotel arm, Pan Pacific Hotels Group (PPHG), owns and/or manages 33
hotels, resorts and serviced suites, mainly under the Pan Pacific and
PARKROYAL brands. Its hospitality assets in Singapore include the 367-
room Parkroyal on Upper Pickering and the 126-unit Pan Pacific Serviced
Suites Orchard.
Recurrent income accounts for ~60% of earnings. On an adjusted

EBITDA basis, recurrent income from UOL’s investment properties and the
hotels account for around 60% annually. This provides a stable foundation to
buffer against the volatilities of earnings from the residential development
business.
Fig 62: UOL’s Singapore residential landbank
Fig 63: Property investment and hotel ops make up ~60% of adjusted EBITDA annually


What’s next for UIC? UOL’s 43.9% associate, UIC, privatized Singapore
Land Limited (SingLand) in Aug 2014. SingLand was arguably the prized
possession and UIC now has nearly full control (99.5%) of SingLand. Even
though UIC/SingLand’s office properties are not as modern as Asia Square
Towers 1 and 2, or Marina Bay Financial Centre, they are still centrally
located in prime locations like Raffles Place and Shenton Way.
UIC’s portfolio now comprises 2.5m sq ft of attributable office NLA, and

660,577 sq ft of retail NLA, making it comparable to some of the larger
REITs. Assuming UOL manages to privatize UIC too, the Group will be a
formidable landlord, controlling 3.4m sq ft of office space, and 1.4m sq ft of
retail space.
The next step for UOL would naturally be to attempt to privatize UIC too.
However, this is less straightforward as UOL owns 43.9% of UIC, while Mr
John Gokongwei (UIC’s Deputy Chairman and founder of JG Summit
Holdings) controls another 37.0% via Telegraph Developments Ltd. Both
parties have been independently inching up on their stakes. In addition,
another potential stumbling block is that valuations for UIC are not
particularly cheap at this point at 0.9x P/B and P/RNAV, whereas SingLand
was privatized at 0.75x P/B and P/RNAV.
Fig 64: Cross-holding diagram of UOL-related companies


Fig 65: UOL’s RNAV breakdown



Wing Tai Holdings WINGT SP; WTHS.SI
Last Close : S$1.72

02 December 2014

Financials ATTRACTIVE DEEP VALUE

YE Jun (SGD m) 2013 2014 2015F 2016F
Wing Tai is our top mid-cap property sector pick and
Revenue 1,332.5 803.4 577.0 559.8
we initiate coverage with a BUY recommendation
Gross Profit 552.8 353.8 275.2 257.5 and TP of $2.30, pegged to a 35% discount to RNAV.
PATMI 531.1 254.4 98.4 119.1 While concerns over the Singapore residential
Core PATMI 294.0 130.1 98.4 119.1 segment are warranted, the deep discounts attached
Core EPS (SG cts) 37.0 16.4 12.4 15.0 to Wing Tai are not. With an est. dividend yield of
Core EPS grth (%) 93.5 -55.7 -24.4 21.1 3%, investors can look to a potential upside of ~40%.
Core P/E (x) 4.6 10.5 13.9 11.5
Luxury properties at a steal. Wing Tai’s unsold
DPS (SG cts) 12.0 6.0 5.0 5.0
inventory comprises mainly two super-prime Ardmore
Div Yield (%) 7.0 3.5 2.9 2.9
Park sites, Le Nouvel Ardmore and Nouvel 18 (50%
BVPS (SG cts) 360.9 377.3 383.2 391.8 stake), and The Crest at Prince Charles Crescent (40%)
P/B (x) 0.5 0.5 0.4 0.4 stake. The current share price implies Wing Tai’s land
EV/EBITDA (x) 4.8 9.3 13.5 11.2 bank has a GDV of merely S$1,510 psf - a steep
discount to the ~$2,700 psf which the 14-year old
Key Operating Statistics Ardmore Park Condo is still transacting at.
2013 2014 2015F 2016F
Gross Margin (%) 41.5 44.0 47.7 46.0
No need for panic. For the two Ardmore Park projects,
Wing Tai still has some time on its hands before the QC
Core Net Margin (%) 22.1 16.2 17.1 21.3
deadline expires (17 months and 24 months
ROE (%) 18.7 8.6 3.3 3.9
respectively). We understand that Wing Tai and CDL will
ROA (%) 10.7 5.2 2.0 2.4 soon be jointly marketing the 156-unit Nouvel 18. With a
Net Gearing (%) 14.6 15.7 15.2 11.3 breakeven of ~S$2,500 psf, we believe the JV partners
have lots of room to price the project competitively and
Stock Data yet make decent profit margins. We currently have a
Issued Shares (m) 787.8 very conservative ASP assumption of S$3,000 psf.
52 week lo / hi $1.64 / $2.04 UNIQLO’s enjoying great success. Perhaps often
overlooked is the fact that Wing Tai is the 49% local JV
Ave Daily Traded Vol / Val (3-Month) 0.8m / $1.5m
partner of the very popular UNIQLO in Singapore.
Free Float 49.5%
UNIQLO has been so well-received in Singapore that by
Major Shareholders Cheng Family (deemed) 50.3% the end of the year, it will have 21 stores since opening
its first outlet at Tampines 1 in Apr 2009. With the
success of UNIQLO, Wing Tai is in the process of
rationalizing its stable of 17 other retail brands. We value
12-Month WINGT SP (Blue) vs. FSSTI Wing Tai’s retail business at close to S$200m, almost
4000 2.50 twice the market cap of listed retailer FJ Benjamin.
3800
2.30
3600 Patience could pay off handsomely. We reiterate the
3400 2.10 attractiveness of Wing Tai’s deep value, supported by a
3200 1.90 relatively attractive yield of ~3%. While we do not think
3000 the cooling measures will be lifted any time soon, we
1.70
2800
2600 1.50
think the high-end segment may be the biggest
beneficiary should the ABSD be reduced for foreigners.
Jul-13
Jul-14
Jan-13
Mar-13
Sep-13
Nov-13
Jan-14
Mar-14
Sep-14
Nov-14
May-13
May-14
Initiate with BUY, TP S$2.30.
Source: Bloomberg
Wilson LIEW, CFA

