Singapore Industry Focus Singapore Developers & …...Developers are hungry for land in Singapore,...

ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa:JC, PY

Rocky Road, Take me home

Luxury residential and office subsectors to bottom

out ahead of other subsectors in 2017

Diversification remain a key strategy for most real

estate companies, cheap valuations could spark M&A

Deleveraging trend to kick in from 2017

Luxury residential and office are our sector picks in 2017. While the Singapore property market is expected to remain on a declining trend (suburban residential homes, industrial, retail and hospitality), we see green shoots in the office and luxury residential subsectors. This is mainly coming from expected higher transaction volumes and take-up rates for new buildings in 2017.

Continued focus on diversification while cheap valuations could spark M&A. We see continued interest from S-REITs and developers to invest overseas but see fewer completed deals given higher currency volatility. In Singapore, land-hungry developers are likely to turn towards the En-bloc market given limited sites in the public land tenders. S-REITs are likely to seek asset recycling in order to fund growth as cost of equity edge higher. Fueled by strong capital flows and attractive valuations of listed firms, we also see a sector consolidation as larger players look to gain access to land banks and income-producing properties at attractive prices.

Deleveraging trend in 2017 and beyond. With higher rates on the horizon, we expect selected developers and REITs to pare down debt over time when the opportunity arises. Of focus is close to c.S$6.3bn worth of bonds expiring in 2017-2018, where refinancingcould prove difficult for some given investor risk aversion post recent defaults in the oil & gas space.

Developers – too cheap to ignore. We see a myriad of catalysts for developers especially from M&A activities which will lift investor sentiment for the sector. Our picks are CDL and UOL. A wildcard could be a potential unwinding of government policies.

Singapore REITs – capital preservation is key. We prefer those with good earnings visibility and minimal downside to our/consensus estimates. Picks are K-REIT, A-REIT and MCT. Small cap picks are FLT, KDC REIT and Croesus.

STI : 2,880.76

Analyst Derek TAN +65 6682 3716 Mervin SONG CFA +65 6682 3715 [email protected] [email protected]

Rachel TAN +65 6682 3713 Singapore Research Team [email protected] [email protected]

Source: DBS Bank, Bloomberg Finance L.P.

Closing price as of 4 Jan 2017

DBS Group Research . Equity 6 Jan 2017

Singapore Industry Focus

Singapore Developers & REITs Refer to important disclosures at the end of this report

STOCKS

Price Mkt Cap Target Price Performance (%)

S$ US$m S$ 3 mth 12 mth Rating

Developers

City Developments 8.39 5,341 9.90 (8.5) 11.8 BUY UOL Group 6.12 3,448 7.20 7.5 1.2 BUY

REITs Ascendas REIT 2.31 4,597 2.65 (6.1) 3.1 BUY Keppel REIT 1.02 2,315 1.23 (8.0) 11.3 BUY Mapletree Commercial Trust 1.42 2,800 1.62 (8.0) 10.6 BUY

Frasers Logistics & Industrial Trust 0.94 925 1.10 (5.0) N.A BUY

Keppel DC REIT 1.20 938 1.33 2.5 20.4 BUY Croesus Retail Trust 0.85 452 0.99 (1.2) 3.9 BUY

Industry Focus

Singapore Developers & REITs

ASIAN INSIGHTS VICKERS SECURITIES

The DBS Asian Insights SparX report is a deep dive look into thematic angles impacting the longer-term investment thesis for a sector, country or the region. We view this as an ongoing conversation rather than a one-off treatise on the topic, and invite feedback from our readers, and in particular welcome follow-on questions worthy of closer examination.

Table of Contents

1. Investment Summary 3

2. Peer Comparisons 5

3. Key Charts 7

4. Developers – Catalysts abound to lift valuations from multi-year lows4.1 Attractive valuations with upcoming catalysts. 4.2 Diversification to remain a key strategy for developers. 4.3 Improved transactions in the luxury end of the market to continue. 4.4 Looming ABSD deadlines not a precursor for a significant price cuts.

4.5 Potential land-banking opportunities in Singapore. 4.6 More En-bloc transactions in 2017. 4.7 Merger and Acquisition (M&A) activities could pick up. 4.8 Will Developers need to deleverage?

10

5. Singapore REITs – Déjà vu 5.1 Impact of higher interest rates on prices and distributions 5.2 Modest DPU growth.

5.3 Potential risk to property values in the industrial and hospitality sectors.

5.4 Acquisitions may be difficult to execute with redevelopments an attractive option.

31

6. Residential Subsector Outlook: Luxury home prices to bottom out in 20176.1 Trends, demand and supply outlook

6.2 Scenarios where government could relax policy measures

47

7. Office Subsector Outlook: Grade A office space to bottom by end 20177.1 Trends, demand and supply outlook

55

8. Retail Subsector Outlook: Hampered by weakening retail sales8.1 Trends, demand and supply outlook

63

9. Industrial Subsector Outlook: Year of consolidation post supply spikes9.1 Trends, demand and supply outlook

67

10. Hospitality Subsector Outlook: No turnaround in sight yet10.1 Trends, demand and supply outlook

74

11. Charts: S-REIT yield and P/Bk NAV Charts: Developers P/Bk NAV

83

Stocks Profiles 102

Note: Prices used as of 04 Jan-2017

Page 2

Industry Focus



Investment Summary

2017 remains a tenants' market as heightened supply completion poses a risk for most real estate sectors. It will be another year of moderation for the Singapore property market as we believe that most real estate subsectors will continue to see downside in rents and/or prices on the back of soft demand given the current economic slowdown. Meanwhile, heightened supply completion in 2017 means that it will remain a tenants' market.

Key Themes

1. Luxury-end of residential market and office sectors

bottoming out

Luxury residential and office sectors the brighter spot. However, among the real estate sectors, we see brighter prospects in the luxury end of the residential market and office subsectors. We believe that luxury residential prices in Singapore are attractive on a relative basis compared to home prices in the region which we expect higher investment transaction volumes in 2017. The office sector is projected to see slower rental declines of (5-10%) mainly due to better-than-projected take-up in upcoming new office buildings and see the sector bottoming out by end of 2017.

However, the retail, hospitality and industrial sectors are still expected to feel the pressure from projected negative net absorption, given excess supply outlook.

Singapore Property Clock

Source: DBS Bank

2. Developers and REITs to continue seeking overseas

opportunities; en-bloc deals to pick up in 2017

Diversification remains a key strategy but opportunities limited as currency volatility arises. We believe that property developers and REITs will continue their strategy to diversify overseas for growth but expect the acquisition momentum to taper on the back of increased currency volatility, coupled with higher cost of funds. Countries that we believe remain attractive on a currency-adjusted basis are London, Australia (Melbourne and Sydney) and selected Tier 1 cities of China like Shanghai.

Apart from acquisitions, REITs could also capitalize on the increased development limits (25% cap vs 10% previously subject to conditions) accorded by Monetary Authority of Singapore (MAS) to take on more asset enhancements to rejuvenate their portfolios and boost returns.

Developers are hungry for land in Singapore, more en-bloc deals in 2017. We expect continued increased participation from developers in the upcoming first half 2017 government land sales program (GLS) as developers look to replenish diminishing land banks which will mean that land prices are likely to remain firm. In addition, we expect to see more en-bloc deals for opportunities, especially in the luxury end of the market. These activities in our view, likely signal expectations that home prices should remain fairly stable in the coming years.

3. Privatisations, mergers and acquisitions to pick up

Privatizations, mergers and acquisitions (M&A) in the developer space to pick up. We believe that more listed property developers will take the delisting route along with the wave of privatizations that we saw in recent years. This puts valuations for property developers again in the spot light. Developers are trading at an attractive average 0.75x P/NAV, close to the -1SD of their historical trading range.

Reasons that drive this trend could be (i) sea of capital looking to deploy in Asian real estate, and (ii) strategic capital partners or major shareholders looking to recalibrate their strategies given the lacklustre capital markets and thus capturing the upside in the medium term.

We believe that such M&A activities highlight the attractive valuations of listed developers, namely City Developments, CapitaLand, Global Logistics Properties and UOL which are trading at close to -1 standard deviation (SD) to their 5-year historical trading range.

Page 3

Industry Focus



4. Deleveraging a focus as interest rate risks loom

Balance sheet deleveraging a major wildcard; spike in bond expiry in 2017-2018 a key data-point to watch. In view of the uncertainty of the pace of interest rate hikes in 2017, we believe that the early refinancing and hedging of interest rates will be a key focus for developers and REITs going forward. Of noteworthy is close to S$6.3 worth of bonds (S$4.0bn among developers) expiring over 2017-2018 where issuers will need to source for refinancing or alternative means to repay the bonds. While we believe that refinancing for REITs are likely to be more straight forward given that credits are backed by consistent recurring cash flows, we believe that certain developers, especially those in the mid-cap space which have been more opportunistic in tapping the bond market in recent years could face more hurdles. The recent bond defaults in 2016 among the oil & gas firms have cooled investors’ interest in bonds and we believe that investors will be more selective on the credit for future bond issuances. As such, the inability to refinance these expiring bonds could mean that issuers (developers or REITs) might seek alternative financing sources such as banks or even issuance of equity. Strategies for:

Singapore REITs – Capital preservation a key strategy Projected more hawkish four FED hikes to limit upside performance. We see increasing road-bumps to further outperformance for Singapore REITs (S-REITs) going into 2017, especially faced with a slowing DPU growth profile of 1.0% amidst a rising interest rate environment. DBS economist projects four FED rate hikes over the course of the year and as a result, the Singapore 10-year yield is expected to increase another 0.7% to a normalized c.3.0%. Forward FY17F yield spreads of 4.0% are already at historical mean levels which indicate that valuations for REITs are fair. Capital preservation is key. In an environment of low growth and rising interest rates, we believe that investors will look at stock-specific catalysts to maintain relative outperformance with the sector. These are S-REITs that provide (i) higher confidence in earnings sustainability and visibility, (ii) stronger relative growth, and (iii) lower gearing which limits impact of rising rates on distributions.

Our picks are Ascendas REIT (A-REIT), Keppel REIT (K-REIT), and Mapletree Commercial Trust (MCT). Among the mid-cap space, we like Croesus Retail Trust (CRT) , Keppel DC REIT (KDC REIT) and Frasers Logistics Trust (FLT). Singapore Developers – Catalysts abound to re-rate Potential policy relaxation and M&A could lift sentiment on developer stocks. Our call on the developers is mainly due to valuations supported by an improved outlook. Firstly, we view current trading levels of (P/Bk NAV of 0.75 and 0.65x P/RNAV) as attractive given that developers are trading at close to historical -1SD level. We believe that re-rating opportunities will come from the following data-points: (i) improved sell-through rates for existing developments on the back of improved transaction momentum, (ii) potential relaxation of selective government policy in 2017 driving higher demand for homes and investors’ sentiment, and (iii) potential privatization, M&A activities among developers or value-locking events like asset divestments which will provide a lift for NAVs and thus share prices for developers. Our picks are City Developments and UOL. Risks

1. Faster-than-projected rise in shorter-term interest rates which will negatively impact earnings and potentially capital values in the medium term.

2. External shocks impacting on GDP outlook and unemployment rates in Singapore which will have an overhang on demand/supply dynamics.

Page 4

Industry Focus



2. Peer Comparison

Singapore REITs Peer Comparisons

REIT FYE Price Rec Target Price

Mkt Cap

Total Return

DPU (S Cts) CAGR Yield (%)

P/NAV

(S$) (S$) S$'Bn (%) FY16/ 17F

FY17/ 18F

FY18F/ 19F

FY16/ 17F

FY17/ 18F

FY18F/ 19F

(x)

Office CCT Dec 1.505 BUY 1.70 4.5 18% 9.0 9.3 9.2 1% 5.9% 6.1% 6.1% 0.87 FCOT Sep 1.270 BUY 1.49 1.0 25% 9.8 9.8 9.8 0% 7.8% 7.8% 7.8% 0.83 KREIT Dec 1.020 BUY 1.23 3.5 26% 6.5 6.5 6.5 0% 6.3% 6.3% 6.3% 0.74 OUECT Dec 0.695 HOLD 0.74 0.9 15% 5.3 5.2 5.0 -3% 7.7% 7.6% 7.3% 0.71 Suntec Dec 1.650 HOLD 1.71 4.3 9% 10.0 10.0 10.0 0% 6.0% 6.0% 6.0% 0.78 Retail - - - - 6.4% 6.3% 6.4% 0.80 CRCT Dec 1.385 BUY 1.60 1.2 22% 10.3 10.5 10.3 0% 7.4% 7.6% 7.4% 0.78 CMT Dec 1.930 BUY 2.25 6.9 21% 11.2 11.2 11.3 0% 5.8% 5.8% 5.8% 1.01 CRT Jun 0.850 BUY 0.99 0.6 26% 7.5 8.2 8.5 7% 8.8% 9.6% 10.0% 0.88 FCT Sep 1.930 BUY 2.29 1.8 23% 11.8 11.8 12.1 2% 6.0% 6.0% 6.2% 1.02 SPH REIT Aug 0.955 HOLD 1.00 2.4 9% 5.5 5.7 5.7 2% 5.8% 5.9% 5.9% 1.00 MCT Mar 1.415 BUY 1.62 4.1 19% 8.7 8.9 9.1 2% 6.0% 6.2% 6.3% 1.11 MAGIC Mar 0.945 BUY 1.11 2.7 24% 7.2 7.3 7.4 1% 7.5% 7.7% 7.8% 0.77 SGREIT Dec 0.755 BUY 0.87 1.6 21% 5.2 5.2 5.4 2% 6.8% 6.8% 7.1% 0.81 Industrial - - - - 6.3% 6.4% 6.5% 0.97 a-itrust Mar 1.010 BUY 1.13 1.0 18% 5.9 6.4 6.2 3% 5.8% 6.3% 6.1% 1.52 A-REIT Mar 2.310 BUY 2.65 6.7 19% 15.7 15.6 15.7 0% 6.7% 6.6% 6.7% 1.14 Cache Dec 0.815 HOLD 0.93 0.7 22% 7.9 7.5 7.5 -2% 9.6% 9.2% 9.2% 0.81 CREIT Dec 0.540 HOLD 0.54 0.7 6% 4.1 4.2 4.2 1% 7.5% 7.6% 7.6% 0.79 FLT Sep 0.940 BUY 1.10 1.3 23% 6.6 6.6 6.8 1% 7.0% 7.0% 7.2% 1.10 MINT Mar 1.645 BUY 1.90 2.9 23% 11.3 11.5 12.0 3% 6.9% 7.0% 7.3% 1.18 MLT Mar 1.020 BUY 1.15 2.5 19% 7.2 7.4 7.6 3% 7.0% 7.2% 7.3% 0.99 SBREIT Dec 0.655 BUY 0.75 0.7 22% 6.1 6.1 6.2 1% 9.2% 9.3% 9.4% 0.80 Hospitality - - - - 7.1% 7.1% 7.2% 1.07 ASCHT Mar 0.700 BUY 0.84 0.8 27% 5.5 5.4 5.6 1% 7.8% 7.6% 8.0% 0.81 ART Dec 1.155 BUY 1.32 1.9 21% 8.2 8.1 8.3 1% 7.1% 7.0% 7.2% 0.81 CDREIT Dec 1.360 BUY 1.59 1.3 23% 9.4 9.0 9.3 0% 6.9% 6.6% 6.8% 0.84 FEHT Dec 0.595 HOLD 0.62 1.1 10% 4.3 4.0 4.2 0% 7.1% 6.6% 7.0% 0.62 FHT Sep 0.645 BUY 0.75 1.2 15% 5.2 5.0 5.3 2% 8.0% 7.7% 8.2% 0.85 OUEHT Dec 0.685 BUY 0.72 1.2 13% 4.3 4.5 4.6 3% 6.4% 6.7% 6.8% 0.78 Healthcare - - - - 7.2% 7.1% 7.4% 0..80 P-Life Dec 2.390 BUY 2.75 1.5 20% 12.1 12.2 12.3 1% 5.1% 5.1% 5.1% 1.47 Others - - - - IREIT Dec 0.720 HOLD 0.75 0.4 1% 6.3 6.4 6.3 0% 8.7% 8.8% 8.7% 1.16 KDCREIT Dec 1.200 BUY 1.33 1.4 -3% 6.8 7.2 7.5 5% 5.6% 5.8% 6.1% 1.33 Manulife US REIT

Jan 0.835 BUY 0.93 0.7 19% 5.6 6.0 6.1 n/a 6.7% 7.2% 7.2% 1.06

Sector Average 6.8% 6.8% 6.9% 0.95

Note: Prices used as of 04 Jan-2017

Source: Bloomberg Finance L.P., DBS Bank

Page 5

Industry Focus



Singapore Developers Peer Comparisons

Mkt Price 12-mth Company FYE Cap 4-Jan-17 RNAV *Assumed Target Price Upside P/RNAV Latest Qtr (S$m) (S$) (S$) Discount

(%) (S$) % Rcmd (x) P/NBV

Developers Capitaland Dec 13.0 3.06 4.80 -25% 3.60 17% BUY 0.64 0.77 City Dev Dec 7.5 8.39 11.90 -17% 9.90 19% BUY 0.70 0.84 Frasers Centrepoint Ltd

Sep 4.4 1.60 2.86 -30% 2.00 31% BUY 0.53 0.67

Global Logistics Properties

Mar 10.1 2.24 3.53 -30% 2.47 14% BUY 0.61 0.83

UOL Dec 4.7 6.12 10.23 -30% 7.20 23% BUY 0.57 0.59 Average 0.57 0.75 Non-Covered Guocoland Dec 10.9 2.40 - - - - - na 0.90 UIC Dec 3.9 2.79 - - - - - na 0.66 Ho Bee Dec 1.4 2.04 - - - - - na 0.50 Wheelock Dec 1.8 1.49 - - - - - na 0.60 Wing Tai Jun 1.3 1.62 - - - - - na 0.40 Bukit Sembawang Dec 1.2 4.48 - - - - - na 0.90 United Engineers Dec 1.6 2.57 - - - - - na 0.90 Tuan Sing Dec 0.4 0.29 - - - - - na 0.39 Hiap Hoe Dec 0.3 0.72 - - - - - na 0.51 Heeton Holdings Dec 0.1 0.39 - - - - - na 0.41 Average na 0.63 Average sector 0.68

Note: Prices used as of 04 Jan-2017 Source: Bloomberg Finance L.P., DBS Bank

Page 6

Industry Focus



2. Key Charts

Residential

Outlook – Positive (Luxury) Negative (Suburban)

Luxury end of the residential market bottoming out

Price differential across major cities (luxury hoe prices)

A tenants' market as vacancy rates spike

Home prices in the suburbs to see more downside

Key Assertions

DBS project prices for luxury residential homes (0% to +1%) to bottom out as transaction volumes and foreigner interests pick up within the Core Central region.

Prices for homes in suburban region to fall further by as much as -3 to -5% as affordability remain curbed for upgraders given higher-than-average differential in prices between HDB resale prices and prices of suburban homes.

Potential policy relaxation in 2017 given macro uncertainties in 2017 coming on the back of the pace of interest rate increases and its impact on mortgages.

Risks

Looming from higher mortgage rates, diminishing rental spreads amidst higher market vacancy rates could worsen the holding power for households.

• External shocks causing a downturn in the Singapore economy and a loss of jobs, resulting in a significant decline in the property market.

Source: URA, CBRE, DBS Bank

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

0

20

40

60

80

100

120

140

160

180

1Q2004 3Q2005 1Q2007 3Q2008 1Q2010 3Q2011 1Q2013 3Q2014 1Q2016

(2010=100)

Property Price index (Outside Central Area) Spread vs HDB

High Demand From Upgraders

(P ublic to Private)

Af fordability Curbed but

spread is closing

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

20

11

Q1

20

11

Q2

20

11

Q3

20

11

Q4

20

12

Q1

20

12

Q2

20

12

Q3

20

12

Q4

20

13

Q1

20

13

Q2

20

13

Q3

20

13

Q4

20

14

Q1

20

14

Q2

20

14

Q3

20

14

Q4

20

15

Q1

20

15

Q2

20

15

Q3

20

15

Q4

20

16

Q1

20

16

Q2

20

16

Q3

Un its Units Sold in Core Central Region (LHS) Rolling 4 Quarters Growth (%)

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

Monaco HongKong

London New York LosAngeles

Japan Singapore Toronto

US$ psf

60.0

70.0

80.0

90.0

100.0

110.0

120.0

130.0

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

Jun-

04D

ec-0

4Ju

n-05

Dec

-05

Jun-

06D

ec-0

6Ju

n-07

Dec

-07

Jun-

08D

ec-0

8Ju

n-09

Dec

-09

Jun-

10D

ec-1

0Ju

n-11

Dec

-11

Jun-

12D

ec-1

2Ju

n-13

Dec

-13

Jun-

14D

ec-1

4Ju

n-15

Dec

-15

Jun-

164Q

16

Index Value(%)

Vacancy Rate (Non-Landed) (LHS) Rental Index (Non-Landed) (RHS)

Page 7

Industry Focus



Retail Outlook - Neutral

Rental reversions to moderate as RSI declines

Upcoming supply are mainly in the fringe

Key Assertions

Muted retail sales outlook poses a risk to landlords’ occupancy costs and rental reversions.

• Consolidation among retailers to intensify in 2017 amid rising labour costs and labour shortage.

• Better-performing malls with sizeable operational scale, strong record of recurring traffic which will continue to attract retailers.

Risks

• Increased penetration of e-commerce causing decline in retail sales.

• Weaker-than-expected economic growth (GDP), affecting consumer sentiment and expenditure.

• Weaker-than-expected tourist arrivals which will have an impact on retail sales performance in Orchard Road malls.

Source: DBS Bank

Office Outlook - Positive

Supply to fall off from 2018 onwards

Two-tier Market with Premium Grade A office leading

Key Assertions

• Demand outlook remains uncertain with a merry-go-round of tenants gravitating towards Grade A office space.

• A two-tier market to emerge; with Grade A office space leading the pack and Grade B office space needing to drop rents or undergo refurbishments to attract tenants.

• Office rents could bottom by end of 2017 as pre-commitment rates for key office buildings remain strong.

Risks

• Earlier completion of new office supply. • Shadow space from further contraction in demand from

the financial services sector.

Source: DBS Bank

-

0.50

1.00

1.50

2.00

2.50

2016 2017 2018 2019 2020

m'sqft

Downtown Core Fringe Area Rest of Central Area

Orchard Outside Central Region

-4%-2%0%2%4%6%8%10%12%

7.00

8.00

9.00

10.00

11.00

12.00

13.00

Spread between Premium Grade vs Grade A (RHS)

Colliers Premium Grade Raffles Place/New Downtown (LHS)

CBRE Grade A Core CBD (LHS)

S$ psf / mth

‐

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

‐1,500

‐1,000

‐500

0

500

1,000

1,500

2,000

2,500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

'000 sqft

Net supply: Downtown Core (LHS)

Net demand: Downtown Core (LHS)

CBRE Grade A office rents (RHS)

S$ psf pm

Post GFC2010‐2014 average:1.10m sqft

2015‐2019 average:1.15m sqft

Page 8

Industry Focus



Industrial Outlook – Negative (Factory & Warehouse Space)

Positive (Business Parks)

Time to absorb supply that entered the market

Rental reversions remain negative

Key Assertions

Market rents to moderate 5% p.a. due to time needed to absorb supply completion in 2016-2017. Market vacancy rates to hit a high of 10%.

Business Park space to remain stable; given lack of new supply but downside risk persists if CBD office rents weaken further.

Industrial REITs' rental reversions to remain generally negative over 2017-2018.

Risks

Weaker than-expected Singapore economy resulting in further-than-expected declines in rents.

Shadow space in the single-user factory/warehouse sectors which result in increased competition for tenants.

Source: DBS Bank

Hospitality Outlook - Negative

Supply to continue outpace demand growth in 2017

RevPAR to remain under pressure in 2017

Key Assertions

We expect demand in 2017 to grow by 4% y-o-y. However, as corporate demand is expected to remain soft, projected demand for accommodation growth should remain modest.

Persistent supply pressures arising from a 6% increase in room stock will pressure room and occupancy rates. We project RevPAR to fall by 4% in 2017 before rebounding thereafter.

Risks

Slower-than-expected rebound in Chinese tourist arrivals and greater level of competition from regional markets would cause RevPAR to drop more than expected.

Upside risk would come from delays in opening of new hotels.

Source: DBS Bank

0%

2%

4%

6%

8%

10%

12%

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

2,007 2,008 2,009 2,010 2,011 2,012 2,013 2,014 2,015 2016F 2017F 2018F 2019F 2020F

m' sqft

Demand Supply Vacancy Rate (RHS)-20%

-10%

0%

10%

20%

30%

40%

50%

2009 2010 2011 2012 2013 2014 2015 2016F 2017F 2018F

Business Park Warehouse Factory

7%

-3%

1%

9%

4%4%

6%

3%

-2%

3.4%

5%4%

7%

4%

7%

4%

6%

2%

-1% -1%

-5%-4% -4%

3%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

2013 2014 2015 2016F 2017F 2018F

Visitor Arrivals Visitor Days Room supply RevPAR

y-o-y growth

61,287 2,520 3,857

1,355

45,000

50,000

55,000

60,000

65,000

70,000

75,000

2015 2016F 2017F 2018F

Rooms

Hotel rooms Expected net additions

4.1%

6.0%2.0%

Page 9

Industry Focus



4. Developers – Catalysts abound to lift valuations from multi-year lows

Key Points

Developers to continue looking for opportunities overseas, high-end residential space

M&A and potential policy relaxation could lift sentiment for the sector

Top picks: City Developments Limited (CDL), UOL

Range bound in 2016. The Singapore Property Developers (measured by the FSTREH index) has fallen by close to 5% since the start of 2016 and prices are generally c.9% below prices from the start of 2015. The FSTREH lagged the S-REITs for the most of 2016 but caught up after the recent spike in bond yields saw S-REIT prices weaken on the back of market expectations of a more hawkish FED rate hike momentum in 2017.

4.1 Attractive valuations with upcoming catalysts Looking forward, we believe that the Singapore developers (SG Developers) can outperform the S-REITs, especially with expected headwinds from the uncertainty in the number of

subsequent FED hikes over 2017 to mean limited re-rating opportunities for the S-REITs. We see re-rating catalysts for Singapore Developers come 2017 on the back of (i) improved investor sentiment on increasing expectations of a government policy easing in 2017 as property prices fall by as much as 12-15% from the peak (currently 11%) (ii) potential merger and acquisition (M&A) activities, and (iii) improved balance sheets on the back of expected asset recycling/deleveraging trend. The Singapore Developers, which are trading at an average P/NAV of 0.7x, close to its -1SD is attractive. Current P/NAV valuations are close to multi-year lows. At a 0.7x P/NAV, valuations for developers are similar during past periods of economic stress in 1997, 2003 and 2009, which we believe will not be the case going forward, especially with the Singapore GDP projected to grow by c.1.3% in 2017 according to our DBS economists. While we continue to expect Singapore residential prices to fall marginally in 2017, most negatives are priced in, in our view. We believe that we are closer to the trough, especially with expectations that the government will likely tweak policy measures to negate a further fall in prices.

Figure 1: Developers underperformed S-REITs in 2016 but caught up in 4Q16


600.00

650.00

700.00

750.00

800.00

850.00

900.00

‐10%

‐8%

‐6%

‐4%

‐2%

0%

2%

4%

6%

1/1/15 1/4/15 1/7/15 1/10/15 1/1/16 1/4/16 1/7/16 1/10/16

Index Value Relative Performance (%)

Relative Performance Developers

Page 10

Industry Focus



Figure 2: Valuations attractive as developers still trade at close to past 3 market down-cycle troughs


Figure 3: Historical developers Price-to-Bk NAV vs

PPI

Figure 4: Developers trading at 45% discount to

RNAVs (-1.0 standard deviation)

Source: URA, DBS Bank

-

0.50

1.00

1.50

2.00

2.50

-

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0 (x )Index Value

Property Price Index Developer P/Bk NAV

1997-98 Asian Financial Crisis

2008-2009 Global Financial Crisis

2002-2003 Dot Com Crash

2011 Euro Crisis

Mean: 0.95x

-1 SD: 0.60x

+1 SD: 1.30x

-

0.50

1.00

1.50

2.00

2.50

Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17

P/NAV (x)

P/NAV (w/o GLP) Mean - 1 SD +1 SD P/NAV (with GLP)

-60%

-50%

-40%

-30%

-20%

-10%

0%2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Discount to RNAV Mean +1 SD - 1 SD

Page 11

Industry Focus



4.2 Diversification to remain a key strategy for developers Diversification remains a key strategy. Singapore Property Developers have been acquiring and diversifying overseas over the past few years, driven mainly by the lack of opportunities in Singapore and also the attractive prospects of higher returns overseas. Based on our estimates, out of a sample size of 22 listed Singapore Property Developers with total assets amounting to an aggregate S$143bn, only 44% of their assets are in Singapore with the remaining invested overseas in China (28%), United States (8%) and Australia (4%) as shown in Figure 5. This diversity in exposure has been mainly built over the past three years post a series of cooling measures that were put in place on purchasing residential properties in Singapore. Based on our estimates, we saw close to S$8.1bn of capital invested overseas, in contrast to S$7.6bn invested in Singapore over the past few years. The trend was different prior to 2013 when a majority of capital were vested within Singapore and Asia. Australia, London and Japan have been the main markets of interest in recent years, with commercial (office/hotels)

properties being the main target asset class. One of the key reasons was the relative attractive returns when compared to Singapore, boosted by a strong exchange rate and low cost of funds as funding rates remain anchored at low levels.

Figure 5: Developer exposure by geography

Source: Companies, DBS Bank

Figure 6: Investment Destinations for Singapore Developers (2013-YTD)


Australia: S$1.4bn

Singapore S$7.6bn

U.K.: S$4.6bn

Europe: S$0.7bn

USA: S$0.3bn

Japan: S$0.2bn

China: S$1.2bn

Page 12

Industry Focus



Overseas capital deployment to continue but opportunities limited as currency volatility impact returns. While we believe that developers will continue to seek higher returns overseas, the yield compression seen for prime assets over the past few years will mean that market focus will likely change. According to JLL, an SGD investor total foreign currency (FX) adjusted total return will diminish over 2016-2018 and is forecasted to yield in the -3% to 10% range with Shanghai, Sydney and Melbourne offering the highest returns which will continue to feature regularly on developers’ horizon over time. We believe that London will remain one of the key investment markets, despite Brexit going forward and JLL expecting returns to moderate, mainly due to weak GBP in the medium term. Developers are likely to be still keen on the UK if it maintains its financial hub status in Europe. As developers are expected to continue targeting to grow their recurring income base, we believe that core assets in the commercial space which offer stable cash flows will be key acquisition targets.

DBS economist believes that most major currencies will depreciate against the US dollar over 2017, as the normalization of the US monetary policy and hawkish policies from new President Trump might lead to flows from emerging markets back to the US. Looking forward, currency volatility will continue to have a big impact on total returns for investors diversifying into real estate outside their home markets, and it is important to closely monitor currency movements.

In Singapore, developers could turn to M&A and en-bloc opportunities to land bank. Developers who are looking to replenish their property land banks in Singapore have turned up in force in the government land sales program (GLS) in 2016 and have also ventured into the En-bloc market to gain access to land banks. Looking ahead, we believe that another avenue will be in the listed space, especially with listed developers trading at 0.7x P/NAV and certain mid-cap developers trading below that. As pressure from additional buyer stamp duties (ABSD) on land purchase and Qualifying Charges (QC) increase from 2017 onwards, we believe this could spark merger and acquisition (M&A) activities going forward.

Figure 7: FX adjusted returns over time

Source: JLL, DBS Bank

-20%

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0%

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20%

Sing

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Sydn

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Shan

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Del

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Sing

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bour

ne

Sydn

ey

Hon

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Seou

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Toky

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Lond

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New

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Beiji

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Shan

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Del

hi

Mum

bai

Kual

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mpu

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Sing

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Sydn

ey

Hon

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ng

Seou

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o

Lond

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New

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ng

Shan

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Del

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Mum

bai

Kual

a Lu

mpu

r

FX gain/loss Property Return FX adjusted total return

2016 2017 2018

Page 13

Industry Focus



Figure 8: Prime Yields for commercial real estate


Figure 9: Singapore Developers' Exposure (% of RNAV) Remarks

Developers SG Residential

SG Commercial

Overseas Total

CapitaLand 9% 25% 66% 100%

City Dev 27% 52% 21% 100%

Ho Bee 15% 56% 29% 100%

Wheelock 30% 39% 32% 100%

UOL Limited 7% 85% 8% 100%

OUE Ltd 9% 56% 35% 100%

Wing Tai 19% 20% 60% 100%

Global Logistics Properties 0% 0% 100% 100%

SG Developers' exposure to domestic residential sector is generally <10% with the exception of the likes of City Dev, Ho Bee Wheelock, and Wingtai, which have exposure in excess of 15%.


0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Beijing Shanghai Tokyo Singapore Sydney Mebourne Brisbane

1Q14

2Q15

2Q16

Page 14

Industry Focus



4.3 Improved transactions in the luxury end of the market to continue Pick-up in transactions in the luxury residential market. We believe that the luxury end of the market is approaching a near-term bottom, judging by the increased number of transactions seen in the core central region. According to URA-lodged caveats, YTD 9M16 transactions by Foreigners (excluding Singapore permanent residents) rose by close to 12% compared to the same period a year ago. We note that the increase in transactions mainly come from buyers in China, Malaysia and Indonesia, up more than 15% y-o-y respectively. If transaction volumes sustain, it will imply investors’ confidence in Singapore’s fundamentals and prospects of long-term capital gains from current levels. Attractive relative pricing compared to other popular investment destinations. According to JLL, Singapore remains an attractive investment destination, especially with additional

stamp duties recently levied on foreign purchases by other popular residential investment destinations such as London, Melbourne, Sydney which somewhat makes Singapore attractive again for international investors looking for real estate purchases. In addition, we note that (figure 1212) Singapore luxury home prices have corrected 11% over the past few years and the gap has widened over time, when compared to other residential investment destinations such as Hong Kong, London and New York, where prices have continued to increase over the past few years (figure 13). Therefore, we believe that Singapore luxury home is attractive from a relative pricing across countries with potential capital upside in the medium term once the current over-supply situation normalizes.

Figure 10: Transactions in Core Central region growing Figure 11: Core Central Region transactions

outpacing overall total Singapore market

Source: Companies, DBS Bank Figure 12: % Growth in prices Figure 13: Prices of luxury residential homes

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

20

11

Q1

20

11

Q2

20

11

Q3

20

11

Q4

20

12

Q1

20

12

Q2

20

12

Q3

20

12

Q4

20

13

Q1

20

13

Q2

20

13

Q3

20

13

Q4

20

14

Q1

20

14

Q2

20

14

Q3

20

14

Q4

20

15

Q1

20

15

Q2

20

15

Q3

20

15

Q4

20

16

Q1

20

16

Q2

20

16

Q3

Un its Units Sold in Core Central Region (LHS) Rolling 4 Quarters Growth (%)

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

20

11

Q1

20

11

Q2

20

11

Q3

20

11

Q4

20

12

Q1

20

12

Q2

20

12

Q3

20

12

Q4

20

13

Q1

20

13

Q2

20

13

Q3

20

13

Q4

20

14

Q1

20

14

Q2

20

14

Q3

20

14

Q4

20

15

Q1

20

15

Q2

20

15

Q3

20

15

Q4

20

16

Q1

20

16

Q2

20

16

Q3

% Change (Rolling 4 Quarters)

Overall Transactions Core Central Region

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

Monaco HongKong

London New York LosAngeles

Japan Singapore Toronto

US$ psf

90.0

110.0

130.0

150.0

170.0

190.0

210.0

230.0

Q1

201

0

Q2

201

0

Q3

201

0

Q4

201

0

Q1

201

1

Q2

201

1

Q3

201

1

Q4

201

1

Q1

201

2

Q2

201

2

Q3

201

2

Q4

201

2

Q1

201

3

Q2

201

3

Q3

201

3

Q4

201

3

Q1

201

4

Q2

201

4

Q3

201

4

Q4

201

4

Q1

201

5

Q2

201

5

Q3

201

5

Q1

201

6

Q2

201

6

Q3

201

6

Index Value

Hong Kong Korea Malaysia Singapore Taiwan Thailand

Source: URA, MAS, Christie Real Estate, JLL, Knight Frank, DBS Bank

Page 15

Industry Focus



4.4 Looming ABSD deadlines not a precursor for a significant price cuts for all developments. Strong sales in the core central region could mean firmer prices going forward. There were close to 22,502 unsold units (both completed and uncompleted) as of 3Q16 of which 24% of 5,464 units were located in the Core Central region as of 3Q16. The strong sales seen in recent quarters (especially for recently re-launched completed projects – Gramercy Park, OUE Twin Peaks near downtown Orchard) have brought the number of available units for sale down by 6% q-o-q, which is one of the fastest fall compared to homes in other regions. Based on the current run-rate for residential transactions, we estimate that total transactions in 2016 will likely come in at close to 15,500 (c.8,000 primary sales and 7,500 secondary sales), which implies close to 10% growth y-o-y. The increase is mainly driven from a marked increase in both the primary and secondary transactions. The former is mainly due to generally more aggressive marketing activities and price discounts. The improvement seen in the secondary market mainly came from i) higher transactions in the Core Central region and ii) innovative financing schemes and price discounts offered by developers for selected de-licensed projects which resulted in fairly good response from buyers (see figure 14).

Selected impact of ABSD deadlines as most projects continue to enjoy healthy margins. Developers with projects that are subjected to deadlines on the ABSD remission on residential sites in 2017-2018 have also done well, in our view. Based on our analysis of selected projects with significant unsold inventories at the start of 2016 and are likely to be under pressure to clear stock due to looming ABSD deadlines in 2017-2018, most have cleared a substantial portion of their inventory. This is mainly coming from more aggressive marketing activities while prices dipped slightly by 4-12%, with some staying steady as shown in Figure 15. This is against investors’ initial concern that developers might have to suffer deep cuts in prices in order to move unsold inventories. The pick-up in sales momentum, in our view, will likely give developers more optimism to continue marketing existing projects while upcoming property launches in the Central region could also increase in order to capture the current improved sentiment in that space. We believe that developers are likely to pay the ABSD for most projects come 2017 as margins are expected to remain healthy (figure 16).

Figure 14. Pipeline supply of unsold private homes (excluding executive condominiums) as of end of 3rd quarter 2016

Total Units Core Central Region

Rest of Central Region

Outside Central Region

Remarks

(units) (units) (units) (units) Units Available for sale (3Q16): Unsold uncompleted units 20,577 4,711 7,130 8,736 Unsold completed units 1,925 753 543 629 Total unsold units 22,502 5,464 7,673 9,365 % Chg Q-o-Q -3% -6% 1% -5% Demand : Primary Sales (YTD 9M16) 5,253 444 1,715 3,094 Secondary Sales 6,337 1568 1792 2977 Total Sales 11,590 2,012 3,507 6,071

Ratio (Supply/ annualised primary sales) 3.2 9.2 3.4 2.3 Ratios for CCR and RCR regions improved while OCR ratios declined.

Primary Sales (2015) 7,440 407 1,884 5,147 Secondary Sales (2015) 6,677 1,452 1,944 3,281 14,117 1,859 3,828 8,428 Ratio of Supply/Demand 3.0 13.4 4.1 1.8 Ratios for CCR highest due to

low number of primary sales. Average Primary Sales (2013-2016) 7,030 530 4,400 2,100 Average Secondary Sales (2013-2016) 7,475 1,572 2,071 3,464 14,505 2,102 6,471 5,564


Page 16

Industry Focus



Figure 15: ABSD payable for selected projects with high unsold inventory in 2017 / 2018

ABSD liability

Region Project Developer Total Units

Unsold (Jan’16)

Unsold Unsold (Nov’16)

Unsold Units Sold in

2016

Land Cost

Estimated ABSD

(%) (%) (S$’m) (S$’m)

ABSD Payable for projects from government land sites

Jan’17 OCR The Trilinq IOI Properties 755 528 70% 303 40% 225 408 52.1

Feb’17 RCR Mon Jervois Singapore Land 140 61 44% 45 32% 16 118.9 15.2

Mar’17 OCR Kingsford Hillview Peak

Kingsford 512 249 49% 22 4% 227 243.2 31

Jun’17 OCR Vue 8 Residences

Capital Devt. 463 172 37% 84 18% 88 211 26.9

Jul’17 CCR Pollen & Bleu Singapore Land 106 94 89% 93 88% 1 113.2 14.4

Jul’17 RCR Sant Ritz Santarli Corp 214 24 11% 10 5% 14 114.8 14.7

Sep’17 CCR The Siena Far East Org. 54 22 41% 12 22% 10 45.8 5.8

Sep’17 RCR The Crest Wingtai,Metro,UE

469 366 78% 325 69% 41 516 65.9

Oct’17 OCR The Glades Keppel Land 726 343 47% 134 18% 209 434.6 55.5

Dec’17 RCR Alex Residences

Singapore Land 429 173 40% 152 35% 21 332.7 41.6

Jan’18 OCR The Panorama Wheelock 698 126 18% 28 4% 98 550 70.2

Apr’18 OCR Riverbank @ Fernvale

UOL Group 555 188 34% 64 12% 124 262.1 50.2

Jun’18 RCR Highline Residences

Keppel Land 500 320 64% 215 43% 105 550.3 105.3

Apr’18 OCR The Santorini MCC Land 597 390 65% 328 55% 62 289.7 55.5

Sep’18 CCR Sophia Hills Hoi Hup 493 437 89% 346 70% 91 442.3 84.7

ABSD Payable for projects from private land sites

Mar’17 CCR Meyer Melodia Cang Properties

16 15 94% 15 94% 0 9.4 1.2

Mar’17 CCR Robin Suites Robin25 Pte Ltd

92 26 28% 6 7% 20 54 6.8

Jan’17 RCR Ascent @ 456 Quest Homes 28 13 46% 10 36% 3 24 3.1

Apr’17 OCR The Bently Residences

Goodland Group

48 15 31% 5 10% 10 27 3.4

Jun’17 RCR Neem Tree Aylesbury Pte Ltd

84 67 80% 64 76% 3 46 5.9

Sep’17 OCR The Creek @ Bukit

Chiu Teng Group

260 144 55% 107 41% 37 190 24.5

Sep’17 OCR Rezi3Two Tee, KSH and Heeton

65 22 34% 7 11% 15 22.6 2.8

Oct’17 OCR Lotus Ville JVA Venture 11 8 72% 7 64% 1 18 2.3

Nov’17 CCR The Rise @ Oxley

Hao Yuan 120 51 43% 25 21% 26 130 16.6


Page 17

Industry Focus



Figure 16: Selling prices indicate that most projects will still earn good margins after payment of ABSD

Project Est. Breakeven

Est. Breakeven with ABSD

Selling Prices

< 2016

Selling prices in

2016 % Chg Average

Prices Margins

(q/o ABSD) Margins

(with ABSD)

(S$’psf) (S$’psf) (S$’psf) (S$’psf) (%) (S$’psf) (%) (%)

ABSD Payable for projects from government land sites

The Trilinq 920 990 1,405 1,404 0% 1,404 53% 42%

Mon Jervois 1,265 1,400 1,981 1,832 -8% 1,907 51% 36%

Kingsford Hillview Peak 1,010 1,090 1,367 1,286 -6% 1,326 31% 22%

Vue 8 Residences 780 830 983 992 1% 988 27% 19%

Pollen & Bleu 1,450 1,575 1,922 1,801 -6% 1,862 28% 18%

Sant Ritz 1,000 1,080 1,419 1,358 -4% 1,388 39% 29%

The Siena 1,500 1,650 2,067 1,826 -12% 1,947 30% 18%

The Crest 1,350 1,470 1,698 1,718 1% 1,708 27% 16%

The Glades 1,530 1,675 1,454 1,412 -3% 1,433 -6% -14%

Alex Residences 1,350 1,500 1,705 1,943 14% 1,824 35% 22%

The Panorama 1,180 1,300 1,243 1,220 -2% 1,232 4% -5%

Riverbank @ Fernvale 850 940 976 992 2% 984 16% 5%

Highline Residences 1,600 1,800 1,879 1,735 -8% 1,807 13% 0%

The Santorini 950 1,035 1,131 1,082 -4% 1,106 16% 7%

Sophia Hills 1,450 1,650 1,995 1,916 -4% 1,955 35% 19%

ABSD Payable for projects from private land sites

Mayer Melodia 510 530 2,226 - 0% 1,113 >100% >100%

Robin Suites 1,450 1,600 2,496 2,276 -9% 2,386 65% 49%

Ascent @ 456 1,400 1,580 1,506 1,527 1% 1,516 8% -4%

The Bently Residences 1,000 1,050 1,408 1,229 -13% 1,319 32% 26%

Neem Tree 1,180 1,285 1,616 1,756 9% 1,686 43% 31%

The Creek @ Bukit 1,180 1,400 1,589 1,656 4% 1,622 37% 16%

Rezi3Two 1,000 1,050 1,507 1,533 2% 1,520 52% 45%

Lotus Ville 775 830 803 754 -6% 779 0% -6%

The Rise @ Oxley 1,525 1,685 2,335 2,283 -2% 2,309 51% 37%


Page 18

Industry Focus



4.5 Potential land-banking opportunities in Singapore

Developers could turn towards the en-bloc sites or even M&A to grow. The government residential land tenders have remained competitive, driving land bid prices high, following the dearth of land supply since the property market peaked in 2013, coupled by developers having pre-sold most of their inventory on their balance sheets on hand. Looking ahead, as the government continues to maintain a low supply in the upcoming 1H17 land tenders, we believe that developers could turn towards the en-bloc market or even look to M&A to continue land banking and to seek growth.

