CapitaLand May Finally Be Breaking Out On A Clearer Path To Strong, Sustainable ROEs

I’ve long lamented that no matter what CapitaLand (OTCPK:CLLDY) (CATL.SI) did, it just couldn’t seem to break out above S$4/share. That seems to be changing, though, as investors have not only gotten more bullish on the near-term prospects for Singapore’s property market, but also management’s commitment and ability to drive long-term ROEs toward the double-digits (including gains and revaluations).

I’ve been bullish on CapitaLand for a while, and I still am. With demonstrated successes in Singapore and China to build on, and significant growth opportunities in India, Vietnam, fund management, and managed residences, I believe CapitaLand is well on its way with a plan that will deliver better returns for investors. I believe fair value is at least another 15% higher from here, with upside beyond that if management execution can shrink the risk premium in the shares.

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CapitaLand May Finally Be Breaking Out On A Clearer Path To Strong, Sustainable ROEs

CapitaLand Looking To A Large Acquisition To Accelerate Value-Creation

As I’ve lamented in the past, Singapore’s CapitaLand (OTCPK:CLLDY) (CATL.SI) seems stuck in the S$3 to S$4 range no matter what the company does. Although capital recycling, earnings and ROE exceeded expectations in 2018, the stock couldn’t break out of that range. Likewise with the thesis-changing acquisition of Ascendas-Singbridge (“Ascendas”), though the shares are at least a little higher now than when I last wrote about the company.

I continue to believe that CapitaLand is undervalued, and the Ascendas acquisition should not only meaningfully diversify the company, but also create a richer opportunity set of capital recycling options. On the other hand, while CapitaLand is a pretty well-known name in Asian property development and the Ascendas deal will make it a top-10 global player, it’s not well-known to U.S investors, the ADRs are not particularly liquid, and real estate development companies aren’t exactly growth stocks. Consequently, while I do see enough upside here to consider it a long idea, it’s not going to suit all readers or investors.

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CapitaLand Looking To A Large Acquisition To Accelerate Value-Creation

CapitaLand Bouncing Back On Renewed Asset Recycling

I’ve lamented in the past that no matter what CapitaLand (OTCPK:CLLDY) (CATL.SI) does, the shares seem stuck between S$3 and S$4. When I last wrote about the shares, they were on their way down to retest that S$3 level and have since rebounded on good second quarter earnings, the naming of a new CEO, and ongoing steps to recycle capital into new investments, including a meaningful move into the U.S. market.

CapitaLand remains a challenging stock. The liquidity for the ADRs isn’t great (the Singapore-listed shares are far more liquid), and this is a tough stock for many investors to evaluate and model. On the other hand, CapitaLand has proven itself to be a quality developer and manager of properties in Asia with the ability to earn above its cost of capital. That is not presently reflected in the share price, and I believe there is still worthwhile upside from these levels.

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CapitaLand Bouncing Back On Renewed Asset Recycling

CK Asset Following A Different Path, And The Market Doesn't Like It

CK Asset Holdings' (OTCPK:CHKGF) (1113.HK) controlling Li family has laid out a relatively clear vision for what they want CK Asset to be - a diversified asset conglomerate that invests in property development, property management, and infrastructure assets. Unfortunately, this is not really in keeping with what the market wants, as many see this as turning away from CK Asset's traditional strengths and competencies, diluting returns, and missing out on the gains to be made in markets like China and Hong Kong.

That disappointment has translated pretty directly into disappointing share price performance, with the local shares down about 5% year-to-date and down closer to 10% from the time of my last article. While I highlighted some of the risks in this new strategy, I believe I underestimated how the market would respond to this shift, particularly as the market sees this as a company that is turning away from high-margin development activities and buying into income-producing properties at high multiples (which isn't entirely wrong). Although I believe CK Asset is going to have to earn back the benefit of the doubt, I continue to believe that long-term earnings growth in the neighborhood of 7% can support a fair value more than 20% above today's price, making this a more interesting contrarian call.

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CK Asset Following A Different Path, And The Market Doesn't Like It

CapitaLand Continues To Build Out From A Strong Core

Singapore’s CapitaLand (OTCPK:CLLDY) (CATL.SI) is never going to be an “easy follow,” as the basic business model of buying land, developing it, and selling it down the line creates inherent volatility and lumpy financials. While CapitaLand has a solid track record of building value through its property development activities, the market is rarely comfortable enough with the basic model to give the shares any sort of premium, and the local shares have basically marked time between S$3 and S$4 for most of the last decade.

Although I don’t believe you get very far arguing with the market, I do think CapitaLand has generated returns above its cost of capital over the last decade, but the accounting is not simple and that outperformance is not an annual feature (CapitaLand under-earned its cost of capital by my estimation in two of the last three years and three of the last five). With management committed to more capital recycling, though, expanding into new territories and generating more recurring revenue, I believe the valuation is still appealing.

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CapitaLand Continues To Build Out From A Strong Core

CK Asset Holdings Prizing Profits Over Property Pure-Play

When CK Asset Holdings (OTCPK:CHKGF) [1113.HK] was originally created as Cheung Kong Property, the idea is that this would be more or less a pure play on property development and management in China and Hong Kong. That lasted about a year or so, before management announced an intention to diversify beyond property and pursue more of a conglomerate-type structure with investments outside of property development or property management.

Although there are some concerns and drawbacks to this move, net-net, I think it is a positive decision for shareholders. Rather than being tied to the ups and downs of the property cycle (which is looking more “down” in CKA’s core markets), the company’s managers can see fit to recycle and allocate capital wherever the best long-term opportunities may lie. The company hasn’t abandoned property, but can now (I believe) make better long-term decisions without having to stick to a rigid mandate.

