City Developments’ (CDL) pricing strategy at “The Arte” has been successful in motivating demand. The developer sold 101 of the total 336 units developed during the soft launch period in March at a median price of S$874/psf, with a further 110 units sold in April at a median price of S$904/psf. In total, CDL has sold about 250 units, securing a take-up of ~75%. Sweetening the deal is an interest rate absorption scheme [IAS], following an initial down-payment of 20% (5% on booking with the remainder within eight weeks). We see inventory clearance as predicated on continued price discounting, with demand likely to slip unless developers continue with this pragmatic approach to unit sales. Expectations of a rebound in property prices, we believe, are premature.

We maintain our view that notwithstanding the recent optimism in equity markets, the real economy, especially the lodging sector, faces a somewhat challenging operating market. In late May, Millennium & Copthorne (M&C) subsidiary CDL Investments New Zealand Limited stated that it expected to report a loss for the first half of this year, with the outlook for 2009 remaining uncertain. Notwithstanding the profit warnings, M&C indicated that the outlook for the group “remained “unchanged from the statement in the company’s interim management report on 6 May, 2009. The report stated that while the group sees a cap in the supply of new hotel rooms, given a weaker outlook for the lodging sector in the coming years, “next few quarters should present challenging trading conditions”. We still hold the view that its lodging subsidiaries (approximately 25% of net earnings) are a probable source of earnings disappointment in FY09F.

We have only marginally adjusted our earnings assumptions to reflect achieved prices and volumes in “The Arte”. In addition to our marginal adjustments to our earnings expectations, we rolled forward our intrinsic sum-of-the-parts (SOTP) NAV to FY10F and derived a value of S$8.28/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 risk to earnings, and in that context, we adopted mid-cycle discounts to NAV to derive our FY10F price target of S$6.66/share. Price target sensitivity to adopted discounts is presented in the table below.