Apart from government land sales, developers have turned to opportunities in the private market as evidenced by the recent pick-up in en-bloc transactions.

Smaller developers, some of which on average trade at a 50% discount to book values, could be attractive acquisition or privatisation candidates.

Limited government land sales (GLS) to result in sticky

land bid prices

Government residential land sales at its lowest level since GFC. Since the property market peaked in 2013, the government has been moderating the land supply into the market. Total GFA of government residential land sales

tendered out in 2016 has reached its lowest level at approximately 4.4m sqft, 75% below the peak in 2012.

Unsold inventory at the lowest since 2001. With the government moderating the land supply for a few years now, unsold inventory of residential properties has reached its lowest levels since 2001. As at 3Q2016, unsold inventory had almost halved since its peak in 2011.

Land prices have remained sticky. While land prices from the government land tenders have moderated marginally in 2014 to 2015 (highest land prices within the respective year fell c.27% to close to S$900psf ppr levels from a high of S$1,163psf ppr in 2013), we saw land prices in 2016 achieve a record high of S$1,239 psf ppr.

Land bids are increasingly more competitive as spreads thin. The spreads between the winning bid compared to the 2nd and median bids have also narrowed from 15% back in 2013 (peak of 62% in 2009) to 3% in 2016. The number of bids has increased to an average of 12 in 2016, above the historical average of eight bids.

Figure 17: Shortage of land supply from the government

Figure 18: Land prices remain steady as competition remains high

Source: Realis, DBS Bank Source: Realis, DBS Bank

197 245 350 318 228 203 280 320 291

418 489 438 483 481

285 268 350

507

639

460 533

607

869

1,108 1,163

849 871

1,239

241 256 350

413 436 310

463 404

463

681 724650 695

809

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2003

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)

Min Average Max

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Aver

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Page 19

Industry Focus



Figure 19: Winning margin and average range of bid have narrowed

Figure 20: Number of bidders has increased

Source: Realis, DBS Bank Source: Realis, DBS Bank

Figure 21: GLS Sites awarded in 2016 Date of Award Location Type of

Development Lease (yrs)

No. of Bids

Name of Successful Tenderer Developer Successful Tender

Price (S$'m)

$S$ psf per plot

ratio

Units

6-Dec-16 (tender closed)

Margaret Drive Residential 99 14 MCL Land (Regency) Pte Ltd SG Listed 238.4 997.8 275

1-Oct-16 Fernvale Road Residential 99 14 Sing Development (Pte) Ltd and Wee Hur Development Pte Ltd

SG Listed 287.1 517.2 575

5-Sep-16 Anchorvale Lane

Executive Condominium

99 16 Hoi Hup Realty Pte Ltd and Sunway Developments Pte Ltd

Foreign 240.9 355.2 635

1-Jul-16 Martin Place Residential 99 13 First Bedok Land Pte Ltd (Guocoland)

SG Listed 595.1 1,239.4 450

30-May-16 Bukit Batok West Avenue 6

Commercial & Residential

99 11 Qingjian Realty (BBR) Pte Ltd. And Qingjian Realty (BBC) Pte Ltd

Foreign 301.2 634.8 425

13-Apr-16 Jalan Kandis Residential 99 9 Dillenia Land Pte Ltd Foreign 51.1 481.2 110

29-Feb-16 Yio Chu Kang Road

Executive Condominium

99 10 Hoi Hup Realty Pte Ltd Foreign 183.8 331.1 520

26-Feb-16 New Upper Changi Road (Parcel B)

Residential 99 8 CEL Residential Development Pte Ltd

SG Listed 419.4 760.8 570

18-Jan-16 Siglap Road Residential 99 8 FCL Topaz Pte Ltd, Sekisui House Ltd and KH Capital Pte Ltd

SG Listed 624.2 858.3 800

Total 2,702.8 4,085


-20%

0%

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2005

2006

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2016

Ave

rage

aver

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range

of bid

(%

)

Highest vs Lowest Highest vs Median Highest vs 2nd

winning bid margin and average range of bid has narrowed

12

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16

8 8 8

10

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10

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2013

2014

2015

2016

Aver

age

no. of

bid

s

A verage no. of bids = 8

Page 20Page 20

Industry Focus



Figure 22: 1H17 Government Land Sales Program

S/N Location

Site area (ha)

Proposed GPR

Est. No. of Housing

Units

Est, No. of hotel

rooms

Estimated commercial

space (sqm)

Estimated launch

date

Sales agent

CONFIRMED LIST 2H15

Residential Sites

1 Toh Tuck Road 1.87 1.4 325 - - Feb-17 URA 2 Tampines Avenue 10 (Parcel C) 2.17 2.8 715 - - Mar-17 URA 3 Lorong 1 Realty Park 1.31 Landed 50 - - Apr-17 URA 4 Serangoon North Avenue 1 1.72 2.5 505 - - May-17 URA 4 Woodleigh Lane 1.96 3 735 - - May-17 URA

Total (Confirmed List) 2,330 - -

RESERVE LIST Residential sites 1 Stirling Road 2.11 4.2 1110 - - Available URA 2 Bartley Road / Jalan Bunga Rampai 0.47 2.1 115 - - Available URA 3 Sumang Walk (EC) 2.71 3 775 - - Available HDB 4 Yishun Avenue 9 2.17 2.8 715 - - May-17 URA 5 Owen Road 1.38 3.5 605 - - Jun-17 URA 6 Jiak Kim Street 1.33 3.8 515 - 1,500 Jun-17 URA 7 Fourth Avenue 2.02 1.8 455 - - Jun-17 URA 8 1.72 3 575 - - Jun-16 URA Commercial & Residential Sites 9 Holland Road 2.3 2.6 570 - 13,500 Available URA Commercial Sites 10 Beach Road 2.1 4.2 - - 88,200 Available URA 11 Woodlands Square 2.24 3.5 260 - 60,030 Available URA

Total (Reserve List) 5,135 - 158,080 Total (Confirmed List and Reserve List) 7,465 - 158,080


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Industry Focus



4.6 More En-bloc transactions in 2017

Increase in en-bloc transactions in 2016. From 2005-2007, we saw a pick-up in en-bloc transactions when there was a shortage of government land supply. Following the implementation of property cooling measures, en-bloc transactions have dwindled down since 2011 to no transactions in 2014. In 2015, only one successful transaction (the sale of Thong Sia building) was recorded. Nevertheless, we have seen a pick-up of en-bloc transactions in 2016 with Harbour View Gardens being successfully transacted in August 2016 at an average price of S$1.3k psf, five en-bloc deals announced, and increasing media / news on property owners engaging property consultants (such as JLL and CBRE) to set up collective sales committee. The five en-bloc deals announced (excluding en-bloc sales for asset recycling purposes or specifically to be exempted from ABSD or QC charges) were i) Shunfu Ville, Bishan which was the first en-bloc sale of privatised former HUDC estate in nine years at

S$639m (S$557 psf ppr), ii) Raintree Gardens, Potong Pasir second en-bloc sale of privatised former HUDC estate at S$334m (S$593psf ppr) to UOL / UIC JV, iii) No.3 Cuscaden Walk, Orchard at S$103.8m (S$1,826 psf ppr) to SL Capital, a consortium led by Sustained Land, iv) No. 120 Grange Road, Orchard at S$48.5m (S$1,841 psf ppr) to Roxy-Pacific Holdings, and v) No. 8 Hullet Road, Orchard at S$38.2m (S$2,073 psf ppr) to a consortium led by Patrick Kho of Lian Huat Group. Media / news reported properties for sale including two apartments at The Claymore, Lakeside Towers in Jurong, Villa D’Este on Dalvey Road and Cairnhill Mansion on Orchard Road. Despite the tighter rules on en-bloc sales and more tedious process to complete an en-bloc transaction, developers are now willing to undertake these properties, implying that i) developers are hungry for land bank, and ii) developers are taking a more positive outlook in the medium term.

Figure 23: Shortage of land supply from the government Figure 24: Land prices remain high due to competitive bids

Source: URA, DBS Bank Source: URA, DBS Bank

Figure 25: Pick-up in en-bloc sales during shortage of government land supply

Figure 26: Total land transactions has fallen from 2013 onwards, post the implementation of cooling measures

Source: URA, DBS Bank Source: URA, DBS Bank

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Industry Focus



4.7 Merger and Acquisition (M&A) activities could pick up With the recent proposed privatisation of various property-related companies and news reports on potential takeovers of United Engineers (UE) (please refer to our report: Another Centenarian for Sale) and Global Logistic Properties (GLP), we believe that some of the smaller-cap developers which are trading at deep discounts to NAV could look attractive for potential M&A as an alternative to acquire assets / land

banking. We reviewed a list of smaller-cap developers with the key summary of each of the developers below. The smaller-cap developers are trading at an average discount to NAV of 29% with most trading at a range of 40-93% discount to NAV. Companies that are in deep discounts with attractive assets includes Bukit Sembawang (93% discount), Wing Tai (60%), Hiap Hoe (51%), and Hobee (50%).

Figure 27: Sample list of mid-cap developers that could head the M&A route

Bukit Sembawang Wing Tai Hiap Hoe Bloomberg / Reuters BS SP / BSES.SI WINGT SP / WTHS.SI HIAP SP / HIAP.SI Market Cap (S$'m) 1,177 1,298 335

Shareholding Structure Lee Family 44% Cheng Family 50% Teo Family 70%Aberdeen 11% Others 2% Others 1%Asia Fountain Inv (Guoco Grp)

5% Free Float 48% Free float 29%

Free float 39% Disc / (Prem) to NAV 93% 60% 51%

Debt / Equity no debt 0.4 0.7

Net debt / Equity no debt 0.1 0.6

Cash balance (S$'m) 401 966 23

Cash % of Market Cap 34% 74% 7%

Assets by business units Development properties 99.6% Development properties 57.0% Investment properties 45%Investment properties 0.4% Investment properties 39.0% Hotel 11%

Retail 2.0% Development properties 8%

Others 2.0% Construction 4%

Leisure 0%

Others 31%

Assets by countries n/a SG 47% SG 82%

HK 29% AU 18%

CH 11% MY 13%

Key assets Paterson Collection, Orchard, SG - Resi

The Crest, SG - Resi Signature At Lewis, SG - Resi

St Thomas Walk, River Valley, SG - Resi

Le Nouvel KLCC, MY - Resi HH @ Kallang, SG - Industrial

Luxus Hill, Seletar, SG - Landed resi Winsland House, SG - comm Zhongshan Park Integrated, Novena, SG - Mixed

Watercove, Sembawang, SG - Landed resi

Development in Suzhou Industrial Park - Comm

Lanson Place, Shanghai - hospitality Source: DBS Bank

Page 23

Industry Focus



Figure 27: Sample list of mid-cap developers that could head the M&A route (continued) Hobee Roxy Wheelock Bloomberg / Reuters HOBEE SP / HBEE.SI ROXY SP / RXYP.SI WP SP / WPSL.SI Market Cap (S$'m) 1,477 501 1,789

Shareholding Structure Chua Family 76% Teo Family 72% Wheelock and Company Limited

76%

Others 1% Others 6% Aberdeen 6%Free float 23% Free float 22% Free Float 18%

Disc / (Prem) to NAV 50% 45% 40%

Debt / Equity 0.5 1.9 0.0

Net debt / Equity 0.5 1.2 (0.4)

Cash balance (S$'m) 77 327 1,319

Cash % of Market Cap 5% 65% 74%

Assets by business units Commercial 63% Development properties 57% Development properties 58%Residential 35% Hotel 11% Investment properties 35%Industrial 1% Investment properties 16% Investments 7%

Others 17% Assets by countries SG 55% SG 42% SG 80%

UK 29% AU 36% Other 20%CH 12% JP 8% AU 4% TH 4% MY 4% HK 5% ID 1%

Key assets Turquoise, Seascape & Cape Royale, Sentosa Cove, SG

Hotel properties in SG, JP, AU, TH & Maldives

Ardmore Three, Orchard, SG - Resi

Residential projects in Shanghai, Tangshan, Zhuhai

Sunnyvale Residences, SG - Resi Scotts Square, Orchard, SG - Resi

6 commercial buildings in London Trilive, SG - Resi / Retail Fuyang project, Hangzhou, CHThe Metropolis, Buona Vista, SG - Comm / Retail

New World Towers, South Brisbane, AU - Resi

Wheelock Place, SG - Comm / Retail

HB Centre 1 & 2, SG - Ind Land banks in SG, AU, ID Source: DBS Bank

Page 24

Industry Focus



Figure 27: Sample list of mid-cap developers that could head the M&A route (continued)

Metro UE Aspial Oxley Bloomberg / Reuters METRO SP / MTHL.SI UEM SP / UTES.SI ASP SP / ASPA.SI OHL SP / OXHL.SI Market Cap (S$'m) 844 1,676 525 1,282

Shareholding Structure Ong Family 36% Great Eastern 13% Koh Family 84% Ching Chiat Kwong 43%Ngee Ann Dev Pte Ltd

10% OCBC 10% Others 6% Low See Ching (Liu Shijin)

29%

Others 6% Lee Foundation 9% Free float 11% Tee Wee Sien (Zheng Weixian)

12%

Free float 49% WBL Corp 3% Others 15%

Free float 65% Free float 1%

Disc / (Prem) to NAV 37% 15% -60% -63%

Debt / Equity 0.0 0.6 4.2 3.1

Net debt / Equity (0.3) 0.3 3.9 2.6

Cash balance (S$'m) 418 671 72 367

Cash % of Market Cap

50% 40% 14% 29%

Assets by business units

Property 96% Development properties

22% Real estate 44% Development properties

68%

Retail 4% Investment properties

47% Financial service 10% Hotel 13%

Technology & Manufacturing

17% Jewellery 5% Investment properties

7%

Corporate Services & Other Assets

14% Others 41% Corporate 12%

Assets by countries CH 79% SG 85% Singapore 99.9% SG 97%ASEAN 15% CH 10% Malaysia 0.1% MY 2%Others 7% USA 1% UK 1%

MY 1% Japan 0%

TW 1% Cambodia 0%

ASEAN (ex SG & MY)

0% Others 1%

HK 0% Rest of Asia 0% Others 2%

Key assets Nanchang Fashion Mark, Jiangxi, CH - Mixed

UE Bizhub City, SG - Mixed Kensington Square, SG - Retail / Resi

The Flow, East Coast, SG - Comm

The Crest at Prince Charles Crescent, SG - Resi

UE Bizhub West, SG - Ind / Comm

City Gate, SG - Retail / Resi The Rise@Oxley, Oxley Rise Rd, SG - Residences / Retail

Sheffield Digital Campus, Sheffield, UK - Comm

Mixed Development One North, SG - Mixed

Nova City, Cairns, AU - Mixed

Floraville / Floraview / Floravista, Ang Mo Kio, SG - Mixed

Middlewood Locks, Manchester, UK - Resi

Land banks in Brisbane & Penang

Space@Tampines, SG - Industrial

Metro Tower / City, Shanghai - Comm / retail

Novotel & Ibis on Stevens,SG - hospitality

GIE Tower, Guangzhou, CH - Comm

Development properties in Cambodia, Malaysia, Myanmar, etc

Source: DBS Bank

Page 25

Industry Focus



Past transaction multiples imply that 1x P/NAV and 0.8x P/RNAV are levels at which most deals are struck. Based on selected privatisation transactions between 2010 and the latest practicable date involving property developers listed on the SGX (list may not be exhaustive), the deals were

transacted at an average P/NAV multiple of 1.0x and P/RNAV of 0.8x as shown in the table below. However, we note that there may be differences in terms of size, market capitalisation, financials and portfolios that could change the potential valuations for M&A.

Figure 28: Historical Transactions involving listed Property Developers (2010-now) Announcement Date

Target Company

Acquirer Final Offer Price

Deal Value Premium/ Disc

P/NAV P/RNAV

S$'m 1-mth VWAP (x) (x)

Aug-2016 Sim Lian Coronation 3G 1.08 216 16.8% 0.9x n.a.

Jan-2015 Keppel Land Keppel Corp 4.38 2,749 25.0% 0.88x 0.66x

Apr-2014 Hotel Properties Limited Wheelock 4.05 200 33.8% 1.32x 0.79x

Apr-2014 CapitaMalls Asia CapitaLand Limited 2.35 3,025 35.8% 1.26x 0.89x

Feb-2014 Singapore Land Limited United Industrial Corporation Limited

9.40 650 16.9% 0.72x 0.67x

Dec-2012 SC Global Developments Limited

MYK Holdings Pte Ltd 1.80 318 57.2% 1.15x 0.8x

May-2012 Wing Tai Ascend Capital Limited 1.39 1,104 14.3% 0.55x 0.62x

May-2011 Allgreen Limited Brookevale Investment Pte Ltd

1.60 1,060 40.6% 0.99x 0.81x

Sep-2010 Soilbuild Limited Dolphin Acquisitions 0.80 113 15.6% 1.26x 1.07x

Aug-2010 MCL Hong Kong Land Holdings Limited

2.45 189 27.3% 0.96x 0.75x

Min 14.3% 0.62x 0.62x

Mean 28.3% 0.78x 1.0x

Median 26.1% 0.79x 1.0x

Max 57.2% 1.07 1.32

Source: DBS Bank

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Industry Focus



4.8 Will Developers need to deleverage? Average indebtedness across developers over time remain stable; larger-cap developers have been generally more conservative. Property developers have generally been conservative in their approach towards capital management and over the past few years, kept net gearing in the range of 0.4-0.6x. Tracking the average indebtedness across developers over time, we found that mid-sized developers (defined as those with market capitalisation of up to S$2bn) have generally taken more debt in recent years and thus average gearing of c.0.8x in the last four years, higher than the sector’s average of c.0.7x over the same period. On average, over the same period, the large-cap developers have an average net gearing ratio of c.0.5x. Developers that stand out in terms of higher gearing than their peers as of the latest reported quarter are the likes of Guocoland (large-sized developer) at 1.2x and in the mid-sized developer space - Oxley, Tee Land and Roxy-Pacific which all have net gearing in excess of 1.0x (Fig. 30). Chip Eng Seng and Tuan Sing also have high net gearing of above 0.9x. Developers to deleverage as outlook remains subdued. 2017 will turn out to be a tough year for developers to deploy

capital. Firstly, we expect the land-banking climate to remain competitive in Singapore given limited land sites available for tender from the government, which means that most mid-sized developers could be crowded out by their larger competitors or foreign developers. Secondly, increased currency volatility going forward is expected to be a drag on returns when deploying more capital overseas. As such, given limited avenues to deploy capital and fairly strong balance sheets, we believe that a possible avenue where developers could look to deleverage their balance sheet or if not pay higher dividends going forward. The recent spike in swap-offer rates (SOR) could imply higher refinancing costs going forward. As such, faced with a slowing top-line growth and increasing prospects of higher interest obligations, we believe that a viable strategy will be to utilise proceeds that are recognised from subsequent years’ pre-sales to pare down on debt obligations when they come due in 2017-2018. In our interest rate analysis, we estimate impact on PATMI for the developers from a 1% increase in interest rates result in a 4-40% impact on PATMI.

Figure 29: Gearing levels of Property Developers over

time have remained fairly stable Figure 30: Net gearing of Selected Mid-Cap

Developers (Latest Quarter)



0.47 0.50 0.54 0.71

0.85 0.94 0.98 1.07 1.16

2.15

0.00

0.50

1.00

1.50

2.00

2.50

Hobee

Hia

p H

oe

OU

E

Fragra

nce

Heeto

n

Chip

Eng S

eng

Tuan S

ing

TEE L

and

Roxy

-Paci

fic

Oxl

ey

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

0.50

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Ne

t D

eb

t/Equit

y (x

)

Large cap Mid cap Average

Page 27

Industry Focus



Figure 31: Summary of Developers Financial position (As of latest quarter ended Sept-2016)

Developer Type* Market Cap

Total Assets

Total Debt

Total Equity

Cash Total Debt/

Equity

Net Debt/

Equity

Total Debt/

EBITDA (TTM)

Net Debt/

EBITDA

EBITDA/Interest

expense (TTM)

(S$'bn) (S$'bn) (S$'bn) (S$'bn) (S$'bn) (x) (x) (x) (x) (x)

Capitaland Large 13.56 46.21 15.58 23.88 4.24 0.7 0.5 11 8 3.0

GLP Large 8.77 27.73 6.21 18.30 2.47 0.3 0.2 10 6 3.0

Citydev Large 7.40 19.93 6.35 11.02 3.29 0.6 0.3 5 3 11.8

UOL Large 4.52 11.60 2.57 8.51 0.27 0.3 0.3 8 7 9.8

FCL Large 4.32 24.20 9.80 11.84 2.17 0.8 0.6 12 9 5.1

UIC Large 3.86 8.62 1.31 6.98 0.08 0.2 0.2 4 4 28.9

Guocoland Large 2.21 8.15 4.05 3.47 1.13 1.2 0.8 22 16 3.9

Wheelock Mid 1.78 3.28 0.02 3.02 0.40 0.0 (0.1) 0l0 (7) 55

OUE Mid 1.57 8.09 2.97 4.59 0.21 0.6 0.6 17 14 1.5

Perennial RE Mid 1.49 6.71 2.52 3.64 0.19 0.7 0.6 221 1 1.2

Ho Bee Mid 1.44 4.29 1.39 2.79 0.08 0.5 0.5 9 8 21

Wingtai Mid 1.31 4.71 1.13 3.34 0.97 0.3 0.0 89 13 0.3

Oxley Mid 1.23 4.48 2.43 0.96 0.37 2.5 2.1 8 7 8.4

Bukit Sembawang Mid 1.16 1.42 - 1.27 0.40 - (0.3) 0.0 (4) 0.0

Fragrance Mid 1.09 2.00 0.82 1.06 0.06 0.8 0.7 93 85 1.6

Roxy-Pacific Mid 0.53 1.50 0.89 0.48 0.33 1.8 1.2 12 8 4.8

Chip Eng Seng Small 0.39 2.18 1.17 0.75 0.46 1.6 0.9 12 7 5

Tuan Sing Small 0.35 2.09 1.04 0.89 0.16 1.2 1.0 16 14 2.4

Hiap Hoe Small 0.33 1.30 0.45 0.69 0.02 0.7 0.6 8 6 4.4

SingHaiyi Small 0.30 0.95 0.30 0.47 0.12 0.6 0.4 -29 -17 -1.3

Heeton Small 0.14 0.72 0.31 0.33 0.03 0.9 0.9 -85 -77 -0.2

TEE Land Small 0.09 0.42 0.21 0.17 0.03 1.2 1.1 153 135 0.3

Total Debt/

Equity

Net Debt/

Equity

(x) (x)

Average Sector 0.6 0.4

Average Large Cap 0.6 0.4

Average Mid Cap 0.7 0.5

Average Small Cap 1.1 0.9

*Large Cap denotes Market Cap > S$2.0bn, Mid-Cap Developers refer to those with market cap > S$0.5bn to less than S$2.0bn, Small Cap <S$0.5bn in market cap Source: Bloomberg Finance L.P., DBS Bank

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Industry Focus



Bond markets issuances have increased in recent years. With strong investor demand for yields in recent years amidst the low interest rate environment, we have seen an increase in new bond issuances in Singapore. In the real estate space, we saw close to S$34bn of new issues over the past five years, which is more than 20% of the total amount of new bond issuances over the preceding five years. In the real estate sector, bond issuances peaked in 2011, and again reached new highs in 2012 and 2015. In 2015, bond issuances totalled S$8.7bn across the real estate sector. We also note that mid-sized developers have also been tapping the bond markets in recent years. A total of S$3.5bn worth of bonds will be due in 2017. Average cost of funds has also been falling over time, hovering at about 3% since 2008.

S$3.4bn worth of bonds from developers due in 2017 that need to be refinanced. Continued access to funding is a key enabler to a healthy real estate development and investment market. However, recent bond defaults in the oil & gas space has resulted in heightened risk aversion among investors in bonds. In addition, the market for future bond issues appears to be shut for most aspiring issuers for now. If the current risk-off sentiment remains in the medium term, it might be a headwind for issuers in the real estate sector who need to refinance upcoming bond expires in 2017-2018 which total S$6.3bn, out of which S$4.0bn will be from real estate developers. We note that among the bonds due in 2017, developers like Guocoland and OUE will need to refinance expiring bonds. Developers such as OUE and Heeton’s existing cash balances and receivables may not be sufficient for repayment of bonds. Additional financing may be required in due time for bond repayments.

Figure 32: Bond issuances by developers peaked in

2015 Figure 33: Bonds Expiry profile



0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

S$'m

Total amount issued (S$m) Average cost of debt

2.9

1.1 1.2

3.6

0.7

2.6

1.40.9

6.00.8

1.5 1.3

1.3

2.1

1.2

1

0.9

3.2

2 0 1 7 2 0 1 8 2 0 1 9 2 0 2 0 2 0 2 1 2 0 2 2 2 0 2 3 2 0 2 4 > 2 0 2 4

S$'BN Developers REITs

Page 29

Industry Focus



Figure 34. Selected property developers’ outstanding bonds, 2017-2018 (S$m)

Issuer Maturity Amount Outstanding (S$'m)

SingHaiyi Group Ltd Jan-17 100

Fragrance Group Ltd Jan-17 85

OUE Ltd Feb-17 300

City Developments Ltd Feb-17 250

GLL IHT Pte Ltd (Guocoland) Feb-17 160

UOL Group Ltd May-17 75

Oxley Holdings Ltd May-17 150

Heeton Holdings Ltd Jun-17 60

CapitaLand Treasury Ltd Jul-17 50

GLL IHT Pte Ltd (Guocoland) Aug-17 170

Keppel Land Ltd Aug-17 100

GLL IHT Pte Ltd (Guocoland) Sep-17 105

Chip Eng Seng Corp Ltd Oct-17 150

TEE Land Ltd Oct-17 30

Hongkong Land Dec-17 50

City Developments Ltd Mar-18 100

Perennial Treasury Pte Ltd (Perennial) Mar-18 100

UOL Treasury Services Pte Ltd (UOL) Apr-18 175

Global Logistic Properties Ltd May-18 67

Centurion Corp Ltd Jul-18 65

Roxy-Pacific Holdings Ltd Jul-18 60

GLL IHT Pte Ltd (Guocoland) Sep-18 75

Citydev Nahdah Pte Ltd Sep-18 50

City Developments Ltd Sep-18 50

Perennial Real Estate Holdings Ltd Oct-18 300


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Industry Focus



5. Singapore REITs: Déjà vu

Key Assertions

Back to square one with REITs facing expectations of rising interest rates

Some buffer with yield spreads at average levels even after accounting for 3% 10-year bond yield

Combination of growth and/or large discount to book best positioned to ride out 2017

Large-cap picks: A-REIT, KREIT, MCT,

Mid-cap picks: CRT, FLT, KDCREIT

Negative 2016 outlook for S-REITs fails to materialise until towards later half of the year. At the end of 2015 after the first rate hike by the US Federal Reserve in December 2015, the market was pricing in three rate hikes. These expectations resulted in S-REITs correcting in January 2016. However, as the year progressed, the impact of (1) negative interest rates in Europe and Japan, (2) further correction in oil prices, (3) disappointing nonfarm payroll data in May, and (4) uncertainty caused by Brexit, caused expectations for rate hikes to be dialed back significantly. Consequently, the S-REIT index (excluding dividends) rallied by 11% till early September, outperforming the 0.4% rise in the STI and 2% fall in the property developers index. However, with an improving US economy causing interest expectations to rise, further accelerated by the victory by President-Elect Trump on 8 November 2016, the S-REIT index fell by 8%, underperforming the 0.4% and 0.3%% drop in both the STI and developers index. DBS more hawkish on interest rates means S-REITs performance to be capped. Going into 2017, consensus expectations are for three rate hikes with our DBS economists being more hawkish, forecasting the US Federal Reserve to increase the Fed Funds rate by 25bps once every quarter next with the US 10-year bond yield rising to 3.25% versus current spot rate of 2.3% and consensus forecasts of 2.5%. The Singapore 10-year bond yield is also expected to increase in tandem to 3.05%. Should our DBS house view come to fruition, we believe the performance of S-REITs will likely be capped. Deteriorating rental outlook for most real estate subsectors. Revenues across the office, retail, industrial and hospitality sectors were under pressure in 2016 due to a combination of sluggish demand as well as increase in physical completions and anticipated supply. Demand for the more cyclical sectors office, hotel and industrial sectors were also negatively

impacted by the uncertain economic environment. Meanwhile, the retail sector was affected by Singaporeans spending their disposable income overseas and shopping online. Going into 2017, we believe these negative trends are likely to continue, resulting in a modest 1.1% growth in DPU for the sector. Current forward yields offer some buffer with yield spread at average levels assuming a normalised 10-year yield of 3.0%. While S-REITs are likely to face headwinds in the form of falling rents and rising interest rates, we believe the recent correction has provided some downside buffer. The current FY17F yield spread to a normalised 3% bond yield stands at 4.0% which is slightly above the historical average spread of 3.8% and close to the 4.1% average since 2010. Full impact on DPU from rise in interest rates will not be felt immediately. While investors are rightfully concerned about the impact of an increase in interest rates on DPU, based on our analysis, the full impact will only be felt over the course of the next two to three years. This is because S-REITs in general have hedged 75-85% of their debt into fixed rates and have only 9%, 21% and 20% of total debt up for refinancing over 2017, 2018 and 2019 respectively. We estimate that a 1% rise in interest rates will have a 2.9% and 4.9% impact on distributions in 2017 and 2018 respectively. Sector preferences – (1) Office, (2) Retail, (3) Industrial, and (4) Hospitality. In terms of sectors, our preference is for the office REITs despite the expected decline in office rents given that the sector trades at 20% discount to book value and 10-30% discount to recent market transactions. In addition, we think the sector remains under-owned relative to other sectors. Our second preference is the retail sector for its resilient income stream (i.e. exposure to suburban necessity shopping malls) and the fact that it now trades close to 1x P/BV versus the sector’s typically 10-20% premium to book value. The industrial sector's third ranking is mainly attributed to our positive view on the larger REITs such as Ascendas REIT which offer a combination of strong balance sheets, decent yields and growth options. While we see long-term value in the hospitality sector given that the sectors trades at 20-40% discount to book, we believe there is limited re-rating catalyst at least for 1H17 as RevPAR is expected to remain under pressure. However, we recommend that investors look for opportunities to re-enter in 2H17 on the

Page 31

Industry Focus



back of a potential recovery in 2018 as the oversupply situation in Singapore normalises. Stocks with growth and/or trading at a discount to recent market transactions/book to outperform. With a challenging 2017 to come, we believe REITs with a clear and visible growth driver will do well. On that front in the large-cap space, Mapletree Commercial Trust (MCT) stands out given its DPU-accretive acquisition of Mapletree Business City Phase I which is under-rented as well as continued growth at its core asset Vivocity. We also believe the risk reward for Ascendas REIT (AREIT) is favorable given its exposure to the business park space which is supply constrained. Moreover, AREIT will be under geared balance sheet post conversion of the outstanding convertible bonds next year which will allow AREIT to further deepen its presence in Australia through acquisitions.

In the mid-cap space, Frasers Logistics and Industrial Trust (FLT) and Keppel DC REIT (KDCREIT), with inbuilt annual rental escalations and the ability to deploy their lowly geared balance sheets, offer visible growth in DPU. Growth in DPU is also evident at Croesus Retail Trust (CRT) which will benefit from favorable hedges, with additional upside should it be taken over. Finally, our top pick for stocks that trade at a discount relative to book and recent market transactions is Keppel REIT (KREIT). The implied value for KREIT’s Singapore portfolio on a per sqft basis stands at S$2,250 versus recent market transactions of S$2,700 and above, and it trades at 0.76x P/BV.

Figure 35: Price performance of Singapore REITs vs

Singapore Developers and STI Index Figure 36: S-REIT yields and yield spread chart



0.75

0.80

0.85

0.90

0.95

1.00

1.05

1.10

1.15

FSTREI (ex dividend) STI Index Developers

+12%

0%

2%

4%

6%

8%

10%

12%

14%Sector Yield spread

Sector Yield

MAS 10 Year

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Industry Focus



Key Issues in 2017 With a sense of déjà vu, as we approach 2017, we are faced with the similar issues confronting investors at the start of 2016 and 2015. These include risk of rising interest rates, slowing growth, higher cost of capital potentially constraining the ability to raise capital to fund growth plans, and heightened risk of write-downs of property values given falling rents. With economic outlook now softer than at the start of 2015 and 2016, we believe that S-REITs with stronger relative growth will command an increasing premium. In addition, S-REITs which offered resiliency in the past and trade at a premium but are now only able to offer flattish DPU growth might be vulnerable, given rising risks of earnings disappointment. Key themes in 2017 are as follows: 5.1 Impact of an increase in interest rates on

share price, distributions DBS economists project interest rates to rise faster than consensus. We believe investors’ attention is now focused on the pace of interest rates in 2017. Thus far, consensus is expecting three rate hikes with the US 10-year bond yield forecast to rise to 2.5-2.6%. With share prices for S-REITs having already corrected in anticipation of this outcome, we believe S-REITs will likely deliver steady returns. In contrast, the more hawkish forecasts by our DBS economists, who anticipate four rate hikes (25bps once a quarter), would take the Fed funds rate to 1.5% by end-2017, the US 10-year bond yield to 3.25% and the Singapore 10-year bond yield to 3.05%. Under our house view, the overall performance of S-REITs will likely to capped.

But expectations could be dialled back again. While the market remains focused on rate hikes, there is a possibility that 2016 could repeat again, with interest rate expectations being reduced. This could arise from the European Central Bank (ECB) and Bank of Japan’s (BOJ) decision to push interest rates further into negative territory and concerns over the potential breakup of the Euro on the back of victories by nationalist parties in several European elections next year. Furthermore, the policies actually implemented by President-elect Trump may not be as inflationary as first thought and/or concerns over impact on curtailment of global trade/economies weigh more on long-term bond yields.

Potential return of capital to the US a headwind (Figure 38). The SGD strengthened against the USD between 2009 and 2013, when the US Federal Reserve implemented three rounds of quantitative easing. During this period, the carry trade was prevalent with USD-based investors taking advantage of the stronger SGD by taking positions in yield instruments including S-REITs. This resulted in the FSTREI Index rallying c.44% to its peak in May 2013. However, with the end of the quantitative easing by the US Federal Reserve and the interest rate up cycle commencing from December 2015, the FSTREI Index has become more volatile, moving in sync with changes in interest rate expectations and movements in the USD. Going forward, should US interest rates continue on an aggressive path upwards, in line with our DBS economists view, capital from Asia would likely return back to the US, presenting a headwind to the performance of S-REITs.

Figure 37: DBS Interest Rates Forecasts Figure 38: Singapore REITs vs currency

Current (8 Dec'16) 1Q17F 2Q17F 3Q17F 4Q17F

US 10- Year Bond

2.35% 2.65% 2.85% 3.05% 3.25%

US 2-year bond

1.10% 1.50% 1.70% 1.90% 2.10%

US yield Curve

1.25% 1.15% 1.15% 1.15% 1.15%

SG 10 year bond

2.34% 2.65% 2.75% 2.85% 3.05%

SG 2-year bond

1.17% 1.50% 1.65% 1.80% 1.95%

SG Yield Curve

1.17% 1.15% 1.10% 1.05% 1.10%



1.00

1.10

1.20

1.30

1.40

1.50

1.60

1.70

1.80

-

200

400

600

800

1,000

1,200

FSTREI Index (LHS) USDSGD Rate (RHS)

WeakerSGD a

potential headwind

Period whenstrengtheningSGD a tailwind

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Industry Focus



Yield spread below historical averages assuming normalised 3.05% yield. The current FY17F yield spread to the spot 10-year bond yield stands at 4.7% which is above the historical average spread of 3.8% and 4.1% average since 2010. However, assuming a normalised 3.05% bond yield, the yield spread will drop to 4.0% which will be in line with its historical mean. This implies that current share prices have priced in rates inching back to normalised levels. Potential for yield spreads for REITs with growth to compress during rising interest rate environment. Assuming the long bond yield spikes to 3.05% by end-2017, share prices of S-

REITs in general may face some volatility. However, we believe S-REITs with clear visible growth drivers have the potential to experience a compression in yield spread, with absolute yields stable or even compressing. This would be similar to the experience during the last interest rate up-cycle. Using Capital Mall Trust (CMT) as an example, from 2004-2007, CMT’s yield spread fell from over 4% to 0.4% in mid-2007, while the US Federal Reserve raised the Fed Funds Rate from 1% to a peak of 5.25%, and CMT generated annual DPU growth in excess of 7%.

Figure 39: CMT experienced a compression in interest rates during an up-cycle in interest rates

Source: Bloomberg Finance L.P., Thomson Reuters, DBS Bank

Figure 40: Forward S-REIT yield spread at a new normal


0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

CMT yield spread (LHS) SG 10 year bond yield (LHS)

US Fed Funds Rate (LHS) y-o-y DPU growth (RHS)

Increase in interest rates

Fall in yieldspread

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%Sector Yield spread

+1 SD

-1 SD

-2 SD

+2 SD

Mean

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Industry Focus



Figure 41. Historical S-REIT yield and S-REIT yield spread (2005-current)

Period Years 10 Year bond (%)

S-REIT Yields (%)

S-REIT Yield Spreads (%)

Comments

2005 2.9% 4.8% 2.1% 2006-2008 was a period of high growth for the S-REITs where average distribution growth was c.13% over 2006-2008. Key catalysts were acquisitions

“High Growth” 2006 3.4% 5.0% 1.6%

2007 2.9% 4.1% 1.2%

“Aberration in valuations due to

the GFC”

2008 2.8% 7.3% 4.5% Yield spread expanded to >5.1% due to financial crisis 2009 2.3% 9.6% 7.3%

2010 2.4% 6.3% 3.9%

Post-global financial crisis period, the sector saw yield compression in 2012-2013 before the Fed hinted of rate hikes in mid-2013

“Liquidity driven recovery”

2011 2.2% 6.4% 4.2%

2012 1.5% 6.5% 5.0%

2013 2.0% 5.8% 3.8%

2014 2.4% 6.2% 3.8%

2015 2.4% 6.3% 3.9%

Periods

2005-cuurent 2.5% 6.2% 3.8%

2006-2008 3.0% 5.4% 2.4%

2010-current 2.1% 6.3% 4.1%

Forward

Current (FY17F) 2.3% 7.0 % 4.7%

Forward(FY17F) 3.0% 7.0% 4.0%

Source: Bloomberg Finance L.P. Finance L.P, DBS Bank

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Industry Focus



Figure 42. Implied share price based on average yield spread and normalised 3.05% 10-year bond yield

Avg Yield

Spread Avg Yield

Yield (+1SD)

Yield (-1SD)

Forward DPU (Scts)

Current Price (S$)

Current Forward

Yield

Implied Yield (Average

Yield Spread + 3.05%)

Implied Share Price

(S$)

Upside / downside from current share

price Office KREIT 4.1% 6.3% 7.2% 5.4% 6.5 1.020 6.1% 7.1% 0.92 -11% CCT 3.7% 5.8% 6.5% 5.1% 9.3 1.505 6.1% 6.7% 1.39 -9% OUECT 5.1% 7.4% 8.1% 6.7% 5.2 0.695 7.7% 8.1% 0.64 -7% FCOT 4.9% 7.0% 7.8% 6.2% 9.8 1.270 7.7% 7.9% 1.24 -2% Retail CRCT 4.6% 6.8% 7.4% 6.1% 10.5 1.385 7.6% 7.6% 1.38 -1% CMT 3.2% 5.3% 5.7% 4.9% 11.2 1.930 5.7% 6.2% 1.81 -7% CRT 7.1% 9.4% 10.1% 8.7% 7.5 0.850 9.0% 10.1% 0.74 -13% FCT 3.8% 5.3% 5.7% 4.9% 11.8 1.930 6.0% 6.8% 1.74 -11% SPH REIT 3.3% 5.6% 5.9% 5.3% 5.7 0.955 5.9% 6.3% 0.90 -7% Commercial MCT 3.8% 5.8% 6.4% 5.3% 8.7 1.415 6.0% 6.8% 1.28 -12% MAGIC 4.8% 7.1% 7.7% 6.4% 7.2 0.945 7.4% 7.8% 0.92 -3% SGREIT 4.4% 6.6% 7.1% 6.0% 5.2 0.755 6.9% 7.4% 0.70 -8% Suntec 4.2% 6.3% 7.3% 5.3% 10 1.650 5.9% 7.2% 1.39 -16% Hospitality ART 5.1% 7.2% 7.9% 6.5% 8.1 1.155 7.1% 8.1% 1.00 -14% ASCHT 5.4% 7.5% 8.4% 6.6% 5.5 0.700 7.9% 8.4% 0.65 -8% CDREIT 4.8% 6.9% 7.8% 6.0% 8.9 1.360 6.8% 7.8% 1.14 -17% FEHT 4.0% 6.2% 6.9% 5.5% 4 0.595 6.8% 7.0% 0.57 -5% FHT 5.2% 7.5% 7.8% 7.1% 5 0.645 9.6% 8.2% 0.61 -6% OUEHT 4.9% 7.2% 7.8% 6.5% 4.5 0.685 6.9% 7.9% 0.57 -16% Industrial AIMS 6.3% 8.5% 9.8% 7.1% 11.3 1.310 8.7% 9.3% 1.22 -7% a-itrust 4.7% 6.8% 7.4% 6.2% 5.9 1.010 5.6% 7.7% 0.77 -25% A-REIT 4.2% 6.3% 6.8% 5.9% 15.7 2.310 6.7% 7.2% 2.18 -7% Cache 5.9% 8.0% 8.9% 7.2% 7.5 0.815 9.2% 8.9% 0.84 3% CREIT 5.9% 8.0% 9.3% 6.8% 4.2 0.540 7.8% 8.9% 0.47 -14% FLT 5.0% 6.9% 7.2% 6.7% 6.6 0.940 7.2% 8.0% 0.83 -13% MINT 5.1% 7.2% 7.7% 6.7% 11.3 1.645 6.9% 8.1% 1.40 -15% MLT 5.0% 7.1% 8.2% 6.0% 7.2 1.020 7.1% 8.0% 0.90 -13% SBREIT 5.8% 8.1% 8.8% 7.5% 6.1 0.655 9.5% 8.8% 0.69 5% Healthcare P-Life 3.3% 5.4% 6.0% 4.9% 12.2 2.390 5.0% 6.3% 1.94 -19% Others IREIT 6.3% 8.6% 9.2% 7.9% 6.3 0.720 8.8% 9.3% 0.68 -6% KDCREIT 3.9% 6.1% 6.7% 5.5% 7.2 1.200 5.8% 6.5% 1.11 -10% MUST 4.9% 6.9% 7.2% 6.6% 6 0.835 7.3% 7.9% 0.80 -5%

Green boxes denote downside limited to <5% Source: Bloomberg Finance L.P., DBS Bank

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Industry Focus



Impact of interest rates on distributions

Still some breathing room as impact of interest rates will be felt over time. While interest rates are anticipated to rise next year, the majority of S-REITs have hedged 75-85% of their borrowings and with a weighted average debt maturity of 2-3 years. For FY17, on average about 9% of debt is due to be refinanced, thus the full impact from higher costs of borrowings will not be felt in 2017 but over the next few years. In addition, the impact from a rise in interest rates is likely to be felt by the REITs which predominantly borrow in SGD. In contrast, REITs with exposure to European, Japanese and Australia assets with commensurate debt in EUR, JPY and Australia, may even report declining or face a slower

increase in borrowing costs as they refinancing their debt. This is due to current interest rates in Europe, Japan and Australia being lower than when the REITS first borrowed in the respective local currencies. Assuming a 1% lift in the cost of borrowing above our current estimates (we have already assumed up to a 25-bp increase in cost of debt compared to FY16) and the impact only occurs when the various S-REITs refinance 9% and 21% of all loans outstanding in 2017 and 2018 respectively, as well as only impacting the current outstanding floating rate debt, we estimate up to 2.9% and 4.9% impact on FY17F and FY18F overall S-REIT DPU respectively.

