CapitaLand intensifies China presence as Mainland rivals face credit stress

Taking advantage of acquisition opportunities.

CapitaLand's recent announcement that it has acquired a 60% interest in two adjacent prime residential sites in Chengdu, China for RMB752m (S$155m) is part of the company's strategy to deepen its presence in key China sub-markets, which is viewed positively by OCBC Investment Research as a great move to cut into Mainland market. Currently, property rivals are grappling with tighter credit conditions, which gives CapitaLand a window of opportunity to make more acquisitions.

Here's more from OCBC:

Acquires 60% interest in two Chengdu sites. CapitaLand (CAPL) announced that it has acquired a 60% interest in two adjacent prime residential sites in Chengdu, China for RMB752m (S$155m). These two land parcels have an est. GFA of 479,850 sqm, and are located within the central core of Chengdu’s Tian Fu New Area, which is focused on advanced manufacturing and high-end service industries. These sites are nestled in a mature, good class residential area and are well connected to landmarks such as New Century Global Centre (the world’s largest commercial building by floor space), No. 7 Middle School (one of China’s top secondary schools) and other retail, F&B and leisure facilities.

Deepening its presence in Chengdu. The acquisitions are subject to approval from authorities and are expected to be completed by 2Q14. The project will yield ~4,600 residential units and an anticipated 133k sqm will cater to first-time homebuyers and upgraders. Construction will begin in 2Q14 and the first phase will launch by end 2014. The group has already successfully developed and launched Raffles City Chengdu, The Loft and The Botanica in the city, and we like CAPL’s strategy of deepening its presence in key sub-markets in which they have experience and expertise.

More acquisition opportunities could come from credit crunch. The Chinese credit markets are experiencing increasing stress as authorities opt to let weaker companies go into financial default, and we believe this could throw up acquisition opportunities for CAPL as its Chinese peers grapple with tightening credit conditions and rising cost of debt. Note that Chinese developer Zhejiang Xingrun Real Estate Co. has declared insolvency last week, and the yield on five-year AA- corporate bonds has leaped 129 basis points YoY to 7.75%. In the meantime, CAPL enjoys a strong balance sheet with an estimated S$6.9b in cash and net gearing of 29%, after its recent AustraLand divestment. Maintain

BUY on CAPL. Pending completion of these acquisitions, we opt to keep our fair value unchanged at S$3.50.