Wednesday, September 30, 2009

Capitaland Limited - Hold by OCBC (30 Sep 09)

Asset swap with SZITIC Commercial Property. Yesterday, CapitaLand (CapLand) announced that its sponsored funds - CapitaRetail China Development Fund and CapitaRetail China Development Fund II had entered into an asset swap agreement with SZITIC Commercial Property (SCP). Earlier in 2004 and 2005, CapLand and the development funds had jointly invested in 33 Wal-Mart anchored retail projects with SCP and CapLand holds an indirect interest of 45% in the 2 development funds. With the asset swap agreement, CapLand and the development funds will take full ownership interest and management control of 22 Wal-Mart anchored malls and SCP will take full ownership interest in 5 of the malls. For the remaining 6 land parcels, these will be divested to a third party. Following the asset swap, the cooperative agreement with SCP will be terminated.

Limited financial impact…The asset swap is not expected to have significant financial impact on CapLand as no additional investment outlay is required. In addition, the portfolio of assets under the asset swap agreement constituted just ~20% of CapLand's total retail portfolio value in China (46 retails mall with asset value of RMB 28.9b or S$6.2b) after the asset swap.

But longer term strategic implications seen. The termination of the cooperative agreement was due to the strategic differences between CapLand and SCP but we do not see any potential negative implications from the termination of the agreement. The original intention of the partnership was to leverage on SCP's expertise and accelerate CapLand's expansion in the commercial property segment in China and since then, CapLand has successfully grown its capabilities in commercial property development and management in China, which is evident in the success of its Raffles City projects in China and the listing of CapitaRetail China Trust.Over the longer term, the termination of the cooperative agreement could be beneficial to both CapLand and SCP as both companies will be able to take on their preferred strategies without the need to reconcile any difference in opinions.

No impact on valuation for now; Maintain HOLD. We maintain our RNAV estimate of S$3.72 and fair value of S$3.72, which is pegged at par to our RNAV estimate. While we do not see any financial impact from the asset swap exercise, we think that this could accelerate the process of injecting the malls into a REIT as CapLand and the development funds now has complete control and management over the 22 malls. Divesting the malls into a REIT could lead to a positive re-rating of the stock. We maintain our HOLD rating on CapLand.

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