Figure 43. Potential impact on DPU with 1% increase in interest rates

REIT Percentage Fixed

rate debt (%)

Percentage floating rate debt

(%)

Percentage of debt ue for refinancing

(%) Change in DPU

2017 2018 FY17F FY18F Ascendas Hospitality Trust 97 3 31 37 -2.8% -5.6% Ascendas India Trust 100 - 11 12 -0.6% -1.4% Ascendas REIT 78 22 6 22 -2.2% -3.8% Ascott Residence Trust 80 20 13 11 -4.9% -6.4% Cache Logistics Trust 64 36 14 43 -3.9% -7.2% Cambridge Industrial Trust 88 12 0 29 -1.1% -4.0% CapitaLand Commercial Trust* 80 20 5 16 -3.0% -4.7% CapitaLand Mall Trust* 90 10 7 16 -1.5% -2.9% CapitaLand Retail China Trust 53 47 43 10 -9.6% -10.7% CDL Hospitality Trust 60 40 0 35 -3.7% -6.6% Croesus Retail Trust 100 - 14 41 -1.8% -6.3% Far East Hospitality Trust 71 29 30 28 -6.6% -9.1% Frasers Centrepoint Trust 59 41 30 8 -4.8% -5.2% Frasers Commercial Trust 85 15 24 24 -3.7% -6.0% Frasers Hospitality Trust 86 14 14 15 -2.7% -4.0% Frasers Logistics & Industrial Trust 84 16 0 0 -0.9% -0.8% IREIT Global 88 12 12 0 -1.8% -1.8% Keppel REIT* 74 26 0 14 -4.0% -6.1% Keppel DC REIT 86 14 1 44 -0.6% -2.4% Manulife US REIT 100 - 0 0 0.0% 0.0% Mapletree Commercial Trust 74 26 2 2 -2.5% -2.6% Mapletree Greater China Commercial Trust

85 15 9 29 -2.8% -6.1%

Mapletree Industrial Trust 69 31 1 9 -3.3% -4.0% Mapletree Logistics Trust 81 19 1 15 -2.2% -3.8% OUE Commercial REIT 78 22 27 49 -9.1% -18.9% OUE Hospitality Trust 68 32 0 34 -3.4% -6.8% Parkway Life REIT 98 2 0 14 -0.2% -1.4% Soilbuild Business Space REIT 88 12 0 33 -0.9% -3.2% SPH REIT 86 14 0 38 -0.8% -3.0% Suntec REIT* 60 40 3 37 -5.0% -9.2% YTL Starhill Global REIT 96 4 35 28 -3.8% -6.2% Total S-REIT Debt 77 23 9 21 -2.9% -4.9%


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Industry Focus



S-REIT debt maturity profile

Figure 44. Debt Expiry Profile Figure 45. S-REIT debt by sector

Source: Bloomberg Finance LLP, DBS Bank


Figure 46. Debt maturity profile for individual S-REITs (%)

REIT Total Debt (S$bn) 2016 2017 2018 2019 2020 >2020 AIMS AMP Capital Industrial REIT 0.61 0% 0% 31% 40% 13% 16% Ascendas Hospitality Trust 0.54 4% 31% 37% 0% 28% 0% Ascendas India Trust 0.40 0% 11% 12% 21% 20% 36% Ascendas REIT 3.37 10% 6% 22% 15% 16% 31% Ascott Residence Trust 1.98 0% 13% 11% 8% 15% 53% Cache Logistics Trust 0.53 0% 14% 43% 34% 10% 0% Cambridge Industrial Trust 0.53 0% 0% 29% 19% 30% 21% CapitaLand Commercial Trust* 3.28 0% 5% 16% 21% 37% 20% CapitaLand Mall Trust* 3.84 0% 7% 16% 13% 12% 53% CapitaLand Retail China Trust 1.00 4% 43% 10% 18% 10% 15% CDL Hospitality Trust 0.93 0% 0% 35% 24% 20% 22% Croesus Retail Trust 0.78 0% 14% 41% 14% 17% 14% Far East Hospitality Trust 0.82 5% 30% 28% 12% 0% 24% First REIT 0.46 0% 31% 34% 26% 9% 0% Frasers Centrepoint Trust 0.73 0% 30% 8% 16% 10% 36% Frasers Commercial Trust 0.75 0% 24% 24% 28% 10% 13% Frasers Hospitality Trust 0.80 0% 14% 15% 70% 0% 0% Frasers Logistics Trust 0.52 0% 0% 0% 34% 32% 34% IREIT Global 0.30 0% 12% 0% 49% 39% 0% Keppel REIT* 3.32 0% 0% 14% 28% 23% 36% Kepple DC REIT 0.34 9% 1% 44% 38% 8% 0% Manulife US REIT 0.30 0% 0% 0% 36% 23% 41% Mapletree Commercial Trust 2.34 0% 2% 2% 12% 19% 65% Mapletree Greater China Commercial Trust 2.42 0% 9% 29% 16% 16% 30% Mapletree Industrial Trust 2.11 0% 1% 9% 26% 30% 34% Mapletree Logistics Trust 2.05 0% 1% 15% 16% 14% 54% OUE Commercial REIT 1.28 0% 27% 49% 22% 0% 2% OUE Hospitality Trust 0.86 0% 0% 34% 31% 34% 0% Parkway Life REIT 0.68 2% 0% 14% 31% 27% 27% Religare Health Trust 0.18 0% 5% 54% 35% 7% 0% Soilbuild Business Space REIT 0.47 0% 0% 33% 6% 39% 21% SPH REIT 0.85 0% 0% 38% 15% 33% 15% Suntec REIT* 2.99 0% 3% 37% 27% 10% 22% YTL Starhill Global REIT 1.14 1% 35% 28% 9% 15% 12% Total S-REIT Debt 44.37 1.1% 8.8% 21.3% 20.4% 18.6% 29.7%

Source: Various REITs, DBS Bank

1.1%

8.8%

21.3% 20.4%18.6%

29.7%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

2016 2017 2018 2019 2020 >2020

S$bnIndustrial

27%

Hospitality 13%

Office33%

Retail24%

Healthcare3%

Page 38

Industry Focus



5.2 Moderating DPU performance

Grinding out DPU growth in 2017. On the back of an increasingly uncertain economic environment, supply pressures across various property segments and an uptick in borrowing costs, delivery of DPU growth will increasingly become more challenging in 2017. Nevertheless, we still expect S-REITs in general to grind out a 1.1% y-o-y growth in DPU. This is marginally higher than 0.4% DPU growth in FY16, which was partially impacted by several rights issues, predominantly in the hospitality sector. The slightly higher growth in 2017 is also a function of a low-base effect from a fairly challenging 2016 This came from several industrial REITs facing lower rents on the renewal of master leases and/or loss of income from the conversions of single-tenanted buildings to multi-tenanted buildings.

Meanwhile, the slowdown for the retail sector is largely due to CMT and FCT being in a transition as they embark on the redevelopment of Funan and Northpoint respectively. For the office/commercial sector, DPU growth is expected to moderate on the back of the decline in office rents. However, the office/commercial sector provides the strongest DPU growth in 2017. This is largely due to stronger performances from CCT and MCT which will benefit from the full-year contribution from the acquisitions of CapitaGreen and Mapletree Business City respectively. Despite the headwinds in 2017, there are several REITS with attractive growth prospects next year. These include CCT, MCT, AIT, CRT, OUEHT and KDCREIT.

Figure 47: Office/Commercial REITs forecasted to

deliver strongest growth in DPUs Figure 48: DBSV forecasts vs consensus estimates



Figure 49: Selected S-REITs offer strong growth profiles

REIT Sector Sector Growth FY16-17F DPU growth

Growth driver

CCT Office 1.3% 3.7% Acquisition of 60% remaining interest in CapitaGreen

MCT Office/ Commercial 1.3% 2.5% Acquisition of Mapletree Business City

AIT Industrial 0.8% 8.1% New developments and acquisition of BlueRidge Phase II

CRT Retail (Japan) 1.1% 8.7% Improved SGD/JPY hedge rate

OUEHT Hospitality -1.3% 5.0% Acquisition of Crown Plaza Changi Airport Extension, opening of Michael Kors and Victoria Secret store and low-base effect

KDCREIT Data-centre (industrial) 0.8% 5.0% Acquisition of data centres in Milan and Singapore

MUST Office (USA) 1.3% 7.8% Improvement in US office market


0.4%

2.5%

1.2%

1.2%

0.0%

-6.7%

1.1%

1.3%

1.1%

0.5%

0.8%

-1.3%

-8.0% -6.0% -4.0% -2.0% 0.0% 2.0% 4.0%

S-REITs

Office/ Commercial

Retail

Singapore Retail

Industrial

Hospitality

FY17/18

FY16/171.1%

1.3%

1.1%

0.5%

0.8%

-1.3%

1.5%

-0.2%

2.3%

1.2%

2.5%

-0.7%

-2.0% -1.0% 0.0% 1.0% 2.0% 3.0%

S-REITs

Office/ Commercial

Retail

Singapore Retail

Industrial

Hospitality

Consensus

FY17/18

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Industry Focus



5.3 Potential risk to property values in the industrial and hospitality sectors

Capital values most resilient for office and retail sector. Cap rates have generally been compressing over the past few years due to low interest rates and ample liquidity boosting transactions velocity and value. Looking ahead, with projected decline in rents and RevPAR for the industrial and hotels in 2016, there is potential downside to the capital values for some industrial and hospitality REITs. While rents for the office and retail sector are under pressure near term, we expect capital values to remain steady, given abundant liquidity chasing both these asset classes. This can be seen by recent office transactions such as the sale of Asia Square Tower 1 and Straits Trading Building for approximately S$2,700 and S$3,500 per sqft respectively. In addition, the implied price for the Central Boulevard land tender made by IOI Properties was over S$3,000 per sqft.

For retail space, CityVibe at Clementi was sold at a net yield of slightly above 4% while vendors for Jurong Point is seeking to sell the mall for over S$2bn at a sub-4% net yield. The values ascribed to these transactions are in line or above the valuations of the properties of the various office and retail REITs.

Figure 50: Implied price per sqft of NLA for Singapore

portfolio on completed basis

REIT Price (S$)

Total attributable SG

NLA (m sqft)

Implied psf (S$)

CCT 1.505 3.1 1,850 KREIT 1.020 2.6 2,250 OUECT 0.695 1.0 2,320 Suntec 1.650 2.4 2,050

*Calculated as EV less value of non Grade A office properties divided by attributed property

Figure 51: Recent office transactions

Date Property Location Land tenure Net Lettable Area (sq ft)

Price ($) Price per NLA (S$)

Aug-14 Equity Plaza Raffles Place 74 years remaining 252,135 550,000,000 2,181

Jul-14 Anson House Tanjong Pagar Area

82 years remaining 76,362 172,000,000 2,252

Sep-14 MBFC Tower 3 Marina Bay 92 447,327 1,248,000,000 2,790

Jan-15 AXA Tower Tanjong Pagar 66.5 remaining (2015) 675,000 1,170,000,000 1,733

Jun-15 One Raffles Place Raffles Place 99/FH 600,000 1,429,166,667 2,382

Nov-15 CPF Building 79 Robinson Road 99 LH (2067) 324,000 550,000,000 1,698

May-16 Remaining 60% interest in CapitaGreen

Raffles Place 57 remaining expiring 31Mar2073

703,122 1,600,500,000* 2,276 (2,700 assuming 99 year leasehold)

May-16 Straits Trading Building 9 Battery Road 999 LH 158,897 560,000,000 3,524

Jun-16 Asia Square Tower 1 Marina Bay 99 LH from 2007 1,200,000 sqft office & 40,000 sqft retail

3,400,000,000 2,668

*Based on 100% equity interest Source: Various press reports, DBS Bank

Page 40

Industry Focus



Figure 52: Cap rates for office Remarks


Transaction cap rates have compressed

down to low-3.0% level as demand for

quality offices remain high due to

foreign investors willing to price in a

recovery of the sector in the medium

term.

More transactions in the pipeline could

mean that cap rates in the interim will

likely remain stable.

Figure 53: Cap rates for retail sector Remarks


Cap rates have also been compressing

over time and is now close to 70bps

below the peak of 6.1% back in 2009.

Transactions in the retail sector is mainly

driven by related party deals – Sponsors

divesting the malls to their REITs.

Cap rates expected to remain steady or

even compress depending on the

potential sale of Jurong Point Mall in

2017.

Figure 54: Cap rates for industrial sector Remarks


Cap rates for factory and warehouse

space have compressed over time to a

peak back in 2013. Since then, it has

expanded slightly but remained fairly

stable since.

Any downside to valuations are likely

due to unforeseen increase in vacancy

rates from property conversions (single-

user to multi-user) properties.

3.9%

4.1%

3.6% 3.8%3.6%

3.3%

3.0%

3.2%

3.4%

3.6%

3.8%

4.0%

4.2%

Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16

(%)

5.7%

5.4%

6.1%

5.8%

5.4%

5.7%

5.3%

4.8%

5.0%

5.2%

5.4%

5.6%

5.8%

6.0%

6.2%

6.4%

Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16

(%)

7.5%

6.5%

7.1%

6.9%

7.3%

6.4%

6.8%6.7%

6.0%

6.2%

6.4%

6.6%

6.8%

7.0%

7.2%

7.4%

7.6%

Mar-2009 Mar-2010 Mar-2011 Mar-2012 Mar-2013 Mar-2014 Mar-2015 Mar-2016

(%)

Factory

Warehouse

Page 41

Industry Focus



5.4 Acquisitions may be difficult to execute with redevelopments an attractive option

Slowdown in acquisitions in 2016.At the end of 2015, we expected the high cost of equity to potentially constrain the ability of S-REITs to raise equity to fund acquisitions. This partially came to fruition with total announced acquisitions dropping 16% y-o-y to S$6.2bn. The most active sectors were the Industrial (S$3.0bn), followed by Office/Commercial (S$1.9bn) and Hospitality (S$0.8bn). Notable transactions include MCT’s purchase of Mapletree Business City Phase I (S$1.8bn), CCT’s acquisition of the remaining 60% interest in CapitaGreen (S$1.6bn) and CRCT’s purchase of Galleria Mall (S$0.3bn). In terms of country allocation, Singapore returned as the primary market (66% of total acquisitions worth S$3.8bn) for acquisitions. This was mainly driven by the purchase of Mapletree Business City Phase I and 60% interest in CapitaGreen. Australia remains a popular destination with total

acquisitions worth S$861m as industrial REITs such as AREIT, FLT and MLT sought freehold properties with annual rental escalations. Suntec and FHT also bought a 25% interest in Southgate, Melbourne (S$289m) and Novotel Melbourne (S$246m) respectively. In 2016, the S-REIT sector made its maiden acquisition in Italy with KDCREIT’s purchase of a data centre in Milan. S-REITs increased the number of assets sold from S$306m in 2015 to S$555m in 2016 as AREIT exited China and redeployed its capital to Australia, while RHT sold its 51% economic interest in its Gurgaon property given the inability of the trust to obtain the necessary regulatory approval to buy a direct 51% equity interest in the hospital. Meanwhile, the share of properties acquired from the S-REITs' sponsors jumped to 72% in 2016 from 49% in 2015 as MCT and CCT bought from their respective sponsors. Stripping out these two transactions, the majority of acquisitions were made from third parties.

Figure 55: Acquisition value marginally down Figure 56: Acquisitions were mainly Singapore-centric

Source: Various S-REITs, DBS Bank Figure 57: Industrial REITs remain most active Figure 58: Sponsor remains key source of acquisitions

in 2016


32%51% 57% 49%

72%

68%49% 43% 51%

28%

0%10%20%30%40%50%60%70%80%90%

100%

2012 2013 2014 2015 2016

Sponsor/Strategic partner 3rd party

36%

6%3%

38%

3% 14%

2015

Singapore

China

Japan

Australia

Indonesia

Others

66%5%

2%

15%

3%8%

2016

Singapore

China

Japan

Australia

Indonesia

Others0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2012 2013 2014 2015 2016

S$'m

Others

Indonesia

Australia

Japan

China

Singapore

0 2,000 4,000 6,000 8,000

Office/Commercial

Retail

Industrial

Hospitality

Healthcare

Total

2016

2015

2014

2013

2012S$m

Page 42

Industry Focus



Figure 59: Announced acquisitions by S-REITs in 2016

REIT Property Country Sector Value (S$m)

Vendor

LMRT Lippo Mall Kuta Indonesia Retail 81.6 Sponsor Related LMRT Lippo Plaza Jogja Indonesia Retail 51.0 Sponsor Related FIRT Siloam Hospitals Yogyakarta Indonesia Healthcare 40.8 Sponsor Related ART Sheraton Tribeca New York Hotel US Hospitality 218.0 3rd Party AIT Building at CyberVale, Chennai India Industrial 13.2 3rd Party P-Life Silver Heights Hitsujigaoka Ichiban-kan & Niban-kan Japan Healthcare 13.6 3rd Party CRT Fuji Grand Natalie Japan Retail 40.2 3rd Party FHT Maritim Hotel Dresden, Germany Germany Hospitality 90.4 3rd Party CRT Mallage Saga and Feeeal Asahikawa Japan Retail 74.5 3rd Party CCT Remaining 60% interest in CapitaGreen Singapore Office 960.0 Sponsor Related MLT Four dry warehouse facilities located in Sydney, NSW, Australia Australia Industrial 84.4 3rd Party MLT Mapletree Shah Alam Logistics Park Malaysia Industrial 53.2 Sponsor Related SBREIT Bukit Batok Connection Singapore Industrial 96.3 Sponsor Related MCT Mapletree Business City (Phase 1) Singapore Industrial/Office 1,780.0 Sponsor Related OUEHT Crowne Plaza Extension Singapore Hospitality 205.0 Sponsor Related Suntec Southgate Complex Australia Office/Retail 289.0 3rd Party KDCREIT Data Centre in Milan, Italy Italy Industrial 57.3 3rd Party CRCT Galleria China Retail 304.9 3rd Party FLT 111 Indian Drive, Keysborough, Melbourne & Lot 1 Pearson

Road, Yatala, Brisbane (Call option properties) Australia Industrial 71.2 Sponsor Related

FHT Novotel Melbourne on Collins, Australia Australia Hospitality 245.9 3rd Party AREIT 197-201 Coward Street, Sydney & Stage 4, Power Park Estate,

Dandenong South, Melbourne Australia Industrial 170.8 3rd Party

MLT Mapletree Logistics Park Phase 2, Vietnam Vietnam Industrial 20.6 Sponsor Related KDCREIT Keppel DC Singapore 3 Singapore Industrial 141.0 Sponsor Related FIRT Siloam Hospitals Labuan Bajo Indonesia Healthcare 20.0 Sponsor Related AREIT 2 Science Park Properties Singapore Business Park 420.0 Sponsor Related MLT 4 warehouses in Australia Australia Industrial 151.9 3rd Party Total 5,696 Industrial 3,162 Retail 393 Office 1,277 Hospitality 551 Healthcare 313


Figure 60: Announced disposals by S-REITs in 2016

REIT Property Country Sector Value (S$m) Buyer RHT 51% economic interest in Gurgaon Clinical Establishment and

Shalimar Bagh Clinical Establishment India Healthcare 299.8 Sponsor Related

CIT 23 Tuas Avenue 10 & 2 Ubi View Singapore Industrial 27.0 3rd Party AREIT A-REIT City @ Jingqiao China Industrial 228.1 3rd Party FIRT Siloam Hospitals Surabaya - Plot A and existing hospital Indonesia Healthcare 35.7 Sponsor Related ART Salcedo Residences Philippines Hospitality 7.2 3rd Party Cache Changi Districentre 3 Singapore Industrial 25.5 3rd Party PREIT 4 Nursing Homes Japan Healthcare 48.9 3rd Party

Source: Various REITs, DBS Bank More redevelopments to potentially occur. Given depressed share prices causing difficulty in raising equity to fund acquisitions and potential investor reluctance to gear up

balance sheets in a rising interest rate environment, we believe the pace of acquisitions may slow further in 2017.

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Industry Focus



Nevertheless, redevelopments may come to fore especially with the increase in the development limit from 10% previously to 25%. To date, we have seen CMT redevelop Funan and CCT announce plans to building a Grade A office building at its

existing Golden Shoe property. For 2017, we anticipate that CRT will announce plans to maximise its One’s Mall and Torius property, while FCOT may redevelop Alexandra Technopark should the anchor tenant HP move out.

Figure 61: S-REITs' gearing headroom and sponsor pipeline

REIT Gearing end FY16/17F*

Headroom 40%

Sponsor Potential Pipeline Remarks

Office CCT 38% 316 CapitaLand Remaining stake in

CapitaGreen Contingent on performance of CapitaGreen

FCOT 36% 137 Frasers Centrepoint Land

Valley Point/Alexandra Point/Cecil Street Office property/Australand properties

High likelihood for Australand's properties though subject to FCOT share price

KREIT 39% 141 Keppel Land N/A Limited near-term pipeline from sponsor OUECT 38% 91 OUE Limited OUE Downtown Potential in 2017-2018 Retail CRCT 36% 180 CapitaLand Malls in China Subject to valuation and malls being

stabilised CMT 35% 831 CapitaLand Westgate, Star Vista,

Bedok Mall, Ion Orchard

Possible acquisition of Westgate

CRT 45% n/a Croesus Group, Daiwa House, Marubeni

Mallage Saga, China properties

No immediate plans to purchase Chinese properties

FCT 28% 423 Frasers Centrepoint Limited

Waterway Point, Northpoint City

Pipeline assets under construction

SPH REIT 26% 798 SPH Seletar Mall Seletar Mall yet to be stabilised as it only opened in Dec-14

Commercial MCT 37% 344 Mapletree

Investments Mapletree Business City (MBC) 1&2

MBC 2 under construction

MAGIC 39% 70 Mapletree Investments

Kowloon East Office Kowloon East Office under construction, MAGIC looking at opportunities in China

SGREIT 35% 277 YTL Corporation

- Focused on existing assets at the moment

Suntec 38% 304 Cheung Kong / ARA

- No acquisitions expected


Page 44

Industry Focus



Figure 62: S-REITs' gearing headroom and sponsor pipeline (cont’d)

REIT Gearing end FY16/17F

Headroom 40%

Sponsor Potential Pipeline Remarks

Industrial a-itrust 36% 78 Ascendas Group Other Ascendas Group

Indian properties Subject to share price performance and stabilisation of INR

A-REIT 34% 921 Ascendas Group Industrial assets Acquisitions likely to be from sponsor (business park properties in Singapore)

Cache 41% n/a CWT/ARA Ramp up warehouses from CWT

Unlikely to acquire from sponsor

CREIT 38% 56 N/A Exploring opportunities in Australia, Japan and Malaysia

MINT 30% 612 Mapletree Group Tai Seng development Under development and not likely to be acquired in the near term

MLT 37% 223 Mapletree Group Properties in Hong Kong, China

High likelihood of M&A to supplement growth, given headwinds in Singapore

SBREIT 33% 152 Soilbuild Group Holdings

Various industrial properties

Hospitality ASCHT 33% 196 Ascendas

Group/Accor Asia Pacific properties Potential disposal of Pullman

Cairns to provide additional financial flexibility

ART 41% n/a Ascott Group Serviced apartments in Europe, Quest apartments in Australia

Subject to ability to recycle capital and raise equity

CDREIT 36% 176 City Developments St Regis, South Beach project

Lower gearing provides firepower for acquisitions

FEHT 33% 303 Far East Organisation 7 hotels & serviced residences

Assets not ready to be injected

FHT 34% 46 Frasers Centrepoint Limited and TCC Group

17 hotels and serviced residences

Subject to ability to raise equity

OUEHT 38% 92 OUE Limited OUE Downtown serviced apartments

Limited, given proposed acquisition of Crowne Plaza Changi and extension

Healthcare P-Life 38% 66 IHH Hospitals in the region

including Novena Mt Elizabeth

Others KDCREIT 29% 300 Keppel T&T T27 Asset not stabilised yet IREIT 42% n/a Stella Holdings,

Shanghai Summit, Mr Lim Chap Huat

Low likelihood, given current share price


Page 45

Industry Focus



Figure 63: S-REITs with development potential and/or asset recycling potential REIT Assets with redevelopment potential Potential asset recycling opportunity

Office CCT Golden Shoe n/a FCOT Alexandra Techno Park if HP/Microsoft moves out n/a KREIT n/a n/a OUECT n/a n/a

Retail CRCT n/a n/aCMT Funan n/aCRT One’s Mall and Torius Mall n/aFCT Integration with Northpoint extension n/aSPH REIT n/a n/a

Commercial MCT n/a n/aMAGIC n/a n/aSGREIT n/a n/aSuntec Park Mall n/a

Industrial a-itrust n/a n/aA-REIT Selected properties with unutilised GFA Older properties with limited medium upside Cache n/a n/aCREIT Selected properties with unutilised GFA Older properties with limited medium upside MINT Selected properties with unutilised GFA Older properties with limited medium upside MLT Selected properties with unutilised GFA Older properties with limited medium upside SBREIT Selected properties with unutilised GFA n/a

Hospitality ASCHT n/a

ART n/a Rental properties in Japan / Assets in lower-tier cities in Europe CDREIT n/a n/aFEHT n/a n/aFHT n/a n/aOUEHT n/a n/a

Healthcare P-Life n/a n/aRHT n/a n/a

Other KDCREIT n/a n/a IREIT n/a n/a


Page 46

Industry Focus



6. Residential Subsector Outlook: Luxury home prices to bottom out

Key Assertions

Luxury residential home prices (CCR) to bottom out on the back of improved transaction velocity & foreigner buying interest.

Suburban home prices (OCR) to see up to a 3%-5% further drop in prices impacted by higher mortgage rates and market vacancy rates.

Government could relax policy given uncertain macro-outlook and pace of interest rate rise.

Prices for luxury residential homes to further stabilise come 2017; downside for home prices in the suburbs. We believe that the property market may have stabilised at these low levels in the near term with further downside risk likely to come only from a deterioration of the economic outlook for Singapore. The bright spots are that luxury and central market segments have likely bottomed out, while we expect up to a further 5% drop for property prices in the Outside Central Region (OCR).

We believe the stabilisation of the market could be led by the following:

1. PPI has declined 11.4% from the peak in September 2013 (with the inclusion of net prices in 3Q), inching closer to the government’s trigger point for intervention at c.13% decline from the peak based on historical incidences. Potential relaxation of government policies which will be supportive of prices.

2. At these price levels, sales volume has improved (+9.8% in 9M16) largely led by executive condominium (EC) and secondary sales which may moderate further decline in property prices.

3. Vacancy rate remains high with continued pressure on rental rates.

4. While the 3Q16’s economic data were worse than expected, coupled with unemployment concerns, our economist believes that the downside risk is beginning to moderate (DBS Economics: Singapore: down but not out).

Figure 64: Residential Market Summary

Key Indicators % Chg 1Q16 2Q16 3Q16 Price Index -1.5% 140.6 140.0 137.9

Rental Index -1.2% 107.5 106.9 105.6

Transactions* -12.2% 1,419 2,256 1,981

Pipeline of supply -7.5% 53,512 47,250 43,693

Vacancy rate -0.2% points 7.5% 8.9% 8.7%

*Excludes Executive condominiums Source: URA

Page 47

Industry Focus



6.1 Trends, demand & supply Outlook

Price Trends

3Q16 Property Price Index saw the sharpest drop partly due to the inclusion of net prices of de-licensed projects (Chart 1). Private property prices saw the largest q-o-q decline of 1.5% in 3Q16 since the streak of falling prices following the September 2013 peak. This was partly due to the inclusion of net prices of de-licensed projects for the first time which does not present a ‘clean’ q-o-q price movement for this quarter. The landed private property price index (PPI landed) recorded the largest decline of 6.9% y-o-y and a 2.3% q-o-q decrease in 3Q16. The PPI has declined 11.4% since peaking in September 2013 with landed PPI and non-landed PPI dropping by 15.9% and 9.8% respectively.

PPI has fallen 11.4% from September 2013 peak (Chart 1). Following the new inclusion, PPI has declined 11.4% from the peak in September 2013 with landed properties recording the largest decline of 15.9%, followed by RCR (-11.0%) and CCR (10.6%). Based on the past two incidences (AFC in 1998 and dot com collapse in 2000), the government has been seen to intervene when property prices fell c.13% from the peak. If history is a good indicator, the quantum of the decline is inching closer to the government’s trigger point.

Central region bottoming out (Chart 1). Property prices fell in all three regions in Singapore partially due to the inclusion of net prices with Core Central Region (CCR) recording the highest decline at 1.9% q-o-q. Property prices in Rest of Central Region (RCR) and Outside Central Region (OCR) each recorded a 1% decline q-o-q. With the inclusion of net prices, property prices in CCR and RCR recorded 10.6% and 11.0% declines from their peaks. OCR, which previously held up better than the central region, is now inching closer at 9.8%. Nevertheless, we believe the central region is bottoming out as previously, property prices in the central region saw two consecutive quarters of marginal increase in PPI of 0.3% q-o-q in the CCR in both 1Q16 and 2Q16, while RCR saw three consecutive quarters of flat-to-marginal increase of 0.2% q-o-q (2Q16: +0.2% q-o-q).

Transactions

Total transactions inch up as secondary volumes lead the way (Charts 2 and 3). Total residential transactions rose by 11% y-o-y and 1% q-o-q to 4,596 units. This was mainly due to a rise in resale transactions of 53% y-o-y to 2,615 units while executive condominiums saw a 15% increase to 1,398 units. Primary sales volumes (excluding EC) fell 18% after four quarters of improved y-o-y transactions.

Higher 9M16 transactions lead by EC and secondary sales. Total residential transactions rose by 9.8% y-o-y to 12,000 units led by a 65% increase in EC sales and a 25% increase in secondary sales. Primary sales volumes fell 3.1%. We believe that signs of transactions returning to the market albeit from a lower base, implies that after a close to 10% drop in price index, buyers are seeing value in the current market.

Supply

Supply completion to start moderating from 2017 onwards. The cut in the number of sites available for tender in the government land sales programme and lack of collective sales in recent years mean that supply growth will peak in 2016 at 51,210 units (25,000 public housing units, 21,650 private units and 4,560 ECs) and moderate from 2017 onwards. The total supply under construction stands at 155,750 units (88,000 public housing units, 53,150 private units and 14,600 ECs). Given the declining completion outlook, we believe that the oversupply situation in the residential market will also start to improve and normalise over the coming years. We expect vacancy rates to inch up from 8.9% as of 2Q16 to 9-10% over 2016-2017 before reversing.

Page 48

Industry Focus



Rentals

Increased supply and weak employment outlook to result in further pressure on rental yields. The 3Q16 residential rental index fell 1.2% q-o-q led by non-landed residential homes rental (-1.4%) while rental for landed homes was flat. The residential rental index (non-landed) for residential homes (non-landed) declined by 1.4% compared to a quarter ago and is now more than 10.7% down from its 3Q13 peak. The q-o-q fall is evenly spread across the various parts of the island, with rental for residential homes in OCR leading the decline at 2.4% followed by CCR's -1.4% and RCR's -0.6%.

Vacancy rates improved marginally by 0.2ppt to 8.7% as at end of 3Q16, still above the historical average of 6.6%. The weakness in rental can be attributed to the ramp-up in supply completions in recent years. Despite the marginal improvement, we continue to expect vacancy to rise and further downward pressure for rents but at a more muted rate.

The uncertainty in the employment outlook, and the ongoing job rationalisation at financial institutions and tighter regulations impacting expatriates’ employment in Singapore may add pressure on demand for some homes, especially those in the CCR.

Figure 65: Residential Price Indices – Gradual decline in prices

Period All-Residential

Index

Landed

Index

Non-Landed Non-Landed Index HDB

Index Core Central Region

Rest of Central Region

Outside Central Region

3Q13 0.4% 0.3% 0.6% -0.3% -0.9% 2.2% -0.9% 4Q13 -0.9% -1.0% -0.9% -2.1% 0.4% -0.9% -1.6% 1Q14 -1.2% -0.7% -1.3% -1.0% -3.3% -0.1% -1.6% 2Q14 -1.1% -1.7% -0.8% -1.5% -0.3% -0.9% -1.4% 3Q14 -0.7% -1.8% -0.4% -0.8% -0.4% -0.4% -1.7% 4Q14 -1.1% -1.3% -1.0% -0.9% -1.3% -0.8% -1.5% 1Q15 -1.0% -0.9% -1.1% -0.4% -1.7% -1.1% -1.0% 2Q15 -0.9% -1.0% -0.8% -0.6% -0.6% -1.1% -0.4% 3Q15 -1.3% -0.4% -1.5% -1.2% -2.2% -1.6% -0.3% 4Q15 -0.5% -1.8% -0.2% -0.3% 0.2% 0.0% 0.1% 1Q16 -0.7% -1.1% -0.6% 0.3% 0.0% -1.3% -0.1% 2Q16 -0.4% -1.9% -0.1% 0.3% 0.2% -0.5% 0.0% 3Q16 -1.5% -2.3% -1.2% -1.9% -1.0% -1.0% 0.0% %yoy Chg (3Q16) -3.1% -6.9% -2.0% -1.6% -0.6% -2.8% 0.1%

% Chg (Peak) -11.4% -15.9% -9.8% -10.6% -11.0% -9.8% -9.4%

3Q16 (index) 137.9 152.4 134.9 126.9 139.2 154.9 134.7

Source: URA, HDB, DBS Bank

Page 49

Industry Focus



Charts on Property Transactions

Figure 66: Developers' Sales by Type Remarks

We note that given increased transactions in recent months, there has been an increase in sales launches.

Developers sold 73% of total new units launched in 3Q16, an improved q-o-q take-up rate led by new launches.


Figure 67: Developers' Sales by Type Remarks

3Q16 was one of the more active quarters in recent years.

Resale Transactions (Secondary Market) contributed close to 57% of total transactions in 3Q16, one of the highest since 2013.


0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

‐

1,000

2,000

3,000

4,000

5,000

6,000

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16

Units

Private Residential Units Launched (uncompleted)Total Direct Sales (Uncompleted)

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000


UnitsSecondary Market (Private)

Primary Sales (Private)

Executive Condominiums

Page 50

Industry Focus



Figure 68: Developers' Sales by Region Remarks

Transactions in the Rest of Central Region (RCR) and Core Central Region (CCR) contributed 27% and 17% of total transactions respectively in 3Q16.


Charts on Residential Supply Outlook

Figure 69: Supply of new residential units by expected year of completion Remarks

Close to 29,000 units were completed in 1H16.

Looking ahead, we are looking at a more modest rate of increase in new units completing, due to fewer units available for sale as a result of the cuts in land for tenders from the government's land sale program.

Public housing supply remains fairly constant at close to 19,000-25,000 new units completing each year.

Source: MND, DBS Bank

-

10,000

20,000

30,000

40,000

50,000

60,000

2H16 2017 2018 2019

Units

Competed Private Residential Executive Condo Public Housing

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000


units

CCR RCR OCR

Page 51

Industry Focus



Charts on Residential Rents

Figure 70: Rental index has been weakening since 4Q13, in line with property prices

Remarks

The residential rental index remains in decline, dropping further by 1.2% in 3Q16.

Given the positive correlation between rental and prices, we expect prices to continue moderating as rentals weaken further.

`Source: URA, HDB, DBS Bank

Figure 71: Rental index remains weak on high vacancy rates Remarks

With expectations that the residential vacancy rate will continue to inch up towards the 8-10% level from the current 8.7%, we expect rentals to remain weak.


60.0

70.0

80.0

90.0

100.0

110.0

120.0

130.0

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

Jun-0

4D

ec-0

4Ju

n-0

5D

ec-0

5Ju

n-0

6D

ec-0

6Ju

n-0

7D

ec-0

7Ju

n-0

8D

ec-0

8Ju

n-0

9D

ec-0

9Ju

n-1

0D

ec-1

0Ju

n-1

1D

ec-1

1Ju

n-1

2D

ec-1

2Ju

n-1

3D

ec-1

3Ju

n-1

4D

ec-1

4Ju

n-1

5D

ec-1

5Ju

n-1

64Q

16

Index Value(%)

Vacancy Rate (Non-Landed) (LHS) Rental Index (Non-Landed) (RHS)

-

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

-10%

-5%

0%

5%

10%

15% Index Value% Chg

Q0Q Chg in Rental Index PPI Index

Page 52

Industry Focus



6.2 Scenarios where government could relax policy measures

Government to tinker only if “material stress” is seen in the system. The Singapore property prices have been in a controlled and modest decline of approximately c.5% per annum from the peak of 3Q13. With prices now fallen by 11% from the peak in 3Q13 and we expect the market to remain on a downside bias in 2017. The government’s key focus is still the overall health of the Singapore’s economy and its intertwining relationship with property prices. With property forming close to 45% of total household wealth as of 3Q16, it is not in the government’s interest to have a rapidly declining property market. Emerging risk in the horizon stemming from increased volatility in interest rates, coupled with a weak rental outlook due to heightened supply completion outlook, will likely warrant the government to consider tweaking its macro prudential policies. What are potential scenarios or datapoints that could lead to a policy easing? A marked drop in prices in a quarter or a peak-to-trough price drop of 13-15% might point to a first round of policy unwinding. If history is a good indicator, the current PPI, having fallen close to 11% from the peak, is inching closer to the government’s trigger point of c.13%. Historically (during the Asian Financial Crisis (AFC) in 1998 and the dot com collapse in 2000), the government has been seen to intervene when property prices fell c.13% from the peak over a period of approximately one year. Current mortgage-to-household income ratio stands at 1.5x (mortgage-to-household income ratio ranged from 1.4-1.9x from 1997-2014). The government’s initial responses were: 1) suspend the seller stamp duty during the AFC; and 2) tax exemptions (capital

gains tax and property tax for land under development) were given and the government opened the market to foreigners again by allowing them to obtain loans in SGD during the dot com collapse. However, we believe the scenarios that may warrant a re-look at policies will be a marked drop in prices in a certain quarter or a potential tweak in certain policies on a selective basis. On that front, we believe that “cyclical measures” such as the buyer stamp duties/seller stamp duties which have been effective in curbing speculative demand, could be re-looked if transaction volumes continue to remain tepid over 2017. Singapore citizen unemployment rate rising towards 4.0%. The uncertain employment outlook in Singapore might be a dampener for prospects for price increases in 2017. As of 3Q16, it was reported that unemployment rate among Singapore citizens rose by 0.6ppt to 3.0% as of June 2016 but has held steady (fallen marginally to 2.9% as of September 2016) since. While not sounding any alarm bells at this point, we caution that prices tend to weaken in the event that unemployment rate rises to 4.0% and above (figure 74). DBS economist believes that the unemployment outlook is likely to remain fairly stable at the 3.0% level and not expected to deteriorate in a big way. Sharp increase in interest rates. The recent spike in SIBOR rates, which a majority of home loans is a risk for prices in our view given that it will a rise in mortgage payments going forward. The pace of increase in base rates are likely to be closely watched by the government in order to avoid an unwarranted fallout in property prices which might pose a risk to an already weak economic outlook.

Figure 72: Summary of possible Scenarios that could warrant a potential policy action

Scenario Description Potential Impact on property market What has history taught us? 1. A peak-to-trough fall

in property price of 13-15%.

Usually accompanied with a weakening GDP outlook, this will dampen homebuyer sentiment as the “loss of wealth” effect on home-owners could cascade to a downward spiral in prices.

Government had back in 1998 and 2000 intervened when property price dropped 13% from the peak.

2. Unemployment Rate rising towards 4.0%.

Given the high ownership rate of c.91%, an increase in unemployment will impact on households’ ability to maintain mortgage payments.

A rise in unemployment rate to close to 4.0% and beyond typically results in a fall in property prices.

3. Sharp increase in interest rates.

Impact on affordability as a larger portion of disposable income is channelled to mortgage repayments.

No real correlation historically but likely be one of the key reasons of assessing household affordability.


Page 53

Industry Focus



Figure 73: Measures that government tweaked during previous fall in the Singapore Property Price Index

Blue denotes relaxation measures Source: URA, HDB, DBS Bank Figure 74: Unemployment spikes to close to 4% typically result in a slide in property prices


Figure 75: Sensitivity of interest rates to mortgage payments

Monthly Mortgage Payments** Typical Property Type

Price S$’000

Loan S$’000* 2.0% 3.0% 4.0% 5.0%

HDB BTO 500 400 $1,695 $1,897 $2,111 $2,338 Resale 600 480 $2,035 $2,276 $2,534 $2,806 Resale/EC 800 640 $2,713 $3,035 $3,378 $3,741 EC / Private 1,000 800 $3,391 $3,794 $4,223 $4,677 Private 1,250 1,000 $4,239 $4,742 $5,278 $5,846 Private 1,500 1,200 $5,086 $5,691 $6,334 $7,015 Private 1,750 1,400 $5,934 $6,639 $7,390 $8,184 Private 2,000 1,600 $6,782 $7,587 $8,445 $9,353

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%Mar-92 Mar-94 Mar-96 Mar-98 Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16

0

20

40

60

80

100

120

140

160

180

(%) Index Value

Property Price Index

Unemployment Rate (Inverse)

‐

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

Mar‐9

5

Dec‐9

5

Sep‐9

6

Jun‐97

Mar‐9

8

Dec‐9

8

Sep‐9

9

Jun‐00

Mar‐0

1

Dec‐0

1

Sep‐0

2

Jun‐03

Mar‐0

4

Dec‐0

4

Sep‐0

5

Jun‐06

Mar‐0

7

Dec‐0

7

Sep‐0

8

Jun‐09

Mar‐1

0

Dec‐1

0

Sep‐1

1

Jun‐12

Mar‐1

3

Dec‐1

3

Sep‐1

4

Jun‐15

Sept 02: ECdownpayment ‐ 10% cash and 10% CPF

Dec 02: 2 yrs property tax exempt on land under dev; 30% reduction in

stamp duty

Jun 98: deferralof buyer stamp duty

1997: seller stamp duty

suspended

Nov 98: 10%CPF housing grant cut

May 99: 2nd CPF housing grant cut

Feb 00: taxexemption on land dev

removed; DC rates on resi land increased

Jun 00: HDBtightened regulations

Oct 01: CGT lifted; foreigners can use SGD loans; property

tax exempted for land under dev

Jul 05: LTV raised from 80% to 90%; cash payment reduced fr 10% to 5%; relax foreign

ownership rules; relaxation on non‐related singles joint purchasesNov 05: Waived security

requirement of developers on DPS

Dec 06: buyer stamp duty concession

removed

Oct 07: DPS removed

Series of tightening measures

Sep’97-Dec’98 Unemployment Rate: 1.9% - 4.7% Property Price Index: Fell by 36%

Sep’00-Dec’01 Unemployment Rate: 2.6% - 5.2% Property Price Index: Fell by 17%

Sep’07-Sep’09 Unemployment Rate: 2.4% - 4.9% Property Price Index: Fell by 25%

* Assumed 80% loan for a tenure of 25 years Source: URA, HDB, DBS Bank

Page 54

Industry Focus



7. Office Subsector Outlook: Grade A office space to bottom by end 2017

Key Assertions

Office rents projected to bottom in 2017 as new supply sees good pre-commitment.

