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Potential Policy Headwinds Push CapitaLand Lower, But Long Term Prospect Remains Strong
Corporate Digest | 30 May 2011
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By: Xavier Lim
Articles (51) Profile

CapitaLand’s share price has plunged roughly seven weeks in a row and has fallen by around 26% since it peaked at $4.23 on 07 Oct-10, based on 27 May-11 closing price of $3.11. The share has underperformedthe Straits Times Index’s (STI) 5.4 percent loss since the STI’s 09 Nov-10 peak. The significant decline in the share price of CapitaLand was in line with worries about further cooling measures in both Singapore and China.

To weigh in further on CapitaLand’s share price, sales of new private homes (excluding executive condos) rose 29 percent in April to a 5-month high as property developers pushed out more projects to ride on the buying momentum. This triggered fears of more aggressive monetary tightening measures
from the government.

According to Urban Redevelopment Authority’s data, developers sold 1,788 homes in April as compared to 1,386 in March, the highest since 1,915 units were bought in November. Analysts said that the growth was due to investors seeking Singapore as a safe haven for assets investment following events from Japan’s worst earthquake to political turmoil in some Middle East nations.

On the other hand, China’s home sales transaction value slid 21 percent in April from Rmb413.6 billion to Rmb324.9 billion on a month-on-month basis, based on Statistics Bureau data. Nevertheless, property prices continued to rise for eight consecutive months with average home prices for April inching up 0.4 percent to Rmb8,773 per square meter from Rmb8,738 in March. Although housing prices in big cities showed signs of slowdown, prices in smaller cities are still increasing at a fast pace.

So What’s The Problem?
Premier Wen Jiabao said that he is determined to bring down the skyrocketed property prices in some cities to a “reasonable” level. Hence, it is likely that the Chinese government will take more stringent policies on the “stubborn” property prices in order to pull the housing prices back to earth.

Back home, the Housing & Development Board (HDB) has announced that it would roll out 4,000 new flats in six projects and increase the supply for 2011 from 22,000 units to 25,000 units. This is the largest supply of new flats ever released in a single launch. HDB also plans to build ahead new flats before demand is determined. While industry players warn that this could lead to oversupply problems down the road, our new National Development Minister Khaw Boon Wan explains that while he intends to ease the $8,000 income ceiling on HDB flats, he expects that there will be additional demand, hence he has to prepare for that.

Well, this writer believes that resale flats and executive condominiums will be affected by the HDB’s new plans. Prices of these 2 types of properties market will simmer down and is likely to affect the mass market condominiums.

On the technical picture, CapitaLand tried in April this year to rebound off from its low in March 2011, however, the share quickly slid down to hit $3.08, the low again. This suggests that the overall momentum is still weak. Moreover, the share is in the descending trend channel, suggesting that CapitaLand is likely to continue to trade lower. Supported by the RSI indicator that is staying below the 50 mark, the share is likely to remain on the bearish side.

What Has Been Done?
Recently, CapitaLand sold a residential site located in Shanghai’s Qingpu District for Rmb807.7 million (approximately $152.6 million) and the Hilton Double Tree Hotel in Kunshan for Rmb257.5 million (approximately $49 million), realising a total gain of $100 million. Earlier, it has also divested New Minzhong Leyuan Mall for a cash consideration of $69.8 million. These sales will contribute positively to its FY11 earnings and further strengthen its already strong balance sheet.

CapitaLand’s announcement to move into the affordable-housing segment in China should positioned the group to capture the tremendous growth potential of low-cost housing sector, which is underpinned by real and sustainable demand for value homes in China. Investors may be worry that CapitaLand’s overall EBIT (earnings before interest and taxes) margin could get eroded, but higher sales volumes supported by rapid urbanisation should be able to offset it.

How Now?
Like most analysts, I am long term bullish on the economic prospects of China and Singapore. In addition, the Singapore government is making efforts to raise productivity for sustainable wage growth in the long term and the Chinese government is aiming to increase per capita household income by 7% a year in real terms through 2015.

Hence, investors should perhaps adopt a hold strategy on CapitaLand because economic growth and a population that becomes wealthier on average over time would lead real property prices to grow over the long term.

Of course, a persistent housing policy risk in Singapore and China, where CapitaLand derive more than half of its business, should be a concern. This would jeopardise the recovery of the share price. Investors
and traders may want to keep a constant look out on its psychological immediate support of $3.

1-year daily chart for CapitaLand
CapitaLand Chart: 1-year daily chart for CapitaLand

Armed with an arsenal of investment knowledge, Xavier is the Senior Research Editor at Shares Investment.

Please click here for more information about this author.

CapitaLand  3.430 -0.04 -1.15%   
Business: Co develops, owns, and manages real estate properties. [FY18 Geographical] China (41.2%), S'pore (38.5%), Europe & others (18.6%), Vietnam & Others (1.7%).

Insight: Apr-19, 1Q19 revenue fell 23.8% while net profit d... Read More

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