Morningstar | City Development Builds on China Strategy with a Sincere Investment. See Updated Analyst Note from 19 May 2019
Along with a largely in line first-quarter result, no-moat City Development, or CDL, acquired a 24% stake in Chinese Developer Sincere Property for CNY 5.5 billion, or SGD 1.1 billion. Total assets from China increase to 15% of the group from 9%, adding diversification to the group’s geographical operation. Previously, CDL’s operation in China was limited to a few residential development projects and investment properties. Within China, Sincere has operations across 20 cities, mainly in Tier 1 and 2 cities in developed regions in Yangtze River Delta and growing regions in Chengdu and Chongqing in Southwest China. Residential developments in 70 projects are balanced with investment properties across retail, office, hotels and serviced apartments. Presold residential value totals SGD 4.85 billion with revenue recognised over the next three years. CDL will have board seats and the partnership with Sincere will see CDL providing advice to the latter on international expansion.Our forecasts are adjusted lower for the weaker hotel operation in the first quarter, which was impacted by refurbishments and softer contribution from operations in Asia. Our fair value is reduced to SGD 12 from SGD 12.70. We continue to see the developer as undervalued but limited near-term catalysts for the share price to converge toward our fair value, as the restrictive measures on residential properties in Singapore remaining in place. Overall residential sales volume was flat against the fourth quarter of 2018 while first-quarter prices were 0.7% lower than same period last year.
Separately, CDL also purchased a 70% stake in Hongqiao Sincere Center, a mixed service residence and office property in Shanghai, for SGD 247 million. The acquisitions are a continuation in CDL’s strategy to deploy excess capital. In addition to the Sincere stake, CDL picked up SGD 27.5 million in a residential rental project in Leeds and made an SGD 77.8 million investment in listed IREIT Global. The two investments will increase the contribution of recurring income to the group, another earlier announced strategy. IREIT holds five office properties in Germany.
City Developments is a property developer and owner and investment holding company. Co. and its subsidiaries have four reportable segments: Property Development, which develops and purchases properties for sale; Hotel Operations, which owns and manages hotels; Rental Properties, which develops and purchases investment properties for lease; as well as Others, which comprises club operator and owner, investment in shares, property management, project management and consultancy services and provider of information technology and procurement services. The property development, hotel operations and rental properties segments are managed on a worldwide basis.
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