Improving pre-commitment rates for key new buildings mainly driven by tenant relocation rather than a net office absorption.

A two-tier market to emerge with Grade A office to emerge out of the downtown first; Business Park space remain attractive.

7.1 Trends, Demand and Supply outlook

Office rents to bottom in 2017. With Marina One slated to be completed in the first half of next year, we project office rents to bottom in mid or late 2017. Our base scenario assumes Grade A office rents to hit a trough at c.S$8.50 per square foot per month (psf/mth) from S$9.30 psf/mth currently. Not only is this reflective of the expected spike in vacancy rates in the

overall Downtown Core area but is also at a market clearing level to entice a company to move into a new office given fit-out costs of S$2.00-2.50 psf/mth and office rents of between S$10.40-11.40 psf/mth over the past year. In our bear case scenario, we project Grade A office rents to hit a low of S$7.50-8.00 psf/mth, which is 14-19% below current Grade A office rents of S$9.30 psf/mth. Office rents continued to trend down in 3Q16. Office rents continued on their downward trajectory since peaking in the first quarter of 2015. According to CB Richard Ellis (CBRE), Grade A office rents fell 2% q-o-q (-15% y-o-y) to S$9.30 psf/mth after falling 4% q-o-q in the second quarter of 2016. Grade B rents also dropped 2% q-o-q to S$7.50 psf/mth. Meanwhile, Grade A occupancies improved to 95.9% from 94.8% in the second quarter of 2016 as CBRE reported positive net absorption of 820k sqft islandwide which ended four consecutive quarters of negative absorption numbers.

Figure 76 Office rents and occupancies Rents 3Q15 2Q16 3Q16 q-o-q y-o-y

URA Office Rental Index: Central Area 187.0 174.1 172.0 -1% -8%

URA Office Rental Index: Fringe Area 147.8 135.3 135.0 0% -9%

CBRE Grade A Core CBD (psf/mth) 10.90 9.50 9.30 -2% -15%

CBRE Grade B Core CBD (psf/mth) 8.35 7.65 7.50 -2% -10%

Occupancy 3Q15 2Q16 3Q16 q-o-q (bps) y-o-y (bps)

URA occupancy private sector: Central Downtown Core 91.1% 90.9% 88.5% -235 -260

URA occupancy private sector: Central Fringe Area 86.7% 88.8% 89.6% 76 287

CBRE Grade A 94.8% 94.8% 95.9% 110 110

CBRE Core CBD 95.8% 95.1% 95.9% 80 10

Source: URA, Corporate Locations, CBRE, various REITs and corporate, press reports, DBS Bank

Page 55

Industry Focus



Demand

Uncertain outlook for new office demand. Over the past three years, employment growth in the four key sectors driving office demand were (1) Financial Services, (2) IT and other information services, (3) Legal, Accounting and Management Services, and (4) Insurance Services, and had been healthy. The three-year compound annual growth rate (CAGR) for those sectors ranged from 3-9% to end-September 2016. However, given a slowing economy, announced job losses in the financial services industry and businesses moving out of the CBD to business parks/suburban locations, we believe the demand for new office space will be sluggish but still positive. This is evidenced by c.13,000 sqm of net new space in Downtown Core area during the first nine months of the year. In addition, the number of people employed in the services sector continues to grow, expanding by 2% in the nine months to September compared to the same period last year. Improving pre-commitment rates for key new buildings. Compared to earlier this year where the pace of securing tenants for new offices was muted, the environment has since improved. Guoco Tower, according to press reports, has now been 80% pre-leased, while pre-commitments level has increased to 30-40% for Marina One with Duo Tower stable at 30%. With less urgency for Guoco Tower to secure tenants and Marina One potentially increasing pre-commitment levels in the coming months, the incremental pressure on Premium Grade A rents may start to ease. Supply

16% jump in downtown core office supply. Approximately 5.4m sqft of office net lettable area (NLA) will be completed within Singapore’s downtown core between 2016 and 2018; translating into a 16% increase in existing downtown CBD stock, or at a three-year CAGR of 5%. Approximately 73% of new office supply (by NLA) will be concentrated in four assets: (a) DUO Tower located in Bugis; (b) Guoco Tower, located in Tanjong Pagar; (c) Marina One in Marina Bay; and (d) Frasers Tower, located at Tanjong Pagar (Table 1). Based on press reports, the majority of the remaining developments will likely be sub-divided and strata sold to end-users.

Forecasts

Spike in vacancy but market moves to two-tier market. On the back of sluggish demand and jump in supply, we anticipated Private Sector Downtown Core vacancy rate to potentially spike from 11.5% at the end of September 2016 to 17% in 2017 and 18% in 2018, approaching the levels seen in 2004 and surpassing the 14% vacancy level in 2010 and 2011. While the headline vacancy rate is high, the figure will be composed of two very different markets. One would consist of the older buildings such as those in Shenton Way and Raffles Place where there will be a “structural” or persistent high vacancy potentially in excess of 20% as these buildings are unable to compete against the new buildings currently under construction or recently completed due to less efficient floorplates and modern specifications. In contrast, vacancy at the newer buildings or those defined as Category 1 office buildings by URA will enjoy substantially lower vacancies, closer to the 10% level, as the “flight to quality” takes place, i.e. tenants seeking better quality offices to cater to their expansion plans or consolidate their various offices into a single location. According to URA, Category 1 office buildings are defined as those located in core business areas in Downtown Core and Orchard Planning Area which are relatively modern or recently refurbished, command relatively high rentals, and have large floor plate sizes and gross floor areas. Recovery from 2018 onwards. While we expect office vacancy rates to peak in late 2017 or early 2018, with new office supply easing from 2018 onwards, we anticipate rents to start recovering as early as the end of 2017, as both tenants and landlords anticipate vacancies to drop due to a fall in supply. However, we expect a recovery in rents to largely occur in the premium spectrum of Grade A office space, as the older buildings at Shenton Way and Raffles Place will unlikely be able to raise rents due to their still high occupancies and uncompetitive products. On that front, we expect Grade A office rents to recover from the S$8.50 psf/mth low in 2017 towards S$10 psf/mth in 2018, similar to the 14% rise in office rents experienced between mid-2013 and 2015 as we approached a dearth of new supply in 2015 and demand normalises to historical average in 2019. The projected recovery in Grade A office rents is also partially a result of the increased proportion of premium quality office stock commanding higher office rents.

Page 56

Industry Focus



Key Charts

Figure 78: Office supply in the Central Business District (CBD) Remarks Office (CBD) Location Developer Estimated

NLA (sqft)

Property Type

2016

Guoco Tower Peck Seah Street Guocoland 890,000 Leasing

EON Shenton Shenton Way Roxy Pacific Holdings 101,045 Strata Sale

SBF Center Robinson Road Far East 353,480 Strata Sale

DUO Tower Rochor Road M + S 570,475 Leasing

GSH Plaza Cecil Street GSH/TYJ/Vibrant/DB2 282,000 Strata Sale

OUE Downtown 1 Shenton Way OUE 50,000 Leasing

2,247,000

2017

Marina One Marina Bay M + S 1,876,000 Leasing

UIC Building Shenton Way UIC 278,000 Strata Sale

Oxley Tower Robinson Road Oxley Consortium 112,000 Strata Sale

Crown @ Robinson Robinson Road WyWy Developments 70,000 Strata Sale

2,299,000

2018

Redevelopment of International Factors Building and Robinson Towers

Robinson Road Tuan Sing 194,380 Strata Sale

Frasers Tower Cecil Street Frasers Centrepoint Limited 645,000 Leasing

858,380

2019

Funan North Bridge Road

CapitaLand Mall Trust 204,000 Leasing

204,000

2020

CPF Building Shenton Way Ascendas-Singbridge, Mitsui and Tokyo Tatemono

500,000 Leasing

500,000

2021

Golden Shoe Market Street CapitaLand Commercial Trust

800,000 Leasing

Central Boulevard White Site

Marina Bay In bidding stage 1,070,000 Leasing

1,870,000

Estimated 5.4m sqft of office net lettable area (NLA) is expected to complete within the Downtown Core between 2016 and 2018, representing a 16% total increase in current Downtown Core office stock.

Around 4.0m sqft of NLA will be held for leasing purposes, while the rest will likely be strata sold.

Key office projects to watch out for are Guoco Tower (2016), DUO Tower (2016), Marina One (2017) and Frasers Tower (2018).

Following the easing of supply in 2018 and 2019, a pickup in new CBD supply will only occur in 2020/2021 when CPF Building, Golden Shoe and Central Boulevard White site are scheduled to be completed.


Page 57

Industry Focus



Figure 79: Decentralised office supply Remarks Office (Decentralised)

Location Developer Estimated NLA (sqft)

Property Type

2016 M18 Eastern Suburbs

- Paya Lebar Mapletree 56,000 Leasing

Havelock II River Valley / Havelock

Guthrie GTS 64,850 Strata Sale

120,850 2017 Arc 380 Eastern Suburbs

- Jalan Besar Tong Eng Group 103,500 Strata

Sale

Vision Exchange Western Suburbs - Jurong

500,000 Strata Sale

603,500 2018 Paya Lebar Central Eastern Suburbs

- Paya Lebar Lend Lease / ADIA 750,000 Leasing

750,000 2019 Woods Square Northern Suburbs

- Woodlands Far East Organisation 534,500 Strata

Sale

534,500

Over the next few years, supply of decentralised office space will be steady. Given a large majority of this new supply is being sold as strata units potentially for smaller users and owner occupiers, they will compete directly with CBD space.

However, in 2018, Paya Lebar Central may pose some form of competition to CBD office space if Lend Lease/ADIA is able to position the property as a viable alternative.


Figure 80: Average new supply per annum over 2015-2019 in line with average from 2010-2014

Remarks

While the headline supply is expected to be large from 2015-2019, the average supply of 1.15m sqft p.a. is comparable to 2010-2014’s average of 1.10m sqft p.a. Despite the large supply in 2010-2014, central area office rents still recorded positive growth.


‐

2.0

4.0

6.0

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20.0

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'000 sqft

Net supply: Downtown Core (LHS)

Net demand: Downtown Core (LHS)

CBRE Grade A office rents (RHS)

S$ psf pm

Post GFC2010‐2014 average:1.10m sqft

2015‐2019 average:1.15m sqft

Page 58

Industry Focus



Figure 81: URA rental index (central) growth vs. changes in employment for financial institutions (1998 – present)

Remarks

Between 1998 and 2015, there was 90% correlation between changes in the URA rental index (central) and employment growth in the financial services sector.

Lower correlation in rents and financial services employment from 2012 onwards (73%) reflects a diversification in demand for CBD office space from other sectors such as technology, media and telecommunications, commodities/resources and professional services.

Employment in the financial institution sector will still have a large influence on the direction of rents in the CBD.

Source: URA, Singstat, CEIC, DBS Bank

Figure 82: Business Park rents still cheaper than Grade A but pricing advantage has narrowed

Remarks

Business Park rents have stayed fairly flattish over the past five years, and the pricing advantage expanded when Grade A rents increased by around 20% from 3Q13 to its peak in 1Q15-2Q15.

Firms which wanted to achieve significant cost savings and were eligible to be located in business parks, had thus relocated from the CBD while maintaining a leaner presence in the CBD.

Source: CBRE, DBS Bank

‐5%

0%

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‐30%

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‐10%

0%

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URA rental index ‐ central (LHS) Employment ‐ Financial & Insurance Services (RHS)

0%

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2Q16

3Q16

Grade A and BP rent spread (RHS) Grade A office rent (LHS)

Business Park rent (LHS)

S$ psf/mth

Page 59

Industry Focus



Figure 83: Uncertain demand outlook for key sectors that drive CBD office demand Remarks

Key drivers of CBD office demand include financial services, legal and accounting sectors, as well as IT and other information services. Between 2012 and 2015, these key sectors led CBD office demand, and reported headcount increases of between 3-9% p.a.

With an uncertain economic environment ahead, the outlook across these sectors has turned more cautious. Nevertheless, given still positive GDP growth ahead as projected by our DBS economists, we expect net positive demand for space though at a slower pace than the more buoyant times during 2012-2013. For 9M16, the amount of occupied space in the Downtown Core area rose by 237k sqft, according to the latest URA statistics.

Source: Singstat, CEIC, DBS Bank

7%

3%

5%

8%

5%

0.0% 5.0% 10.0%

IT and Other information

Services

Financial Services

Insurance Serivces

Legal, Accounting and

Management Services

Total

3‐year headcount CAGR (2012‐2015) Outlook

IT and Other information

Services, 21%

Financial Services, 41%Insurance

Serivces, 8%

Legal, Accounting

and Management Services, 30%

Key sectors for CBD office demand

Page 60

Industry Focus



Figure 84: Office vacancies to spike on sluggish demand and increase in supply Remarks

We expect the soft demand outlook to result in c.40k sqft of net demand for space in the Downtown core region for the next three years.

Given the large increase in supply, this will result in Downtown Core vacancy rates spiking to 17% and 18% in 2017 and 2018 respectively from 11.5% as at the end of September 2016.

Vacancy rates should start trending down from 2019 onwards as demand normalises back up to historical averages, and supply eases.


Figure 85: DBS Grade A office rental forecast (2016-2017) Remarks

Based on the projected increase in vacancies, we expect Grade A rents to bottom out at around S$8.50 in 2017 before recovering to c.S$10 by end-2018.

While overall vacancy rates are likely to remain elevated in 2018, we believe Grade A rents will recover to c.S$10 as the proportion of Premium Grade buildings (which typically charge higher rents) become an increasing proportion of the Grade A category.

In our bear-case scenario, rents could fall to S$7.50-8.00, from S$9.30 currently before recovering to S$9.00 in 2019.


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2.0

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-1,000

-500

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2001

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2008

2009

2010

2011

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2013

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2019

'000 sqft

Net Supply: Downtown Core (LHS)Net demand: Downtown Core (LHS)CBRE Grade A office rents (RHS)

S$ psf pm

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-500

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'000 sqft

Net Supply: Downtown Core (LHS)Net demand: Downtown Core (LHS)CBRE Grade A office rents (RHS)DBS Base case (RHS)DBS Bear Case (RHS)

S$ psf pm

-1,500

Page 61

Industry Focus



Figure 86: Two-tier Grade A office market to develop Remarks

While we expect overall Downtown Core vacancy rate to rise to c.18% by 2018, we believe a two-tier market will develop.

The first submarket will be related to the older buildings in Shenton Way and Raffles Place where vacancy levels will be structurally higher given an uncompetitive product (lower efficiency and older specifications) resulting in lower rents.

The other category will be the premium grade buildings, largely consisting of new buildings currently under construction or built over the past 5-6 years. These will command higher rents and achieve lower vacancies. This can already be evidenced by the increasing spread between Premium Grade rents as reported by Colliers and overall Grade A core CBD rents as estimated by CBRE.

Going forward, Premium Grade offices will continue to command 11% higher rents relative to overall Grade A offices, and this spread may widen.


-4%

-2%

0%

2%

4%

6%

8%

10%

12%

7.00

8.00

9.00

10.00

11.00

12.00

13.00

Spread between Premium Grade vs Grade A (RHS)

Colliers Premium Grade Raffles Place/New Downtown (LHS)

CBRE Grade A Core CBD (LHS)

S$ psf / mth

Page 62

Industry Focus



8. Retail subsector Outlook: Hampered by weakening retail sales

Key Assertions

Retail sector outlook tempered by impact of e-commerce and dampened consumer sentiment.

More demand in the outskirts; Orchard roadexpect to remain weak.

Rental reversion remain flattish to marginallynegative.

8.1 Trends, demand and supply outlook

We see the next supply spike in 2018 adding more pressure in rental and occupancy. The years 2013 and 2014 saw Singapore’s largest influx of retail space since 2006. Recent supply has been largely located outside the central region (Figure 88), an indication that the government’s push towards a live, work and play concept in regional hubs is bearing fruit. The recently completed Waterway Point (95% tenanted) continues to see good demand, an indication that retailers remain keen to tap into suburban demand for goods and services. Much more limited supply is expected in 2016 and 2017, before another spike in completions in 2018, stemming from two key projects: Changi Jewel and Northpoint City (Figure 89-90).

Demand

Tempered by retail headwinds. Despite strong take-up rates in recently completed malls, net absorption has been negative since 2015 (Figure 92). Existing malls have, in general, been under occupancy and rental pressure. As of 3Q16, shop occupancy rates across the country had fallen to 91.3%, from a high of 95.5% in 2013. Occupancy for Frasers Centrepoint Trust fell by 1ppt on-year to 94.9% (adjusted to exclude Northpoint which is undergoing an asset enhancement initiative); though occupancy for CapitaLand Mall Trust was more stable, down marginally to 98.6% from 98.8% at the end of 2014, its rental reversions dropped to 1.3% for 9M16,

significantly below the 6% average over the past few years, and the lowest since 2009. Retailers have been hit by several factors: (a) declining sales efficiency (revenue per square foot) as a result of e-commerce and leakage from residents travelling abroad; (b) a manpower shortage due to government restrictions on foreign labour; and (c) rising labour costs from minimum wage policies. Faced with declining revenues and rising costs, retailers have, since 2014, begun to consolidate their operations, cutting down on the number of stores they operate while maintaining a presence in better-performing malls. The impact of retail headwinds will not be felt evenly across all malls, in our view. We believe that in order for a mall to outperform, it needs to be well located with a strong track record of recurring footfall and tenant sales, and have active asset management and advertising and promotion efforts.

Supply

Moving to the outskirts. The retail experience for locals will be an increasingly suburban affair. The majority of shopping mall completions in the past year have been located in the suburbs: One KM in Tanjong Katong, Big Box in Jurong East, Paya Lebar Square in Paya Lebar and Seletar Mall in Seletar, for example. Looking ahead, new retail space will still be largely focused in the suburbs. Waterway Point in Punggol opened in January 2016, and Northpoint City in Yishun (2018) and Changi Jewel (2018) are largest suburban developments in the pipeline. Just as we have seen in Jurong East, the government has been actively encouraging the continued development of regional centres in decentralised areas as key working and leisure destinations, as a means of relieving the congestion in the central business district and Orchard Road. As a result, we have seen many retailers that were previously only in the Orchard Road area moving into suburban shopping malls in order to directly cater to residents living in those areas. Examples include Zara, Coach, Kate Spade and Isetan.

Figure 87: Retail Market Summary Key Indicators % Chg 2Q16 3Q16Price Index -0.6% 123.1 122.3

Rental Index -1.5% 107.0 105.4

Pipeline of supply -11.2% 734k sqm GFA 652k sqm (GFA)

Vacancy rate +0.6% points 7.8% 8.4%

Source: URA

Page 63

Industry Focus



Figure 88: Net Additions to Shop Space Supply - suburban retail stock has been growing at a quicker pace than that in the central region

Remarks

Retail supply additions in recent years have been mainly in the Outside Central Region (a.k.a. OCR; dark grey column) and Fringe of City Centre (pink column).

In the OCR, major completions since 2013 include Westgate, JEM, Sports Hub, One KM, Seletar Mall, Paya Lebar Square, Capitol Piazza and Big Box.

Waterway Point, the latest mall to obtain its temporary occupation permit – in 4Q2015 –added around another30,000 square metres (sqm) of space to the retail sector.

Source: URA, CEIC, DBS Bank

Figure 89: Upcoming retail developments by planning region (478,230 sqm of gross floor area)

Remarks

New retail supply will be heavily skewed to the suburbs (OCR) with around 46% of total gross floor area (GFA).

This is in line with the government’s strategy of decentralising and creating regional “work, live, play” hubs.

Large proportion of OCR retail supply will be in the East Region (i.e. Changi Jewel).

New supply of Downtown Core is concentrated on Funan Redevelopment (2019), OUE Downtown (2016) and Marina One (2017).


(0.60)

(0.40)

(0.20)

-

0.20

0.40

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0.80

1.00

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1.40

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 9M16

m' sqft

Downtown Orchard Rest of Central Fringe Outside Central Region

Orchard5.0%

Orchard5.0%

Fringe Area31.7%

Rest of Central Area2.1% East Region

25.6%

North Region14.9%

West Region9.1%

North East Region6.6%

Outside Central Region46.0%

Page 64

Industry Focus



Figure 90: New Retail Space Supply by regions Remarks

Most of the pure-play retail supply had already entered the market in 2014 and 2015.

Going forward, most of the supply will be part of mixed-use developments (including both office and retail components).

Key mall supply will come from Northpoint City in Yishun, and Changi Jewel in Changi. These are slated for completion in 2018.


Figure 91: Net Absorption of retail supply and Occupancy Rate Remarks

Net additions of shop space outpaced net absorption which has turned negative since 2015 and has been declining further in 2016 as landlords take more time to fill up the space in recently completed malls.

We expect net absorption to continue to fall going forward, as retailers are consolidating their operations amid headwinds in the sector.

Likewise, occupancy rates should continue to moderate in the next 1-2 years.


Figure 92: URA property rental index (shop) Remarks

Rents in the central region have been weakening at a faster pace than rents in the fringe area.

Rentals in the Central Area have fallen c.15% from the peak in June 2008 and c.11% from December 2014, as retailers’ consolidation efforts accelerate.


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Orchard Outside Central Region

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89%

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91%

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96%

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Page 65

Industry Focus



Figure 93: Upcoming retail developments by project name

Project Name Street Name Developer Region Total Retail Space (000'sqft)

2016 548.0

Hillion Mall Jelebu Road Sim Lian JV Outside Central Region 221.1

OUE Downtown 1 Shenton Way Alkas Realty Pte Ltd Downtown Core 237.2

Guoco Tower (retail) Wallich Street GuocoLand Downtown Core 77.0

Others 12.69

2017 1,316.8

DUO Galleria Bencoolen Street Kah Motor Co Sdn Bhd Rest of Central Area 79.8

Marina One Yishun Ring Road Northern Resi Pte Ltd/Northern Retail Pte Ltd

Outside Central Region 197.9

Northshore Plaza Punggol Way Housing & Development Board North East Region 91.2

Oasis Terraces Punggol Drive Housing & Development Board North East Region 96.6

Office/retail development Hoe Chiang Road Fragrance Grandeur Pte Ltd Central Region 120.2

Singapore Post Centre (AEI) Eunos Road 8 Singapore Post Limited Central Region 269.0

Tripleone Somerset (AEI) Somerset Road Perennial (Somerset) Pte Ltd Central Region 122.3

Others 339.7

2018 2,323.7

City Gate Beach Road Bayfront Ventures Pte Ltd Central Region 101.7

Frasers Tower Cecil Street FC Commercial Trustee Pte Ltd Central Region 30.9

Changi Jewel Airport Boulevard Changi Airport Group (S) Pte Ltd

East Region 968.4

IMall Marine Parade Central Marine Parade Central Pte Ltd Central Region 74.5

Mapletree 18 Tai Seng Street Mapletree Trustee Pte Ltd North East Region 63.4

Northpoint City Yishun Central 1 Fraser Centrepoint Limited North Region 420.2

Office/retail development Robinson Road Superluck Properties Pte Ltd Central Region 79.7

Oxley Tower Robinson Road Oxley Consortium Pte Ltd Central Region 49.8

Paya Lebar Quarter Paya Lebar Road/Sims Avenue

Roma Central Pte Ltd/Milano Central Pte Ltd/Verona Central Pte Ltd

Central Region 475.5

Woods Square Woodlands Square Woodlands Square Pte Ltd North Region 59.7

2019 and onwards 957.6

Office/retail development Hoe Chiang Road Mansfield Developments Pte Ltd


Funan (redevelopment) North Bridge Road HSBC Institutional Trust Services (S) Limited


Wisteria Mall Yishun Ring Road Northern Resi Pte Ltd/Northern Retail Pte Ltd

North Region 83.3

Others 237.5

* We have selectively shown retail properties that are over 45,000 sqft in size in this table. Source: URA, DBS Bank

Page 66

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9. Industrial Sector Summary: Year of consolidation post supply spike

Key Assertions

Supply absorption remain the key drag on rentalgrowth prospects.

Demand outlook weak given firms remain on aconsolidation trend; vacancy rates to hike up to11% by end-2018.

Business Park space offers the best visibility.

9.1 Trends, demand and supply outlook

Downside as pre-commitments for new supply remain low. We believe that the industrial sector outlook remains soft and is projected to remain on a decline with rental rates expected to edge down by 5-10% per annum over the coming two years, weighed down by a spike in supply completions over 2016-2107. Demand for space is expected to lag behind supply

growth in the coming years as firms continue to look to consolidate or downsize their space requirements in order to remain cost efficient. Vacancy rates are expected to remain on an uptrend to 11% by end-2018. Manufacturing Sector expanded in September 2016 but outlook remains weak. The Singapore PMI increased to 50.1 in September 2016 which is an expansion in factory activity for the first time in 15 months, led by higher new orders, new exports, and output. It was a first month of expansion in over a year for the country with the electronics sector rising to 50.3 (50.2 in August 2016). However, the outlook is likely to remain uncertain with anaemic growth in Singapore’s major industrial sectors. Industrial leasing volumes inched up in 3Q16, closing 4% higher y-o-y and flat q-o-q to 2,172 leasing deals (inclusive of factory, warehouse and business park space).

Figure 94: Industrial Market Summary Key Indicators % Chg 2Q16 3Q16Price Index Industrial Property -1.70% 100.0 98.3Multi-User -0.98% 101.8 100.8Rental Index Industrial Property -1.98% 96.2 94.3Single-User Factory -1.28% 93.4 92.2Multi-User Factory -2.12% 104.0 101.8Warehouse -4.40% 95.4 91.2Business Park -0.19% 104.4 104.2Vacancy rate Industrial Property -0.1% 10.6% 10.5%Single-User Factory 0.8% 8.6% 9.4%Multi-User Factory -0.2% 13.1% 12.9%Warehouse 0.0% 10.9% 10.9%Business Park -0.1% 19.0% 18.9%Pipeline under construction Industrial Property -8.90% 57.2 52.1Single-User Factory -14.10% 23.5 20.2Multi-User Factory -4.29% 18.0 17.3Warehouse -6.66% 15.2 14.2Business Park 2.33% 0.5 0.5

Source: JTC

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Demand.

Year-to-date absorption remains negative. As of end-September 2016, year-to-date take-up for industrial space still lagged behind supply growth with net increase in unoccupied space of close to 6.7m square feet (sqft). This is almost double that when compared to a year ago, coming mainly from close to 5.0m sqft of single-user factory space that was competed but yet to be occupied. We expect this to be occupied when a majority of the space is taken up progressively by end-user occupiers in the coming quarters.

As one of the key drivers for space in the industrial sector has been the consolidation of operations to achieve operational efficiency, we expect the increased take-up in the single-user factory space to be at the expense of higher vacancy rates emerging from existing multi-user factory space where some of the end-users are expected to vacate from.

Supply

Increased competition from a spike in supply completions. The industrial market is in the midst of a spike in supply completions starting from 2014 and peaking in 2017. As such, landlords are typically still facing an increasingly competitive operating environment, and compounded from the weak demand outlook on the back of a slowing economy, we expect downside risks to occupancy rates and market rents. Based on the latest Urban Redevelopment Authority (URA) statistics, a total of 5.9m square metres (sqm) – equivalent to

60.0m sqft – of new industrial space are either under construction or in planning and projected to complete over the next four years from 2016-2020. Of this, more than 60% of the space will be completed and operational by the end of 2017. Among industrial types, warehouse space is expected to see the highest growth in supply at 21% or close to 20m sqft. Factory space, inclusive of both single-user and multi-user space, have close to 44m sqft of new space under construction, implying a growth rate of 13%. The business park space will add another 3m sqft of new space, implying a 14% increase in space to close to 26m sqft. However, most of the space are pre-committed and thus not an issue for existing landlords. Forecasts

Industrial sector overall vacancy rates to increase to 10-11% by 2017; with a negative bias if economic outlook deteriorates. Taking into account assumed pre-commitment rates and projected new demand, and faced with an increasing supply outlook, the average vacancy rate is now 10.5% (as of 3Q16) and we expect further weakness till the end of 2017 before bottoming out from 2018 onwards.

As the influx and pace of completions are skewed over the 2016-2017 calendar year, we believe that, on average, spot rentals are likely to see downside to the tune of 7-10% per annum over 2016-2017, with the exception of business park space, which we believe will be resilient with around 0-3% growth.

Figure 95: Industrial Leasing Transactions Remarks

Leasing volumes in 3Q are flat q-o-q, while they appear to be picking up in recent quarters, we believe that it is still early to call a bottom.

Source: JTC, URA, DBS Bank

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Figure 96: Close to 50m sqft of new space to complete over 2016-2019 Remarks

Supply completions to spike from 2014 and peak in 2016-2017 with an average of 25m sqft of space, thereafter it will drop significantly to 5.3m sqft from 2017 onwards.

Supply completions to be more than double that of the past five years.


Figure 97: We project net absorption to remain negative over 2016F-2020F with vacancy rates inching up to 11%


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Industry Focus



Figure 98: Rental reversion trend to remain negative over 2016-2018 Remarks

Rental reversion trends are expected to turn from flattish to negative from 2016 onwards.

The factory and warehouse space is expected to see a larger drop in rental reversions.

Business park space is expected to buck the trend, given expectations of a 3% per annum rise in market rents in 2016; flat in 2017.


Figure 99: Rental trends (forecast) RemarksIndustrial Segments 2015 2016F 2017F 2018F

S$ psf/mth S$ psf/mth S$ psf/mth S$ psf/mth Factory 2.09 1.88 1.75 1.70

Warehouse 1.98 1.79 1.66 1.58

Business Park 4.15 4.15 4.24 4.32

% Chg % Chg % Chg % Chg

y-o-y y-o-y y-o-y y-o-y Factory -2% -10% -7% -3%

Warehouse -3% -10% -7% -5%

Business Park -1% 0% 2% 2%

Rentals for factory and warehouse segments are forecast to decline by 5-10% over the next two years. We forecast warehouse space to see the largest declines given supply competition.

Business park segment is expected to increase by 2% in 2017-2018, supported by a lack of supply completions.


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Industry Focus



Industrial Sub-sector – Multi-User Factory

Figure 100: Multi-user factory supply: Supply spike in 2016 to be an overhang Remarks


Supply completions to spike in 2016-2018; resulting in vacancy rates increasing to more than 14%.

However, we see risk emerging from “shadow space” arising from the single-user factory segment if end-users decide to sub-lease part of their space (bottom chart).

Rentals are expected to remain under pressure as competition heats up. We project a 7-10% drop over 2016-2017 followed by a more modest 3% fall in 2018.

Figure 101 Multi-user factory: Occupancy and rental rates to dip


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Industrial Sub-sector – Warehouse

Figure 102: Warehouse: Oversupply situation to persist till 2018 Remarks

Supply under construction remains one of the highest among industrial subsectors, at close to 21%.

While new supply appears to be pre-committed, we believe that shadow space will emerge from tenant consolidation from multiple locations to single warehouses for efficiency purposes.


Figure 103: Warehouse: Occupancy to dip below 90% Remarks

Warehouse rents expected to decline 7-10% over 2016-2017.

Occupancy rates projected to dip below 90% going forward.


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Industrial Sub-sector – Business Parks

Figure 104: Majority of Business Park space has been pre-committed Remarks

While the sector is expected to see a c.14% increase in supply, a majority has been pre-committed with minimal speculative built except for certain properties – Mapletree Business City which has also seen good take-up rates.


Figure 105: Business parks: Rental differential currently above historical averages Remarks

Business park rents (off-central and rest of Island) tend to be at 50% and 60% discounts to Grade A offices respectively.

Current differential above historical average but softening outlook for CBD office rents caps further upside.


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(S$ psf/mth)

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Industry Focus



10. Hospitality Outlook Summary

Key Assertions

Supply remains the key drag on RevPAR growth

prospects.

Corporate demand to remain soft; demand for

accommodation to lag supply growth.

Hotel sector to bottom only from 2H17-2018

onwards.

10.1 Trends, demand and supply outlook Decline in 3Q16 RevPAR. Following a soft second-quarter where RevPAR was weak and declined 3% y-o-y to S$191, RevPAR in the third-quarter (3Q16) continued to fall, based on the Singapore Tourism Board (STB) statistics. The 4% fall in RevPAR was a result of a decrease in both occupancy (87.2% vs 88.3% in 3Q15) and average daily rate (ADR; S$244 versus S$249 in 3Q15) as excess supply continued to weigh on the market despite an increase in tourists arrivals. However, tourist arrivals for 3Q16 was positive, up 4%, driven largely by Chinese tourists (+20%).

2017 will be another challenging year. While we expect tourist arrivals into Singapore to increase in 2016 by 9% to 16.6 million, largely led by a 35% jump Chinese visitors (+41% in Jan-Sep), we forecast total visitor days to rise by only 4% due to the shorter average length of stay. In addition, while the increase in new supply this year is now lower than earlier expected due to delays in completion of some hotels (2,520 net rooms to be added this year versus 3,930 previously), we remain cautious on the outlook for revenue per available room (RevPAR) given soft demand from the corporate sector which typically offers higher yields, and excess supply. Thus, we project that RevPAR in 2016 will drop by 4% year-on-year (y-o-y) to S$201. For 2017, we expect tourist arrivals to grow at a more modest rate of 4%, but average length of stay to lengthen, resulting in 5% uplift in total visitor days. However, with corporate demand expected to remain soft and persistent supply pressures arising from a 6% increase in room stock, 2017 RevPAR is projected to fall 4%.

Figure 106: Hospitality sector remained under pressure in 3Q16

3Q15 2Q16 3Q16 q-o-q y-o-y

Industry Occupancy 88.3% 83.2% 87.2% 4.0% -1.2%

Industry average daily rate (S$) 249 229 244 6.6% -1.9%

Industry RevPAR (S$) 220 191 212 11.2% -3.6%

Tourist* arrivals 4,096,271 4,022,046 4,248,079 5.6% 3.7%

Luxury RevPAR (S$)* 409 348 421 21.2% 3.1%

Upscale RevPAR (S$)* 242 215 233 8.4% -3.8%

Mid-Tier RevPAR (S$)* 157 144 151 5.2% -3.8%

Economy RevPAR (S$)* 90 81 84 3.7% -6.9%

Source: Singapore Tourism Board, STR Global, DBS Bank

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Industry Focus



Demand

Overall increase in seat capacity to Singapore points to growth in tourist arrivals offset by decline in average length of stay. Based on data from Centre for Asia Pacific Aviation (CAPA), seat capacity between Singapore and the rest of the world is projected to increase 3% on-year in the fourth quarter of this year following an increase of 3% during January-September. Overall seat capacity is expected to increase by a further 5% y-o-y in the first quarter of 2017. We believe this is supportive of a sustained recovery in Singapore arrivals and underpins our forecast for a 9% and 3% increase in tourist arrivals in 2016 and 2017 respectively. However, given the lower “quality” of tourists coming in such as tour groups, which typically only stay 1-2 days in Singapore, we forecast total visitor days to rise by only 3% in 2016 due to a shorter average length of stay of 3.42 days, down from 3.61 days in 2015. For 2017, we expect a slight increase in the average length of stay to 3.46 days as the proportion of Chinese visitors fall, resulting in total visitor days rising by 5% y-o-y. Recovery in Chinese tourists. Following an extremely weak 2014

where Chinese tourist arrivals (Singapore’s second largest source

market) dropped 24% on‐year to 1.7 million due to Chinese tour

groups avoiding Southeast Asia as a consequence of the MH370

incident and the political uncertainty in Thailand, Chinese visitor

arrivals recovered in 2015, rising 22% on‐year to 2.1 million. We

expect the recovery to continue in 2016. With visitor arrivals from

China growing 41% y‐o‐y during January to September, the

recovery is on track to hit our 35% growth projection for this year.

Beyond 2016, we expect Singapore to remain an attractive

destination for Chinese visitors, and we expect arrivals from China

will increase by 10% and 7.5% in 2017 and 2018 respectively.

Recovery in Indonesian visitors. We project Indonesian tourist

arrivals (Singapore’s largest source market) to grow by 6% this year

due to a healthy performance during January to September

(arrivals up by 6%), and low base effect as overall tourist arrivals in

2015 was down 10% y‐o‐y. This is despite a 2% decline in seat

capacity between Indonesia and Singapore in 2016 based on data

from CAPA. For 2017 and 2018, we expect growth to normalise to

3% per annum.

Competition from other markets. Singapore faces increased competition from other tourism markets through a variety of factors which include easier access to other countries through the relaxation of visa restrictions, e.g. multiple entry visas for Chinese visitors into Japan; devaluation of the other regional currencies, potentially making its cheaper to visit other countries compared to Singapore, e.g. a weaker Korean won and Japanese yen; and Singapore already having a high market

share, e.g. Singapore accounts for 38-39% of total Indonesian outbound travel. Potential headwinds from near-term currency volatility. The recent depreciation of regional currencies, especially the IDR and MYR, could pose near-term headwinds to tourist arrivals into Singapore. Nevertheless, the number of Indonesian and Malaysian visitors (third largest source market) to Singapore is expected to remain on an upward trajectory as the SGD was weak against the IDR and MYR over the past six months. Supply

Pressure from new room supply. While new room supply in 2016 is projected to be lower than the 4,237 rooms added in 2015, supply pressures should still persist with a net addition of 2,520 rooms. This is despite a reduction from the 3,930 rooms projected earlier this year, on account of delays in the completion of hotels. As a consequence of hotels such as Intercontinental Robertson Quay and Sofitel at Tanjong Pagar Centre which were originally scheduled to open in 2016 being shifted to 2017, supply for 2017 now stands at 3,857 rooms, up from 2,727 rooms previously. Thus, the demand and supply situation in Singapore is likely to become more balanced only in 2018, when supply pressures ease and new room inventory is projected to increase by only 2%. 2016 supply mainly outside traditional areas with 2017 supply growth to come from Central Business District (CBD) and Orchard. The majority of new supply in 2016 is concentrated outside the traditional areas of Bras Basah, CBD, Orchard and Singapore River, such as Changi, Joo Chiat and East Coast. These hotels account for 1,413 rooms or 45% of supply in 2016. Meanwhile, the second largest cluster of hotels opening in 2016 are located in the Singapore River precinct (20% of 2016 supply). These include M Social, and The Warehouse Hotel. Combined with the completion of refurbishment works at Swissotel Merchant Court, an estimated 507 rooms (9% of existing supply in the precinct) will hit the market. Beyond the new supply in the Singapore River area, the rebranding of Riverview Hotel as Four Points by Sheraton would also raise the level of competition in this sub-market. In 2017, the majority of supply will switch back to Orchard (1,612 rooms, equivalent to 14% of existing Orchard inventory, from Novotel on Stevens and Ascott Orchard) and the CBD area (c.748 rooms from hotels such as JW Marriot, Sofitel Singapore Tanjong Pagar, The Murray Hotel and Grand Park City Hall). More evenly balanced across tiers in 2016 with growth in luxury in 2017. In 2015, the growth in supply was driven by the Mid-Tier segment, which represented 64% of total net new supply in 2015 and 20% of existing Mid-Tier stock. For 2016, the new

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Industry Focus



supply of 2,520 rooms is more evenly spread across all the different categories, 25% in Economy, 40% in Mid-Tier and 25% in Upscale, with no hotels opened in the Luxury segment. Nevertheless, similar to 2015, we expect Mid-Tier and Economy categories to face the greatest pressure on ADR and occupancies. For 2017, the proportion of new room supply to Economy, Mid-Tier and Upscale hotels is expected to drop to 21%, 34% and 25% respectively, with Luxury hotels making a return with 21% of 2017 supply. With a larger proportion of new rooms being added in the Upscale and Luxury segment in 2017, there may be more pricing discipline compared to 2016 given constraints by these upper-tier brands to cut room rates without affecting their brand status. Forecasts Supply pressures to weigh on RevPAR in 2016. The Singapore hospitality market is facing the same issues in 2016 as in 2015, i.e. excess supply. While we expect a 9% bounce in tourist arrivals, we believe this will only translate to a 4% increase in visitor days due to a higher proportion of Chinese tour groups which typically have a shorter average length of stay. In addition, while there has been a delay in the opening of some

hotels this year, supply growth is still projected to increase by 4%. Combined with continued weak corporate demand, which is typically higher yielding, we project a 4% decline in RevPAR to S$201. This will be led by a decline in ADR (down 4% to S$236) with occupancy relatively stable at c.85%. 2017 still weak with recovery only in 2018. With the carryover of new hotels which were originally scheduled to open in 2016 into 2017, our earlier expectation of a more balanced market in 2017 is likely to be delayed into 2018 where the supply of new hotels drops off. The decline in new room supply in 2018 is due to the lack of new land released by the Singapore government for hotel developments over the past two years. On the back of a 6% jump in supply in 2017 and still weak corporate demand, we expect ADR to remain under pressure, down 4% with occupancy stable at 85%. This translates to a 4% decline in RevPAR. Going into 2018, we expect a 3% recovery in RevPAR, as demand (+4% growth in visitor arrivals) exceeds the 2% growth in new room supply.

Figure 107: Number of visitors rising year-to-date but growth in visitor days still modest and RevPAR remains soft on supply pressure

Remarks

Tourist arrivals jumped 4% in 3Q16, led by China (+20%), Indonesia (+ 3%) and India (+6%) But visitor days were only up by 1% due to decline in average length of stay RevPAR remains weak, down 4% in 3Q16 on excess supply and weak corporate demand

Source: Singapore Tourism Board, STR Global, DBS Bank

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Figure 108: Uptick in overall airline capacity points to sustained recovery in tourist arrivals

Remarks

Historically, there is a positive correlation between seat capacity growth and inbound tourist arrivals Inbound tourist arrivals have recovered following a reduction in seat capacity in 2014 second half and 2015 first half

Airline seat capacity into Singapore is projected to grow by 3% and 5% y-o-y in fourth quarter 2016 and first quarter 2017 which underpins growth of tourist arrivals into Singapore. We project 9% and 4% growth in visitor arrivals for 2016 and 2017

Source: Centre for Asia Pacific Aviation, Singapore Tourism Board, Bloomberg Finance L.P., DBS Bank

Figure 109: Chinese visitor arrivals on a recovery path Remarks

Downturn in Chinese arrivals started from October 2013 due to new tourism laws which banned “shopping tours”. Chinese visitors avoided Singapore/Southeast Asia in 2014 due to the MH370 incident and political instability in Thailand. Recovery in Chinese visitors over 2015-2016. Expect growth in visitors from China to continue but at a slower rate than in first half 2016.

Source: Singapore Tourism Board, DBS Bank

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Figure 110: Stable 2H16 seat capacity between Indonesia and Singapore with pick-up in1Q17

Remarks

Growth in Indonesian arrivals from 4Q12 to 2Q14 on the back of increases in seat capacity between Indonesia and Singapore, despite a weaker rupiah against Singapore dollar. The trend reversed from 3Q14 to 4Q15 on the back of declines in seat capacity especially in the low cost carrier segment

Healthy start to 2016, with 6% y-o-y growth in tourist arrivals from Indonesia in Jan to Sep despite a decline in overall airline seat capacity

Stable seat capacity between Indonesia and Singapore in 4Q16; 7% y-o-y pick up in 1Q17 points to continued growth in Indonesian tourist arrivals. We project 5.5% and 3% increases for 2016 and 2017 respectively

Source: Centre for Asia Pacific Aviation, Singapore Tourism Board, Bloomberg Finance L.P., DBS Bank

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Figure 111: Uptick in arrivals not translating to significant growth in visitor days Remarks

Despite healthy increase in total visitors arrivals into Singapore of c.9% for the first nine months of the year, visitor days i.e. total length of time spent in Singapore only rose 3.1 %

The more modest growth in visitor days is due to a decline in the average length of stay from 3.61 days in 2015 to 3.49 days for 9M16.

The fall in the average length stay was driven by an increase in Chinese visitors who are on tour groups, typically staying only for 1-2 days

Source: Singapore Tourism Board, Bloomberg Finance L.P., DBS Bank

Figure 112: Increased competition from other tourism markets (9M16 inbound tourist arrivals)

Remarks

Increased competition for Chinese tourists from countries such as Japan, Korea and Australia

Singapore getting a larger share of Chinese tourists potentially due to Singapore Tourism Board’s success in promoting Singapore as a single destination, following weaker growth in the prior year

General upturn in Indonesian outbound travel but Singapore lagging growth of other market such as South Korea and Japan

Source: CEIC, Singapore Tourism Board, Bloomberg Finance L.P, DBS Bank

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Figure 113: Recent FX volatility in regional currencies a potential headwind Remarks

Recent correction in regional currencies for Singapore’s top five source markets a potential headwind. However, weakening of SGD over the last six months provides some buffer.

