CapitaLand made a headline loss of $1.57 billion in FY2020 ended Dec 31, 2020. However, Andrew Lim, CFO at CapitaLand, is not overly worried. “It’s important to look beyond the headline number. Our operating resilience has delivered a very credible north of $1.5 billion in operating cash flow,” says Lim, referring to the group’s operating cash flow of $1.53 billion in FY2020.
In 2HFY2020, CapitaLand generated net cash from operating activities of $1.23 billion. This came primarily from collections from development projects in China and recurring cash flow from its investment properties, partially offset by prepaid land costs for a residential project in China. Including net cash from investing activities of $152 million which came from the proceeds of divestments, plus dividends from associates and JVs, this took free cash flow in 2HFY2020 to $1.38 billion. The cash generated was partially used for the acquisition and development of investment properties, investments in and loans to associates and JVs. In all, CapitaLand notched up free cash flow of $1.56 billion in FY2020.
“We cut costs, deferred capex and held back investments. At the same time, the team worked hard to make sure we had sufficient liquidity to last for 24 months,” notes Lee Chee Koon, CapitaLand’s group CEO. Still, CapitaLand had revaluation losses of $1.627 billion and impairments of $861 million. Some $450 million in impairments were due to Lai Fung, an illiquid Hong Kong-listed company. CapitaLand had acquired a stake in Lai Fung for $150 million in 2006.
“Over the years we have taken our share of profit. The carrying value is $450 million. We’ve realised a good share of the profits of $20 million in dividends, $250 million in cash profits from JV developments and $16 million in fees,” says Lim. The other impairments were due to a residential project in Chongqing where average selling prices have fallen compared to the underwritten prices. In Australia, Quest Apartment Hotels also took a writedown on goodwill because the pandemic has hit Quest’s franchise business. Altogether, Lai Fung, the residential project in Chongqing and Quest accounted for $688 million of the $861 million impairment.
Meanwhile, Jewel and ION Orchard, CapitaLand’s tourism-focused malls in Singapore, and three properties in China, Raffles City Chongqing (RCCQ), CapitaMall Westgate in Wuhan, and Tianjin International Trade Centre were responsible for $886 million of the $1.627 billion valuation decline.
“This is not a systemic impact into our investment property business but a focused impact experienced by a specific number of assets impacted by the nature of their business. Some were opened not long ago and were hit hard by the pandemic,” explains Lim. If China and retail sales recover to pre-pandemic levels, valuations could rebound, depending on the rental outlook, the properties’ occupancies and interest rate trends.
OODL vs Sincere
Some market watchers may have looked on in consternation as City Developments wrote off almost all its $1.9 billion investment in a Chinese developer. But more than 10 years ago, CapitaLand spent even more to acquire a portfolio in China. In January 2010, CapitaLand announced its plans to acquire Orient Overseas Development (OODL) for US$2.2 billion to gain a foothold in China. Valued at US$2 billion, OODL was the property development arm of Hong Kong-listed Orient Overseas International (OOIL).
In the wake of the GFC in 2009, the major shareholders of OOIL decided to shift focus to shipping and divest OODL. At that time, OODL owned seven sites in Shanghai, Kunshan and Tianjin, with 1.48 million sq m of GFA when fully developed. Around half the GFA was residential, with the balance in office, retail, and serviced residences and hotels. More than 87% of the GFA was in greater Shanghai, including the famed French Concession, with the remainder in Tianjin city centre.
In an interview last November, Lucas Loh, president, China, CapitaLand Group, said the Tianjin acquisition did not quite work out. Acquired at a cost of RMB1.9 billion, the commercial portion was recently valued at RMB877 million ($181 million) while the residential portion was sold.
Within the old French Concession, the Luwan site was valued at RMB3.93 billion or RMB27,000 psm and has been developed into The Paragon with its six towers.
“The land cost was only RMB27,000 psm and our breakeven was between RMB40,000 psm and RMB50,000 psm,” Loh recalls. Units were going at RMB150,000 psm as recently as 2019 and Tower 5 was fully sold by that time. CapitaLand has retained Tower 6 which was last valued at RMB1.51 billion as at Dec 31, 2020, down RMB34 million y-o-y.
Also in the former French Concession, Ascott Hengshan Lu, which was from the OODL portfolio, saw a drop in valuation to RMB948 million in FY2020 from RMB1.098 billion in FY2019 as a result of the pandemic, but that was still way above the land acquisition price of RMB385 million or RMB27,000 psm.
Elsewhere, the undeveloped Changning site was valued at RMB4.32 billion or RMB17,000 psm. Now known as Raffles City Changning (RCCN), it was valued at RMB13.25 billion as at Dec 31, 2020, unchanged y-o-y. CapitaLand owns 42.8% of RCCN after recycling some of the proceeds.
The Hilton Doubletree, a hotel located in Kunshan, which is part of greater Shanghai, was sold off. The residential properties in Kunshan and Nanmatou in Pudong, were also developed and sold. In total, the OODL acquisition turned out to be significantly profitable for CapitaLand despite initial astonishment at the price.
The difference between Sincere Property Group and OODL was that the latter, which was owned by the family of former Hong Kong chief executive Tung Chee-Hwa, had stronger corporate governance. As soon as CapitaLand announced the acquisition of OODL, it provided details of the seven sites, their land value and their potential GFA.