+65 6236 2538

Wing Tai Holdings Tuesday, 02 December 2014

Prized landbank going for a song? Renowned for its high-end residential
developments, Wing Tai has been cautiously managing its Singapore
residential landbank since the Global Financial Crisis in 2008. Currently, its
landbank comprises two luxury projects in the prestigious Ardmore Park
area, namely the 43-unit Le Nouvel Ardmore and the 156-unit Nouvel 18,
which is a JV with CDL. It also has two other ongoing mid-end launches,
namely The Crest at Prince Charles Crescent, and the substantially-sold
Tembusu near Kovan MRT Station.
Sales of the first three projects have been affected by government policies.
Both Ardmore Park sites predominantly cater to demand from wealthy
foreigners, who have since been put off by the 15% ABSD. The Crest was
launched in June this year, but demand has been crimped with prospective
buyers hampered by the TDSR requirements.
Despite the challenges it faces, we believe the stock market has been overly
punitive on Wing Tai’s share price. The implied value of Wing Tai’s landbank
based on the current share price is estimated at just S$1,510 psf (on a
Gross Development Basis), suggesting that prime Ardmore Park properties
are going for a song. Therefore, in our view, the stock offers tremendous
value, unless one is actually able to buy physical properties in Ardmore Park
at S$1,500 psf.
Fig 66: Wing Tai’s Singapore
Source: URA, Company, AmFraser estimates
Fig 67: EV analysis - share price implied value of Wing Tai’s landbank
Source: Bloomberg, Company, AmFraser estimates


Deep value waiting to be realized. We have a target price of S$2.30,
pegged to a 35% discount to RNAV, which is steeper than the discount we
ascribe to the big-cap developers. Our ASP assumptions for Le Nouvel
Ardmore and Nouvel 18 are $4,000 psf and $3,000 psf respectively, which
we think are fairly conservative despite the current state of the high-end
segment. In addition, Wing Tai has a strong balance sheet with S$860m and
a net gearing of just 0.15x, putting it in good stead to ride through the lean
years and make acquisitions if land prices fall significantly enough in the
future.
Trading at a steep 55% discount to book and 51% discount to our RNAV of
$3.54, we believe valuations are very compelling. Initiate with a BUY
recommendation.
Fig 68: Wing Tai’s RNAV breakdown




Appendices


Appendix A: Timeline of Singapore property cooling measures
Source: URA, HDB


Appendix B: Historical P/B trends of Singapore property developer stocks
Fig 69: CapitaLand’s historical P/B trend Fig 70: KepLand’s historical P/B trend
Fig 71: CDL’s historical P/B trend Fig 72: UOL’s historical P/B trend
Fig 73: Wing Tai’s historical P/B trend
Source: Bloomberg


Appendix C: S-REIT Peer Comparison Table
Last Market Cons/AMF DPU Leverage
Yield (%)
Price Cap Distribution (cents) ratio Price-to-
Frequency Current Current book (x)
(S$) (S$ m) Next FY Next FY (%)
FY FY