* Inbound travel statistics for Singapore and Thailand related to 8M16 Source: CEIC, Singapore Tourism Board, Bloomberg Finance L.P., DBS Bank

Figure 114: Opening of some hotels delayed from 2016 to 2017 Remarks

Despite delays in the completion of new hotels resulting in 2,520 net new rooms being added in 2016 (down from 3,930 previously), supply pressures are expected to persist due to a 4% growth in supply. Delay in the demand and supply situation in Singapore being more balanced as hotels previously expected to open in 2016 are now shifted to 2017 resulting in a 6% growth in room inventory in 2017.

Potential recovery in 2018 only when supply pressures ease.

Source: CDL Hospitality Trust, Singapore Tourism Board, DBS Bank

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Figure 115: More supply in Singapore River and CBD areas in 2016 switching to Orchard in 2017

Remarks

New supply switching from Orchard and Bras Basah in 2015 to Singapore River and CBD areas in 2016. For 2017, the majority of supply will come from Orchard and CBD areas. Growth in new supply also coming from outside core city centre areas.


Figure 116: Majority of supply growth in 2016 coming from the Mid-Tier category Remarks

Majority of new supply in 2016 coming from the Mid-Tier category. For 2017, there is greater share of new rooms being opened in the luxury and upscale category which may result in more pricing discipline in the industry.

Source: CEIC, Singapore Tourism Board, DBS Bank

Figure 117: RevPAR to remain weak in 2016 and 2017 with recovery from 2018 Remarks

9% growth in visitor arrivals is expected for 2016 but this will be partially offset by the shorter average length of stay which translates to 3% growth in visitor days. However, a 5% increase in room supply remains a key issue for hoteliers, with RevPAR expected to decline by 4% this year. 2017 to remain a challenging year due to a 6% growth in supply with a recovery only occurring in 2018 when supply pressures ease.


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Industry Focus



Figure 118: Supply of new rooms

Year of opening Hotel Net room addition 2016 The South Beach -654 2016 Hotel Grand Central 46 2016 Ibis Styles 298 2016 Oasia Downtown Hotel 314 2016 Grand Park City Hall -165 2016 Hotel Clover @ 7 HK St 27 2016 Hotel Indigo Singapore Katong 131 2016 Mercure Singapore Middle Road 395 2016 M Social 293 2016 Holiday Inn Express Singapore Katong 451 2016 Crowne Plaza Changi Airport (extension) 243 2016 Premier Inn Singapore 300 2016 JW Marriott Hotel Singapore South Beach (formerly The South Beach) 634 2016 Swissôtel Merchant Court 150 2016 Villa Samadhi 20 2016 The Warehouse Hotel 37 2017 Andaz Singapore (DUO Project) 342 2017 Novotel Singapore on Stevens 254 2017 InterContinental Singapore Robertson Quay (Gallery Hotel after refurbishment) 225 2017 Sofitel Singapore City Centre Hotel (Tanjong Pagar Centre) 222 2017 The Ascott Orchard Singapore 220 2017 The Patina Capitol Singapore 157 2017 Duxton Terrace (formerly Murray House) 138 2017 Duxton House (formerly Blakes) 50 2017 Laguna Dusit Thani 197 2017 Ibis Singapore on Stevens 528 2017 Grand Park City Hall 181 2017 Park Hotel Farrer Park 300 2017 Courtyard Marriott at Novena 250 2017 YOTEL Orchard Road 610 2017 Aqueen Hotel Geylang 100 2017 Aqueen Hotel Little India 83 2018 Frasers @ China Street 306 2018 Yotel Changi Jewel 130 2018 Aqueen Hotel Lavender (Additional rooms) 69 2018 Outpost Hotel Sentosa & Village Hotel Sentosa 850


Page 82

Industry Focus



11. Charts

Page 83

Industry Focus



Singapore REITs

S-REIT Sector Yield Spread Source: Bloomberg Finance L.P., DBS Bank

S-REIT Sector Historical P/BV


0%

1%

2%

3%

4%

5%

6%

7%

8%

Sector Yield spread Sector Yield MAS 10 Year

Mean Yield +1 SD -1 SD

Nov'11 (0.89x)

Jan'12 (0.84x)

Nov'13 (1.04x)

Feb'14 (0.94 x) Nov'15 (0.94 x)

Jan'16 (0.90x)

OCt'16 (1.01)

0.98

Historical Mean : P/NAV at 1.0x

-1 S tandard Deviation : 0.92x P /NAV

0.80

0.85

0.90

0.95

1.00

1.05

1.10

1.15

1.20 Sector P/BV

P/BV Mean

+1 SD

-1 SD

Page 84

Industry Focus



Office REIT Sector Yield Spread Office REIT Sector Historical P/BV



CapitaLand Commercial Trust Historical Yield Spread CapitaLand Commercial Trust Historical P/BV



Frasers Commercial Trust Historical Yield Spread Frasers Commercial Trust Historical P/BV



0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

Jan-2010 Jan-2011 Jan-2012 Jan-2013 Jan-2014 Jan-2015 Jan-2016 JanFCOT P/BV Mean +1 SD -1 SD

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

Jan-2010 Jan-2011 Jan-2012 Jan-2013 Jan-2014 Jan-2015 Jan-2016 Jan-2017

Office REITs P/BV Mean +1 SD -1 SD

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

Jan-2010 Jan-2011 Jan-2012 Jan-2013 Jan-2014 Jan-2015 Jan-2016CCT Yield Spread CCT Yield Mean Yield-1 SD +1 SD

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%


FCOT Yield Spread FCOT Yield Mean -1 SD +1 SD

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%


Office REITs Yield Spread Office REITs Yield Mean Yield

-1 SD +1 SD

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2


CCT P/BV Mean +1 SD -1 SD

Page 85

Industry Focus



IREIT Global Yield Spread IREIT Global Historical P/BV Source: Bloomberg Finance L.P., DBS Bank


Keppel REIT Historical Yield Spread Keppel REIT Historical P/BV Source: Bloomberg Finance L.P., DBS Bank


Manulife US REIT Historical Yield Spread Manulife US REIT Historical P/BV



0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

Sep-2014 Mar-2015 Sep-2015 Mar-2016 Sep-2016IREIT Yield Spread IREIT Yield Mean -1 SD +1 SD 0.9

1.0

1.1

1.2

1.3

1.4

Sep-2014 Mar-2015 Sep-2015 Mar-2016 Sep-2016IREIT P/BV Mean +1 SD -1 SD

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

Jan-2010 Jan-2011 Jan-2012 Jan-2013 Jan-2014 Jan-2015 Jan-2016KREIT Yield Spread KREIT Yield Mean Yield -1 SD +1 SD

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

Jan-2010 Jan-2011 Jan-2012 Jan-2013 Jan-2014 Jan-2015 Jan-2016

KREIT P/BV Mean +1 SD -1 SD

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Jun-2016 Sep-2016 Dec-2016MUST Yield Spread MUST Yield Mean -1 SD +1 SD

0.90

0.93

0.95

0.98

1.00

1.03

1.05

Jun-2016 Sep-2016 Dec-2016MUST P/BV Mean +1 SD -1 SD

Page 86

Industry Focus



OUE Commercial Trust Historical Yield Spread OUE Commercial Trust Historical P/BV



0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

Feb-2014 Aug-2014 Feb-2015 Aug-2015 Feb-2016 Aug-2016OUECT Yield Spread OUECT Yield Mean -1 SD +1

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

Feb-2014 Aug-2014 Feb-2015 Aug-2015 Feb-2016 Aug-2016OUECT P/BV Mean +1 SD -1 SD

Page 87

Industry Focus



Retail REIT Sector Yield Spread Retail REIT Sector Historical P/BV



CapitaLand Mall Trust Historical Yield Spread CapitaLand Mall Trust Historical P/BV



CapitaLand Retail China Trust Historical Yield Spread CapitaLand Retail China Trust Historical P/BV Source: Bloomberg Finance L.P., DBS Bank


0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Jan-2010 Jan-2011 Jan-2012 Jan-2013 Jan-2014 Jan-2015 Jan-2016 Jan-20CMT Yield Spread CMT Yield Mean Yield

-1 SD +1 SD 0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

Jan-2010 Jan-2011 Jan-2012 Jan-2013 Jan-2014 Jan-2015 Jan-2016CMT P/BV Mean +1 SD -1 SD

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Jan-2010 Jan-2011 Jan-2012 Jan-2013 Jan-2014 Jan-2015 Jan-2016 Jan-2017CRCT Yield Spread CRCT Yield Mean Yield

-1 SD +1 SD

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%


Retail REITs Yield Spread Retail REITs Yield Mean Yield

-1 SD +1 SD

0.60

0.70

0.80

0.90

1.00

1.10

1.20

1.30

1.40

1.50


Retail REITs P/BV Mean +1 SD -1 SD

0.8

0.9

1.0

1.1

1.2

1.3

1.4


CRCT P/BV Mean +1 SD -1 SD

Page 88

Industry Focus



Croesus Retail Trust Historical Yield Spread Croesus Retail Trust Historical P/BV



Frasers Centrepoint Trust Historical Yield Spread Frasers Centrepoint Trust Historical P/BV



Mapletree Greater China Commercial Trust Historical Yield Spread

Mapletree Greater China Commercial Trust Historical

P/BV



0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

Jun-2013 Jun-2014 Jun-2015 Jun-2016

Croesus Yield Spread Croesus Yield Mean Yield

-1 SD +1 SD

0.8

0.9

1.0

1.1

1.2

Jun-2013 Dec-2013 Jun-2014 Dec-2014 Jun-2015 Dec-2015 Jun-2016 Dec-2016

Croesus P/BV Mean +1 SD -1 SD

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Jan-2010 Jan-2011 Jan-2012 Jan-2013 Jan-2014 Jan-2015 Jan-2016 Jan-20FCT Yield Spread FCT Yield Mean Yield-1 SD +1 SD

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

Jan-2010 Jan-2011 Jan-2012 Jan-2013 Jan-2014 Jan-2015 Jan-2016 Jan-201FCT P/BV Mean +1 SD -1 SD

0.7

0.8

0.9

1.0

1.1

1.2

1.3

Mar-2013 Mar-2014 Mar-2015 Mar-2016

MAGIC P/BV Mean +1 SD -1 SD

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

2013 2014 2015 2016

MAGIC Yield Spread MAGIC Yield Mean

-1 SD +1 SD

Page 89

Industry Focus



[SPH REIT Historical Yield Spread SPH REIT Historical P/BV



Starhill Global REIT Historical Yield Spread Starhill Global REIT Historical P/BV



0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

Jul-2013 Jul-2014 Jul-2015 Jul-2016

SPH REIT P/BV Mean +1 SD -1 SD

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5


SGREIT P/BV Mean +1 SD -1 SD

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Jul-2013 Jul-2014 Jul-2015 Jul-2016SPH REIT Yield Spread SPH REIT Yield Mean Yield-1 SD +1 SD

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Jan-2010 Jan-2011 Jan-2012 Jan-2013 Jan-2014 Jan-2015 Jan-2016 JanSGREIT Yield Spread SGREIT Yield Mean Yield-1 SD +1 SD

Page 90

Industry Focus



Mixed Commercial REIT Sector Yield Spread Mixed Commercial REIT Sector Historical P/BV



Mapletree Commercial Trust Historical Yield Spread Mapletree Commercial Trust Historical P/BV



Suntec REIT Historical Yield Spread Suntec REIT Historical P/BV



0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%


Mixed Use REITs Yield Spread Mixed Use REITs Yield

Mean Yield -1 SD

+1 SD

0.5

0.7

0.9

1.1

1.3

1.5

1.7


Mixed Use REITs P/BV Mean +1 SD -1 SD

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

Apr-2011 Apr-2012 Apr-2013 Apr-2014 Apr-2015 Apr-2016MCT Yield Spread MCT Yield Mean Yield

-1 SD +1 SD

0.5

0.7

0.9

1.1

1.3

1.5

1.7

Apr-2011 Apr-2012 Apr-2013 Apr-2014 Apr-2015 Apr-2016

MCT P/BV Mean +1 SD -1 SD

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5


Suntec P/BV Mean +1 SD -1 SD

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

Jan-2010 Jan-2011 Jan-2012 Jan-2013 Jan-2014 Jan-2015 Jan-2016 Jan-20Suntec Yield Spread Suntec Yield Mean

-1 SD +1 SD

Page 91

Industry Focus



Hospitality REIT Sector Yield Spread Hospitality REIT Sector Historical P/BV



Ascendas Hospitality Trust Historical Yield Spread Ascendas Hospitality Trust Historical P/BV



Ascott Residence Trust Historical Yield Spread Ascott Residence Trust Historical P/BV Source: Bloomberg Finance L.P., DBS Bank


0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

Jul-2012 Jul-2013 Jul-2014 Jul-2015 Jul-2016

ASCHT Yield Spread ASHT Yield Mean -1 SD +1 SD

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%


Hospitality REITs Yield Spread Hospitality REITs Yield

Mean Yield -1 SD

+1 SD

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6


Hospitality REITs P/BV Mean +1 SD -1 SD

0.6

0.8

1.0

1.2

1.4

1.6

Jul-2012 Jul-2013 Jul-2014 Jul-2015 Jul-2016

ASCHT P/BV Mean +1 SD -1 SD

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%


Ascott Yield Spread Ascott Yield Mean Yield

-1 SD +1 SD

0.6

0.8

1.0

1.2

1.4

1.6


Ascott P/BV Mean +1 SD -1 SD

Page 92

Industry Focus



CDL Hospitality Trust Historical Yield Spread CDL Hospitality Trust Historical P/BV

Source: Bloomberg Finance L.P., DBS Bank Source: Bloomberg Finance L.P., DBS Bank

Far East Hospitality Trust Historical Yield Spread Far East Hospitality Trust Historical P/BV



Frasers Hospitality Trust Historical Yield Spread Frasers Hospitality Trust Historical P/BV



-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%


CDREIT Yield Spread CDREIT Yield Mean Yield-1 SD +1 SD

0.6

0.8

1.0

1.2

1.4

1.6


CDREIT P/BV Mean +1 SD -1 SD

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

Aug-2012 Aug-2013 Aug-2014 Aug-2015 Aug-2016FEHT Yield Spread FEHT Yield Mean -1 SD +1 S

0.60

0.80

1.00

1.20

1.40

1.60

Aug-2012 Aug-2013 Aug-2014 Aug-2015 Aug-2016FEHT P/BV Mean +1 SD -1 SD

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

Aug-2014 Feb-2015 Aug-2015 Feb-2016 Aug-2016FHT Yield Spread FHT Yield Mean -1 SD +1 SD

0.6

0.8

1.0

1.2

1.4

1.6

Aug-2014 Feb-2015 Aug-2015 Feb-2016 Aug-2016FHT P/BV Mean +1 SD -1 SD

Page 93

Industry Focus



OUE Hospitality Trust Historical Yield Spread OUE Hospitality Trust Historical P/BV

Source: Bloomberg Finance L.P., DBS Bank Source: Bloomberg Finance L.P., DBS Bank

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

Jul-2013 Jul-2014 Jul-2015 Jul-2016OUEHT Yield Spread OUEHT Yield Mean Yield

-1 SD +1 SD

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

Jul-2013 Jan-2014 Jul-2014 Jan-2015 Jul-2015 Jan-2016 Jul-2016 Jan-20OUEHT P/BV Mean +1 SD -1 SD

Page 94

Industry Focus



Industrial REIT Sector Yield Spread Industrial REIT Sector Historical P/BV



Ascendas REIT Historical Yield Spread Ascendas REIT Historical P/BV



Cambridge Industrial Trust Historical Yield Spread Cambridge Industrial Historical P/BV

S Source: Bloomberg Finance L.P., DBS Bank


0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%

10.0%11.0%

Jan-2010 Jan-2011 Jan-2012 Jan-2013 Jan-2014 Jan-2015 Jan-2016 Jan-

AREIT Yield Spread AREIT Yield Mean Yield -1 SD +1 S

0.7

0.9

1.1

1.3

1.5

1.7

Jan-2010 Jan-2011 Jan-2012 Jan-2013 Jan-2014 Jan-2015 Jan-2016 Jan

AREIT P/BV Mean +1 SD -1 SD

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

CREIT P/BV Mean +1 SD -1 SD

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8


Industrial REITs P/BV Mean +1 SD -1 SD

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%


Industrial REITs Yield Spread Industrial REITs Yield

Mean +1 SD

-1 SD

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%


CREIT Yield Spread CREIT Yield Mean Yield-1 SD +1 SD

Page 95

Industry Focus



Cache Logistics Trust Historical Yield Spread Cache Logistics Trust Historical P/BV



Frasers Logistics & Industrial Trust Yield Spread Frasers Logistics & Industrial Trust Historical P/BV



Keppel DC REIT Historical Yield Spread Keppel DC REIT Historical P/BV



0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

Apr-2010 Apr-2011 Apr-2012 Apr-2013 Apr-2014 Apr-2015 Apr-2016

Cache Yield Spread Cache Yield Mean Yield-1 SD +1 SD

0.7

0.9

1.1

1.3

1.5

1.7

Apr-2010 Apr-2011 Apr-2012 Apr-2013 Apr-2014 Apr-2015 Apr-2016Cache P/BV Mean +1 SD -1 SD

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Jul-2016 Aug-2016 Sep-2016 Oct-2016 Nov-2016 Dec-201

FLT Yield Spread FLT Yield Mean Yield -1 SD +1 SD

1.02

1.04

1.06

1.08

1.10

1.12

1.14

Jul-2016FLT P/BV Mean +1 SD -1 SD

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

Jan-2015 Jul-2015 Jan-2016 Jul-2016KDCREIT Yield Spread KDCREIT Yield Mean -1 SD +1 S

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

Jan-2015 Jul-2015 Jan-2016 Jul-2016KDCREIT P/BV Mean +1 SD -1 SD

Page 96

Industry Focus



Mapletree Industrial Trust Historical Yield Spread Mapletree Industrial Trust Historical P/BV



Mapletree Logistic Trust Historical Yield Spread Mapletree Logistic Trust Historical P/BV



Soilbuild Business Space REIT Historical Yield Spread Soilbuild Business Space REIT Historical P/BV



0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

Apr-2011 Apr-2012 Apr-2013 Apr-2014 Apr-2015 Apr-2016

MINT Yield Spread MINT Yield Mean Yield-1 SD +1 SD

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

Oct-2010 Oct-2011 Oct-2012 Oct-2013 Oct-2014 Oct-2015 Oct-201MINT P/BV Mean +1 SD -1 SD

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%


MLT Yield Spread MLT Yield Mean Yield -1 SD +1

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5


MLT P/BV Mean +1 SD -1 SD

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

Aug-2013 Aug-2014 Aug-2015 Aug-2016

SBREIT Yield Spread SBREIT Yield Mean Yield-1 SD +1 SD

0.50

0.60

0.70

0.80

0.90

1.00

1.10

1.20

1.30

1.40

1.50

Aug-2013 Aug-2014 Aug-2015 Aug-2016

SBREIT P/BV Mean +1 SD -1 SD

Page 97

Industry Focus



Ascendas India Trust Historical Yield Spread Ascendas India Trust Historical P/BV



0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%


AIT Yield Spread AIT Yield Mean Yield -1 SD +1 SD

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

Jan-2010 Jan-2011 Jan-2012 Jan-2013 Jan-2014 Jan-2015 Jan-2016 Jan

AIT P/BV Mean +1 SD -1 SD

Page 98

Industry Focus



Healthcare REIT Sector Yield Spread Healthcare REIT Sector Historical P/BV



Parkway Life REIT Historical Yield Spread Parkway Life REIT Historical P/BV



Religare Health Trust Historical Yield Spread Religare Health Trust Historical P/BV



0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%


Healthcare REITs Yield Spread Healthcare REITs Yield

Mean -1 SD

+1 SD

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%


PREIT Yield Spread PREIT Yield Mean-1 SD +1 SD

0.5

0.7

0.9

1.1

1.3

1.5

1.7

Jan-2010 Jan-2011 Jan-2012 Jan-2013 Jan-2014 Jan-2015 Jan-2016PREIT P/BV Mean +1 SD -1 SD

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5


Healthcare REITs P/BV Mean +1 SD -1 SD

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

Nov-12 Nov-13 Nov-14 Nov-15 Nov-1

RHT Yield Spread RHT Yield Mean Yield-1 SD +1 SD

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

Nov-2012 Nov-2013 Nov-2014 Nov-2015 Nov-2016

RHT P/BV Mean +1 SD -1 SD

Page 99

Industry Focus



Singapore Developers

CapitaLand Limited P/NAV City Developments Limited P/NAV



Global Logistics Properties Limited P/NAV UOL Limited P/NAV



Wheelcok Properties P/NAV Wingtai P/NAV



0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

(X)

City Dev P/NAV Mean -1 SD +1 SD

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

2010 2011 2012 2013 2014 2015 2016

(X)

GLP P/NAV Mean -1 SD +1 SD

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

(X)

UOL P/NAV Mean -1 SD +1 SD

0.0

0.5

1.0

1.5

2.0

2.5

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

(X)

Wheelock P/NAV Mean -1 SD +1 SD

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

(X)

Wingtai P/NAV Mean -1 SD +1 SD

0.0

0.5

1.0

1.5

2.0

2.5

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

(X)

CapitaLand P/NAV Mean -1 SD +1 SD

Page 100

Industry Focus



UIC Limited P/NAV Perennial Real Estate P/NAV



Ho Bee Group Limited P/NAV Bukit Sembawang Limited P/NAV



United Engineers P/NAV Tuan Sing P/NAV



0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

(X)

UIC P/NAV Mean -1 SD +1 SD

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

2014 2015 2016

(X)

Perennial RE P/NAV Mean -1 SD +1 SD

0.0

0.5

1.0

1.5

2.0

2.5

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

(X)

Ho Bee P/NAV Mean -1 SD +1 SD

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

(X)

Bukit Sembawang P/NAV Mean -1 SD +1 SD

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

(X)

United Engineers P/NAV Mean -1 SD +1 SD

0.0

0.2

0.4

0.6

0.8

1.0

1.2

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

(X)

Tuan Sing P/NAV Mean -1 SD +1 SD

Page 101

Industry Focus



Stock Profiles

Page 102

ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa:JC, PY

BUY Last Traded Price (4 Jan 2017): S$3.06 (STI : 2,921.31)

Price Target 12-mth: S$3.60 (18% upside)

Potential Catalyst: Stronger than anticipated residential sales

Where we differ: Estimates are more conservative than consensus

Analyst Derek TAN +65 6682 3716 [email protected] Rachel TAN +65 6682 3713 [email protected]

Price Relative

Forecasts and Valuation FY Dec (S$ m) 2015A 2016F 2017F 2018F

Revenue 4,762 4,109 4,959 4,730 EBITDA 2,325 1,651 1,851 1,961 Pre-tax Profit 1,839 1,152 1,313 1,357 Net Profit 1,066 661 753 779 Net Pft (Pre Ex.) 1,066 661 753 779 Net Pft Gth (Pre-ex) (%) (8.2) (38.0) 14.0 3.4 EPS (S cts) 25.0 15.5 17.7 18.3 EPS Pre Ex. (S cts) 25.0 15.5 17.7 18.3 EPS Gth Pre Ex (%) (8) (38) 14 3 Diluted EPS (S cts) 25.0 15.5 17.7 18.3 Net DPS (S cts) 9.00 9.00 9.00 9.00 BV Per Share (S cts) 420 427 436 445 PE (X) 12.3 19.9 17.5 16.9 PE Pre Ex. (X) 12.3 19.9 17.5 16.9 P/Cash Flow (X) 5.3 nm 11.9 17.5 EV/EBITDA (X) 13.8 21.0 18.9 18.2 Net Div Yield (%) 2.9 2.9 2.9 2.9 P/Book Value (X) 0.7 0.7 0.7 0.7 Net Debt/Equity (X) 0.5 0.6 0.6 0.6 ROAE (%) 6.1 3.7 4.1 4.2 Earnings Rev (%): - - - Consensus EPS (S cts): 17.0 19.0 20.8 Other Broker Recs: B: 18 S: 0 H: 3

Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P

Strong earnings quality Improving earnings quality. We believe that CapitaLand Limited (CAPL) offers good value, trading at an attractive 0.7x P/B and 0.6x P/RNAV. The group’s strategy to focus on growing its commercial portfolio is bearing fruit, offering better earnings visibility. Coupled with opportunistic asset recycling of mature assets into its listed REITs/funds, there is ample upside potential to our earnings estimates. We maintain our BUY call with a target price of S$3.60. Growing recurring revenues from retail mall portfolio and Ascott. Its property portfolio has c. 75% of assets in retail malls, and commercial integrated developments, including Ascott Group, which offers strong income visibility in the medium term. The operating performance of its malls will improve as the properties reach maturity, boosted by the completion of four Raffles City mega developments in China in the medium term. Robust set of 3Q16 results. CAPL reported a robust 28.4% growth in net profit to S$247.5m, on the back of stronger revenues which was up 27.7% to S$1,373m. The better performance was seen across its portfolio, but mainly driven by development projects in Singapore and China, and higher performance from its Singapore commercial portfolio. Tenant sales across its malls in Singapore and China were stable. Valuation:

Our target price of S$3.60 is based on a 25% discount to our

adjusted RNAV of S$4.80/share. Our RNAV is based on our

estimates of the market valuations of its various property

developments and investment property assets across its various

divisions.

Key Risks to Our View:

Slowdown in Asian economies. The risk to our view is if there

is a slowdown in Asian economies, especially China, which

could dampen demand for housing and private consumption

expenditure and retail sales. At A Glance Issued Capital (m shrs) 4,237

Mkt. Cap (S$m/US$m) 12,966 / 9,167

Major Shareholders (%)

Temasek Holdings Pte Ltd 40.1

Blackrock 6.0

Free Float (%) 53.9

3m Avg. Daily Val (US$m) 17.4

ICB Industry : Real Estate / Real Estate

DBS Group Research . Equity

4 Jan 2017

Singapore Company Guide

CapitaLand Version 6 | Bloomberg: CAPL SP | Reuters: CATL.SI Refer to important disclosures at the end of this report

67

87

107

127

147

167

187

207

2.4

2.9

3.4

3.9

4.4

Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

Relative IndexS$

CapitaLand (LHS) Relative STI (RHS)


Page 2

Company Guide

CapitaLand

CRITICAL DATA POINTS TO WATCH

Earnings Drivers:

Growing recurring revenues from retail mall portfolio and

Ascott. While trading properties (residential development and

strata offices) account for 24% of assets, we see continued

strength from CAPL’s retail mall division (CapitaMalls Asia) and

commercial integrated developments, including Ascott Group,

its successful serviced residence brand, which form a significant

76% of total assets and is expected to contribute to growing

recurring income for the group.

CapitaMalls Asia continues to perform steadily despite ongoing

operational headwinds. There are 87 operating properties

across Asia (56 of it in China). As at Sep-16, the group’s

shopping malls continue to record steady sales and occupancy

rates. Portfolio tenant sales remained healthy at 2.5% for

Singapore and 5.2% in China on the back of improving traffic.

For China, sales performance varies, with malls in Tier 1 cities

performing better (tenant sales +2.8%) while those in Tier 2

and Tier 3 cities marginally higher by 2.4% and 1.7%

respectively. Looking ahead, CAPL is expected to open another

16 properties (nine in China) in the next few years.

In addition, Raffles City integrated developments in China will

continue to offer stable returns (7-8% for stabilised properties

in Shanghai and Beijing, c.3% for stabilising properties in

Chengdu and Ningbo). Looking ahead, the group will be

opening four more Raffles City developments in 2016-2018,

which will boost the group’s returns and profitability when

completed.

The Ascott Limited remains on the fast track to achieve its

80,000-unit target by year 2020 and will add another 770 units

by 4Q16. Ascott’s investment in China’s largest and fastest-

growing online apartment sharing platform, Tujia has yet to

bear fruit meaningfully but we continue to believe in its longer

term synergies and ability to leverage on Tujia’s platform to

reach out to a wider addressable market in the medium term.

Launch of new PE funds. Leveraging on its fund management

expertise, CAPL aims to launch 5-6 private equity (PE) funds

with funds under management of S$8-10bn by 2020. We think

that by tapping on third-party capital, CAPL would be able to

leverage on larger economies of scale, better capitalise on

market opportunities and at the same time de-risk its property

level exposure. The group launched the US$1.5bn Raffles City

China Investment Partners III (RCCIP III) aimed at prime

integrated developments in gateway cities in China which will

likely be seeded by their properties.

Revenue (S$’m)

Breakdown of Revenues (FY17)

Operating PATMI (Ex Revaluations)

RNAV of CapitaLand S$'bn

Value of CapitaLand Singapore 7,082.5

Value of CapitaLand China 9,818.5

CapitaMalls Asia 17,446.0

Ascott 4,237.1

Others 855.0

GDV of CAPL Group 39,439.2

Less: Net Debt (11,552.3)

Less: devt capex (7,548.6)

RNAV of CAPL 20,458.3

Total Shares 4,258.6

RNAV per share 4.80

Discount to RNAV 25%

Target price 3.60

Source: Company, DBS Bank

-

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

6,000.0

13A 14A 15A 16F 17F 18F

S$'m

CapitaLand Singapore

21%

Capitaland China 29%

CapitaMalls Asia31%

Ascott 16%

Others3%

-

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

900.0

13A 14A 15A 16F 17F 18F

S$'m

ASIAN INSIGHTS VICKERS SECURITIES Page 3

Company Guide

CapitaLand

Balance Sheet:

Balance sheet remains strong. We forecast debt/equity ratio to remain stable, at below c.0.6x over the coming years. Debt maturity profile remains long at 3.5 years (as of 3Q16) with an average cost of 3.4%. Approximately 70% of the interest cost is hedged into fixed rate debt. Share Price Drivers:

De-risking its Singapore residential exposure/replenishing land bank. CAPL has been actively de-risking its Singapore residential exposure through active marketing of its unsold units across its projects and most completed projects are substantially sold. Singapore residential is only c.6% of its total asset value, and is not likely to have a major impact on earnings if further risks arise. Looking ahead, while the group has not been an active investor in Singapore’s residential market, winning any new land tenders will imply improved confidence in the outlook for Singapore’s residential market in the medium term. Relaxation of government policies. Expectations of policy relaxation (especially cyclical measures like the Buyers’ and Sellers’ stamp duties) may improve buyers’ market sentiment and spark a revival in transactional volumes in the Singapore residential market. This is also expected to lift sentiment on property stocks, which we believe will enable CAPL to close the gap between stock price and its NAV. Asset recycling into listed S-REITs. CAPL will continue to demonstrate its ability to crystallise value through strategic divestments of mature assets to its listed REITs, which are market leaders in their respective subsectors of retail, office and hospitality. The ability to recycle capital efficiently will enable the group to free up capital, improve its balance sheet position and deploy capital to projects with higher returns. Key Risks:

Slowdown in Asian economies. The risk to our view is a further slowdown in Asian economies which could dampen demand for housing and private consumption expenditure and retail sales. This in turn could result in slower-than-expected projections. Company Background

CapitaLand is one of Asia’s largest real estate companies headquartered and listed in Singapore. Its two core markets are Singapore and China; while Indonesia, Malaysia and Vietnam have been identified as new growth markets.

Leverage & Asset Turnover (x)

Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.0

0.0

0.0

0.1

0.1

0.1

0.1

0.1

0.2

0.2

0.2

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

2014A 2015A 2016F 2017F 2018F

Gross Debt to Equity (LHS) Asset Turnover (RHS)

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

2014A 2015A 2016F 2017F 2018F

Capital Expenditure (-)

S$m

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2014A 2015A 2016F 2017F 2018F

Avg: 15.3x

+1sd: 18.3x

+2sd: 21.2x

‐1sd: 12.4x

‐2sd: 9.4x8.4

10.4

12.4

14.4

16.4

18.4

20.4

22.4

Jan-13 Jan-14 Jan-15 Jan-16

(x)

Avg: 0.82x

+1sd: 0.91x

+2sd: 1.01x

‐1sd: 0.72x

‐2sd: 0.62x

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3


(x)


Company Guide

CapitaLand

Segmental Breakdown

FY Dec 2014A 2015A 2016F 2017F 2018F Revenues (S$m) CapitaLand Singapore 1,242 1,229 890 1,030 1,053 CapitaLand China 638 2,039 1,505 2,005 1,601 CMA 1,178 663 840 997 1,128 Ascott 683 744 725 775 794 Others 185 86.1 148 151 153 Total 3,925 4,761 4,109 4,959 4,730

Income Statement (S$m)

FY Dec 2014A 2015A 2016F 2017F 2018F Revenue 3,925 4,762 4,109 4,959 4,730 Cost of Goods Sold (2,543) (3,287) (2,245) (2,851) (2,498) Gross Profit 1,382 1,475 1,864 2,107 2,232 Other Opng (Exp)/Inc (513) (431) (465) (489) (513) Operating Profit 869 1,044 1,398 1,619 1,719 Other Non Opg (Exp)/Inc 541 490 0.0 0.0 0.0 Associates & JV Inc 970 726 188 167 177 Net Interest (Exp)/Inc (382) (422) (435) (473) (539) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 1,997 1,839 1,152 1,313 1,357 Tax (238) (344) (207) (236) (244) Minority Interest (599) (430) (283) (323) (334) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 1,161 1,066 661 753 779 Net Profit before Except. 1,161 1,066 661 753 779 EBITDA 2,444 2,325 1,651 1,851 1,961 Growth Revenue Gth (%) 11.8 21.3 (13.7) 20.7 (4.6) EBITDA Gth (%) 7.4 (4.9) (29.0) 12.1 6.0 Opg Profit Gth (%) 27.8 20.2 33.9 15.8 6.2 Net Profit Gth (Pre-ex) (%) 32.7 (8.2) (38.0) 14.0 3.4 Margins & Ratio Gross Margins (%) 35.2 31.0 45.4 42.5 47.2 Opg Profit Margin (%) 22.1 21.9 34.0 32.6 36.3 Net Profit Margin (%) 29.6 22.4 16.1 15.2 16.5 ROAE (%) 7.1 6.1 3.7 4.1 4.2 ROA (%) 2.6 2.3 1.4 1.6 1.7 ROCE (%) 1.9 2.0 2.7 3.0 3.1 Div Payout Ratio (%) 33.0 36.0 58.0 50.9 49.2 Net Interest Cover (x) 2.3 2.5 3.2 3.4 3.2


Mainly from residential sales in China and Singapore


Company Guide

CapitaLand

Quarterly / Interim Income Statement (S$m)

FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Revenue 1,076 1,740 894 1,132 1,374 Cost of Goods Sold (738) (1,359) (615) (828) (950) Gross Profit 338 381 279 304 423 Other Oper. (Exp)/Inc (30.2) (28.4) 2.70 77.9 (89.3) Operating Profit 308 352 282 382 334 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 140 224 165 198 149 Net Interest (Exp)/Inc (105) (97.1) (108) (102) (101) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 343 479 339 477 383 Tax (64.4) (84.7) (51.6) (82.1) (61.2) Minority Interest (85.6) (147) (69.6) (101) (74.1) Net Profit 193 248 218 294 248 Net profit bef Except. 193 248 218 294 248 EBITDA 448 576 447 580 483 Growth Revenue Gth (%) 4.3 61.7 (48.6) 26.6 21.4 EBITDA Gth (%) (17.4) 28.6 (22.4) 29.6 (16.6) Opg Profit Gth (%) 0.5 14.4 (19.9) 35.3 (12.5) Net Profit Gth (Pre-ex) (%) 36.1 28.5 (11.9) 34.7 (15.8) Margins Gross Margins (%) 31.4 21.9 31.2 26.8 30.8 Opg Profit Margins (%) 28.6 20.3 31.5 33.7 24.3 Net Profit Margins (%) 17.9 14.2 24.4 26.0 18.0

Balance Sheet (S$m)

FY Dec 2014A 2015A 2016F 2017F 2018F Net Fixed Assets 1,047 808 908 1,007 1,107 Invts in Associates & JVs 12,781 12,858 13,130 13,389 13,654 Other LT Assets 18,705 20,760 21,260 21,760 22,260 Cash & ST Invts 2,941 4,257 2,151 2,477 2,431 Inventory 0.0 0.0 0.0 0.0 0.0 Debtors 963 1,424 1,027 1,240 1,154 Other Current Assets 7,676 6,945 6,808 6,259 6,299 Total Assets 44,113 47,053 45,285 46,131 46,904 ST Debt 3,469 2,246 2,246 2,246 2,246 Creditor 3,070 4,064 1,386 1,088 690 Other Current Liab 463 620 684 777 879 LT Debt 12,517 13,812 14,312 14,812 15,312 Other LT Liabilities 1,386 1,373 1,373 1,373 1,373 Shareholder’s Equity 16,758 17,905 18,183 18,553 18,949 Minority Interests 6,451 7,032 7,101 7,282 7,455 Total Cap. & Liab. 44,113 47,053 45,285 46,131 46,904 Non-Cash Wkg. Capital 5,107 3,685 5,766 5,633 5,883 Net Cash/(Debt) (13,045) (11,801) (14,407) (14,581) (15,127) Debtors Turn (avg days) 99.1 91.5 108.9 83.4 92.3 Creditors Turn (avg days) 438.9 404.1 456.1 162.1 133.4 Inventory Turn (avg days) N/A N/A N/A N/A N/A Asset Turnover (x) 0.1 0.1 0.1 0.1 0.1 Current Ratio (x) 1.7 1.8 2.3 2.4 2.6 Quick Ratio (x) 0.6 0.8 0.7 0.9 0.9 Net Debt/Equity (X) 0.6 0.5 0.6 0.6 0.6 Net Debt/Equity ex MI (X) 0.8 0.7 0.8 0.8 0.8 Capex to Debt (%) 0.8 0.4 1.0 1.0 0.9 Z-Score (X) 1.1 1.1 1.1 1.1 1.1


Gearing to remain stable


Company Guide

CapitaLand

Cash Flow Statement (S$m)

FY Dec 2014A 2015A 2016F 2017F 2018F Pre-Tax Profit 1,997 1,839 1,152 1,313 1,357 Dep. & Amort. 64.6 65.0 65.0 65.0 65.0 Tax Paid (256) (145) (144) (143) (142) Assoc. & JV Inc/(loss) (970) (726) (188) (167) (177) Chg in Wkg.Cap. 51.9 1,264 (2,144) 39.3 (352) Other Operating CF 111 169 0.0 0.0 0.0 Net Operating CF 999 2,466 (1,259) 1,107 751 Capital Exp.(net) (127) (64.0) (164) (164) (164) Other Invts.(net) (1,357) (718) (500) (500) (500) Invts in Assoc. & JV 841 509 (150) (150) (150) Div from Assoc & JV 406 394 65.8 58.5 62.1 Other Investing CF (102) 33.0 0.0 0.0 0.0 Net Investing CF (339) 154 (749) (756) (752) Div Paid (705) (727) (598) (525) (545) Chg in Gross Debt 177 (212) 500 500 500 Capital Issues 1.38 0.0 0.0 0.0 0.0 Other Financing CF (3,746) (274) 0.0 0.0 0.0 Net Financing CF (4,272) (1,213) (98.1) (24.9) (44.7) Currency Adjustments 55.0 16.9 0.0 0.0 0.0 Chg in Cash (3,557) 1,424 (2,106) 326 (45.8) Opg CFPS (S cts) 22.2 28.2 20.8 25.1 25.9 Free CFPS (S cts) 20.5 56.4 (33.4) 22.1 13.8


Target Price & Ratings History

Source: DBS Bank

Analyst: Derek TAN, Rachel TAN

S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 08 Jan 16 3.16 3.73 BUY

2: 18 Jan 16 3.02 3.73 BUY

3: 16 Feb 16 2.90 3.73 BUY

4: 18 Feb 16 2.91 3.70 BUY

5: 02 Mar 16 3.07 3.70 BUY

6: 16 Mar 16 3.14 3.70 BUY

7: 18 Apr 16 3.16 3.70 BUY

8: 20 Apr 16 3.17 3.70 BUY

9: 27 May 16 2.98 3.70 BUY

10: 31 May 16 2.99 3.70 BUY

11: 09 Jun 16 3.05 3.70 BUY12: 05 Aug 16 3.22 3.60 BUY13: 16 Sep 16 3.12 3.60 BUY14: 30 Sep 16 3.20 3.60 BUY

Note : Share price and Target price are adjusted for corporate actions. 15: 18 Oct 16 3.13 3.60 BUY16: 24 Oct 16 3.17 3.60 BUY17: 07 Nov 16 3.04 3.60 BUY18: 10 Nov 16 3.08 3.60 BUY19: 14 Nov 16 3.00 3.60 BUY20: 16 Nov 16 2.99 3.60 BUY21: 21 Nov 16 2.98 3.60 BUY22: 25 Nov 16 3.02 3.60 BUY

12

3

45

6

7

8

91011

12

13

14

15

16

17

18

19

20

21

22

2.67

2.77

2.87

2.97

3.07

3.17

3.27

3.37

Jan-16 May-16 Sep-16 Jan-17

S$

Assumed capex

ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa: JC, PY

BUY Last Traded Price (4 Jan 2017): S$8.39 (STI : 2,921.31) Price Target 12-mth: S$9.90 (18% upside) Potential Catalyst: Further injections into PPS structure Where we differ: Below consensus Analyst Rachel TAN +65 6682 3713 [email protected] Derek TAN +65 6682 3716 [email protected]

Price Relative

Forecasts and Valuation FY Dec (S$ m) 2015A 2016F 2017F 2018F Revenue 3,304 3,654 3,875 4,437 EBITDA 948 1,092 1,135 1,246 Pre-tax Profit 985 787 830 937 Net Profit 760 548 577 653 Net Pft (Pre Ex.) 436 548 577 653 Net Pft Gth (Pre-ex) (%) 8.6 25.7 5.3 13.2 EPS (S cts) 83.6 60.2 63.5 71.8 EPS Pre Ex. (S cts) 47.9 60.2 63.5 71.8 EPS Gth Pre Ex (%) 9 26 5 13 Diluted EPS (S cts) 79.7 57.4 60.5 68.4 Net DPS (S cts) 16.0 11.5 12.1 13.7 BV Per Share (S cts) 989 1,034 1,085 1,145 PE (X) 10.0 13.9 13.2 11.7 PE Pre Ex. (X) 17.5 13.9 13.2 11.7 P/Cash Flow (X) 98.0 8.0 11.3 5.4 EV/EBITDA (X) 13.4 11.4 11.0 9.5 Net Div Yield (%) 1.9 1.4 1.4 1.6 P/Book Value (X) 0.8 0.8 0.8 0.7 Net Debt/Equity (X) 0.3 0.3 0.3 0.2 ROAE (%) 8.7 6.0 6.0 6.4 Earnings Rev (%): - - - Consensus EPS (S cts): 62.5 63.3 69.2 Other Broker Recs: B: 19 S: 1 H: 3


Solitaire PPS Club member Attractive valuations. We continue to see good value at 0.8x FY17F P/NAV, at 1SD below historical average. Key catalysts are: i) potential injection of assets into Profit Participation Securities (PPS), ii) improvement in hotel operations, and iii) accretive acquisitions/land banking. 9M16 net profit grew 13% on one-off gains. 9M16 net profit grew 13% y-o-y to S$409m (68% of consensus’ full-year estimates) driven by revenue growth of 12% y-o-y (largely contributions from property development), one-off gains from disposal of 53% stake in City E-Solutions (CES) and insurance claims. Property development continues to record strong growth coupled with a 24% y-o-y increase in 9M16 property sales value (number of units sold was stable y-o-y). Weak performance from the hotel properties continue to weigh down earnings. Some light from overseas investments. CDL’s decision to diversify into the overseas property market amid a challenging outlook in the Singapore property market is finally coming to fruition. With most of its Singapore property projects having been completed or are soon-to-be-completed, we expect international properties (UK and China) to drive property sales/revenue recognition in 2017/2018. We believe this could partly offset the impact of a weak property market in Singapore. Valuation:

We maintain our BUY call with TP to S$9.90 pegged to a 20% discount to our RNAV of S$11.90. Supported by a strong balance sheet and diversified earnings base, CDL should be able to navigate well around the current uncertain market conditions. Key Risks to Our View:

Decline in residential prices in Singapore. As a proxy to Singapore’s residential market, a deteriorating operating environment will cap share price performance. At A Glance Issued Capital (m shrs) 909 Mkt. Cap (S$m/US$m) 7,629 / 5,341 Major Shareholders (%) Davos Investments 16.4 Hong Leong Investment 15.4 Aberdeen Asset Management 14.0

Free Float (%) 54.2 3m Avg. Daily Val (US$m) 8.9 ICB Industry : Real Estate / Real Estate



City Developments Version 5 | Bloomberg: CIT SP | Reuters: CTDM.SI Refer to important disclosures at the end of this report

56

76

96

116

136

156

176

196

216

6.0

7.0

8.0

9.0

10.0

11.0

12.0

13.0

14.0


Relative IndexS$

City Developments (LHS) Relative STI (RHS)


Company Guide

City Developments


Earnings Drivers:

Aiming for a higher proportion of recurring earnings base. Weighed down by weak sentiment and depleting land bank for its development projects, CDL’s focus in 2015-2016 has been to focus on its commercial portfolio; building up a recurring income base in order to sustain profitability. In 2015, CDL had close to 64% of its revenues from recurring and stable segments. Hotel operations are the largest revenue contributor (49%) among all divisions despite showing some signs of weakness, which implies a substantial proportion of stable income. Potential headwinds in this segment are further deterioration of RevPAR especially in Asian hotels and further depreciation of GBP. The group’s investment property division (office and retail malls mainly in Singapore) is projected to offer steady returns. In total, the hotel and investment property divisions contribute c. 64-67% of revenues. Looking overseas to sustain growth. We continue to see good progress for the group’s overseas investments. London – CDL recorded strong sales at its 82-unit Reading project, and is expected to book in revenues of c. GBP18.4m (S$36m), while its other projects will be launched progressively in the coming quarters. The Teddington Studios and Stag Brewery sites (planning approvals expected in 1Q18) are expected to be launched in phases in the medium term. CDL has also signed a contract to purchase 56-64 Leonard Street in Shoreditch for GBP37.4m (S$73.5m), to be redeveloped into an office tower block. In China, CDL has launched some projects in Suzhou (Hong Leong City Center continues to see steady sales). Phase 1 of the project (30-storey, 462-unit residential tower and 912-unit Soho Tower) has seen good sales momentum, selling 995 units to date, locking in sales proceeds of over RMB2.12bn (S$424m) which will be booked when completed. Tower 2 of the project was launched and fully sold in an hour. The group’s Hongqiao Royal Lake project also moved 32 units (out of 85), locking in sales of RMB634m (S$127m). CDL’s other projects in Chongqing and Suzhou will likely take more time before they can be launched. In Australia, the group’s JV residential project in Brisbane is 93% sold (Ivy and Eve, two 30-storey towers comprising 472 apartments), and will be booked in 2018. The group’s developments in Tokyo will likely be launched in the medium term. New PPS structure. Post the successful launch of three PPS structures, management is keen to continue unlocking value through fund management and/or new private equity structures. The successful launch will enable the group to book in substantial gains given that assets are recorded at cost.

