City Developments acquires 30% stake in Millenium & Copthorne’s Ginza project

City Developments Limited recently announced that it will take 30% stake in a development acquired by subsidiary Millenium & Copthorne , in Ginza, Tokyo. M&C owns the remaining 70% stake.

The acquisition allows M&C to gain a strategic foothold in Tokyo’s most famous shopping, dining and entertainment district at what we believe is a reasonable price. Going into 2012, the potential slowdown in M&C’s impact on its bottomline.

Our View
M&C will be working with Mitsui Fudosan to redevelop the prime site in Ginza into a deluxe 325‐room hotel, slated for completion by end‐2014. Mitsui Fudosan will be the project manager and the eventual lessee to operate the hotel. M&C estimates the total development cost including land to be £113m, or £349,000 per key. We think this is a fair price as we estimate the breakeven Average Room Rate to be £173/night, whereas the hotel may eventually command an ARR of £200/night.

Meanwhile, the ongoing Eurozone debt crisis could weigh on the hospitality business in Europe, particularly if the demand for business travel given that Europe ex‐London generally constitutes less than 5% of its EBITDA. In contrast, London, its biggest market in Europe and accounting for about 25% of earnings, should perform well next year as the city hosts the 2012 Summer Olympics from 27 July to 12 August.

In Singapore, we expect CDL to moderate the pace of its new launches. High‐end projects such as Lucky Tower may not be rolled out until the jitters in the global markets dissipate. On the other hand, the raising of the monthly income ceiling from $10,000 to $12,000 to buy Executive Condo flats should benefit CDL, which still has about 700 unsold EC units from Blossom Residences and a yet‐to‐be‐launched site at Choa Chu Kang.

Action & Recommendation
Given the strong likelihood of a recession next year, we see few positive catalysts to upgrade our call on CDL. Maintain HOLD on resilient earnings and rock solid balance sheet. Target price maintain at $11.05, pegged at a 15% discount to RNAV.