I have relatives who live in City Square Residence condominium above City Square Mall. I also visit City Square often to shop. The Decathlon outlet sells very cheap sportswear with its buy-in-bulk strategy. When I am in Raffles Place, I tend to visit friends who are working in Republic Plaza, one of the tallest buildings in Singapore. And when I go jogging nearby, I would run past an almost-complete Executive Condominium development called The Criterion.
What do all these buildings have in common? Yes, you guessed it correctly, they are all built and/or owned by City Developments Limited (SGX:C09) (C09 10.71 -0.04 -0.37%). Listed in Singapore, The property developer is one of the largest in the region. Similar companies in the sector includes CapitaLand Ltd (SGX:C31) (C31 3.50 -0.02 -0.57%) and UOL Group Limited (SGX:U14) (U14 7.78 +0.09 +1.17%). It has projects in 6 key markets. Is City Developments Limited a possible investment for you?
Here are 7 key information you ought to know about CDL.
Ticker Symbol: C09
Market Capitalisation: S$ 9.65b
Industry: Real Estate and Property Development
City Developments Limited (CDL) (SGX: C09) is one of the largest property and hotel conglomerates in Singapore. It is involved in real estate development, hotel ownership and operations, property fund investments, facilities management and hospitality solutions.
It owns more than 18 million square feet of floor area globally, across offices, shopping malls, hotels, serviced apartments, residences, and integrated developments. They are found in 6 key markets: Singapore, US, UK, China, Japan and Australia. CDL also owns one of the world’s largest hotel management groups: the Millennium and Copthorne Hotels (M&C). Millennium and Copthorne Hotels is listed in London and owns more than 130 hotels globally. That is certainly a big foot print in the hotel industry.
To give you some idea on CDL’s income based on its different business segments, we look at CDL’s Q1 2017 financial results.
Here is a breakdown of its Earnings Before Interest Tax Depreciation and Amortisation (EBITDA). Its Property Development contributes 48.4%, Hotel Operations takes up 22%, Rental Properties constitutes 30.1%, and Others contribute -0.5% (a loss).
Source: CDL Q1 2017 Results
In terms of Total Assets, Property Development: 48.1%, Hotel Operations: 27.7%, Rental Properties: 21.8%, Others: 2.5%.
Source: CDL Q1 2017 Results
CDL’s businesses are well-diversified across the entire spectrum of real estate value chain, including property development, real estate investments, owning and leasing out properties, and property funds investment. Such diversity stabilizes the company’s performance during the downturn of a particular segment as it is not overly reliant on any business segment. On this, Q1 2017 results show that CDL has 52% of its EBITDA derived from recurring income segments (hotel operations and property rental), and 44% of EBITDA contributed by the overseas operation.
Gradual Upturn of Property Market
Since the Singapore government tweaked its property cooling measures pertaining to Total Debt Servicing Ratio and waiting time to avoid Sellers Stamp Duty recently, the local property market has shown signs of thawing. News media is reporting some new property launches enjoying brisk sales, picking up of En-Bloc Sales, and more aggressive land bidding by developers. While these do not point to a bottoming property market conclusively, sentiments among buyers and real estate players might be improving. This could possibly give rise to a better market moving forward, enabling more sales and higher selling price for CDL’s future projects.
One uncertainty in CDL’s operation is that it is increasing its overseas presence where it has a limited track record. The company has recently ventured more heavily into China and the UK, with about $400m deployed in strategic acquisitions. For example, CDL spent RMB900m in acquiring Meidao Business Plaza in Hongqiao Shanghai, and $58m on a 1.6 acre Ransomes Wharf site in the UK. While these property purchase are envisioned to diversify CDL’s overseas exposure and increase its recurring income base, it remains unclear if these assets can command good rental rates or selling price in markets that could be impacted by the ongoing Brexit negotiations and China government’s efforts to rein in high property prices. CDL management needs to be competent and proactive in navigating through these challenging markets.
Increase in Interest Rate
US Federal Reserves has just raised interest rates by 25 basis points to a range of 1% to 1.25%. The Fed has also maintained its forecast of 3 rate hikes this year, which means possibly another round of rate hike in 2017. With the improving US economy and job markets, and an increasing focus by the Fed to control inflation, suffice to say that we have moved into a rising interest rate market.
In Singapore, the local interest rate is rising in tandem with the US interest rates movement. The 3-month SIBOR has risen from 0.875% in August last year to 0.998% in May this year. With SIBOR being the reference rate which many home loans are priced against, the interest expenses on many local home loans will increase. This may result in lower demand for property purchases.
Fluctuation of Hotel Operations
Hotel Operations contribute a sizeable chunk to CDL’s revenue. In Q1 2017, its share of revenue from this segment amounted to 47% of the total sales. This poses a risk because hotel operations and hospitality industry are notoriously volatile. There are many factors that could affect the tourism industry, such as Geo-Political tension, the economy well-being of the source country of tourists, natural disasters, government policy and measures, thus rendering the tourism industry a difficult one to predict.
The picture has in fact not been rosy for the local hotel industry in recent years. For instance, Revenue per Available Room (RevPAR) of CDL Hospitality Trust, a key metric measuring overall health hotel industry, has been trending down from financial year 12 to 16 most recently. While there are forecasts that the hotel industry will bottom out soon, there are still risk that that would not materialize.
With an increasingly competitive tourism landscape in the region, Singapore’s tourism industry will have to continue reinventing itself by offering compelling holiday packages and new attractions to remain relevant. Likewise, CDL will have to constantly enhance its hotel product offerings to stay ahead of the curve.
CDL is currently trading at PE ratio of 15.06 and P/NAV ratio of 1.07. Perhaps its status as a blue-chip property company warrants a premium to its NAV.
Hong Leong Group, its parent’s company, is the major shareholder with Hong Leong Holdings and Hong Leong Investment Holdings owning 16.4% and 15.2% of total shares respectively. Other top ten shareholders include mainly institutional players storing their shares through Bank Nominees account.
CDL’s latest quarter financial performance can be found here.
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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in CS Chong’s personal capacity. It does not in any way represent those of his employer and other related entities. CS Chong does not own any companies mentioned.