Revenue growth (FY14A-18F)

Breakdown in revenues (FY16F)

Revenue growth from hotel segment

RNAV breakdown

RNAV S$'m Investment Portfolio (office) 3,122.2 Investment Portfolio (mixed Development ) 1,505.1 Investment Portfolio (hotels) 1,071.5 Investment Portfolio (retail) 893.5 Investment Portfolio (industrial and others) 137.4 GDV of residential portfolio 4,757.6 Listed Stakes in M&C 1,856.7 CDL HT 338.1 Others 86.7 Gross Asset Value 13,768.8 Less: pref conversion (211.8) Less: Net debt (1,835.9) RNAV of CDL 11,721.2 No of shares 954.3 RNAV/share 12.3 Discount -20% TP 9.90


0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

4,000.0

4,500.0

5,000.0

2014A 2015A 2016F 2017F 2018F

S$'m

Others Hotel operations Rental income Property devt

Property devt36%

Rental income11%

Hotel operations

49%

Others4%

40%

42%

44%

46%

48%

50%

52%

1,350.0

1,400.0

1,450.0

1,500.0

1,550.0

1,600.0

1,650.0

1,700.0

1,750.0

1,800.0

1,850.0

2013A 2014A 2015A 2016F 2017F

S$'m

Revenue % of topline


Company Guide

City Developments

Balance Sheet:

Undervalued Net Asset Value (NAV). As the group has chosen to account for investment properties on a historical cost basis, its NAV is conservative as we estimate that current fair values of CDL’s properties are much higher than carrying values. Low gearing of 26%. CDL’s gearing is estimated to remain low at <30% (and closer to mid-teens assuming that its investment property values are marked-to-market) which is within management’s comfortable range. This provides greater financial flexibility and debt headroom for the group to acquire opportunistically. Share Price Drivers:

Replenishing land bank is key to income sustainability. The ongoing tight government measures have taken a toll on the group’s residential business segment, with the group staying selective on land banking activities. However, CDL has been active in the Executive Condos (ECs) segment; The Brownstone EC and The Criteron saw brisk sales when launched. CDL launch 40 units in Gramercy Park, a high-end condominium in May 2016 and has achieved 90% sales. The group has been marketing the project regionally and is understood to have received positive responses from investors. The successful launch of its ongoing project will be positive to investor sentiment on property stocks, which we believe will enable CDL to close the gap between its stock price and NAV. Key Risks:

Decline in residential prices in Singapore. Seen as a proxy to Singapore’s residential market, a worsening of the operating environment is expected to cap any upside potential for the stock. Unsold inventories are mainly in the high-end and executive segments whose unsold stock typically take time to clear. Interest rate risk. A rise in interest rates will have a negative impact on property transactions, given lower affordability and thus could adversely affect the group’s outlook. Company Background

City Developments Limited (CDL) is one of the pioneers in Singapore's property sector. It is a property and hotel conglomerate involved in real estate development and investment, hotel ownership and management, and facility management.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.1

0.2

0.2

0.3

0.3

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

2014A 2015A 2016F 2017F 2018F


0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

900.0

1,000.0

2014A 2015A 2016F 2017F 2018F


S$m

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

2014A 2015A 2016F 2017F 2018F

Avg: 17.6x

+1sd: 21.2x

+2sd: 24.7x

‐1sd: 14.1x

‐2sd: 10.6x9.5

11.5

13.5

15.5

17.5

19.5

21.5

23.5

25.5


(x)

Avg: 1.05x

+1sd: 1.25x

+2sd: 1.45x

‐1sd: 0.85x

‐2sd: 0.65x

0.5

0.7

0.9

1.1

1.3

1.5

1.7


(x)


Company Guide

City Developments

Segmental Breakdown

FY Dec 2014A 2015A 2016F 2017F 2018F Revenues (S$m) Property devt 1,581 1,037 1,324 1,478 1,960 Rental income 385 405 394 420 428 Hotel operations 1,678 1,698 1,773 1,814 1,885 120 163 163 163 163 Others 0.0 0.0 0.0 0.0 0.0 Total 3,764 3,304 3,654 3,875 4,437


FY Dec 2014A 2015A 2016F 2017F 2018F Revenue 3,764 3,304 3,654 3,875 4,437 Cost of Goods Sold (2,132) (1,648) (1,888) (2,003) (2,316) Gross Profit 1,632 1,656 1,766 1,872 2,121 Other Opng (Exp)/Inc (948) (1,030) (926) (982) (1,124) Operating Profit 684 626 840 891 997 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 54.8 107 37.3 30.1 33.9 Net Interest (Exp)/Inc (90.5) (72.2) (90.8) (90.7) (94.4) Exceptional Gain/(Loss) 356 325 0.0 0.0 0.0 Pre-tax Profit 1,004 985 787 830 937 Tax (95.1) (119) (135) (144) (163) Minority Interest (139) (92.7) (91.3) (96.0) (108) Preference Dividend (12.9) (12.9) (12.9) (12.9) (12.9) Net Profit 757 760 548 577 653 Net Profit before Except. 401 436 548 577 653 EBITDA 939 948 1,092 1,135 1,246 Growth Revenue Gth (%) 17.1 (12.2) 10.6 6.1 14.5 EBITDA Gth (%) (7.4) 1.0 15.3 3.9 9.8 Opg Profit Gth (%) (12.8) (8.5) 34.2 6.0 12.0 Net Profit Gth (Pre-ex) (%) (40.4) 8.6 25.7 5.3 13.2 Margins & Ratio Gross Margins (%) 43.4 50.1 48.3 48.3 47.8 Opg Profit Margin (%) 18.2 18.9 23.0 23.0 22.5 Net Profit Margin (%) 20.1 23.0 15.0 14.9 14.7 ROAE (%) 9.4 8.7 6.0 6.0 6.4 ROA (%) 4.1 3.8 2.7 2.7 3.0 ROCE (%) 3.6 3.0 3.7 3.8 4.2 Div Payout Ratio (%) 19.2 19.1 19.1 19.1 19.1 Net Interest Cover (x) 7.6 8.7 9.3 9.8 10.6


Recognition of locked-in sales


Company Guide

City Developments


FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Revenue 809 855 723 1,092 923 Cost of Goods Sold (396) (392) (365) (652) (493) Gross Profit 413 463 358 440 430 Other Oper. (Exp)/Inc (258) (3.9) (82.9) (98.5) (50.6) Operating Profit 156 459 209 214 245 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 20.6 29.2 10.6 12.5 16.5 Net Interest (Exp)/Inc (22.0) (17.1) (14.8) (21.4) (22.7) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 155 471 205 205 239 Tax (24.4) (44.1) (14.5) (37.6) (35.6) Minority Interest (23.7) (16.8) (18.6) (33.7) (33.1) Net Profit 106 410 172 134 170 Net profit bef Except. 106 410 172 134 170 EBITDA 234 546 272 280 313 Growth Revenue Gth (%) (1.9) 5.7 (15.4) 51.0 (15.5) EBITDA Gth (%) (8.9) 133.5 (50.2) 3.1 12.0 Opg Profit Gth (%) (18.0) 194.5 (54.4) 2.2 14.6 Net Profit Gth (Pre-ex) (%) (20.3) 285.8 (58.1) (22.2) 27.3 Margins Gross Margins (%) 51.1 54.2 49.5 40.3 46.6 Opg Profit Margins (%) 19.3 53.7 28.9 19.6 26.6 Net Profit Margins (%) 13.1 48.0 23.8 12.2 18.5

Balance Sheet (S$m)

FY Dec 2014A 2015A 2016F 2017F 2018F Net Fixed Assets 4,918 5,175 5,260 5,346 5,431 Invts in Associates & JVs 1,128 1,307 1,527 1,740 1,957 Other LT Assets 3,324 2,949 2,949 2,949 2,949 Cash & ST Invts 3,933 3,597 3,913 3,988 4,799 Inventory 11.2 11.2 12.9 13.7 15.8 Debtors 1,589 1,762 1,948 2,066 2,366 Other Current Assets 4,797 5,519 5,312 5,509 5,067 Total Assets 19,701 20,319 20,921 21,610 22,584 ST Debt 2,233 1,911 1,911 1,911 1,911 Creditor 1,463 1,602 1,836 1,948 2,251 Other Current Liab 261 319 195 204 222 LT Debt 4,466 4,572 4,572 4,572 4,572 Other LT Liabilities 501 702 702 702 702 Shareholder’s Equity 8,410 8,996 9,398 9,870 10,413 Minority Interests 2,365 2,217 2,309 2,405 2,513 Total Cap. & Liab. 19,701 20,319 20,921 21,610 22,584 Non-Cash Wkg. Capital 4,672 5,371 5,242 5,438 4,975 Net Cash/(Debt) (2,766) (2,885) (2,569) (2,495) (1,684) Debtors Turn (avg days) 156.6 185.0 185.3 189.1 182.3 Creditors Turn (avg days) 263.6 390.3 375.0 386.1 364.7 Inventory Turn (avg days) 1.9 2.9 2.6 2.7 2.6 Asset Turnover (x) 0.2 0.2 0.2 0.2 0.2 Current Ratio (x) 2.6 2.8 2.8 2.9 2.8 Quick Ratio (x) 1.4 1.4 1.5 1.5 1.6 Net Debt/Equity (X) 0.3 0.3 0.3 0.3 0.2 Net Debt/Equity ex MI (X) 0.3 0.3 0.3 0.3 0.2 Capex to Debt (%) 14.0 (13.0) 4.6 4.6 4.6 Z-Score (X) 1.7 1.7 1.7 1.7 1.7


Weaker property development division, rental and hotel divisions

Conservative gearing


Company Guide

City Developments


FY Dec 2014A 2015A 2016F 2017F 2018F Pre-Tax Profit 1,004 985 787 830 937 Dep. & Amort. 200 215 215 215 215 Tax Paid (188) (194) (259) (135) (144) Assoc. & JV Inc/(loss) (54.8) (107) (37.3) (30.1) (33.9) Chg in Wkg.Cap. (482) (712) 252 (204) 444 Other Operating CF (187) (110) 0.0 0.0 0.0 Net Operating CF 292 77.8 957 675 1,418 Capital Exp.(net) (936) 843 (300) (300) (300) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 828 (227) (200) (200) (200) Div from Assoc & JV 17.9 16.9 16.9 16.9 16.9 Other Investing CF 47.6 (113) 0.0 0.0 0.0 Net Investing CF (41.8) 520 (483) (483) (483) Div Paid (275) (271) (158) (118) (123) Chg in Gross Debt 172 (310) 0.0 0.0 0.0 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF 842 (333) 0.0 0.0 0.0 Net Financing CF 739 (914) (158) (118) (123) Currency Adjustments 189 (16.6) 0.0 0.0 0.0 Chg in Cash 1,178 (333) 316 74.6 811 Opg CFPS (S cts) 85.1 86.8 77.5 96.7 107 Free CFPS (S cts) (70.7) 101 72.3 41.3 123



Source: DBS Bank

Analyst: Rachel TAN, Derek TAN

S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 08 Jan 16 7.58 10.26 BUY

2: 18 Jan 16 7.18 10.26 BUY

3: 16 Feb 16 6.93 10.26 BUY

4: 26 Feb 16 7.20 10.26 BUY

5: 16 Mar 16 7.58 10.26 BUY

6: 18 Apr 16 8.76 10.26 BUY

7: 12 May 16 7.97 9.60 BUY

8: 27 May 16 8.35 9.60 BUY

9: 09 Jun 16 8.80 9.60 BUY

10: 12 Aug 16 8.80 9.90 BUY

11: 16 Sep 16 8.86 9.90 BUY12: 27 Sep 16 8.99 9.90 BUY13: 30 Sep 16 9.07 9.90 BUY14: 18 Oct 16 8.77 9.90 BUY

Note : Share price and Target price are adjusted for corporate actions. 15: 24 Oct 16 8.82 9.90 BUY16: 10 Nov 16 8.60 9.90 BUY17: 16 Nov 16 8.38 9.90 BUY

1 2

3

4 5

6

7

8 9

10

11

12

1314

15

16

17

6.34

6.84

7.34

7.84

8.34

8.84

9.34


S$

ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa: YM, PY

BUY Last Traded Price ( 4 Jan 2017): S$1.60 (STI : 2,921.31) Price Target 12-mth: S$2.00 (25% upside) Potential Catalyst: Better operating results Where we differ: Our estimates are conservative Analyst Rachel TAN +65 6682 3713 [email protected] Derek TAN +65 6682 3716 [email protected]

Price Relative

Forecasts and Valuation FY Sep (S$ m) 2016A 2017F 2018F 2019F Revenue 3,440 2,412 3,103 2,633 EBITDA 993 1,051 1,153 1,107 Pre-tax Profit 960 830 886 836 Net Profit 533 387 415 378 Net Pft (Pre Ex.) 368 387 415 378 Net Pft Gth (Pre-ex) (%) (23.8) 5.0 7.2 (8.8) EPS (S cts) 18.4 13.3 14.3 13.0 EPS Pre Ex. (S cts) 12.7 13.3 14.3 13.0 EPS Gth Pre Ex (%) (24) 5 7 (9) Diluted EPS (S cts) 18.4 13.3 14.3 13.0 Net DPS (S cts) 8.61 8.60 8.60 8.60 BV Per Share (S cts) 230 234 240 245 PE (X) 8.7 12.0 11.2 12.2 PE Pre Ex. (X) 12.6 12.0 11.2 12.2 P/Cash Flow (X) 4.2 nm 14.4 nm EV/EBITDA (X) 17.6 18.7 17.4 19.2 Net Div Yield (%) 5.4 5.4 5.4 5.4 P/Book Value (X) 0.7 0.7 0.7 0.7 Net Debt/Equity (X) 0.6 0.8 0.8 0.8 ROAE (%) 8.1 5.7 6.0 5.4 Earnings Rev (%): 0 0 0 Consensus EPS (S cts): 17.0 19.3 19.0 Other Broker Recs: B: 8 S: 0 H: 0


Yielding like a REIT Growing developer with high dividend yields. We maintain our BUY rating on Frasers Centrepoint Ltd (FCL) for its attractive valuations at 0.7x P/NAV and FY17F PE of 11x, and offering one of the highest dividend yields among developers at c.5.7%. We continue to expect re-rating catalysts coming from potential asset monetisation from ongoing strategies to crystallise value across its portfolio. FY16 core net profit fell 11% (in line) weighed down by weak earnings from development properties. FY16 net profit fell 23% y-o-y to S$597m, mainly due to lower core net profit and lower fair value gains. FY16 fair value gains was 34% lower at S$160m, mainly due to fair value losses in Singapore and Hospitality units offset by fair value gains in Australia (including S$77m fair value gain from the injection of properties into Frasers Logistics and Industrial Trust (FLT)). FY16 profit before interest and tax (PBIT) from development properties fell 29% while recurring income from investment properties dropped by 9% (partly due absence of one-off gains). Property sales were lower in FY16, falling 25% to 4.9k units. Management remains cautious and is selective in the residential sector, and continues to look for opportunities to strengthen its recurring income from commercial properties. Asset recycling into its listed S-REITs. FCL will continue to demonstrate its ability to crystallise value by strategically divesting matured assets to its listed REITs. The group is thus able to free up capital, improve its balance sheet position and recycle capital to projects with higher returns. Valuation: We maintain our BUY rating on FCL, TP maintained at S$2.00 (30% discount to RNAV). Key Risks to Our View: Dependent on the outlook of the Australian real estate market and currency. The group derives an estimated 30% of PBIT from Australia, and returns could be impacted by the weakening AUD/SGD exchange rate. At A Glance Issued Capital (m shrs) 2,900 Mkt. Cap (S$m/US$m) 4,625 / 3,213 Major Shareholders (%) TCC Assets Ltd 59.2 Thai Beverage 28.4 Free Float (%) 12.4 3m Avg. Daily Val (US$m) 0.24 ICB Industry : Real Estate / Real Estate Investment & Services



Frasers Centrepoint Ltd Version 5 | Bloomberg: FCL SP | Reuters: FRCT.SI Refer to important disclosures at the end of this report

88

108

128

148

168

188

208

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2.0

2.1

2.2

Jan-14 Jan-15 Jan-16

Relative IndexS$

Frasers Centrepoint Ltd (LHS) Relative STI (RHS)


Company Guide

Frasers Centrepoint Ltd


Earnings Drivers:

Growing recurring revenues from its commercial and hospitality divisions. Frasers Centrepoint Limited (FCL) is one of the largest property developers in Singapore with an asset base of over S$24bn as of FY16. The group aims to grow recurring revenues to 60-70% of PBIT in the medium term. The group’s commercial portfolio will see incremental income from the completions of WaterwayPoint (completed in January 2016), Northpoint City (retail) and Frasers Towers (commercial) from 2018 onwards, which will boost its earnings further while The Centrepoint mall’s AEI has completed in Sep16. Frasers Hospitality is also expected to see its footprint expand to 30,000 managed units by 2019. In addition, the acquisition of the Malmaison Hotel du vin Group (MHDV), which has a portfolio of 29 boutique lifestyle hotels and 2,082 keys within 25 regional cities in the UK, will further deepen its presence and clientele reach. We see cross-selling opportunities and synergies between MHDV and the Frasers brand, propelling the division’s performance to greater heights. New launches across its portfolio; property development division has over S$3.6bn in locked-in sales. FCL sold 330 units in FY16, and launched the 628-unit Parc Life EC project (80:20% JV with Keong Hong) in Sembawang, selling close to 119 units (or c.19% of total units), which is below initial expectations. We believe this could be due to supply fatigue of ECs in the vicinity but management remains optimistic that sales will return over time once competition within the space thins out. In China and Australia, FCL achieved sales of 1.7k units and 2.9k units during FY16. Unrecognised revenues from its property division, including Frasers Property Australia totalled about S$3.1bn. Sustainable high dividend. FCL has one of the highest ROEs among property developers (c.8-11% over FY14A-15A) and dividend yield of close to 6% vs industry average ROE of close to 6% and dividend yield of c.2-3%. This is mainly due to the group’s efficient operating model of quick-asset turns for its residential development projects and its focus on a portfolio of recurring commercial properties (hotels, retail and office) which boosts returns. Golden Land acquisition to bear fruit in the medium term. The group acquired close to a 35.6% stake in Golden Land Property Development PCL (GOLD) and management believes that this acquisition offers good synergies to FCL as both companies share similar investment philosophies with an aim to continue growing its recurring income base. GOLD also offers FCL the ability to tap into the growing real estate market in Thailand, supported by favourable market fundamentals.

Revenue (FY15A-FY19F)

PBIT breakdown by divisions (FY16)

PATMI (FY15A-19F)

RNAV RNAV S$'m Surpluses from: Commercial Portfolio (Office, retail, hotels) (699) Stakes in REITs 190 Frasers Australand 519 Fee income : Hotel Mgmt 854 Fee income : REITs 373 NPV development projects 346 Total Surpluses 1,583 Add: Book NAV 8,053 Gross Development Value 9,636 less: preference shares (1,392) less: MI (3,791) Add: MI Attributable to REITs 3,827 RNAV 8,280 RNAV/share ($) 2.86 Discount 30% TP ($) 2.00


0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

4,000.0

2015 2016 2017F 2018F 2019F

S$'m

Development properties

31%

Commercial properties

30%

Hospitality13%

Frasers P roperty Australia

26%

-

100.0

200.0

300.0

400.0

500.0

600.0

2015 2016 2017F 2018F 2019F

S$'m


Company Guide


Balance Sheet:

Balance sheet remains strong. Debt/equity ratio is expected to remain fairly stable at between 0.8-0.9x over FY15F-17F which is within management's comfortable range. Debt maturity profile remains long at 3.0 years with an average cost of debt of 3.1%. Fixed rate percentage of its loans remains high at 81%. Share Price Drivers:

Replenishing land bank key to income sustainability. The group currently has 9.3m sq ft of development space, mainly in Australia. It is actively looking for efficient means to replenish its land bank especially in Singapore but remains selective, given the sustained high land prices seen in recent government land tenders. The ability to secure additional land bank at lower prices will mean upside to RNAVs and could re-rate the stock. Relaxation of property cooling measures in Singapore. Expectations of policy relaxation (especially cyclical measures like the Buyers’ and Sellers’ stamp duties) might improve buyers’ market sentiment and spark a revival in transaction volumes in the Singapore residential market. This is also expected to lift sentiment on property stocks, which we believe will enable FCL to close the gap between its stock price and NAV. Gains from asset recycling into its listed S-REITs to boost share price. Recycling activities are perceived positively by investors as FCL is able to free up capital by selling its matured assets to its listed REITs, which will improve the group’s balance sheet position and recycle capital to projects with higher returns. Key Risks:

Small free float. The stock has a low free float with 87.9% of the company held by major shareholders TCC Group and Thai Beverage, thus leading to low liquidity. Dependent on the outlook of Australia's real estate market, currency outlook. The group derives an estimated 30% of PBIT from Australia which is dependent on the real estate market and whose returns could be impacted by the weakening AUD/SGD exchange rate. Company Background

Frasers Centrepoint Ltd (FCL) is a one of Singapore’s main real estate companies with assets exceeding S$23bn. The group has four key core businesses focused on residential, commercial, hospitality and industrial sectors spanning 77 cities across Asia, Australasia, Europe and the Middle East.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.0

0.0

0.0

0.1

0.1

0.1

0.1

0.1

0.2

0.2

0.2

0.00

0.20

0.40

0.60

0.80

1.00

2015A 2016A 2017F 2018F 2019F


0.0

10.0

20.0

30.0

40.0

50.0

60.0

2015A 2016A 2017F 2018F 2019F


S$m

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

2015A 2016A 2017F 2018F 2019F

Avg: 11.6x

+1sd: 12.6x

+2sd: 13.6x

‐1sd: 10.5x

‐2sd: 9.5x

8.2

9.2

10.2

11.2

12.2

13.2

14.2


(x)

Avg: 0.66x

+1sd: 0.8x

+2sd: 0.94x

‐1sd: 0.52x

‐2sd: 0.37x

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1


(x)


Company Guide



FY Sep 2015A 2016A 2017F 2018F 2019F Revenue 3,562 3,440 2,412 3,103 2,633 Cost of Goods Sold (2,479) (2,407) (1,337) (1,827) (1,440) Gross Profit 1,082 1,033 1,075 1,276 1,193 Other Opng (Exp)/Inc (257) (266) (193) (248) (184) Operating Profit 825 767 882 1,028 1,009 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 279 171 114 70.6 44.1 Net Interest (Exp)/Inc (149) (142) (166) (212) (216) Exceptional Gain/(Loss) 241 164 0.0 0.0 0.0 Pre-tax Profit 1,197 960 830 886 836 Tax (184) (194) (141) (151) (142) Minority Interest (241) (169) (238) (257) (252) Preference Dividend (46.9) (64.5) (64.3) (64.3) (64.3) Net Profit 724 533 387 415 378 Net Profit before Except. 483 368 387 415 378 EBITDA 1,146 993 1,051 1,153 1,107 Growth Revenue Gth (%) 61.7 (3.4) (29.9) 28.6 (15.1) EBITDA Gth (%) 47.2 (13.3) 5.9 9.7 (4.0) Opg Profit Gth (%) 33.0 (7.1) 15.1 16.5 (1.9) Net Profit Gth (Pre-ex) (%) 16.6 (23.8) 5.0 7.2 (8.8) Margins & Ratio Gross Margins (%) 30.4 30.0 44.6 41.1 45.3 Opg Profit Margin (%) 23.2 22.3 36.6 33.1 38.3 Net Profit Margin (%) 20.3 15.5 16.0 13.4 14.4 ROAE (%) 11.2 8.1 5.7 6.0 5.4 ROA (%) 3.3 2.3 1.6 1.6 1.4 ROCE (%) 3.4 2.8 3.2 3.7 3.5 Div Payout Ratio (%) 34.4 46.9 64.5 60.1 65.9 Net Interest Cover (x) 5.5 5.4 5.3 4.8 4.7



Company Guide



FY Sep 4Q2015 1Q2016 2Q2016 3Q2016 4Q2016 Revenue 1,037 672 898 682 1,188 Cost of Goods Sold (1,176) (420) (610) (453) (924) Gross Profit (138) 252 288 229 264 Other Oper. (Exp)/Inc 249 (73.8) (57.3) (85.6) 210 Operating Profit 110 178 231 143 474 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 162 32.8 4.77 23.8 110 Net Interest (Exp)/Inc (37.8) (32.7) (37.3) (38.2) (33.9) Exceptional Gain/(Loss) 180 (1.3) 9.41 64.0 92.3 Pre-tax Profit 415 177 207 193 643 Tax (62.8) (35.6) (37.2) (29.0) (92.4) Minority Interest (92.4) (42.7) (47.0) (9.5) (69.7) Net Profit 213 98.7 123 154 481 Net profit bef Except. 32.8 100.0 114 90.0 388 EBITDA 292 241 262 192 611 Growth Revenue Gth (%) 2.7 (35.3) 33.7 (24.0) 74.2 EBITDA Gth (%) (12.3) (17.4) 8.8 (26.7) 218.4 Opg Profit Gth (%) (57.9) 61.6 29.4 (38.0) 231.7 Net Profit Gth (Pre-ex) (%) (81.9) 204.4 13.9 (20.9) 331.4 Margins Gross Margins (%) (13.3) 37.5 32.1 33.5 22.2 Opg Profit Margins (%) 10.6 26.5 25.7 21.0 39.9 Net Profit Margins (%) 20.5 14.7 13.7 22.6 40.5

Balance Sheet (S$m)

FY Sep 2015A 2016A 2017F 2018F 2019F Net Fixed Assets 1,991 1,972 1,919 1,867 1,814 Invts in Associates & JVs 585 793 907 978 1,022 Other LT Assets 14,150 14,467 14,615 14,764 14,912 Cash & ST Invts 1,393 2,169 576 633 455 Inventory 7.47 5.68 2.12 2.93 2.29 Debtors 844 678 345 443 376 Other Current Assets 4,096 4,120 6,961 8,088 8,721 Total Assets 23,067 24,204 25,326 26,774 27,302 ST Debt 1,020 1,470 1,470 1,470 1,470 Creditor 1,315 1,695 2,137 2,954 2,310 Other Current Liab 218 284 188 198 189 LT Debt 9,255 8,325 8,725 8,925 9,725 Other LT Liabilities 608 586 586 586 586 Shareholder’s Equity 7,803 8,053 8,190 8,356 8,485 Minority Interests 2,848 3,791 4,028 4,285 4,537 Total Cap. & Liab. 23,067 24,204 25,326 26,774 27,302 Non-Cash Wkg. Capital 3,415 2,825 4,983 5,383 6,601 Net Cash/(Debt) (8,882) (7,627) (9,620) (9,763) (10,740) Debtors Turn (avg days) 84.8 80.7 77.4 46.3 56.8 Creditors Turn (avg days) 196.8 263.0 608.3 608.3 608.3 Inventory Turn (avg days) 1.1 0.9 0.6 0.6 0.6 Asset Turnover (x) 0.2 0.1 0.1 0.1 0.1 Current Ratio (x) 2.5 2.0 2.1 2.0 2.4 Quick Ratio (x) 0.9 0.8 0.2 0.2 0.2 Net Debt/Equity (X) 0.8 0.6 0.8 0.8 0.8 Net Debt/Equity ex MI (X) 1.1 0.9 1.2 1.2 1.3 Capex to Debt (%) 0.4 (0.5) 0.0 0.0 0.0


Gearing to remain stable at 0.8x


Company Guide



FY Sep 2015A 2016A 2017F 2018F 2019F Pre-Tax Profit 955 766 830 886 836 Dep. & Amort. 781 54.5 54.5 54.5 54.5 Tax Paid (184) (194) (237) (141) (151) Assoc. & JV Inc/(loss) (279) (171) (114) (70.6) (44.1) Chg in Wkg.Cap. 302 344 (2,063) (409) (1,210) Other Operating CF (891) 298 0.0 0.0 0.0 Net Operating CF 684 1,097 (1,529) 320 (514) Capital Exp.(net) (45.3) 50.6 0.0 0.0 0.0 Other Invts.(net) (1,501) (264) (150) (150) (150) Invts in Assoc. & JV (57.9) (317) 0.0 0.0 0.0 Div from Assoc & JV 350 197 0.0 0.0 0.0 Other Investing CF (146) (389) 0.0 0.0 0.0 Net Investing CF (1,401) (722) (150) (150) (150) Div Paid (249) (456) (249) (249) (249) Chg in Gross Debt 936 (940) 400 200 800 Capital Issues 649 1,000 0.0 0.0 0.0 Other Financing CF (111) 340 (64.3) (64.3) (64.3) Net Financing CF 1,225 (56.2) 86.3 (114) 486 Currency Adjustments (8.4) 39.1 0.0 0.0 0.0 Chg in Cash 500 358 (1,593) 56.5 (177) Opg CFPS (S cts) 13.2 26.0 18.4 25.1 24.0 Free CFPS (S cts) 22.1 39.6 (52.7) 11.0 (17.7)



Source: DBS Bank

Analyst: Rachel TAN

Derek TAN

S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 08 Jan 16 1.65 2.05 BUY

2: 18 Jan 16 1.60 2.05 BUY

3: 04 Feb 16 1.60 2.05 BUY

4: 16 Feb 16 1.58 2.05 BUY

5: 16 Mar 16 1.58 2.05 BUY

6: 05 Apr 16 1.65 2.05 BUY

7: 18 Apr 16 1.69 2.05 BUY

8: 11 May 16 1.67 2.05 BUY

9: 08 Aug 16 1.53 1.90 BUY

10: 30 Sep 16 1.49 1.90 BUY

11: 18 Oct 16 1.50 1.90 BUY12: 10 Nov 16 1.53 2.00 BUY

Note : Share price and Target price are adjusted for corporate actions.

1 2

3

4

5

67

8

910

11

12

1.39

1.44

1.49

1.54

1.59

1.64

1.69

1.74


S$

ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa: YM, PY

BUY Last Traded Price ( 4 Jan 2017): S$2.24 (STI : 2,921.31) Price Target 12-mth: S$2.47 (10% upside) Potential Catalyst: Better-than-expected results Where we differ: More positive than consensus in the medium-term Analyst Rachel TAN +65 6682 3713 [email protected] Derek TAN +65 6682 3716 [email protected]

Price Relative

Forecasts and Valuation FY Mar (US$ m) 2016A 2017F 2018F 2019F Revenue 777 851 946 1,029 EBITDA 735 615 688 746 Pre-tax Profit 1,343 473 540 592 Net Profit 690 269 311 341 Net Pft (Pre Ex.) (30.0) 269 311 341 Net Pft Gth (Pre-ex) (%) nm nm 15.6 9.6 EPS (S cts) 20.8 8.10 9.36 10.3 EPS Pre Ex. (S cts) (0.9) 8.10 9.36 10.3 EPS Gth Pre Ex (%) nm nm 16 10 Diluted EPS (S cts) 20.8 8.10 9.36 10.3 Net DPS (S cts) 6.25 6.98 8.07 8.84 BV Per Share (S cts) 250 253 256 260 PE (X) 10.7 27.4 23.7 21.6 PE Pre Ex. (X) nm 27.4 23.7 21.6 P/Cash Flow (X) 17.6 nm 14.5 14.1 EV/EBITDA (X) 21.7 27.8 25.5 24.4 Net Div Yield (%) 2.8 3.1 3.6 4.0 P/Book Value (X) 0.9 0.9 0.9 0.9 Net Debt/Equity (X) 0.3 0.4 0.4 0.4 ROAE (%) 8.4 3.2 3.7 4.0 Earnings Rev (%): - - - Consensus EPS (S cts): 7.4 8.2 9.3 Other Broker Recs: B: 10 S: 2 H: 4


In pursuit of growth Value at current prices. We maintain BUY on Global Logistics Properties (GLP) with TP of S$2.47, pegged at 30% discount to RNAV to reflect ongoing uncertainties in the operating environment. Trading at 0.9x P/BV, below the lower end of historical range, we believe the cautious outlook is priced in. 1H17 results driven by higher rental income, management fees and development completions; core results in line. Core 1H17 net profit (excluding revaluation gains and one-off items) grew 36% y-o-y to S$137m, in line with street’s FY17 estimates, led by higher rental income mainly from Japan (+21%) and US (+67%) and higher management fees from Japan (+47%) and US (+165%). In 1H17, GLP recorded development profit of US$128m at 30% margin (vs 27% in FY16), achieving 64% (ahead) of its full-year target of US$200m. GLP achieved 42% and 46% of its development starts and completion targets respectively. Management has turned positive on Brazil, and cautiously positive on China, while Japan and US continue to show strong demand. AUM of fund management platform rose to US$38bn. As at 1H17, total AUM had risen to US$38bn, and the group has another US$12bn of uncalled capital, expected to be deployed in the next two years. Given that this business is a highly scalable and an ROE-enhancing business arm of the group, management is focusing on driving returns and operational scale by establishing new funds. Valuation:

We maintain our BUY call and target price of S$2.47, pegged at a 30% discount to RNAV. Despite a weaker outlook, we believe the current share price, which is at 0.9x P/BV, below the lower end of historical range, is attractive. Key Risks to Our View:

Faster-than-expected ramp-up in competing supply on the back of a slowdown in China's retail sector would impact demand for logistics warehouses. At A Glance Issued Capital (m shrs) 4,687 Mkt. Cap (S$m/US$m) 10,499 / 7,292 Major Shareholders (%) GIC Pte Ltd 36.9 Hillhouse Capital 8.2 Blackrock 6.0

Free Float (%) 43.5 3m Avg. Daily Val (US$m) 28.3 ICB Industry : Real Estate / Real Estate



Global Logistic Properties Version 7 | Bloomberg: GLP SP | Reuters: GLPL.SI Refer to important disclosures at the end of this report


Company Guide

Global Logistic Properties


Earnings Drivers:

Riding on the growing demand from e-commerce players for logistics space. Riding on the tailwinds of China’s rising consumerism and thriving e-commerce sector, Global Logistics Properties (GLP) remains in the front seat to take advantage of China’s rapidly changing retail landscape. With an extensive portfolio of warehouses (11.8m sqm of space) in 35 cities in China, the group is one of the leading providers of modern logistics solutions to end-users. GLP’s network of warehouses enables customers to expand; this has been positively received by current users of its space. Its strong network of warehouses enables management to enjoy recurring demand from existing clients. Close to 90% of GLP’s portfolio is occupied by businesses geared towards domestic consumption. Strong operational momentum across markets. As expected, FY16 recorded a strong year largely led by positive effective rent growth on renewal and same-property net operating income. The group’s lease ratio remains relatively stable at 92% with WALE of 2.6-5.5 years. While management has turned cautious on China and Japan, hence reducing development targets, the US market appears to have strong growth potential. Fund management platform delivers superior returns at lower risk. GLP’s fund management platform delivers superior returns at lower risk. Management fees increased 80% to US$130m in FY16 and this segment is expected to potentially earn US$400m in the medium term. As of end-March 2016, total AUM had risen to US$35bn, with another US$11bn of uncalled capital to be deployed. We expect the fund management business to continue growing through new funds due to its scalable nature, boosting returns and ROEs for the group. Going forward, the group is looking to launch a new China fund with equity capital of c.US$3bn to increase its reach in China. Development starts and completion pipeline. In FY17, GLP has set lower targets for development starts and completions of US$2.1bn (vs US$2.8bn in FY16) and US$1.5bn (vs US$2.1bn in FY16) respectively as management turns cautious. Nevertheless, value creation margin at 27% remains above historical average of 25%. Deepening presence in US. We are positive on GLP’s announcement of a US$1.1bn (at valuation) logistics portfolio in the US from Hillwood, a property developer. The acquisition will be in various tranches – initial closing of US$700m is fully leased and income producing by end of December 2016 and the remaining US$400m, when the target properties under development complete and achieve pre-agreed lease ratios. GLP intends to pare down its effective stake in this portfolio to 10% upon syndication to third-party capital partners. Assets are located in key markets of Dallas, Chicago and Atlanta, which according to Colliers, have one of the brightest outlooks for absorption and rental growth in the US.

Top line and EIBT (US’m)

Revenue Breakdown by segment (US$’m)

EBIT Margins (%)

RNAV


0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

900.0

1,000.0

FY15A FY16A FY17F FY18F

US

$'m

n

Revenue Operating profit (ex reval)

-

200.0

400.0

600.0

800.0

1,000.0

1,200.0

FY15A FY16A FY17F FY18F FY19F

US

$'m

n

China Japan US & Brazil

45.0

47.0

49.0

51.0

53.0

55.0

57.0

59.0

FY15A FY16A FY17F FY18F FY19F

EB

IT M

argi

ns (%

)

Valuation of GLP S$'m

Japan Logistics Business (Stabalized) 2,173.8

China Logistics Business (Stabalized) 4,953.7

China Landbank (NPB of future devt) 3,815.0

Other Assets 58.1

GLP J-REIT 413.5

Brazil 523.1

USA 337.0

Fee income business (15x P/E) 1,054.4

Gross Asset Value 13,296

Less: Estimated net debt -660.57

RNAV 12,668

RNAV/ share (US$) 2.62

RNAV/ share (S$) 3.53

Discount 30%

Target Price 2.47


Company Guide


Balance Sheet:

Low leverage ratio. Total debt-to-asset ratio is expected to remain fairly stable at c.0.40x, which is well within management's comfortable level. As such, this provides GLP with additional debt headroom for future debt-funded acquisitions. Currently, the group has 70% of its debt on fixed rate with a weighted average cost of debt of 3.0% and a long debt maturity of 5.2 years. Share Price Drivers:

Robust outlook for e-commerce in China. GLP has a large (11.8m sqm in completed properties) portfolio in China that is positioned strategically to benefit from growth in e-commerce through its modern logistics space, and it has another US$5.3bn slated for completion in FY17-19. We expect the group’s assets to hit higher occupancies and pricier leases, if e-commerce increases in scale (8-year CAGR was 80%) on the back of strong consumer demand (11-year CAGR was 63%, expected to double over the next three years). Incremental earnings contribution from China would be a share price catalyst. Realisation of value through its fund business. GLP continues to expand through its fund platform. Looking ahead, the potential conversion of its development funds in China and Japan into income funds could unlock performance fees, offering upside to the earnings that are currently not in our estimates. Additionally, GLP continues to look for opportunities in the US and potentially Europe to expand its fund management business. Key Risks:

Slowdown in Chinese economy If a slowdown in the Chinese economy leads to a reduced appetite for logistics warehouse space, there could be slower-than-projected revenue growth. Foreign currency risks Exposure to various currencies (CNY, JPY, BRL) could lead to volatility in the group's USD earnings. Company Background

Global Logistics Properties (GLP) is a leading provider of modern logistics facilities in China, Japan, Brazil and the US. The group develops, owns and manages c.41m sqm GFA of logistics properties, catering to growing domestic consumption.


