Is Capitaland’s China-based asset injection paying off?

Net profit growth was just 0.5% per annum.

As it feels the pressure of the weakening Singapore economy, Capitaland shifts its focus away from home in search for better returns.It has injected several capital on developments in China as strategy for focusing on bigger markets. But is it really worth it at this time?

According to RHB analyst Vijay Natarajan, while earnings before income tax (EBIT) contributions from Singapore accounted for about 50-60% of total in 2006-2007, this proportion has dwindled to 40% in the last year.

"Meanwhile, contributions from China have nearly doubled to 39% of EBIT in 2015," the analyst said, noting that this was a huge increase from the proportion of 20% in 2006.

However, it has also faced the tough real estate market conditions in China.

The analyst stated that while CapitaLand's shareholders equity has blossomed at a 10-year compound annual growth rate (CAGR) of 8.9% pa at the end of 2015, the corresponding CAGR in net profit was just 0.5% pa.

"However, tough real estate market conditions in China and Singapore, on the back of a slowing economy, tighter policy measures and increased competitive measures, have made it difficult to execute good quality acquisitions whilst squeezing margins," Natarajan explained.

More so, this was mainly due to sub-optimal return on equity returns of 5% to 7% over the last four years in comparison to the 10-year average of 10.9%.

The analyst also stressed that CapitaLand’s increasing focus on Singapore and China “implies limited global perspective compared to market leaders.”