Acquire stake in Nanyou Shopping Park development. Last month, CapLand announced that it was investing in Peace Base (PB) by exchanging the entire holdings of convertible bonds of principal amount of RMB1,125m (~S$249m) issued by Heng Yue and held by CapitaLand China Holdings (CCH) and CapitaLand AIF (CAIF). PB currently holds a site in Nanshan, Shenzhen PRC that is slated for the development of Nanyou Shopping Park, which will be a mixed development comprising of residential, retail, office and hotel components. Base on the total GFA of 304,000 sqm (excluding carpark space) for the site, acquisition price works out to be around RMB4,900 psm of GFA. The revalued net asset value of PB is approximately RMB1,800m (~S$398m). Taking into account of CapLand's stakes in CCH and CAIF, it will be holding an effective stake of 58.3% in PB.

Acquisition is a positive one. We are positive over the acquisition as the site is strategically located close to the Shenzhen Bay Bridge which connects Shenzhen to Hong Kong and surrounding the site are built-up residential apartments which could provide adequate human traffic flow to the shopping park upon completion. Also, there will be a preferred return hurdle for the bond investors, of which the first RMB2bn proceeds will be paid entirely to bondholders, after which the proceeds will then be distributed between the bondholders and Heng Yue. However, the development is still in planning stages, which we expect to be completed only in late 2009 or early 2010. As such, we do not factor in any potential RNAV contribution from this site, pending further updates from CapLand.

Downgrading to HOLD on valuation. We are now lowering our risk-free rate from 3.4% to 2% but our cost of debt has been raised by 100 basis points, from 4.27% to 5.27%, to take into account of the rising cost of financing. We have also adjusted the valuation of CapLand's listed investments base on their current market value. As such, our valuation of CapLand has been lowered marginally from S$3.28 to S$3.27. We maintain our 40% discount on CapLand's development profits and investment property valuation but continue to keep the valuation of its listed investments at market value. Since our last report dated 17 Dec 2008, the share price of CapLand had risen by 18.5% and we see little upside to its share price at the moment. As such, we are now downgrading CapLand from BUY to HOLD.