Capital Expenditure

ROE (%)

PB Band (x)


0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

1,400.0

1,600.0

2015A 2016A 2017F 2018F 2019F


US$m


Company Guide


Income Statement (US$m)

FY Mar 2015A 2016A 2017F 2018F 2019F Revenue 708 777 851 946 1,029 Cost of Goods Sold (139) (157) (137) (173) (204) Gross Profit 570 620 714 773 825 Other Opng (Exp)/Inc (165) (229) (241) (245) (250) Operating Profit 405 392 473 527 575 Other Non Opg (Exp)/Inc 0.0 91.1 23.6 25.4 26.6 Associates & JV Inc 71.4 241 107 124 133 Net Interest (Exp)/Inc (47.9) (101) (130) (136) (143) Exceptional Gain/(Loss) 434 720 0.0 0.0 0.0 Pre-tax Profit 862 1,343 473 540 592 Tax (194) (310) (50.3) (56.8) (62.6) Minority Interest (182) (314) (125) (144) (160) Preference Dividend (32.0) (28.7) (28.7) (28.7) (28.7) Net Profit 454 690 269 311 341 Net Profit before Except. 201 (30.0) 269 311 341 EBITDA 488 735 615 688 746 Growth Revenue Gth (%) 13.3 9.8 9.4 11.2 8.8 EBITDA Gth (%) (4.4) 50.7 (16.3) 11.9 8.4 Opg Profit Gth (%) 6.0 (3.2) 20.8 11.5 9.0 Net Profit Gth (Pre-ex) (%) (18.6) nm nm 15.6 9.6 Margins & Ratio Gross Margins (%) 80.4 79.8 83.9 81.7 80.2 Opg Profit Margin (%) 57.2 50.4 55.6 55.8 55.8 Net Profit Margin (%) 64.2 88.8 31.6 32.9 33.1 ROAE (%) 5.6 8.4 3.2 3.7 4.0 ROA (%) 2.9 3.4 1.2 1.3 1.4 ROCE (%) 2.1 1.7 2.2 2.4 2.5 Div Payout Ratio (%) 41.7 30.1 86.2 86.2 86.2 Net Interest Cover (x) 8.4 3.9 3.6 3.9 4.0


Top line driven mainly by development completions in China, supported by stable occupancy rates in Japan. In addition, top line is driven from increased fund management fees in US and Brazil


Company Guide


Quarterly / Interim Income Statement (US$m)

FY Mar 2Q2016 3Q2016 4Q2016 1Q2017 2Q2017 Revenue 189 199 199 207 214 Cost of Goods Sold (38.9) (39.2) (41.3) (38.2) (37.5) Gross Profit 150 160 158 168 176 Other Oper. (Exp)/Inc (62.1) (57.3) (78.3) (54.3) (56.2) Operating Profit 88.3 102 79.6 114 120 Other Non Opg (Exp)/Inc 17.1 55.8 (0.4) 7.86 3.03 Associates & JV Inc 34.3 48.5 38.9 57.3 70.7 Net Interest (Exp)/Inc (20.8) (44.7) (39.6) (70.0) (29.5) Exceptional Gain/(Loss) 110 202 214 208 117 Pre-tax Profit 229 364 292 317 281 Tax (52.9) (94.6) (82.7) (67.0) (60.6) Minority Interest (62.3) (84.9) (78.1) (47.2) (47.8) Net Profit 114 184 131 203 173 Net profit bef Except. 3.79 (17.4) (82.2) (5.0) 55.9 EBITDA 91.3 105 82.6 114 120 Growth Revenue Gth (%) (0.4) 5.1 0.1 3.7 3.4 EBITDA Gth (%) (11.2) 15.2 (21.6) 38.2 5.2 Opg Profit Gth (%) (11.6) 15.9 (22.3) 43.4 5.2 Net Profit Gth (Pre-ex) (%) (89.8) nm (371.6) 93.9 nm Margins Gross Margins (%) 79.5 80.3 79.3 81.5 82.4 Opg Profit Margins (%) 46.7 51.5 40.0 55.2 56.2 Net Profit Margins (%) 60.2 92.6 65.9 98.2 81.0

Balance Sheet (US$m)

FY Mar 2015A 2016A 2017F 2018F 2019F Net Fixed Assets 52.2 52.9 52.9 52.9 52.9 Invts in Associates & JVs 1,544 1,954 2,485 3,034 3,592 Other LT Assets 12,479 14,656 14,856 15,053 15,368 Cash & ST Invts 1,446 1,025 350 301 112 Inventory 0.0 0.0 0.0 0.0 0.0 Debtors 475 548 709 788 858 Other Current Assets 1,467 4,895 4,895 4,895 4,895 Total Assets 17,462 23,129 23,348 24,124 24,878 ST Debt 371 1,021 1,021 1,021 1,021 Creditor 811 1,026 724 933 1,111 Other Current Liab 21.9 2,965 2,962 2,968 2,974 LT Debt 2,476 3,750 4,050 4,350 4,650 Other LT Liabilities 1,019 1,208 1,208 1,208 1,208 Shareholder’s Equity 8,780 8,888 8,987 9,103 9,214 Minority Interests 3,983 4,272 4,398 4,541 4,701 Total Cap. & Liab. 17,462 23,129 23,348 24,124 24,878 Non-Cash Wkg. Capital 1,109 1,451 1,917 1,782 1,667 Net Cash/(Debt) (1,402) (3,746) (4,720) (5,070) (5,558) Debtors Turn (avg days) 227.0 240.1 269.6 288.8 291.9 Creditors Turn (avg days) 2,092.7 2,307.7 2,547.5 1,872.9 1,939.8 Inventory Turn (avg days) N/A N/A N/A N/A N/A Asset Turnover (x) 0.0 0.0 0.0 0.0 0.0 Current Ratio (x) 2.8 1.3 1.3 1.2 1.1 Quick Ratio (x) 1.6 0.3 0.2 0.2 0.2 Net Debt/Equity (X) 0.1 0.3 0.4 0.4 0.4 Net Debt/Equity ex MI (X) 0.2 0.4 0.5 0.6 0.6 Capex to Debt (%) 53.5 0.2 4.0 3.7 5.6 Z-Score (X) 0.0 0.8 0.8 0.8 0.7


Gearing (D/E) to remain conservative at 0.4x


Company Guide


Cash Flow Statement (US$m)

FY Mar 2015A 2016A 2017F 2018F 2019F Pre-Tax Profit 862 1,343 473 540 592 Dep. & Amort. 11.6 11.8 11.8 11.8 11.8 Tax Paid (28.5) (31.5) (53.5) (50.3) (56.8) Assoc. & JV Inc/(loss) (71.4) (241) (107) (124) (133) Chg in Wkg.Cap. 45.5 27.3 (463) 129 109 Other Operating CF (375) (691) 0.0 0.0 0.0 Net Operating CF 444 418 (138) 507 522 Capital Exp.(net) (1,523) (8.0) (204) (200) (318) Other Invts.(net) (1,467) 212 0.0 0.0 0.0 Invts in Assoc. & JV (422) (472) (425) (425) (425) Div from Assoc & JV 12.9 2.77 0.0 0.0 0.0 Other Investing CF (10.5) (4,672) 0.0 0.0 0.0 Net Investing CF (3,409) (4,937) (629) (625) (743) Div Paid (174) (200) (208) (232) (268) Chg in Gross Debt 687 1,964 300 300 300 Capital Issues 159 0.0 0.0 0.0 0.0 Other Financing CF 2,246 2,525 0.0 0.0 0.0 Net Financing CF 2,918 4,289 92.4 68.3 32.2 Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash (47.0) (230) (674) (49.6) (188) Opg CFPS (S cts) 11.8 11.8 9.78 11.4 12.5 Free CFPS (S cts) (31.8) 12.4 (10.3) 9.25 6.16



Source: DBS Bank

Analyst: Rachel TAN, Derek TAN

ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa: JC, PY


Price Target 12-mth: S$7.20 (18% upside)

Potential Catalyst: Strong pre-sales for residential projects

Where we differ: Earnings generally more conservative vs peers Analyst Derek TAN +65 6682 3716 [email protected] Rachel TAN +65 6682 3713 [email protected]

Price Relative

Forecasts and Valuation FY Dec (S$ m) 2015A 2016F 2017F 2018F

Revenue 1,279 1,228 1,324 1,410 EBITDA 514 567 601 618 Pre-tax Profit 460 424 453 470 Net Profit 391 355 372 386 Net Pft (Pre Ex.) 343 355 372 386 Net Pft Gth (Pre-ex) (%) (5.9) 3.6 4.8 3.6 EPS (S cts) 49.2 44.6 46.7 48.4 EPS Pre Ex. (S cts) 43.0 44.6 46.7 48.4 EPS Gth Pre Ex (%) (7) 4 5 4 Diluted EPS (S cts) 49.2 44.6 46.7 48.4 Net DPS (S cts) 15.0 15.0 15.0 15.0 BV Per Share (S cts) 991 1,021 1,053 1,086 PE (X) 12.5 13.7 13.1 12.6 PE Pre Ex. (X) 14.2 13.7 13.1 12.6 P/Cash Flow (X) 9.4 28.7 13.8 13.4 EV/EBITDA (X) 14.8 13.9 13.0 12.4 Net Div Yield (%) 2.5 2.5 2.5 2.5 P/Book Value (X) 0.6 0.6 0.6 0.6 Net Debt/Equity (X) 0.3 0.3 0.3 0.2 ROAE (%) 5.0 4.4 4.5 4.5 Earnings Rev (%): 0 0 0 Consensus EPS (S cts): 47.6 47.8 46.6 Other Broker Recs: B: 9 S: 0 H: 3


Diversification is key to sustainability Potential headwinds ahead; but valuations still attractive. Despite the weak operating outlook and potential headwinds, we maintain our BUY rating on UOL Group (UOL) based on its attractive valuations of c.0.6x P/NAV, which is below the low end of its historical range, making it one of the cheapest large cap landlords in Singapore. 3Q16 results in line; outlook improves. UOL’s 3Q16 net profit fell 14% y-o-y to S$87.1m, mainly due to lower contribution from JVs. However, the Group’s recent purchases in London should add to its recurring income stream and improve earnings visibility. Key positives from the results are: i) 11% revenue growth from all divisions, and ii) rental reversions were generally positive for its office and retail properties with stable occupancy rates remained stable. However, RevPAR for most of its hotels in all markets were marginally lower except for hotels in Australia. New launches in 2H16/2017. Management saw good take-up for its recent Park Eleven project in Shangai, selling 131 out of 168 units and there will be subsequent launches in phases in 2017. In addition, UOL is positioning to launch The Clement Canopy (1Q17; 505 units), and Bishopsgate, London (160 units). The purchase of a recent enbloc site at Potong Pasir Ave 1 will be finalised soon, the project is planned for launch in 2018. Valuation:

Maintain BUY on attractive valuations. Our TP of S$7.20 is

pegged to a 30% discount to our RNAV of S$10.23.


Economic slowdown. The downside risk to our projections is if

residential sales are slower than our projections or if

commercial properties and hotels operations are impacted by

slower-than-projected growth in rental/room rates. At A Glance

Issued Capital (m shrs) 805

Mkt. Cap (S$m/US$m) 4,924 / 3,448


CY Wee & Co Pte Ltd 13.9

Wee Investment Pte Ltd 13.4

United Overseas Bank 7.5

Free Float (%) 59.8


ICB Industry : Real Estate / Real Estate


4 Jan 2017


UOL Group Version 6 | Bloomberg: UOL SP | Reuters: UTOS.SI Refer to important disclosures at the end of this report

89

109

129

149

169

189

209

4.7

5.2

5.7

6.2

6.7

7.2

7.7

8.2

8.7


Relative IndexS$

UOL Group (LHS) Relative STI (RHS)


Page 2

Company Guide

UOL Group


Earnings Drivers:

Retail and office sub-segments to offer stable returns. UOL

Group Limited (UOL) derives a significant 47%-58% of its

revenues from retail, office and hotel segments which should

continue delivering stable cashflows in the coming years.

While we see headwinds in both the retail and office segments

ahead, we believe that the positioning and location of UOL’s

portfolio of commercial properties mainly along the fringe areas

of the CBD will result in lower volatility in rents. Thus,

operational performance is likely to remain stable going

forward.

Its retail malls - United Square and Novena Square - are located

in the Novena area, close to the emerging medical hub. The

malls have formed a niche, which should result in high tenant

stickiness. This is especially so for United Square, which houses

tenants well known for providing various children’s education

programs. On the other hand, Novena Square’s tenant mix

mainly caters to necessity shopping and the needs of the

vicinity’s growth as a medical hub.

Hotel performance – weakness in Asia; overall outlook stable.

Growth will be driven by the addition of close to 1,582 rooms

(6 hotels), implying 16% growth in total rooms under

management. Performances from hotels and serviced residences

are expected to remain mixed. We expect the operational

performance of the group’s hotels & residences in Singapore

and Malaysia to be weak, but partially offset by a better

performance from its hotels in Australia. We project portfolio

RevPAR to remain fairly flattish.

Presales for residential projects doing well amid muted

residential outlook. Despite tepid residential transactions year-

to-date, UOL’s projects have continued to do fairly well. As at

Sep 2016, the Group has substantially sold most of its projects

that are completed or currently under development and its

latest project - Principal Garden - has seen good take-up rate of

50% (vs 33.5% last quarter). Park Eleven in Shanghai had a

private launch in 3Q2016 and sold 131units out of the 168

units approved for sale. Looking ahead, UOL will launch further

phases of Park Eleven in Shanghai, The Clement Canopy in

Singapore and its London project in 2017.

The 555-unit Riverbank @ Fernvale (78.2% sold as at Sep 2016),

and 797-unit Botanique at Bartley (95.9% sell-through rate)

have sold well. Despite the low sales take-up rate, Principal

Garden recorded steady sales and is now 43.4% sold. We view

this as a testament of the Group’s ability to design residential

projects that are well liked and attractively priced.

Revenue (S$’m)

PATMI (S$’m)

Operating Margins (%)

RNAV (S$’m) Breakdown of RNAV Properties OMV ($m) Investment Properties 2,950.8 less book value -4,137.0 Surplus/deficit -1,186.2 NPV of devt profits 390.6 Mark to TP value of quoted holdings Listed equities/Strategic Holdings 3,145.9 Hotel operations 2,219.8 Total 5,365.7 less book value -4,367.4 Surplus 998.3 Book NAV 7,894.2 RNAV 8,096.8 Total Shares 787.0 RNAV/share ($) 10.29 Discount 30% Price Target ($) 7.20


0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

1,400.0

1,600.0

15 16F 17F 18F

S$'m

Investments Management ServicesHotel Operations Property InvestmentsProperty Development

330.0

340.0

350.0

360.0

370.0

380.0

390.0

400.0

15 16F 17F 18F

S$'m

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

FY13 FY14 FY15F FY16F FY17F


Page 3

Company Guide

UOL Group

Balance Sheet:

Balance sheet remains strong. Debt to equity ratio is expected

to remain stable at 0.3x to 0.4x from FY16F-FY18F. This leaves

UOL with sufficient headroom to acquire projects / new land

when such opportunities come by.

Share Price Drivers:

Replenishing land bank key to income sustainability. The Group

turns around its projects quickly and has little land bank on its

balance sheet. UOL has always been active in land tenders to

replenish its land bank especially in Singapore but remains

selective given the high competitive environment seen in recent

government land tenders. The ability to secure additional land

bank at lower prices will mean upside to RNAVs and this could

re-rate the stock.

Relaxation of property cooling measures in Singapore.

Expectations of policy relaxation (especially cyclical measures like

the buyers’ and sellers’ stamp duties) may improve market

sentiment and spark a revival in transacted volumes in the

Singapore residential market. This would also lift sentiment on

property stocks, which should enable UOL to close the gap

between its stock price and its NAV.

Deep value from its hotel business. We believe that deep value

lies in the group’s portfolio of well located hotels and serviced

residences in Singapore, Malaysia and Australia. These hotels

are held on a historical cost basis, which we believe are

conservative compared to potential realisable value. We

estimate potential upside of more than S$1bn if these

properties are valued on marked-to-market basis.

Key Risks:

Economic slowdown. The downside risk to our projections is if

residential sales are slower than projected or if its hotel

operations are impacted by slower-than-projected RevPAR

performance. The upside risks to our view and target price

would be higher-than-expected selling prices or upgrades to

the target prices of its listed investment holdings.

Company Background

With a track record of nearly 50 years, UOL Group's impressive

list of property development projects includes best-selling

residential units, office towers, shopping centres, hotels and

serviced suites.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.1

0.1

0.1

0.1

0.1

0.2

0.2

0.2

0.2

0.2

0.2

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

2014A 2015A 2016F 2017F 2018F


0.0

50.0

100.0

150.0

200.0

250.0

300.0

2014A 2015A 2016F 2017F 2018F


S$m

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

2014A 2015A 2016F 2017F 2018F

Avg: 14.8x

+1sd: 16.7x

+2sd: 18.7x

-1sd: 12.8x

-2sd: 10.8x

9.7

11.7

13.7

15.7

17.7

19.7


(x)

Avg: 0.69x

+1sd: 0.77x

+2sd: 0.86x

-1sd: 0.6x

-2sd: 0.51x

0.4

0.5

0.6

0.7

0.8

0.9

1.0


(x)


Page 4

Company Guide

UOL Group

Segmental Breakdown

FY Dec 2014A 2015A 2016F 2017F 2018F Revenues (S$m)

Property Development 676 578 595 675 754

Property Investment 198 219 200 214 218

Hotel Operations 438 419 369 371 374

Investments 20.3 42.3 42.3 42.3 42.3

Others 28.8 20.2 20.8 21.4 22.0

Total 1,361 1,279 1,228 1,324 1,410


FY Dec 2014A 2015A 2016F 2017F 2018F

Revenue 1,361 1,279 1,228 1,324 1,410

Cost of Goods Sold (780) (775) (782) (839) (904)

Gross Profit 581 504 446 485 506

Other Opng (Exp)/Inc (209) (231) (184) (199) (211)

Operating Profit 372 273 261 287 295

Other Non Opg (Exp)/Inc 13.4 18.4 18.4 18.4 18.4

Associates & JV Inc 158 156 220 229 238

Net Interest (Exp)/Inc (28.5) (35.6) (74.9) (81.6) (81.1)

Exceptional Gain/(Loss) 322 48.8 0.0 0.0 0.0

Pre-tax Profit 837 460 424 453 470

Tax (76.7) (47.2) (50.9) (54.3) (56.4)

Minority Interest (74.3) (21.8) (18.5) (26.2) (28.2)

Preference Dividend 0.0 0.0 0.0 0.0 0.0

Net Profit 686 391 355 372 386

Net Profit before Except. 364 343 355 372 386

EBITDA 604 514 567 601 618

Growth

Revenue Gth (%) 28.5 (6.0) (4.0) 7.8 6.5

EBITDA Gth (%) 15.1 (14.8) 10.1 6.1 2.8

Opg Profit Gth (%) 10.1 (26.6) (4.3) 9.6 2.8

Net Profit Gth (Pre-ex) (%) 39.5 (5.9) 3.6 4.8 3.6

Margins & Ratio

Gross Margins (%) 42.7 39.4 36.3 36.6 35.9

Opg Profit Margin (%) 27.3 21.4 21.3 21.6 20.9

Net Profit Margin (%) 50.4 30.6 28.9 28.1 27.3

ROAE (%) 9.5 5.0 4.4 4.5 4.5

ROA (%) 6.2 3.4 3.0 3.1 3.1

ROCE (%) 3.2 2.2 2.0 2.1 2.1

Div Payout Ratio (%) 17.2 30.5 33.6 32.1 31.0

Net Interest Cover (x) 13.0 7.7 3.5 3.5 3.6


Pre-sales of residential units to add to earnings.


Page 5

Company Guide

UOL Group


FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016

Revenue 354 344 330 364 393

Cost of Goods Sold (217) (221) (216) (238) (263)

Gross Profit 137 123 114 125 130

Other Oper. (Exp)/Inc (52.2) (56.2) (55.0) (55.2) (56.5)

Operating Profit 84.5 67.1 59.0 70.2 73.7

Other Non Opg (Exp)/Inc (2.4) (2.4) 5.33 3.86 6.75

Associates & JV Inc 44.8 36.8 34.1 38.1 29.1


Exceptional Gain/(Loss) 2.89 (15.1) 0.17 (26.5) 0.0

Pre-tax Profit 118 76.6 93.7 79.3 104

Tax (13.7) (10.5) (12.4) (10.7) (12.3)

Minority Interest (4.0) (2.3) (4.3) 0.19 (4.4)

Net Profit 101 63.8 77.1 68.8 87.1

Net profit bef Except. 97.9 79.0 76.9 95.3 87.1

EBITDA 144 123 115 128 123

Growth

Revenue Gth (%) 3.4 (2.7) (4.1) 10.1 8.2

EBITDA Gth (%) 7.2 (14.8) (6.3) 11.7 (4.3)

Opg Profit Gth (%) (0.4) (20.5) (12.1) 18.9 5.1

Net Profit Gth (Pre-ex) (%) 6.2 (19.4) (2.6) 23.9 (8.5)

Margins

Gross Margins (%) 38.6 35.8 34.5 34.5 33.1

Opg Profit Margins (%) 23.9 19.5 17.9 19.3 18.7

Net Profit Margins (%) 28.5 18.5 23.3 18.9 22.1

Balance Sheet (S$m)

FY Dec 2014A 2015A 2016F 2017F 2018F Net Fixed Assets 1,241 1,179 1,384 1,517 1,500

Invts in Associates & JVs 3,162 3,366 3,586 3,815 4,053

Other LT Assets 4,528 4,981 4,981 4,981 4,981

Cash & ST Invts 935 276 254 288 482

Inventory 0.80 0.73 0.70 0.76 0.81

Debtors 248 197 189 204 217

Other Current Assets 1,735 1,501 1,561 1,449 1,334

Total Assets 11,848 11,501 11,955 12,255 12,567

ST Debt

1,292 523 523 523 523

Creditor 282 238 229 247 263

Other Current Liab 75.2 42.1 51.2 54.6 56.7

LT Debt 1,737 1,980 2,180 2,180 2,180

Other LT Liabilities 332 317 317 317 317

Shareholder’s Equity 7,643 7,894 8,130 8,382 8,648

Minority Interests 488 507 525 552 580

Total Cap. & Liab. 11,848 11,501 11,955 12,255 12,567

Non-Cash Wkg. Capital 1,626 1,419 1,470 1,353 1,233

Net Cash/(Debt) (2,094) (2,227) (2,449) (2,415) (2,222)

Debtors Turn (avg days) 83.9 63.5 57.4 54.2 54.5

Creditors Turn (avg days) 184.8 134.1 119.3 112.5 111.2

Inventory Turn (avg days) 0.4 0.4 0.4 0.3 0.3

Asset Turnover (x) 0.1 0.1 0.1 0.1 0.1

Current Ratio (x) 1.8 2.5 2.5 2.4 2.4

Quick Ratio (x) 0.7 0.6 0.6 0.6 0.8

Net Debt/Equity (X) 0.3 0.3 0.3 0.3 0.2

Net Debt/Equity ex MI (X) 0.3 0.3 0.3 0.3 0.3

Capex to Debt (%) 5.2 1.9 10.1 7.4 1.8

Z-Score (X) 1.9 2.0 2.0 2.0 2.0


Gearing to remain healthy


Page 6

Company Guide

UOL Group


FY Dec 2014A 2015A 2016F 2017F 2018F

Pre-Tax Profit 760 413 424 453 470

Dep. & Amort. 60.1 67.2 67.2 67.2 67.2

Tax Paid (96.5) (66.7) (41.8) (50.9) (54.3)

Assoc. & JV Inc/(loss) (158) (156) (220) (229) (238)

Chg in Wkg.Cap. (726) 259 (60.8) 114 118

Other Operating CF (250) (0.1) 0.0 0.0 0.0

Net Operating CF (411) 517 170 354 363

Capital Exp.(net) (157) (47.0) (273) (200) (50.0)

Other Invts.(net) (0.8) 0.68 0.0 0.0 0.0

Invts in Assoc. & JV (1.6) 79.8 0.0 0.0 0.0

Div from Assoc & JV 18.7 42.0 0.0 0.0 0.0

Other Investing CF 8.89 (12.3) 0.0 0.0 0.0

Net Investing CF (132) 63.2 (273) (200) (50.0)

Div Paid (57.1) (64.3) (119) (119) (119)

Chg in Gross Debt 690 (466) 200 0.0 0.0

Capital Issues 3.58 7.93 0.0 0.0 0.0

Other Financing CF (103) (62.1) 0.0 0.0 0.0

Net Financing CF 534 (584) 80.6 (119) (119)

Currency Adjustments 2.42 (5.7) 0.0 0.0 0.0

Chg in Cash (6.9) (10.1) (22.6) 34.5 193

Opg CFPS (S cts) 40.1 32.4 28.9 30.1 30.7

Free CFPS (S cts) (72.2) 59.0 (13.0) 19.3 39.3



Source: DBS Bank

Analyst: Derek TAN

Rachel TAN

S.No.Date of

Report

Closing

Price

12-mth

Target

Price

Rat ing

1: 18 Jan 16 5.54 8.47 BUY

2: 29 Feb 16 5.66 7.39 BUY

3: 13 May 16 5.70 7.39 BUY

4: 27 May 16 5.68 7.39 BUY

5: 09 Jun 16 5.61 7.39 BUY

6: 05 Aug 16 5.83 7.20 BUY

7: 16 Sep 16 5.51 7.20 BUY

8: 30 Sep 16 5.61 7.20 BUY

9: 07 Oct 16 5.85 7.20 BUY

10: 18 Oct 16 5.76 7.20 BUY

11: 11 Nov 16 5.66 7.20 BUY


1

2

3

4

5

6

7

89

10

11

4.99

5.19

5.39

5.59

5.79

5.99

6.19

6.39

6.59


S$

Acquisition of 2 properties in London and Raintree Gardens in 2017


BUY Last Traded Price ( 4 Jan 2017): S$0.70 (STI : 2,921.31) Price Target 12-mth: S$0.84 (20% upside and 7.9% yield) Potential Catalyst: Earnings recovery/further acquisitions/potential takeover offer Where we differ: DBS is the sole broker covering this REIT Analyst Mervin SONG CFA +65 6682 3715 [email protected] Derek TAN +65 6682 3716 [email protected]

What’s New 2Q17 DPU of 1.38 Scts flat y-o-y but up 4% y-o-y

on normalised basis

Some near term headwinds but there are levers to

drive earnings

Low gearing (c.32%) provides capacity to pursue

acquisitions

Price Relative

Forecasts and Valuation FY Mar (S$m) 2015A 2016A 2017F 2018F Gross Revenue 227 215 226 225 Net Property Inc 93.3 90.9 92.3 91.6 Total Return 28.6 147 34.4 33.2 Distribution Inc 56.3 63.7 65.4 64.3 EPU (S cts) 1.72 0.10 3.06 2.94 EPU Gth (%) 137 (94) 3,072 (4) DPU (S cts) 5.06 5.41 5.52 5.39 DPU Gth (%) (8) 7 2 (2) NAV per shr (S cts) 74.2 86.0 85.8 85.7 PE (X) 40.7 726.0 22.9 23.8 Distribution Yield (%) 7.2 7.7 7.9 7.7 P/NAV (x) 0.9 0.8 0.8 0.8 Aggregate Leverage (%) 37.2 32.7 32.8 32.8 ROAE (%) 2.3 0.1 3.6 3.4 Distn. Inc Chng (%): 0 0

Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P.

Untapped balance sheet

Attractive yield and discount to book value. We maintain our BUY recommendation and TP of S$0.84. We believe at current levels, Ascendas Hospitality Trust’s (ASCHT) offers a compelling yield in excess of 7% which is based on a 95% payout ratio. In addition, the stock trades at 16% discount to its NAV per unit of S$0.88 and speculated offer price in excess of S$0.80 when several parties were considering a takeover bid for ASCHT earlier this year. Mitigating factors against known headwinds. While ASCHT’s faces several headwinds in the form of an oversupply in the Singapore and Brisbane hospitality markets and recent strengthening of the JPY, we believe ASCHT can still deliver relatively stable DPUs going forward. This is premised on higher earnings from a renegotiated management contract at its Osaka property, uplift from the recently completed refurbishment at Courtyard by Marriott North Ryde, and still positive increase in tourist arrivals into Australia and Japan boosting demand for ASCHT’s Sydney, Melbourne and Tokyo properties. Acquisition capability enhanced due to low gearing and new Chairman with extensive hospitality experience. With gearing of only c.32%, ASCHT is in a strong financial position to pursue debt-funded acquisitions. In addition, we believe the ability to execute on non-organic opportunities is enhanced by the recent appointment of Mr Miguel Ko as Chairman of ASCHT. Mr Ko, who is currently the CEO of ASCHT’s sponsor, was formerly the Chairman and President of Starwoods Hotels & Resorts (Asia Pacific Division) and Deputy Chairman and CEO of CDL Hotels International. Valuation:

We maintain our DCF-based TP at S$0.80. With 20% capital upside and attractive 7.9% yield, we reiterate our BUY call. Key Risks to Our View:

Significant drop in AUD/JPY and demand/supply imbalance. If the AUD/JPY drops significantly from current levels and there is excess supply in ASCHT’s respective markets, there will be downside risks to our DPU estimates and ASCHT may continue to trade at a discount to book value. At A Glance Issued Capital (m shrs) 1,123 Mkt. Cap (S$m/US$m) 786 / 589 Major Shareholders (%) TJ Holdings 27.1 Tang Yigang 6.2 Jinquan Tong 4.9

Free Float (%) 61.8 3m Avg. Daily Val (US$m) 0.30 ICB Industry : Real Estate / Real Estate Investment Trusts



Ascendas Hospitality Trust Version 6 | Bloomberg: ASCHT SP | Reuters: ASHP.SI Refer to important disclosures at the end of this report


Company Guide

Ascendas Hospitality Trust


Earnings Drivers:

Australia – the largest contributor. ASCHT’s Australian portfolio contributed c.55% of FY16 NPI. With a positive outlook for the Australian hospitality market, driven by a combination of continued growth in tourist arrivals (+12% y-o-y for 8M16 following 8% growth in CY15) and modest new hotel supply in Sydney and Melbourne in the near term, we expect ASCHT’s Australian operations to drive the REIT’s performance going forward. Contribution from Australia should also rise in 2019 as ASCHT inked an agreement to acquire the serviced apartment component at Aurora Melbourne Central for A$120m, on an NPI yield of 7.6%. Construction of Aurora Melbourne Central is due to be completed in 2H19. Due to uncertainty over how ASCHT will fund the acquisition of Aurora Melbourne and RevPAR in 2019, we have yet to include this investment in our estimates. Japan is another growth driver. Despite potential softening in ASCHT’s Japanese operations due to the recent strengthening of the JPY, we remain positive on the outlook for ASCHT’s Japanese properties (c.21% of FY16 NPI). This is because while the pace of inbound tourists may slow, it should remain on an uptrend as the Japanese government continues to support the tourism sector through the relaxation of visa requirements. Overall tourist arrivals climbed 24% y-o-y in 9M16 following a 47% y-o-y increase in CY15. New operator for Osaka Namba hotel. Another boost for ASCHT in FY17 is the 13% uplift in annual fixed rents for its Osaka Namba Washington Hotel, as ASCHT has recently appointed a new operator, Sunroute Co Ltd. As part of the new 10-year agreement, the hotel will undergo a refurbishment and will be rebranded under the “Sunroute” name. Modest contribution from Singapore and China. In FY17, we see modest contributions from ASCHT’s Singapore (16% of FY16 NPI) and China (8%) properties due to challenging operating conditions induced by new hotel supply. For Singapore, we project a decline in RevPAR. However, the downside from Singapore is limited given an annual fixed rent of c.S$12m with a 3% annual escalation. Financial flexibility to pursue acquisitions. Following recent revaluation gains, ASCHT’s gearing has fallen to c.32%. This provides the REIT with some debt headroom to pursue acquisitions.

Net Property Income and Margins (%)


Distribution Paid / Net Operating CF

Interest Cover (x)



Company Guide


Balance Sheet:

Stable gearing. Excluding revaluation gains, we expect ASCHT’s gearing to remain stable at around the 32% level in the near term. However, this may increase should ASCHT fund the acquisition of Aurora Melbourne in 2019. Share Price Drivers:

Consistent delivery with upside risk from potential takeover. ASCHT’s share price has been negatively impacted since its IPO due to a patchy DPU track record. We believe a more stable DPU will re-rate ASCHT in the medium term given that ASCHT trades at a c.80bps yield premium to other listed hospitality SREITs. Should ASCHT’s manager fail to deliver, there is potential for activist unitholders soliciting a takeover offer from a third party to crystallise the full value for ASCHT’s portfolio. Inorganic drivers. While ASCHT's ability to raise equity in the short term is constrained by the fact the trust is trading on a relative high distribution yield (above 7%), we think its gearing of c.32% provides ASCHT with some headroom to pursue debt funded acquisitions. Key Risks:

Interest rate risk. As the US Fed is expected to raise interest rates, ASCHT faces the challenge of higher interest costs. Nevertheless, with c.97% of the group’s debt on fixed rates, ASCHT is partially insulated in the near term. FX risks. Significant volatility in AUD and JPY would negatively impact our DPU estimates. However, this risk is tempered by ASCHT entering into 15-month rolling hedges. Supply risk. Any significant increase in the number of hotel rooms without a commensurate growth in demand could limit income growth for the REIT, as hotels may have to lower their room rates in order to remain competitive and maintain high occupancies. Company Background

A-HTRUST is a stapled group comprising Ascendas Hospitality Business Trust (A-HBT) and Ascendas Hospitality REIT (A-HREIT), established to invest in a diversified portfolio of hotel assets in Asia, Australia and New Zealand.

Aggregate Leverage (%)

ROE (%)

Distribution Yield (%)

PB Band (x)



Company Guide



FY Mar 2014A 2015A 2016A 2017F 2018F Gross revenue 214 227 215 226 225 Property expenses (131) (134) (124) (134) (133) Net Property Income 83.5 93.3 90.9 92.3 91.6 Other Operating expenses (40.7) (35.9) (34.6) (36.0) (36.0) Other Non Opg (Exp)/Inc (13.7) (15.0) (3.9) 0.0 0.0 Net Interest (Exp)/Inc (15.0) (17.2) (17.9) (18.4) (18.8) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Net Income 14.3 28.4 38.5 37.9 36.8 Tax (7.7) (9.9) (37.4) (3.6) (3.6) Minority Interest 0.0 0.0 0.0 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Income After Tax 6.66 18.5 1.08 34.4 33.2 Total Return 16.7 28.6 147 34.4 33.2 Non-tax deductible Items 38.0 37.8 62.6 31.1 31.1 Net Inc available for Dist. 54.6 56.3 63.7 65.4 64.3 Growth & Ratio Revenue Gth (%) 55.5 6.0 (5.3) 5.1 (0.4) N Property Inc Gth (%) 73.4 11.8 (2.7) 1.5 (0.7) Net Inc Gth (%) (25.3) 177.5 (94.2) 3,090.0 (3.4) Dist. Payout Ratio (%) 100.0 100.0 95.0 95.0 95.0 Net Prop Inc Margins (%) 39.0 41.1 42.2 40.8 40.7 Net Income Margins (%) 3.1 8.1 0.5 15.2 14.8 Dist to revenue (%) 25.5 24.8 29.6 28.9 28.6 Managers & Trustee’s fees 19.0 15.8 16.1 15.9 16.0 ROAE (%) 0.9 2.3 0.1 3.6 3.4 ROA (%) 0.5 1.3 0.1 2.1 2.0 ROCE (%) 1.8 3.0 0.1 3.6 3.5 Int. Cover (x) 2.9 3.3 3.1 3.1 3.0


Growth driven by ASCHT’s Australian and Japanese properties


Company Guide



FY Mar 2Q2016 3Q2016 4Q2016 1Q2017 2Q2017 Gross revenue 54.5 54.9 52.9 52.4 55.6 Property expenses (31.9) (31.5) (29.5) (29.8) (31.2) Net Property Income 22.6 23.4 23.4 22.6 24.3 Other Operating expenses (8.8) (8.5) (9.0) (9.4) (9.4) Other Non Opg (Exp)/Inc (2.7) 0.0 1.23 (3.2) 0.92 Net Interest (Exp)/Inc (4.3) (4.3) (4.5) (4.5) (4.4) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Net Income 6.80 10.7 11.2 5.56 11.4 Tax (1.4) (1.8) (33.4) (1.3) (2.1) Minority Interest 0.0 0.0 0.0 0.0 0.0 Net Income after Tax 5.36 8.90 (22.2) 4.22 9.36 Total Return 5.36 8.90 123 4.22 9.36 Non-tax deductible Items 10.9 8.12 37.6 11.0 0.0 Net Inc available for Dist. 16.3 17.0 15.4 15.2 16.3 Growth & Ratio Revenue Gth (%) 3 1 (4) (1) 6 N Property Inc Gth (%) 5 4 0 (3) 8 Net Inc Gth (%) (41) 66 nm nm 122 Net Prop Inc Margin (%) 41.5 42.6 44.3 43.2 43.8 Dist. Payout Ratio (%) 95.2 95.3 100.0 95.2 95.0

Balance Sheet (S$m)

FY Mar 2014A 2015A 2016A 2017F 2018F Investment Properties 516 618 788 792 797 Other LT Assets 763 734 733 733 733 Cash & ST Invts 72.4 91.5 94.6 84.6 82.2 Inventory 0.65 0.49 0.37 0.37 0.37 Debtors 8.13 9.67 10.9 9.62 9.58 Other Current Assets 5.79 6.40 5.01 5.01 5.01 Total Assets 1,366 1,460 1,632 1,624 1,627 ST Debt 0.0 72.0 58.0 58.0 58.0 Creditor 31.1 31.5 44.7 31.5 31.4 Other Current Liab 9.21 5.92 9.18 11.4 11.5 LT Debt 485 472 475 475 475 Other LT Liabilities 45.3 52.4 81.4 81.4 81.4 Unit holders’ funds 795 826 963 967 970 Minority Interests 0.0 0.0 0.0 0.0 0.0 Total Funds & Liabilities 1,366 1,460 1,632 1,624 1,627 Non-Cash Wkg. Capital (25.8) (20.9) (37.7) (28.0) (28.0) Net Cash/(Debt) (413) (452) (439) (449) (451) Ratio Current Ratio (x) 2.2 1.0 1.0 1.0 1.0 Quick Ratio (x) 2.1 1.0 1.0 1.0 1.0 Aggregate Leverage (%) 35.5 37.2 32.7 32.8 32.8 Z-Score (X) 0.9 0.9 0.8 0.8 0.8


Gearing expected to remain relatively stable going forward


Company Guide



FY Mar 2014A 2015A 2016A 2017F 2018F Pre-Tax Income 14.3 28.4 38.5 37.9 36.8 Dep. & Amort. 27.4 27.9 26.0 26.0 26.0 Tax Paid (2.5) (6.8) (3.1) (1.3) (3.6) Associates &JV Inc/(Loss) (0.2) (3.1) (4.0) 0.0 0.0 Chg in Wkg.Cap. 11.7 7.26 9.19 (12.0) 0.0 Other Operating CF 17.0 1.94 2.92 5.06 5.06 Net Operating CF 67.7 55.6 69.5 55.7 64.3 Net Invt in Properties (300) (110) (11.4) (3.6) (5.6) Other Invts (net) 0.0 0.0 29.5 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc. & JVs 1.15 1.33 1.02 0.0 0.0 Other Investing CF (24.3) (10.0) (13.8) 0.0 0.0 Net Investing CF (323) (119) 5.26 (3.6) (5.6) Distribution Paid (51.5) (56.9) (58.2) (62.1) (61.0) Chg in Gross Debt 120 85.7 (8.8) 0.0 0.0 New units issued 198 49.2 0.0 0.0 0.0 Other Financing CF 0.0 0.0 0.0 0.0 0.0 Net Financing CF 266 77.9 (67.0) (62.1) (61.0) Currency Adjustments 2.84 1.14 (1.2) 0.0 0.0 Chg in Cash 13.1 15.8 6.48 (10.0) (2.4) Operating CFPS (S cts) 6.09 4.50 5.40 6.02 5.69 Free CFPS (S cts) (25.3) (5.1) 5.19 4.64 5.19



Source: DBS Bank

Analyst: Mervin SONG CFA

Derek TAN


BUY

Last Traded Price ( 4 Jan 2017): S$1.01 (STI : 2,921.31) Price Target 12-mth: S$1.13 (12% upside and 5.8% yield) Potential Catalyst: Acquisitions and/or further redevelopments Where we differ: Above consensus due to incorporation of Blue Ridge Phase II acquisition Analyst Mervin SONG CFA +65 6682 3715 [email protected] Derek TAN +65 6682 3716 [email protected]

Price Relative

Forecasts and Valuation FY Mar (S$m) 2015A 2016A 2017F 2018F Gross Revenue 129 144 168 196 Net Property Inc 77.6 93.7 104 125 Total Return 65.9 105 53.6 57.9 Distribution Inc 49.8 56.5 60.9 66.2 EPU (S cts) 2.97 1.01 5.76 6.19 EPU Gth (%) 59 (66) 470 8 DPU (S cts) 4.86 5.50 5.89 6.37 DPU Gth (%) 7 13 7 8 NAV per shr (S cts) 66.2 67.2 66.6 66.1 PE (X) 34.0 99.9 17.5 16.3 Distribution Yield (%) 4.8 5.4 5.8 6.3 P/NAV (x) 1.5 1.5 1.5 1.5 Aggregate Leverage (%) 25.1 26.9 36.0 37.1 ROAE (%) 4.6 1.5 8.4 9.1 Distn. Inc Chng (%): - - Consensus DPU (S cts): 6.00 6.40 Other Broker Recs: B: 3 S: 0 H: 1


Still under the radar Still has legs to run. We maintain our BUY call on Ascendas India Trust (a-iTrust), with a revised TP of S$1.13. While a-iTrust has rallied over 30% since we upgraded the stock to BUY in late January, and investor interest has picked up, we believe a-iTrust’s growth story still has yet to gain recognition among investors at large. With Singapore-focused REITs increasingly facing headwinds translating into slowing DPU growth (average DPU CAGR of 1%), we anticipate investors will gravitate to a-iTrust given its healthy 2-year DPU CAGR of 8% and a still decent 5.5% yield. Clear growth drivers with prospects of healthy rental reversions ahead. Over the past year, a-iTrust has announced several developments including the construction of The V, a new 408k sqft IT building, as well as acquisitions of CyberVale, aVance 3 & 4 and BlueRidge Phase 2. Coupled with the potential for healthy rental reversions ahead, of 12-20% in Chennai and up to 5% for Hyderabad and Bangalore, provides confidence over a-iTrust’s ability to deliver a robust 8% DPU CAGR over the next two years. Untapped land bank and acquisition pipeline. Through its untapped land bank and sponsor pipeline, a-iTrust has access to c.5.9m sqft of floor area. This provides the trust with a visible and sustainable source of growth over the long term. The ability to execute on these growth opportunities is supported by its healthy balance sheet (current gearing is low at 29%, rising to c.36% with planned developments and acquisitions in the next couple of years). Valuation:

We maintain our DDM-based TP of S$1.13. Key Risks to Our View:

The key risk to our bullish stance is a significant depreciation of the INR, downturn in the Indian economy which will depress rents or delays in the completion of announced acquisitions and development projects. At A Glance Issued Capital (m shrs) 930 Mkt. Cap (S$m/US$m) 939 / 652 Major Shareholders (%) Ascendas Pte Ltd 23.9 Massachusetts Financial Services 12.7 JPMorgan Chase & Co 9.5

Free Float (%) 53.9 3m Avg. Daily Val (US$m) 0.37 ICB Industry : Real Estate / Real Estate Investment Trust



Ascendas India Trust Version 7 | Bloomberg: AIT SP | Reuters: AINT.SI Refer to important disclosures at the end of this report


Company Guide

Ascendas India Trust


Earnings Drivers:

Leveraged on offshoring trends. a-iTrust provides exposure to India, which remains a leading IT and offshoring hub. The growing demand for offshoring services is underpinned by the country's low-cost environment. According to PayScale, the average salary for IT/software, developers or programmers in India stands at US$5,451 p.a. which is way below that of other competing and/or developed countries such as the US (US$73,031), Australia (US$51,331), Hong Kong (US$23,600) and Malaysia (US$10,165). Combined with an abundant skilled labour force and qualified English-speaking talent pool, based on NASSCOM (National Association of Software and Services Companies) estimates, IT-BPM (business process management) revenues are forecast to grow by 10-12% in FY16/17 to US$157-160bn. Balanced lease expiry to capture upside in rents. a-iTrust’s WALE stands at 5.7 years, with 8% and 30% of leases up for renewal in FY17 and FY18 respectively. Given the favourable demand backdrop and limited supply in certain markets such as Chennai, we believe a-iTrust’s lease expiry profile provides it with ample opportunities to capture the upside in rents. Boost from recent acquisitions and developments. Over the past year, a-iTrust announced the construction of The V, a new 408k-sqft IT building, as well as the acquisitions of CyberVale, aVance 3 & 4 and BlueRidge Phase II. These organic and inorganic developments should boost a-iTrust’s DPU, contributing to a healthy 8% DPU CAGR over the next two years. Potential one-third increase in floor area. a-iTrust currently has a portfolio of properties with 9.7m sqft of space with announced plans to take it to c.12m sqft. Beyond this, through its sponsors and assuming a-iTrust exercises its right of first refusal (ROFR), it could access c.2.3m sqft worth of properties. In addition, we understand the trust is also open to the acquisition of third-party properties. Currently, it is exploring acquisition opportunities in Mumbai, Delhi and Gurgaon, thereby expanding its presence beyond its current core markets of Bangalore, Chennai, Hyderabad and Pune.