Another key difference between OODL and Sincere was that CapitaLand took total control of the OODL sites, including land titles, before divesting, recycling, and redeveloping them.
In 2011, CapitaLand made another big investment in China, acquiring the Chaotianmen site in Chongqing for RMB6.54 billion or RMB8,600 psm. This site has since become Raffles City Chongqing (RCCQ), whose total development cost was RMB21.1 billion or RMB25,800 psm. The commercial portion of RCCQ was last valued at RMB8.03 billion as at Dec 31, 2020, following a fair value loss of RMB2.2 billion y-o-y and was one of the major contributors to CapitaLand’s fair value decline in FY2020.
Chinese government curbs growth
Loh explains, “The various components of RCCQ were opened progressively from late 2019. The retail and service residence components were launched in September 2019, the office in January 2020 and the hotel in August 2020. Just as these components were ramping up their momentum, Covid-19 set in, which negatively impacted the overall Chongqing market. RCCQ’s rents and rental growth were adjusted to reflect the short-term impact of Covid-19 and the cautious recovery outlook post-Covid, thus explaining its lower valuation.” Covid-19 is now under control in Chongqing.
“We have seen stronger performances across the various components of RCCQ from 2H2020. Barring any major resurgence of the pandemic, we foresee RCCQ’s occupancy and tenants’ sales will trend towards pre-Covid levels by end 2021, early 2022,” Loh adds.
To be sure, China’s property market is very much fuelled by debt and a large portion of Chinese developers depend on third-party borrowing — from banks, bonds and trusts. They are mainly focused on residential development because these turn capital at a faster rate. “For every residential project, real equity ranges from 5%–15% and the rest is borrowed money. That’s how they churn and within a period of 20–25 years, quite a lot of companies can grow sizeable,” notes Loh. And high churn velocity and high gearing leads to a high growth rate, he adds.
Therefore, it was not surprising the Chinese government recently moved to address debt build-up in the property sector. The red lines are: A 70% limit of liabilities to assets, a cap on gearing at 100% and cash to current liabilities of at least 100%. “These red lines have implications on the ability of developers to borrow and grow. The curtailment of borrowing implies that the old model with a high growth rate comes to an end,” Loh says.
Market watchers will therefore be relieved to note that CapitaLand China is a cash-generating business. In FY2020, it recorded an ebit of $1.806 billion, contributing 54% to a group ebit of $3.33 billion. “For residential in 2020 we saw a stronger year than 2019 in terms of handover and sales. We have 5,000 units to be handed over in 2021, valued at around RMB15 billion, and we have a pipeline of 4,600 units to be launched,” Loh adds.
Slow and steady growth
While CapitaLand’s operating patmi and cash patmi fell 27.2% y-o-y and 38.1% y-o-y to $769.9 million and $924 million respectively, cash patmi rebounded in 2HFY2020 to $653.3 million from $270.5 million in 1HFY2020.
Nevertheless, REITs and private funds will remain a key growth focus for CapitaLand. In fact, the group has positioned its REITs for greater scale through the formation of CapitaLand Integrated Commercial Trust (CICT) and a change in CapitaLand China Trust’s (CLCT) investment mandate. At some point in the future, CICT could be a source of landbank, through the redevelopment of Capital Tower.
In addition, CapitaLand’s stated strategy is to grow its so-called “New Economy” assets in China to $5 billion. In November 2017, CLCT acquired $1 billion of properties across five business parks and raised its stake in Rock Square in Guangzhou to 100% from 51%. As at Dec 31, CapitaLand’s business, tech and logistics parks in China were valued at RMB10.77 billion.
Lim says CapitaLand is on track to meet its target of $100 billion in AUM by 2024. In FY2020, fee income from its REITs, private funds and management contracts rose 4% y-o-y to $306 million. The group has set up a Korea Data Centre Fund with AUM of KRW290 billion ($343.8 million), consisting mainly of core and shell data centres designed to support 30MW– 35MW capacity. This year, Lim says the company’s plans to recycle at least $3 billion in assets, matching the recycling amount attained in FY2020.
In a recent update, Credit Suisse pointed out that capital employed between Developed Markets and Emerging Markets was between 44% and 56% respectively. “We expect capital allocation towards other developed markets ex-Singapore (20% target vs 12% in 2020) and away from China (35% target vs 47% in 2020) going forward,” Credit Suisse says.
Analysts appear to be less enthusiastic about CapitaLand’s prospects than that of CDL though. UOB Kay Hian has a “neutral” rating on CapitaLand but a “buy” on CDL. Other houses such as RHB Bank have retained their “buy” recommendations.
In FY2020, CapitaLand paid out $467.4 million, or nine cents per share, representing a 52% payout ratio of its cash patmi. This translates to a yield of 2.8%. Its FY2020 NAV fell by 7.3% y-o-y to $4.30, with unit prices trading at a 26% discount.
Nevertheless, CapitaLand is diversifying into tech and science parks, data centres and logistics assets, and it is digitalising across its various assets and businesses such as retail, lodging and office.
However, CapitaLand’s recovery is likely to be closely tied to Covid-19 as key properties in its REITs and on its own balance sheet are proxies to travel, tourism, and economic and corporate growth. Its lodging portfolio which is mainly serviced residences are designed for corporate stays. Jewel, ION Orchard and Clarke Quay are touristy places in Singapore.
Therefore, as vaccine efficacy increases, perhaps CapitaLand is the stock to watch
