On Sept 12, OCBC Credit Research downgraded the issuer profile of unlisted CapitaLand Group to “neutral (5)”, which reflects a cautious but not overly pessimistic view of an entity’s ability to meet its financial obligations. The reason, according to the report dated Sept 12, is due to a weaker standalone credit profile — excluding CapitaLand Investment (CLI) — exacerbated by foreseeable losses of development properties while the quality of disclosure has declined.
CapitaLand Group owns a 52.8% stake in the listed CLI and 100% of the unlisted CapitaLand Development (CLD). CapitaLand Group is 100%-owned by CLA Real Estate, a Temasek Holdings entity. Separately, CLA Real Estate owns 30% of Cuscaden Peak, which, in turn, holds 61.44% or 1.74 billion units in Paragon REIT.
In April, CapitaLand Group announced its FY2023 results ended Dec 31, 2023, which showed that revenue, gross profit and profit before tax fell 6.9%, 11.4% and 76.8% y-o-y to $4.8 billion, $1.6 billion and $479 million, respectively. Meanwhile, patmi swung into a $92 million loss in FY2023 compared to a profit of $862 million in FY2022.
“In our view, CapitaLand Group less CLI is mostly or entirely attributable to CLD. CapitaLand Group less CLI in 2021 used to account for the majority of revenue (58%), gross profit (57%), profit from operations (54%), and a sizeable portion of PBT (profit before tax) (40%). However, in 2023, CapitaLand Group’s share of contribution less CLI, fell to 42%, 22%, 12%, and 1%, respectively,” says OCBC.
Too much China
In FY2018, the last full year before CapitaLand acquired Ascendas-Singbridge, China accounted for 36%, 41.4% and 47.4% of CapitaLand’s assets, revenue and earnings before interest and tax (ebit). Assets in China comprised mega projects such as Raffles City Chongqing, which cost RMB24 billion to develop. It became wholly owned by CapitaLand after 2019 when CapitaLand acquired Ascendas-Singbridge.
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In 2018, CapitaLand created Raffles City China Investment Partners III, which, together with GIC, acquired two towers in the North Bund for RMB12.8 billion. The twin towers were renamed Raffles City The Bund, opened in 2021 and valued at over RMB19 billion in 2021.
By then, CapitaLand had split its business into CLI and CLD. The private funds, REITs and property trusts were placed in CLI with the management companies and The Ascott.
The capital-heavy development projects, including Raffles City Chongqing, are in CLD.
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In 2014, CapitaLand doubled down on China after it divested Australand, its ASX-listed stapled security, which owned warehouses in Australia. Australand was swiftly snapped up by Frasers Property TQ5 and renamed Frasers Property Australia.
In 2019, group CEO Lee Chee Koon deftly made a bid for Ascendas-Singbridge (ASB), so that CapitaLand once again has access to warehouses across Asia Pacific, which were much in demand. Warehouses remain in demand in many developed and developing economies, except China where vacancy rates are rising. Additionally, the acquisition of ASB gave CLI a toehold in data centres.
The rationale for splitting the business was for CLI to trade as a real estate investment manager (REIM). REIMs — because of their asset-light nature and focus on property and asset management — are likely to trade at higher ebitda multiples and P/NAV (price-to-book) multiples than developers.
As a case in point, CLI was able to scale its data centre portfolio, adding 22 data centres since 2021. Altogether, CLI has 27 data centres with a capacity of more than 800 megawatts in gross power in eight countries.
CLI is interest-rate sensitive, and since its low on Aug 15 of $2.50, its share price is up 16% based on the close of $2.91 on Sept 16 in anticipation of an easier interest rate regime.
During CLI’s 1HFY2024 results briefing, group CEO Lee had said “to guide the market, we do not envisage any geography should take more than 20% of our capital allocation”. This includes China. Following the split from CLD, CLI still had some 30% of its funds under management and assets under management comprising China.
Group chief operating officer Andrew Lim had explained that CLI’s “China for China” strategy is to tap onshore RMB capital for its onshore funds. It did this with its China Business Park RMB Fund III, which has Ascendas iHub Suzhou as its seed property.
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Lee says to get the China exposure down to 20% requires active recycling of capital and seeking new growth opportunities in Japan, Korea and Australia.
This leaves CLD holding on to the Chinese mega projects, weighing down CapitaLand Group’s financial performance. There has been a sizeable decline in development revenue due to falling contribution from China, partly mitigated by revenue from its other emerging markets and Singapore, OCBC reckons.