Office S$15,689 5.4 5.6 35.7 0.93
CapitaCommercial Trust 1.685 4,962 Semi-Anl 8.7 9.1 5.2 5.4 29.4 0.99
Frasers Commercial Trust 1.470 998 Quarter 9.9 10.0 6.7 6.8 36.8 0.91
Keppel REIT 1.240 3,730 Quarter 7.7 7.2 6.2 5.8 39.6 0.89
Suntec Real Estate Investment Trust 1.970 4,929 Quarter 9.2 10.1 4.7 5.1 38.0 0.92
OUE Commercial Real Estate Investment
Trust 0.800 696 Semi-Anl N.A 5.4 N.A 6.8 41.9 0.75
IREIT Global 0.890 373 Semi-Anl N.A 6.8 N.A 7.6 33.2 1.14

Retail S$35,285 5.7 5.9 33.2 0.92
CapitaRetail China Trust 1.595 1,321 Semi-Anl 10.2 11.0 6.4 6.9 32.6 1.08
CapitaMall Trust 1.980 6,855 Quarter 10.9 11.6 5.5 5.9 35.5 1.14
Fortune Real Estate Investment Trust 7.690 14,404 Semi-Anl 41.7 43.6 5.4 5.7 32.4 0.69
Frasers Centrepoint Trust 1.895 1,735 Quarter 11.6 11.7 6.1 6.2 29.3 1.0
Lippo Malls Indonesia Retail Trust 0.370 912 Quarter 2.9 3.0 7.8 8.1 34.0 0.90
Mapletree Commercial Trust 1.415 2,971 Quarter 7.9 8.1 5.6 5.7 38.6 1.22
Mapletree Greater China Commercial Trust 0.985 2,673 Semi-Anl 6.2 6.7 6.3 6.8 38.0 0.93
SPH REIT 1.060 2,669 Quarter 5.4 5.5 5.1 5.2 25.8 1.13
Starhill Global REIT 0.810 1,744 Quarter 5.0 5.1 6.2 6.3 28.7 0.88

Healthcare S$2,329 5.7 5.8 32.5 1.38
First Real Estate Investment Trust 1.240 907 Quarter 8.1 8.4 6.5 6.8 31.9 1.28
Parkway Life Real Estate Investment Trust 2.350 1,422 Quarter 12.0 12.0 5.1 5.1 32.8 1.44

Hospitality S$7,094 6.7 7.0 32.0 0.94
Ascott Residence Trust 1.275 1,957 Semi-Anl 8.2 8.7 6.4 6.8 33.6 0.93
Ascendas Hospitality Trust 0.690 767 Semi-Anl 5.3 5.6 7.7 8.1 35.6 0.90
OUE Hospitality Trust 0.905 1,196 Quarter 6.7 6.8 7.4 7.5 31.7 0.98
Far East Hospitality Trust 0.830 1,473 Quarter 5.2 5.4 6.3 6.5 30.8 0.83
CDL Hospitality Trusts 1.735 1,701 Semi-Anl 11.0 11.5 6.3 6.6 29.6 1.06

Industrial S$15,608 6.8 7.0 31.5 1.15
AIMS AMP Capital Industrial REIT 1.450 903 Quarter 11.0 11.0 7.6 7.6 31.5 0.99
Ascendas Real Estate Investment Trust 2.340 5,626 Semi-Anl 14.9 15.4 6.4 6.6 29.6 1.16
Cache Logistics Trust 1.175 917 Quarter 8.8 9.1 7.5 7.7 28.8 1.20
Cambridge Industrial Trust 0.690 872 Quarter 5.0 5.2 7.2 7.5 28.1 0.99
Mapletree Industrial Trust 1.505 2,583 Quarter 10.0 10.1 6.6 6.7 34.4 1.25
Mapletree Logistics Trust 1.180 2,913 Quarter 7.7 7.8 6.5 6.6 33.1 1.21
Sabana Shari'ah Compliant Industrial Real
Estate Investment Trust 0.965 677 Quarter 7.6 7.8 7.9 8.1 36.2 0.88
Soilbuild Business Space REIT 0.790 642 Quarter 6.2 6.3 7.8 8.0 28.8 0.98
Viva Industrial Trust 0.790 474 Quarter 7.0 7.0 8.9 8.9 38.1 1.05

Residential S$252 6.2 7.0 36.5 1.36
Saizen REIT 0.890 252 Semi-Anl 5.5 6.2 6.2 7.0 36.5 1.36

