CapitaLand astutely moved to clear existing inventory, notably the sell-off of the 186-unit Wharf Residence in early May. While the market and buyers appear to be convinced of a rebound in asset prices, CapitaLand’s pre-emptive decision to cut prices and clear inventory some eight to nine months after the first launch — and at a time when the company is flush with S$5.5bn in cash — suggests to us that the developer is mindful of the inventory overhang in the Singapore market and the risk of future presale discounting to clear this inventory. To recap, CapitaLand released a total of 100 units on 15 May, selling 85 units on that day. Over the following weekend, management sold a further 24 units, bringing total sales to 134 unitshaving sold 25 units at the original launch in 2008. According to the company, the “average price achieved was S$1,300-1,600 psf”, inclusive of the interest rate absorption scheme (IRAS). The agent we spoke with, however, suggested that prices over the weekend were S$1,100-1,300/psf, as most buyers opted for the deferred payment scheme and the smaller two-bedroom units.

As a consequence of the S$1.84bn rights issue in 1Q09, gross debt fell by S$2.3bn y-y to S$10.0bn, resulting in the group’s net debt-toequity falling to 0.32x at end-1Q09, from 0.59x at end-1Q08. The group currently has a cash balance of S$5.5bn. While CapitaLand has de-levered its balance sheet, the group has not booked any revaluation deficits to date, as “it is the practice of the group to revalue its investment properties half yearly”. Expectations of revaluation deficits, however, are now being realised with CapitaCommerical Trust (CCT) revaluing its portfolio down 10.1% to S$6,029.6mn (equivalent to S$681.0mn) in May prior to announcement of its rights issue. On our numbers, CapitaLand will book, on this announcement alone, an attributable revaluation deficit of S$230.5mn (comprising CapitaLand's attributable stake of CCT revaluation deficit (S$214mn) plus CapitaLand's attributable stake in Raffles City (via CapitaMall Trust), which was revalued down by S$141mn, equivalent to 5.2% of the assets total value).


We agree with CapitaLand management’s prognosis at its 1Q09 results announcement that “downside risks to capital values” remain and see the potential for further asset write-downs over the cycle. In the context of CapitaLand we see such risks as focused on the office/retail sector, rather than in the residential market and its exposure to en bloc developments. The following Exhibit highlights potential asset write-downs of its major associates CCT and CapitaMall Trust, and the implications for CapitaLand, with the group potentially booking an attributable revaluation deficit of about S$1.3bn.

Break-even analysis of CapitaLand’s major residential projects acquired enbloc highlights the potential for modest write-downs for “foreseeable losses” on its development properties, notably Farrer Court (break-even ~S$1,300/psf) and Char Yong Gardens (break-even S$2,700/psf), suggesting a potential write-down of S$125mn — modest in the context of the revaluation deficits that could potentially be booked from the office sector.

Our earnings adjustments are primarily driven by a more positive assessment of the China residential market and adjustments to the timing of residential launches. In addition to the adjustments to our earnings expectations, we rolled forward our intrinsic sum-of-the-parts (SOTP) NAV to FY10F to derive a value of S$3.33/share. Notwithstanding the market’s recent appetite for risk, we maintain our view that asset prices are likely to bottom in 2010F, suggesting further downside risks to earnings. In that context, we adopted mid-cycle discounts to NAV to derive our FY10F price target of S$2.72/share.