“Revenue from residential, commercial, strata and urban development has fallen from around $1.9 billion in 2021–2022 to $1.54 billion in 2023. The contribution from China (including Hong Kong) has declined to $0.81 billion in 2023 (2022: $1.37 billion, 2021: $1.65 billion). Development revenue would have declined further if not for the increase in contribution from Singapore, with revenue growing to $511 million in 2023 (2022: $462 million, 2021: $165 million). Meanwhile, revenue from other emerging markets has increased to $216 million in 2023 (2022: $69 million, 2021: $93 million),” OCBC says. As CLI undertakes minimal development, almost all of CapitaLand Group’s development revenue is attributable to CLD, it adds.
CapitaLand Group is looking for revenue to increase from Vietnam and achieve a residential portfolio of 27,000 units in the country by 2028 from 18,000 currently. “We note recent projects such as The Orchard (sold 70% of 368 units) and Lumi Hanoi (sold 97% of 3,200 units) have sold well,” OCBC says.
China’s continued deceleration
China’s economy has slowed since it reopened after the Covid lockdown. GDP growth in 2Q2024 was a modest 4.7% and the slowdown has spilled over to August based on figures released on Sept 14. Much of the slowdown has been blamed on China’s moribund residential property sector, and the challenges faced by its developers.
In a report dated Sept 16, DBS Group Research said:“Despite stronger growth in exports, industrial production continued to decelerate, amid sluggish domestic demand. Consumption sentiment remained subdued amid higher unemployment rates.”.
In an update on Sept 17, Commerzbank Research concurred, stating: “it seems increasingly likely that China’s economy will miss the official growth target this year. Policymakers will need to do more, especially supporting the demand side as opposed to the supply side, to effectively lift growth.”
Following the release of China’s economic data on Sept 14, Bloomberg reported investor Mark Mobius as saying: “The real problem is that the entrepreneurial impetus is missing, with lots of businessmen unwilling to invest. It will be necessary for the government to loosen up on private enterprise restrictions and regulations so the private sector can be stimulated and help grow the economy.”
Unsold units
CapitaLand Group hasn’t escaped the effect of China’s slowdown, as evidenced by estimated unsold units in China. Its development properties for sale are classified into three main categories: completed development properties; land and related costs and development costs, for revenue which will be recognised over time; and land and related costs and development costs for revenue which will be recognised at a point in time.
OCBC says completed properties have risen to $3.36 billion in 2023 from $2.24 billion in 2022. OCBC believes this implies that CapitaLand Group faced challenges selling units as revenue from development has fallen by 19.4% y-o-y $1.54 billion in 2023. Meanwhile, allowance for foreseeable losses has risen 32% y-o-y to $623 million in 2023. “We think this category primarily comprises unsold properties in China, given the high sales rate in Singapore,” the OCBC report says.
Land and related costs and development costs have fallen by 29.7% y-o-y to $650 million for revenue, which will be recognised over time. This category should include Singapore property. Inventory (land and development costs) have declined along with the 10.6% y-o-y rise in Singapore development revenue to $511 million in 2023. Properties that sold well include CanningHill Piers, One Pearl Bank, and J’den. CLD is replenishing land, for example, through joint ventures that acquired Tampines Avenue 11 at $1.206 billion and a consortium that acquired Holland Drive for $805.39 million.
Revenue that is recognised at a point in time has fallen by 31.1% y-o-y to $2.94 billion. “We think the decline is a result of CapitaLand Group completing the development of properties, and most of these completed properties likely remain unsold, contributing to the stock of completed development properties on CapitaLand Group’s balance sheet. Separately, we note that while land and related costs for the segment fell 19.5% y-o-y to $2.36 billion, development costs fell by a larger 56.4% y-o-y to $586 million. We think this may be part of CapitaLand Group’s decision in slowing the pace of new launches and construction relative to the pace of completion,” the OCBC report says.
Despite its challenges, CLI’s revenue and gross profit have been relatively stable, attributable to recurring income from stakes in CLI’s listed REITs and business trusts, which consistently upstreams dividends which have been mostly stable, as well as fee-related income revenue from fund management, lodging management and commercial management.
CapitaLand Group’s credit profile hinges on CLI. “Given the shrinking profitability and revenues of CLD, CLI has become the most important subsidiary. We estimate that CLI represents 61% of CapitaLand Group’s total assets and 73% of net assets as of end-2023. Excluding CLI, we estimate that CapitaLand Group would have made a net loss of $141 million in 2023,” OCBC says. CapitaLand Group benefits from the “upstreaming of $330 million in dividends a year”, the report adds.
OCBC also believes that CapitaLand Group can monetise its stake in CLI if it needs to, and CLI or its REITs could acquire assets from CapitaLand Group.
A rebound for CapitaLand Group's earnings hinges on China. China may not be the flavour of the month this year, but at some point, foreign investors will return, and outside of China and Hong Kong, CapitaLand Group is the company best placed to partner foreign institutional investors.