Valuing this company ahead of what is almost certain to be additional investments in non-property assets is challenging. I believe the company can generate good adjusted earnings growth (around 7%) even with single-digit ROEs, supporting a fair value of over $10.50 for the ADRs, but there are a lot of unknowns about the composition of earnings five or 10 years down the line.

I would note that CKA’s ADRs do not offer good liquidity. Investors who have the option to invest in the Hong Kong-listed shares should certainly consider doing so.

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CK Asset Holdings Prizing Profits Over Property Pure-Play

CapitaLand Broadening Its Focus To Include More Higher-ROE Services

Singapore's largest property developer, CapitaLand (OTCPK:CLLDY) (CATL.SI) had a pretty good 2017. Helped by improving conditions in Singapore and China, not to mention significant project openings, CapitaLand's local shares climbed 20% and the ADRs did even better.

Although these aren't the easiest shares to own, and it's not a simple company to model, I continue to believe the story and opportunity are worthwhile. CapitaLand management has shown repeatedly that they can successfully develop and manage properties and recycle capital into new value-creating projects. What's more, the company is a good play on the rising middle class in China, and to a lesser extent, Vietnam, India, and Indonesia. With the shares still about 10% to 15% undervalued, CapitaLand looks like a reasonable option for investors who want exposure to consumer-centric real estate in China and Southeast Asia.

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CapitaLand Broadening Its Focus To Include More Higher-ROE Services

CapitaLand Evolving With The Times

Singapore's CapitaLand (OTCPK:CLLDY) (C31.SI) really hasn't done much for investors since the last time I wrote on this high-quality property developer. Although the shares have outperformed peers/comps like China Overseas (OTCPK:CAOVY) and City Developments (OTCPK:CDEVY), I don't think "less bad" is what investors should shoot for, and sentiment has been weighed down by tougher conditions in the Singapore and China property markets, skepticism about the sector as a whole, and a slower progression towards management's ROE goals.

CapitaLand shares do still look undervalued, and I think CapitaLand will be a long-term winner in the space. What's more, I think the company's efforts to invest in Vietnam and pursue an asset-light model will give shareholders a better growth and return mix down the road. That said, the U.S. ADRs are not especially liquid (the Singapore-listed shares are much more liquid, though) and I believe this is a difficult type of company for individual investors to track, benchmark, and analyze.

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CapitaLand Evolving With The Times

Seeking Alpha: CapitaLand Still Not Getting Much Benefit Of The Doubt

The self-improvement story at Singapore's CapitaLand (OTCPK:CLLDY) has run up against investor concerns about the property markets in Singapore and China, and so far the concerns are winning. CapitaLand has gone nowhere fast since my last update on the company, as the local shares have climbed about 5% and the ADRs are down about 3%. That's pretty close to the performance of fellow Singapore property developer City Developments (OTCPK:CDEVY) and Chinese developers like Sung Hung Kai Properties and Hang Lung Properties; there have been outperformers in the comp group, but overall I think the performance of CapitaLand is more of a sector phenomenon than a verdict against the company.

I continue to believe that CapitaLand is undervalued on its potential, but it is incumbent upon management to prove that it can deliver on that potential. The company's suburban malls in Singapore and China are doing well (and there's growth/expansion potential into markets like Indonesia and Malaysia) and the company's expertise in integrated project development is leverageable across a large potential base of projects. If CapitaLand can hit the middle of its ROE target in five years, a fair value of $6/ADR still makes sense and an NAV approach supports a similar fair value.

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CapitaLand Still Not Getting Much Benefit Of The Doubt

Seeking Alpha: CapitaLand Remains Undervalued Amidst Challenging Property Markets

I previously thought that CapitaLand (OTCPK:CLLDY) looked like an undervalued property developer with balanced exposure to Singapore and China and strong portfolio diversification. The markets appear to have agreed, with CapitaLand's shares rising about 15% over the past six months - outperforming comps and peers like City Developments (OTCPK:CDEVY), Keppel Land (OTCPK:KPPLY), Global Logistics Properties (OTCPK:GBTZY), and Cheung Kong (OTCPK:CHEUY) (which I also liked and is up more than 10% over the past six months).

I believe that CapitaLand's decision to reacquire all of CapitaMalls Asia played a meaningful role in this outperformance, but I don't think that is the only trick up management's sleeve. Although the property markets in Singapore and China are in rougher shape now, I don't believe the company has much value at risk and there are attractive opportunities on the way to re-price below-market leases in its Chinese mall business. The key question is still whether or not management can lift ROEs back into the high single-digits or low double-digits, but I still believe that they can (and will) and that these shares have value to around $6.50/ADR.

I should also note here that CapitaLand is not particularly liquid as ADRs go. Investors should be careful when buying (limit orders are a good idea) or try to buy the much more liquid Singapore-listed shares, as most large brokers now make international trading available to retail investors at affordable commissions.

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CapitaLand Remains Undervalued Amidst Challenging Property Markets

Seeking Alpha: CapitaLand's Valuation Looks Too Low

Even though CapitaLand (OTCPK:CLLDY) (CATL.SI) has established a reputation for itself as a quality property developer in Singapore and China, investors seem to be more scared of the near-term risks in Singapore and China than attracted to the long-term potential. Trading well below its average and median price/book and price/RNAV ratios, investors seem to be incorporating pretty pessimistic expectations for the business both in 2014 and beyond. Readers considering these shares today need to appreciate the risks of swimming against the tide, but patience could pay off given the company's leverage to China's growth and management's commitment to streamline and improve operations.

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CapitaLand's Valuation Looks Too Low