32 S-REITs S$76,257 5.9 6.2 33.22 0.98
MASB10Y Index Monetary Authority of Singapore 2.2
Yield Spread 3.7 4.0
Source: Bloomberg, AmFraser estimates


AmFraser Research recommendations are based on a Total Return rating system, defined as follows:
BUY: >15% total return over the next 12 months

HOLD: -15% to +15% total return over the next 12 months
SELL: <-15% total return over the next 12 months
Total Return includes share price appreciation (depreciation) + dividends
Disclaimer
This report is prepared by AmFraser Securities Pte Ltd (“AmFraser”), which is a holder of a capital markets services
licence and an exempt financial adviser in Singapore.
This report is provided for information only and is not an offer or a solicitation to deal in securities or to enter into any legal
relations, nor an advice or a recommendation with respect to such securities. This report is prepared for general circulation. It
does not have regard to the specific investment objectives, financial situation and the particular needs of any recipient hereof.
You should independently evaluate particular investments and consult an independent financial adviser before dealing in any
securities mentioned in this report.
This report is confidential. This report may not be published, circulated, reproduced or distributed in whole or in part by any
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The information or views in the report (“Information”) has been obtained or derived from sources believed by AmFraser to be
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Copyright 2014. AmFraser Securities Pte Ltd. All rights reserved.
______________________________
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for AmFraser Securities Pte Ltd

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Expect further residential price correction. The

Office sector’s lustre may not last. Singapore office

Source: HDB Retail should remain resilient amid challenges. Faced

Please see important disclosures at the end of this publication

Singapore Property Tuesday, December 02, 2014

Retail to remain resilient, despite challenges. Faced with manpower

Fig 1: Valuation summary of property developer stocks under coverage

* Prices as at 28 Nov 2014

Source: Bloomberg, AmFraser estimates

AmFraser Securities Pte Ltd Page 2

Singapore Property Tuesday, December 02, 2014

AmFraser Securities Pte Ltd Page 3

Singapore Property Tuesday, December 02, 2014

While property stocks are mostly inexpensive, we see few near-term

Fig 2: Two-year relative price performance of property stocks vs STI Index

AmFraser Securities Pte Ltd Page 4

Singapore Property Tuesday, December 02, 2014

Source: URA, HDB

AmFraser Securities Pte Ltd Page 5

Singapore Property Tuesday, December 02, 2014

Evidence 1: Diminishing wealth effect. Most of the transactions in recent

Fig 4: Transactions in the OCR by buyers’ address types

Singapore Property Tuesday, December 02, 2014

Evidence 2: TDSR is the main deal-breaker. To combat the flood of

Comparing new homes sold by developers (excluding ECs) in 1H13 (pre-

AmFraser Securities Pte Ltd Page 7

Singapore Property Tuesday, December 02, 2014

From our conversations with developers and agents, many prospective

As revealed by the MAS’ Financial Stability Review 2013 issued in Dec

According to the Financial Stability Review 2014, borrowers with multiple

AmFraser Securities Pte Ltd Page 8

Singapore Property Tuesday, December 02, 2014

Source: URA, AmFraser estimates

Source: National Population and Talent Division

Singapore Property Tuesday, December 02, 2014

As mentioned previously, not all new non-residents lead to incremental

Fig 12: Projection of total household formation in Singapore

Source: HDB, URA, Dept of Statistics, AmFraser estimates

Source: HDB, URA, Dept of Statistics, AmFraser estimates

AmFraser Securities Pte Ltd Page 10

Singapore Property Tuesday, December 02, 2014

Fig 14: Non-landed Private Property Rental Index by Segments

Fig 15: SPI HDB Rental Index

Source: Singapore Real Estate Exchange (SRX)

AmFraser Securities Pte Ltd Page 11

Singapore Property Tuesday, December 02, 2014

Source: AmFraser estimates

Affordability based on Mortgage Servicing Ratio (MSR). We further

Source: URA, Dept of Statistics, AmFraser estimates

Singapore Property Tuesday, December 02, 2014

The government has, as recently as October 2014, reiterated that the

AmFraser Securities Pte Ltd Page 13

Singapore Property Tuesday, December 02, 2014

Marginal impact. In spite of the aversion to Singapore property developers

Fig 20: RNAV sensitivity to ASP changes

Source: AmFraser estimates

AmFraser Securities Pte Ltd Page 14

Singapore Property Tuesday, December 02, 2014

Under such circumstances, landlords have been seizing the opportunity to

Source: URA, JLL, AmFraser estimates

AmFraser Securities Pte Ltd Page 15

Singapore Property Tuesday, December 02, 2014

In addition, DTZ estimates that there is ~550,000 sq ft of shadow space in