Interest Cover (x)



Company Guide


Balance Sheet:

Flexible balance sheet. a-iTrust’s current gearing remains low at <30%. However, we expect gearing to rise to c.36% by end-FY17 after including the trust’s existing development projects and announced acquisitions. This is within management comfortable level of 35%-45%. 100% of debt fixed. As at end September 2016, 100% of the trust’s debt was fixed with an all-in cost of debt of 7.0%. This minimises the trust’s exposure to short-term volatility in interest rates. Share Price Drivers:

Stronger INR. Since a-iTrust’s IPO in 2008, NPI in INR terms has grown at a CAGR of 8%. However, due to the weak INR, a-iTrust’s share price has been capped and net property income in SGD terms has only grown at c.5% CAGR. Should the INR appreciate, this will be a major tailwind for a-iTrust’s share price. Crystallisation of development and sponsor pipeline. The trust has a development and sponsor pipeline of c.3m sqft and 2.3m sqft respectively. The delivery of the development pipeline and acquisition of its sponsor’s properties with resultant increase in earnings/DPU should drive the stock price higher over the medium term. Key Risks:

Currency risk. a-iTrust’s distributions are generated in INR but paid in SGD. While the trust hedges each half-yearly distribution, DPU from the trust will be negatively impacted on a lagged basis if the INR depreciates. In addition, as 75% and 25% of the trust’s borrowings are in INR and SGD respectively, while all its assets are in India, a depreciation of the INR would also be negative to its NAV per share. Economic risk. Deterioration in the Indian economic outlook and/or companies outsourcing their operations to India may negatively impact demand for space and rents at a-iTrust’s properties. Interest rate risk. Increases in interest rates will result in higher interest payments which would reduce income available for distribution. This risk is partially mitigated by the fact that 100% of the trust’s debt is fixed. Company Background

Ascendas India Trust ("a-iTrust") was listed in August 2007 as the first Indian property trust in Asia. Its principal objective is to own income-producing real estate used primarily as business space in India. a-iTrust may also develop and acquire land or uncompleted developments to be used primarily as business space, with the objective of holding the properties upon completion. a-iTrust is managed by Ascendas Property Fund Trustee Pte Ltd, a subsidiary of the Ascendas Group.


ROE (%)


PB Band (x)



Company Guide



FY Mar 2014A 2015A 2016A 2017F 2018F Gross revenue 121 129 144 168 196 Property expenses (48.6) (51.2) (50.2) (64.4) (71.5) Net Property Income 72.1 77.6 93.7 104 125 Other Operating expenses (7.9) (8.4) (16.1) (11.6) (14.1) Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (3.9) (2.8) (9.2) (14.8) (27.1) Exceptional Gain/(Loss) (8.1) 4.31 0.0 0.0 0.0 Net Income 52.2 70.7 68.4 77.6 83.5 Tax (30.4) (38.3) (51.1) (20.8) (22.2) Minority Interest (4.8) (5.1) (8.0) (3.2) (3.3) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Income After Tax 17.1 27.3 9.34 53.6 57.9 Total Return 50.1 65.9 105 53.6 57.9 Non-tax deductible Items (13.3) (16.1) (11.9) 7.34 8.28 Net Inc available for Dist. 46.1 49.8 56.5 60.9 66.2 Growth & Ratio Revenue Gth (%) (4.4) 6.7 11.8 17.0 16.5 N Property Inc Gth (%) (0.1) 7.6 20.8 11.0 19.8 Net Inc Gth (%) (25.4) 59.8 (65.8) 473.2 8.2 Dist. Payout Ratio (%) 90.0 90.0 90.0 90.0 90.0 Net Prop Inc Margins (%) 59.7 60.3 65.1 61.8 63.5 Net Income Margins (%) 14.2 21.2 6.5 31.8 29.5 Dist to revenue (%) 38.2 38.7 39.2 36.2 33.8 Managers & Trustee’s fees 6.5 6.5 11.2 6.9 7.2 ROAE (%) 2.9 4.6 1.5 8.4 9.1 ROA (%) 1.6 2.4 0.7 3.7 3.7 ROCE (%) 2.6 2.8 1.6 4.9 5.4 Int. Cover (x) 16.3 24.4 8.4 6.2 4.1


Improvement in earnings on the back of positive rental reversions and contributions from new properties/acquisitions


Company Guide



FY Mar 2Q2016 3Q2016 4Q2016 1Q2017 2Q2017 Gross revenue 36.5 37.5 35.9 36.1 37.1 Property expenses (12.8) (12.7) (12.7) (12.4) (12.0) Net Property Income 23.7 24.8 23.2 23.6 25.2 Other Operating expenses 0.11 2.35 (2.2) (2.5) (2.9) Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (2.6) (3.0) (2.8) (3.6) (3.3) Exceptional Gain/(Loss) 0.17 (5.7) 0.13 (2.6) 3.00 Net Income 21.4 18.5 18.4 14.9 21.9 Tax (6.1) (8.0) (30.2) (4.6) (3.6) Minority Interest (1.1) (0.8) (5.2) (1.0) (1.2) Net Income after Tax 14.2 9.70 (17.0) 9.39 17.1 Total Return 16.8 9.70 72.6 9.39 17.1 Non-tax deductible Items (4.6) (5.2) (4.0) (0.9) (3.0) Net Inc available for Dist. 14.0 14.0 14.4 14.0 14.2 Growth & Ratio Revenue Gth (%) 7 3 (4) 1 3 N Property Inc Gth (%) 8 5 (6) 2 6 Net Inc Gth (%) 75 (32) nm nm 82 Net Prop Inc Margin (%) 65.0 66.2 64.7 65.6 67.7 Dist. Payout Ratio (%) 90.0 90.0 90.0 90.0 90.0

Balance Sheet (S$m)

FY Mar 2014A 2015A 2016A 2017F 2018F Investment Properties 0.41 0.26 3.29 3.21 3.13 Other LT Assets 953 1,150 1,222 1,442 1,488 Cash & ST Invts 74.4 69.7 85.9 44.2 35.9 Inventory 0.71 0.74 0.69 0.97 1.12 Debtors 20.3 22.8 15.1 29.8 34.7 Other Current Assets 13.9 13.6 22.8 22.8 22.8 Total Assets 1,063 1,257 1,350 1,543 1,586 ST Debt 49.9 89.9 45.0 45.0 45.0 Creditor 39.3 42.6 57.4 55.7 64.9 Other Current Liab 0.97 0.71 0.51 0.51 0.51 LT Debt 184 225 318 511 543 Other LT Liabilities 180 222 238 238 238 Unit holders’ funds 566 627 639 637 636 Minority Interests 42.0 49.3 52.9 56.1 59.4 Total Funds & Liabilities 1,063 1,257 1,350 1,543 1,586 Non-Cash Wkg. Capital (5.4) (6.1) (19.4) (2.6) (6.7) Net Cash/(Debt) (160) (246) (277) (512) (552) Ratio Current Ratio (x) 1.2 0.8 1.2 1.0 0.9 Quick Ratio (x) 1.0 0.7 1.0 0.7 0.6 Aggregate Leverage (%) 22.1 25.1 26.9 36.0 37.1 Z-Score (X) 1.5 1.1 1.1 0.9 0.9


Increase in gearing due to new properties


Company Guide



FY Mar 2014A 2015A 2016A 2017F 2018F Pre-Tax Income 52.2 70.7 68.4 77.6 83.5 Dep. & Amort. 0.10 0.08 0.08 0.08 0.08 Tax Paid (11.3) (12.4) (51.1) (20.8) (22.2) Associates &JV Inc/(Loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. 14.2 3.73 13.3 (16.8) 4.10 Other Operating CF 22.2 17.4 66.5 0.0 0.0 Net Operating CF 77.4 79.6 97.1 40.0 65.5 Net Invt in Properties (35.5) (17.7) (51.8) (198) (68.0) Other Invts (net) (8.6) (91.8) 0.0 (22.2) 22.2 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc. & JVs 0.0 0.0 0.0 0.0 0.0 Other Investing CF 0.04 0.08 0.0 0.0 0.0 Net Investing CF (44.0) (109) (51.8) (220) (45.8) Distribution Paid (40.2) (43.4) (48.0) (54.8) (59.6) Chg in Gross Debt 17.7 80.5 24.7 193 31.6 New units issued 0.0 0.0 0.0 0.0 0.0 Other Financing CF 0.0 (16.3) (0.4) 0.0 0.0 Net Financing CF (22.5) 20.8 (23.7) 138 (28.0) Currency Adjustments (6.4) 4.27 0.0 0.0 0.0 Chg in Cash 4.52 (4.7) 21.6 (41.8) (8.3) Operating CFPS (S cts) 6.91 8.25 9.07 6.11 6.56 Free CFPS (S cts) 4.59 6.73 4.90 (17.0) (0.3)



Source: DBS Bank


Derek TAN

Includes $133m investment in BlueRidge Phase 2

ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa: YM, PY

BUY Last Traded Price (4 Jan 2017): S$2.31 (STI : 2,921.31) Price Target 12-mth: S$2.65 (15% upside and 6.9% yield) Potential Catalyst: Acquisitions Where we differ: Estimates are in line with consensus Analyst Derek TAN +65 6682 3716 [email protected] Mervin SONG CFA +65 6682 3715 [email protected] Singapore Research Team [email protected]

Price Relative

Forecasts and Valuation FY Mar (S$m) 2015A 2016A 2017F 2018F Gross Revenue 673 761 837 858 Net Property Inc 463 534 598 617 Total Return 398 349 415 434 Distribution Inc 351 378 427 446 EPU (S cts) 14.6 13.9 15.3 15.3 EPU Gth (%) 0 (5) 10 1 DPU (S cts) 14.6 15.4 15.7 15.6 DPU Gth (%) 3 5 2 (1) NAV per shr (S cts) 208 207 207 201 PE (X) 15.8 16.6 15.1 15.0 Distribution Yield (%) 6.3 6.7 6.8 6.7 P/NAV (x) 1.1 1.1 1.1 1.1 Aggregate Leverage (%) 33.4 37.1 34.2 34.4 ROAE (%) 7.1 6.7 7.4 7.5 Distn. Inc Chng (%): Consensus DPU (S cts): 15.7 15.9 Other Broker Recs: B: 15 S: 0 H: 7


Takes three at a go! Maintain BUY, TP maintained at S$2.65. Ascendas REIT (A-REIT) offers attractive yields of close to 6.6% to investors looking for steady returns in the current volatile market. A low leverage of 35% supports any potential M&A activities which the REIT has the ability and access to deliver on. Acquisition that ticks the right boxes. A-REIT continues to deepen its exposure to the Business Parks/Science Parks Space with an acquisition of three properties at a price of S$420m. The acquisition ticks most of the boxes – long lease tenure (16.5 years with annual escalations of 2.0%-2.5%), long unexpired land lease tenure (65.7 years) and offers investors a deeper exposure to a sector (R&D) that continues to grow. The yield of 6.0% (all-in cost) appears low at first glance but we believe it reflects the properties’ relatively young age (2.0 years) and long land lease tenure. Accretion is projected to be marginal at 0.5%. We have yet to factor in the acquisition, pending EGM. Conservative capital management. A-REIT stands tall in the face of rising interest rates going into 2017 with a spread-out debt expiry profile of 3.8 years, implying that the REIT does not face any major refinancing in any one year. The manager adopts a prudent interest rate risk management strategy with a weighted average cost of debt of 3.0% with 78.0% hedged into fixed rates. Valuation:

Our DCF-based TP is maintained at S$2.65 as a result of additional contribution from acquisitions. Maintain BUY on the back of total potential returns of c.15% Key Risks to Our View:

Interest rate risk. An increase in lending rates will negatively impact dividend distributions. However, A-REIT's strategy has been to actively manage its exposure and it currently has c.70% of its interest cost hedged into fixed rates. At A Glance Issued Capital (m shrs) 2,843 Mkt. Cap (S$m/US$m) 6,566 / 4,597 Major Shareholders (%) Ascendas Pte Ltd 20.0 Mondrian Investment 8.0 Blackrock 5.1




Ascendas REIT Version 6 | Bloomberg: AREIT SP | Reuters: AEMN.SI Refer to important disclosures at the end of this report

82

102

122

142

162

182

202

222

1.9

2.1

2.3

2.5

2.7

2.9

3.1


Relative IndexS$

Ascendas REIT (LHS) Relative STI (RHS)


Company Guide

Ascendas REIT


Earnings Drivers:

Rebound in occupancy rates to provide upside to earnings. A-REIT’s Singapore portfolio occupancy rates dipped marginally to 87.9%, compared to c.88.3% in 1QFY17 and 89.9% a year ago. The dip was mainly due to non-renewals of leases at 40 Penjuru Lane and Pioneer hub. Given A-REIT’s scale in Singapore, the manager continues to attract a diverse tenant base to its properties, despite the current economic slowdown. The manager is still seeing expansionary and new demand mainly from businesses in the transport and storage, distribution, and electronics sectors. Looking ahead, with close to 13% of the portfolio still vacant, the ability to back-fill the unoccupied space provides potential upside to our earnings estimates. A long portfolio-weighted average lease expiry (WALE) profile of 3.7 years (4.4 years post latest acquisition) means good earnings visibility for the REIT. Still positive rental reversions, but spread will likely narrow. Rental reversionary trends are moderating and reached a low of 0.9% in 2QFY17. Looking ahead, leases representing close to 12% in Singapore and given the narrowing spread between passing and market rents, we expect rental reversionary trends to remain flattish or even turn negative. In Australia, given the well-spread lease expiry profile, we do not anticipate too much volatility in the rentals and the manager is pro-actively engaging tenants ahead of expiry to renew their leases. In Australia, the manager is seeing a pick-up in demand for space in the recent quarter and reported a 4.2 percentage point increase in occupancy to 94.2%, back-filling most of the empty space in the previous quarter. Australia continues to offer the strongest earnings visibility with a WALE of 5.1 years. Inorganic growth to drive contributions in Australia and Singapore. A-REIT has regularly embarked on acquisitions and development projects, which have helped the REIT to deliver sustained growth in distributions over time. Given the limited opportunities in Singapore and the fragmented market in China, the manager has looked overseas for higher returns. The manager remains focused on deepening its presence in the core markets of Singapore, Australia and China, when the opportunity arises. Apart from the recently acquired acquisitions in Australia (A$179m in total), A-REIT will be embarking on a new asset enhancement project at 50 Kallang Avenue for S$45.2m which will be anchored by a new tenant on a long lease. A-REIT has in total S$113.1m in asset enhancements currently underway. The manager is also looking at further asset refurbishment options at its portfolio in Singapore in order to position the assets to capture changing tenant needs.




Interest Cover (x)


65.3%

67.3%

69.3%

71.3%

73.3%

75.3%

77.3%

0

100

200

300

400

500

600

700

2014A 2015A 2016A 2017F 2018F

S$ m

Net Property Income Net Property Income Margin %

62%

64%

66%

68%

70%

72%

74%

76%

109

119

129

139

149

159

1Q20

15

2Q20

15

3Q20

15

4Q20

15

1Q20

16

2Q20

16

3Q20

16

4Q20

16

1Q20

17

2Q20

17


0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

2014A 2015A 2016A 2017F 2018F

(x)

0.00

2.00

4.00

6.00

8.00

10.00

12.00

2014A 2015A 2016A 2017F 2018F

(x)


Company Guide

Ascendas REIT

Balance Sheet:

Optimal gearing level of c.34%. A-REIT’s gearing is estimated to dip to 34% (from c.37%) upon the assumed full conversion of S$300m of Exchange Collateralised Securities (ECS) by end of FY17F. This will be at the lower end of management’s comfortable 35-40% range. We believe that there is still capacity for management to utilise its debt headroom for further acquisitions but any significant deals could mean potential issuance of new equity. Well-staggered debt maturity profile. The manager adopts a prudent interest rate risk management strategy with a weighted average cost of debt of 3.0% with 78.0% hedged into fixed rates. The debt tenure is long at 3.8 years, with a well spread-out refinancing profile ensuring no concentration risk. Share Price Drivers:

Direction of 10-year long bonds impacts share price. Seen by investors as a key S-REIT proxy, A-REIT’s share price has typically been closely linked to investors’ perception on the direction of the US benchmark 10-year bond yields. A fall in 10-year bond yields on the back of a delay in Fed hikes is likely to mean a higher share price. Capital recycling strategy. With limited acquisition opportunities in Singapore, A-REIT regularly looks to divest older, lower-yielding properties and re-cycle the capital into asset- enhancement exercises (AEI), development projects or acquisitions. The aim is to optimise the portfolio returns and distributions which have a positive impact on its share price. Key Risks:

Interest rate risk. Any increase in interest rates will result in higher interest payments, which will reduce income available for distribution and result in lower distribution per unit (DPU) to unitholders. Economic risk. A deterioration in the economic outlook could have a negative impact on industrial rents and occupancies as companies cut back production and require less space, given that industrial rents have a strong correlation with GDP growth. Company Background

A-REIT is Singapore’s first and largest listed business space and industrial real estate investment trust. It has a diversified portfolio comprising assets in Singapore, China and Australia. A-REIT is managed by Ascendas Funds Management (S) Limited, a wholly owned subsidiary of the Singapore-based Ascendas Group.


ROE (%)


PB Band (x)


10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

2014A 2015A 2016A 2017F 2018F

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2014A 2015A 2016A 2017F 2018F

Avg: 6.2%

+1sd: 6.6%

+2sd: 7%

‐1sd: 5.8%

‐2sd: 5.3%

4.3

4.8

5.3

5.8

6.3

6.8

7.3

7.8

2013 2014 2015 2016

(%)

Avg: 1.16x

+1sd: 1.24x

+2sd: 1.32x

‐1sd: 1.09x

‐2sd: 1.01x

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7


(x)


Company Guide

Ascendas REIT

p Income Statement (S$m)

FY Mar 2014A 2015A 2016A 2017F 2018F Gross revenue 614 673 761 837 858 Property expenses (178) (211) (227) (238) (241) Net Property Income 436 463 534 598 617 Other Operating expenses (40.8) (43.8) (67.4) (55.2) (55.4) Other Non Opg (Exp)/Inc 2.67 41.7 (5.7) 0.0 0.0 Net Interest (Exp)/Inc (35.9) (105) (77.5) (109) (108) Exceptional Gain/(Loss) 12.1 2.02 0.0 0.0 0.0 Net Income 374 357 383 434 454 Tax (23.2) (6.7) (25.1) (4.2) (4.7) Minority Interest 0.0 0.0 0.0 0.0 0.0 Preference Dividend 0.0 0.0 (6.6) (15.0) (15.0) Net Income After Tax 351 351 351 415 434 Total Return 482 398 349 415 434 Non-tax deductible Items (8.7) 0.57 26.9 11.6 11.7 Net Inc available for Dist. 342 351 378 427 446 Growth & Ratio Revenue Gth (%) 6.6 9.8 13.0 9.9 2.5 N Property Inc Gth (%) 6.6 6.1 15.3 12.1 3.1 Net Inc Gth (%) 32.8 0.0 0.2 18.1 4.6 Dist. Payout Ratio (%) 100.0 100.0 100.0 100.0 100.0 Net Prop Inc Margins (%) 71.1 68.7 70.1 71.5 72.0 Net Income Margins (%) 57.2 52.1 46.2 49.6 50.6 Dist to revenue (%) 55.7 52.1 49.7 51.0 52.0 Managers & Trustee’s fees 6.6 6.5 8.9 6.6 6.5 ROAE (%) 7.4 7.1 6.7 7.4 7.5 ROA (%) 4.9 4.5 3.9 4.2 4.4 ROCE (%) 5.3 5.5 5.0 5.6 5.7 Int. Cover (x) 11.0 4.0 6.0 5.0 5.2


Driven by acquisitions and development projects.


Company Guide

Ascendas REIT


FY Mar 2Q2016 3Q2016 4Q2016 1Q2017 2Q2017 Gross revenue 183 194 204 208 205 Property expenses (58.8) (51.6) (60.6) (58.1) (53.0) Net Property Income 124 142 143 149 152 Other Operating expenses (12.2) (21.3) (23.1) (14.9) (15.7) Other Non Opg (Exp)/Inc 32.3 3.16 (12.6) (9.3) (13.2) Net Interest (Exp)/Inc (5.3) (22.8) (37.0) (36.8) (28.2) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 5.70 Net Income 123 101 70.8 88.7 101 Tax (0.7) (7.3) (16.7) (2.1) 13.7 Minority Interest 0.38 0.03 0.0 0.0 0.01 Net Income after Tax 123 93.9 54.1 86.6 115 Total Return 123 93.9 47.3 86.6 115 Non-tax deductible Items (23.9) 3.02 41.8 15.7 (7.8) Net Inc available for Dist. 99.3 96.9 89.1 102 107 Growth & Ratio Revenue Gth (%) 1 6 5 2 (1) N Property Inc Gth (%) 0 15 1 4 2 Net Inc Gth (%) 41 (24) (42) 60 33 Net Prop Inc Margin (%) 67.8 73.4 70.3 72.0 74.2 Dist. Payout Ratio (%) 100.0 100.0 102.0 104.5 105.1

Balance Sheet (S$m)

FY Mar 2014A 2015A 2016A 2017F 2018F Investment Properties 6,923 7,868 9,599 9,665 9,695 Other LT Assets 290 135 96.2 96.2 96.2 Cash & ST Invts 67.3 41.6 56.2 8.64 15.3 Inventory 0.0 0.0 0.0 0.0 0.0 Debtors 65.1 90.1 89.3 98.2 101 Other Current Assets 12.9 25.8 35.6 35.6 35.6 Total Assets 7,358 8,160 9,876 9,903 9,942 ST Debt 893 286 1,180 1,190 1,220 Creditor 128 189 172 189 194 Other Current Liab 85.8 32.8 43.5 39.8 40.4 LT Debt 1,231 2,442 2,485 2,195 2,205 Other LT Liabilities 171 198 199 205 210 Unit holders’ funds 4,849 5,014 5,797 6,085 6,074 Minority Interests 0.03 0.04 0.02 0.02 0.02 Total Funds & Liabilities 7,358 8,160 9,876 9,903 9,942 Non-Cash Wkg. Capital (136) (105) (90.6) (95.1) (98.0) Net Cash/(Debt) (2,057) (2,686) (3,608) (3,376) (3,409) Ratio Current Ratio (x) 0.1 0.3 0.1 0.1 0.1 Quick Ratio (x) 0.1 0.3 0.1 0.1 0.1 Aggregate Leverage (%) 28.9 33.4 37.1 34.2 34.4 Z-Score (X) 1.4 1.3 0.9 1.1 1.1


Steady gearing profile


Company Guide

Ascendas REIT


FY Mar 2014A 2015A 2016A 2017F 2018F Pre-Tax Income 374 357 383 434 454 Dep. & Amort. 0.70 0.37 0.18 0.0 0.0 Tax Paid (0.8) (2.4) (4.5) (7.9) (4.2) Associates &JV Inc/(Loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. (1.4) (10.2) 11.5 8.22 2.28 Other Operating CF 28.5 17.4 (6.6) (15.0) (15.0) Net Operating CF 401 362 384 420 437 Net Invt in Properties 0.0 0.0 0.0 0.0 0.0 Other Invts (net) (94.7) (643) (1,496) (66.0) (30.0) Invts in Assoc. & JV 0.0 0.0 0.04 0.0 0.0 Div from Assoc. & JVs 0.0 0.0 0.0 0.0 0.0 Other Investing CF (40.2) 5.50 5.50 5.50 5.50 Net Investing CF (135) (638) (1,491) (60.5) (24.5) Distribution Paid (326) (261) (442) (427) (446) Chg in Gross Debt 170 577 1,218 (280) 40.0 New units issued (0.1) 0.0 342 300 0.0 Other Financing CF (70.8) (68.1) 0.0 0.0 0.0 Net Financing CF (227) 249 1,118 (407) (406) Currency Adjustments 8.53 0.80 (1.7) 0.0 0.0 Chg in Cash 47.8 (25.7) 9.56 (47.6) 6.67 Operating CFPS (S cts) 16.8 15.5 14.7 15.1 15.4 Free CFPS (S cts) 16.7 15.1 15.2 15.4 15.4



Source: DBS Bank

Analyst: Derek TAN

Mervin SONG CFA

Singapore Research Team

S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 08 Jan 16 2.25 2.52 BUY

2: 04 Feb 16 2.34 2.52 BUY

3: 18 May 16 2.32 2.50 BUY

4: 10 Jun 16 2.32 2.50 BUY

5: 12 Jul 16 2.48 2.55 BUY

6: 21 Jul 16 2.49 2.61 BUY

7: 22 Jul 16 2.53 2.61 BUY

8: 22 Aug 16 2.42 2.61 BUY

9: 29 Aug 16 2.44 2.61 BUY

10: 20 Sep 16 2.42 2.61 BUY

11: 26 Sep 16 2.46 2.61 BUY12: 21 Oct 16 2.40 2.65 BUY13: 08 Nov 16 2.34 2.65 BUY14: 06 Dec 16 2.37 2.65 BUY


1

2

3

4

5

6

7 8

9

10

1112

13

14

2.02

2.12

2.22

2.32

2.42

2.52

2.62


S$


BUY Last Traded Price ( 4 Jan 2017): S$1.16 (STI : 2,921.31) Price Target 12-mth: S$1.32 (14% upside and 7.0% yield) Potential Catalyst: Further acquisitions and asset recycling to accelerate growth, improvement in performance of ART’s Chinese properties Where we differ: Below consensus on lower assumed sales Analyst Mervin SONG CFA +65 6682 3715 [email protected]

Price Relative

Forecasts and Valuation FY Dec (S$m) 2014A 2015A 2016F 2017F Gross Revenue 357 421 464 490 Net Property Inc 180 205 219 229 Total Return 121 152 111 102 Distribution Inc 126 123 134 134 EPU (S cts) 4.83 4.61 6.14 6.13 EPU Gth (%) (5) (4) 33 0 DPU (S cts) 8.20 7.99 8.20 8.11 DPU Gth (%) (2) (3) 3 (1) NAV per shr (S cts) 137 141 137 134 PE (X) 23.9 25.0 18.8 18.8 Distribution Yield (%) 7.1 6.9 7.1 7.0 P/NAV (x) 0.8 0.8 0.8 0.9 Aggregate Leverage (%) 37.6 38.4 39.4 39.6 ROAE (%) 3.5 3.3 4.5 4.5 Distn. Inc Chng (%): 0 0 Consensus DPU (S cts): 8.20 8.40 Other Broker Recs: B: 8 S: 0 H: 4


Unrealised potential

Diversified portfolio underpins resilience. We maintain our BUY recommendation on Ascott Residence Trust (ART) and TP of S$1.32. Amid the volatility in the Singapore hospitality market, we believe ART’s diversified portfolio with serviced residences and rental housing across 14 countries in the Asia Pacific, Europe and the US, offers investors a more resilient DPU outlook. ART’s resiliency and cashflow visibility also comes from having 40-50% of its income sourced from master leases and management contracts with minimum guaranteed income. Value from recent acquisitions/AEIs yet to be fully realised. ART has announced c.S$1.2bn worth of acquisitions over the last two years, increasing the value of its assets under management (AUM) by one-third to S$5bn. Combined with completed and ongoing asset enhancement initiatives (AEIs), ART should progressively realise benefits over the next few years. Divestments to strengthen balance sheet. ART’s headline gearing of c.41% is slightly elevated and we are mindful of ART’s adjusted gearing (treating 50% of perpetual securities as debt) which stands at 42-44%. However, we understand this is temporary as ART is reviewing its portfolio mix, and looking to divest some of its lower yielding properties. Valuation: We maintain our DCF-based TP and DPU forecasts which have incorporated the realised forex gains in 3Q16 and lower assumed interest rates given prospects of achieving interest savings as ART refinances its borrowings over the next couple of years, partially offset by moderation of average daily rate (ADR) growth in Japan due to potential impact of the recent strengthening of the JPY. Key Risks to Our View: Oversupply and forex volatility. The key risk to our call is potential oversupply in ART’s key markets as well as impact from forex volatility. These risks are mitigated by ART’s diversified portfolio with no country contributing more than 20% of the group’s net property income. At A Glance Issued Capital (m shrs) 1,653 Mkt. Cap (S$m/US$m) 1,910 / 1,317 Major Shareholders (%) CapitaLand Limited 43.8 Aia Group Ltd 5.0




Ascott Residence Trust Version 5 | Bloomberg: ART SP | Reuters: ASRT.SI Refer to important disclosures at the end of this report

76

96

116

136

156

176

196

216

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7


Relative IndexS$

Ascott Residence Trust (LHS) Relative STI (RHS)


Company Guide

Ascott Residence Trust


Earnings Drivers:

Value of past acquisitions yet to be realised. ART has had an active two years, marking its maiden entries into Malaysia and the US. In addition, ART has deepened its presence in Australia, China and Japan. All in, ART has acquired c.S$1.2bn worth of properties on an average yield of 5-8%. The benefits from these acquisitions should accrue over the next few years. Asset enhancements to drive earnings. Beyond the announced acquisitions, another growth driver for ART are the asset enhancement initiatives it has undertaken or in the process of completing. Refurbishments, which are initiated every 7-10 years, are designed to enhance the market positioning of ART’s various properties and should translate to higher occupancies and room rates. It has announced c.S$95m worth of renovations over the last 18 months in various cities including Barcelona, Dalian, Ho Chi Minh City, London, Manila, Singapore, Shanghai and Tianjin. Australia, Japan and US - key growth markets. With a timely expansion into Australia and Japan, ART is well positioned to take advantage of the growing Australian and Japanese hospitality markets which should translate to healthy RevPAR growth. In addition, ART’s entry into New York provides exposure to the recovering US economy. The abovementioned markets, representing c.34% of ART’s 9M16 net property income (NPI), should help offset potential weakness from its Chinese properties (c.9% of group NPI) which are affected by the economic slowdown in China. Steady income base from Europe and Japan rental properties. Around a third of ART’s NPI comes from properties under master leases in France, Germany, Singapore and Japan (rental properties). With the prudent use of forex hedges, and having properties under management contracts with minimum guaranteed income (14% of group NPI) in Belgium, Spain and UK, ART provides investors with a solid income base. Ambitions to grow portfolio size to S$6bn. ART has ambitions to grow its portfolio from S$5bn currently to S$6bn by 2017. The properties will be sourced from its Sponsor and third parties.




Interest Cover (x)


44.4%

46.4%

48.4%

50.4%

52.4%

54.4%

0

50

100

150

200

250

300

2013A 2014A 2015A 2016F 2017F

S$ m


42%

44%

46%

48%

50%

52%

54%

41

43

45

47

49

51

53

55

57

59

2Q20

14

3Q20

14

4Q20

14

1Q20

15

2Q20

15

3Q20

15

4Q20

15

1Q20

16

2Q20

16

3Q20

16


0.3

0.4

0.5

0.6

0.7

0.8

0.9

2013A 2014A 2015A 2016F 2017F

(x)

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

2013A 2014A 2015A 2016F 2017F

(x)


Company Guide


Balance Sheet:

Temporary increase in gearing. Post ART’s recent acquisition of properties in Australia, Japan and the US, ART’s headline gearing is expected to settle at around the 40-41% level. However, on an adjusted basis treating 50% of the perpetual securities as debt (in line with Moody’s treatment), gearing is expected to hover around 42-44%. While cognizant of the higher gearing near term, we understand ART will look to pare down its debt by disposing some of its lower-yielding properties. Share Price Drivers:

Overcoming past disappointments. ART’s share price has been range bound over the last year due to inconsistent DPU growth over the last two years on account of the dilution impact from the rights issue in late 2013 and weakness from its Chinese properties. However, we believe ART will re-rate as the full benefits from c.S$1.2bn worth of acquisitions and refurbishment activities over the past two years are realised. Key Risks:

Interest rate risks. Any increase in interest rates will result in higher interest payments and reduce the income available for distribution, which will result in lower distribution per unit (DPU) for unitholders. As at 30 September 2016, 80% of ART’s debts are on fixed rates. Currency risk. As ART earns rental income in various currencies, a depreciation of any foreign currency against the SGD could negatively impact DPU. Nevertheless, through the use of currency hedges for EUR and JPY sourced income, as well as the benefits from having a diversified portfolio, FX volatility has had a minimal impact on ART’s earnings historically. In FY13-FY15, changes in ART’s basket of currencies had only a net 0.8-1.5% negative impact on earnings. Company Background

Ascott REIT's Investment portfolio primarily comprises real estate used mainly as serviced residences or rental housing properties (including investments in real estate-related assets and/or other related value-enhancing assets or instruments).


ROE (%)


PB Band (x)


10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

2013A 2014A 2015A 2016F 2017F

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

2013A 2014A 2015A 2016F 2017F

Avg: 6.8%

+1sd: 7.1%

+2sd: 7.5%

‐1sd: 6.4%

‐2sd: 6%

5.1

5.6

6.1

6.6

7.1

7.6

8.1

2013 2014 2015 2016 2017

(%)

Avg: 0.89x

+1sd: 0.96x

+2sd: 1.02x

‐1sd: 0.82x

‐2sd: 0.75x

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3


(x)


Company Guide



FY Dec 2013A 2014A 2015A 2016F 2017F Gross revenue 317 357 421 464 490 Property expenses (155) (177) (217) (245) (261) Net Property Income 161 180 205 219 229 Other Operating expenses (13.0) (19.9) (30.4) (23.2) (23.7) Other Non Opg (Exp)/Inc 0.0 1.29 9.25 0.0 0.0 Net Interest (Exp)/Inc (42.6) (41.2) (48.3) (45.2) (52.3) Exceptional Gain/(Loss) 6.63 0.0 0.0 0.0 0.0 Net Income 112 120 135 151 153 Tax (36.2) (36.9) (36.8) (25.7) (26.1) Minority Interest (6.7) (7.9) (13.8) (6.3) (6.4) Preference Dividend 0.0 (1.4) (13.4) (19.2) (19.2) Net Income After Tax 69.3 74.1 71.2 99.9 102 Total Return 209 121 152 111 102 Non-tax deductible Items (93.8) 4.51 (28.4) 22.5 32.8 Net Inc available for Dist. 115 126 123 134 134 Growth & Ratio Revenue Gth (%) 4.2 12.8 17.9 10.2 5.6 N Property Inc Gth (%) 1.3 11.8 13.5 7.2 4.4 Net Inc Gth (%) 11.2 6.9 (4.0) 40.4 1.7 Dist. Payout Ratio (%) 100.0 100.0 100.0 100.0 100.0 Net Prop Inc Margins (%) 50.9 50.4 48.6 47.2 46.7 Net Income Margins (%) 21.9 20.7 16.9 21.5 20.7 Dist to revenue (%) 36.3 35.2 29.3 28.8 27.4 Managers & Trustee’s fees 4.1 5.6 7.2 5.0 4.8 ROAE (%) 3.8 3.5 3.3 4.5 4.5 ROA (%) 2.1 1.9 1.6 2.1 2.1 ROCE (%) 3.2 3.0 3.0 3.5 3.6 Int. Cover (x) 3.5 3.9 3.6 4.3 3.9


Growth driven by acquisitions in China, Malaysia, Australia, US and Japan over the past 18 months


Company Guide



FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Gross revenue 113 119 106 119 124 Property expenses (58.0) (62.4) (57.0) (61.5) (66.4) Net Property Income 55.2 56.8 48.6 57.9 57.5 Other Operating expenses (6.5) (12.5) (2.6) (7.3) (7.1) Other Non Opg (Exp)/Inc 10.3 6.23 (0.1) (1.1) (1.3) Net Interest (Exp)/Inc (12.1) (13.2) (12.2) (11.7) (12.0) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Net Income 46.9 37.4 33.7 37.7 37.1 Tax (10.3) (16.6) (6.3) (17.3) (5.6) Minority Interest (1.2) (1.8) (1.4) (1.1) (1.4) Net Income after Tax 35.5 19.0 26.0 19.3 30.0 Total Return 45.8 68.1 25.9 55.6 32.1 Non-tax deductible Items (8.9) (31.2) 6.25 (25.3) 11.5 Net Inc available for Dist. 32.0 32.1 27.3 35.0 38.7 Growth & Ratio Revenue Gth (%) 15 5 (11) 13 4 N Property Inc Gth (%) 12 3 (14) 19 (1) Net Inc Gth (%) 174 (46) 37 (26) 56 Net Prop Inc Margin (%) 48.8 47.7 46.0 48.5 46.4 Dist. Payout Ratio (%) 100.0 100.0 100.0 100.0 100.0

Balance Sheet (S$m)

FY Dec 2013A 2014A 2015A 2016F 2017F Investment Properties 3,177 3,724 4,290 4,567 4,577 Other LT Assets 81.1 80.9 80.2 75.7 71.7 Cash & ST Invts 205 193 220 174 147 Inventory 0.37 0.29 0.30 0.30 0.30 Debtors 11.7 36.4 49.7 50.2 53.0 Other Current Assets 107 87.8 84.2 84.2 84.2 Total Assets 3,582 4,122 4,725 4,951 4,933 ST Debt 50.3 249 258 258 258 Creditor 4.37 119 136 143 151 Other Current Liab 114 7.85 5.24 5.24 5.24 LT Debt 1,147 1,302 1,557 1,695 1,695 Other LT Liabilities 79.1 91.4 99.2 99.2 99.2 Unit holders’ funds 2,093 2,255 2,587 2,663 2,630 Minority Interests 94.1 97.8 81.8 88.0 94.4 Total Funds & Liabilities 3,582 4,122 4,725 4,951 4,933 Non-Cash Wkg. Capital 0.68 (2.0) (7.5) (13.4) (18.5) Net Cash/(Debt) (993) (1,358) (1,595) (1,779) (1,806) Ratio Current Ratio (x) 1.9 0.8 0.9 0.8 0.7 Quick Ratio (x) 1.3 0.6 0.7 0.6 0.5 Aggregate Leverage (%) 33.4 37.6 38.4 39.4 39.6 Z-Score (X) 1.0 0.9 0.8 0.7 0.7


Increase in gearing on the back of announced acquisitions


Company Guide



FY Dec 2013A 2014A 2015A 2016F 2017F Pre-Tax Income 112 120 135 151 153 Dep. & Amort. 13.5 16.3 16.6 16.4 16.4 Tax Paid (13.3) (22.4) (24.1) (25.7) (26.1) Associates &JV Inc/(Loss) 0.00 0.0 0.0 (0.2) (0.2) Chg in Wkg.Cap. 2.30 (25.8) (14.8) 5.91 5.15 Other Operating CF 37.2 64.1 64.5 0.0 0.0 Net Operating CF 152 153 177 147 149 Net Invt in Properties (42.2) (40.0) (46.8) (267) (12.3) Other Invts (net) (180) (428) (352) (10.0) (10.0) Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc. & JVs 0.0 0.0 0.0 0.0 0.0 Other Investing CF 2.23 7.76 1.76 0.0 0.0 Net Investing CF (220) (461) (397) (277) (22.3) Distribution Paid (107) (116) (125) (134) (134) Chg in Gross Debt (89.8) 315 581 138 0.0 New units issued 398 0.0 0.0 98.5 0.0 Other Financing CF (52.3) 99.7 (213) (19.2) (19.2) Net Financing CF 149 298 243 83.7 (154) Currency Adjustments (0.8) (2.0) 3.66 0.0 0.0 Chg in Cash 79.3 (12.0) 27.9 (46.1) (27.4) Operating CFPS (S cts) 10.9 11.6 12.5 8.69 8.65 Free CFPS (S cts) 8.03 7.33 8.48 (7.4) 8.22



Source: DBS Bank


S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 26 Jan 16 1.12 1.33 BUY

2: 15 Mar 16 1.08 1.33 BUY

3: 13 Apr 16 1.12 1.33 BUY

4: 18 Apr 16 1.11 1.28 BUY

5: 21 Jul 16 1.16 1.31 BUY

6: 21 Oct 16 1.15 1.32 BUY


1 23

45

6

1.00

1.05

1.10

1.15

1.20

1.25


S$

Acquisition of properties in Australia, Japan and US partially offset by asset disposals in Japan and Philippines


HOLD Last Traded Price ( 4 Jan 2017): S$0.82 (STI : 2,921.31) Price Target 12-mth: S$0.93 (14% upside and 9.2% yield) Potential Catalyst: Better than expected results Where we differ: Estimates are below consensus on lower rental reversion assumption Analyst Derek TAN +65 6682 3716 [email protected] Singapore Research Team [email protected] Mervin SONG CFA +65 6682 3715 [email protected]

Price Relative

Forecasts and Valuation FY Dec (S$m) 2015A 2016F 2017F 2018F Gross Revenue 89.7 116 120 124 Net Property Inc 76.2 91.1 89.1 92.5 Total Return (12.3) (2.5) 58.7 61.3 Distribution Inc 67.9 70.8 67.7 68.2 EPU (S cts) 6.66 6.84 6.50 6.75 EPU Gth (%) (8) 3 (5) 4 DPU (S cts) 8.50 7.87 7.51 7.50 DPU Gth (%) (1) (7) (5) 0 NAV per shr (S cts) 100 91.1 90.1 89.4 PE (X) 12.2 11.9 12.5 12.1 Distribution Yield (%) 10.4 9.7 9.2 9.2 P/NAV (x) 0.8 0.9 0.9 0.9 Aggregate Leverage (%) 39.9 39.1 39.2 39.3 ROAE (%) 6.7 7.7 7.2 7.5 Distn. Inc Chng (%): - - - Consensus DPU (S cts): 8.10 7.80 7.90 Other Broker Recs: B: 2 S: 1 H: 7


Operational weakness to persist Maintain HOLD, TP unchanged at S$0.93. Maintain our HOLD call on Cache Logistics Trust (Cache) on uncertainty regarding the outcome of the holding arrangement with Schenker. This currently has a negative impact on outlook and portfolio valuation. While yields are attractive at 8.5%, we believe that uncertainties owing to the oversupply in the overall Singapore warehouse market and more pressure on Cache’s organic growth potential will cap re-rating opportunities. Interim solution to 51 Alps Avenue a key overhang. 3Q16 DPU fell 13.7% y-o-y on the back of an enlarged share base. Looking ahead, we expect pressure on earnings arising from the holding arrangement with Schenker in relation to 51 Alps Avenue until the Court’s final judgement of the dispute. In the interim, Cache has agreed to receive in “protest” Schenker’s rent of S$0.77 per square foot (psf)/ month until further resolution. Under the worst-case scenario, FY17F DPU will drop by 4.0% to 7.2 Scts. We understand that the decline in future cashflows will also result in a c.S$44m write-off on the property valuation and thus, gearing may inch higher to c.42%. Cache may need to address its gearing in the near term. A scenario of higher gearing of 42% (vs 45% regulatory cap), which is above the management’s comfortable level of 35-40% is likely to result in an overhang in the share price of Cache in the immediate term. We believe that the Manager may consider divestments or acquisitions (funding through equity) to pare down its gearing. Depending on the strategy, potential DPU dilution is possible, this has not been factored in our model yet. Valuation: Our target price remains at S$0.93. Maintain HOLD. Key Risks to Our View: Schenker’s rent dispute. The rent dispute at 51 Alps Avenue (Schenker Megahub) is pending the Court’s resolution with an uncertain timeline. If the Court rules to settle the rent significantly below the market price (which is also our assumption), there could be further pressure on TP and DPU. At A Glance Issued Capital (m shrs) 898 Mkt. Cap (S$m/US$m) 732 / 504 Major Shareholders (%) Bank of New York Mellon Corp 4.4 CWT Ltd 4.4 Capital Group Companies Inc 4.3




Cache Logistics Trust Version 7 | Bloomberg: CACHE SP | Reuters: CALT.SI Refer to important disclosures at the end of this report

64

84

104

124

144

164

184

204

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6


Relative IndexS$

Cache Logistics Trust (LHS) Relative STI (RHS)


Company Guide

Cache Logistics Trust


Earnings Drivers:

Well-spread out lease profile offers strong income visibility. Cache Logistics Trust (Cache) offers investors strong income visibility supported by a weighted average lease to expiry (WALE) of 3.8 years by revenues. Cache has renewed a majority of leases up till 2017 and is actively managing these expiries in order to limit disruption to distributions. The REIT has a stable occupancy rate of 96.5% as of 3Q16. Stable underlying occupancy for expiring master-leases. The underlying occupancies for both properties (Schenker Megahub and Hi-Speed Logistics Centre) are fairly high and given the strategic location at the airport logistics hub where there is minimal new supply. Hence, demand for the space should remain resilient, despite the current weak operating climate, made worse by high supply from completions. The non-renewal of the master lease at Hi-Speed Logistics Centre (40 Alps Ave) is not expected to impact earnings significantly. We anticipate that net property income (NPI) for the property will dip by on the back of lower rents and efficiency for the property. However, given that the property only contributes c.5% of top line, actual impact to distributions is expected to be marginal. The court case regarding the renewal of the lease at Schenker Megahub from the anchor tenant (Schenker) is expected to take some time to resolve. Given this uncertainty, we have assumed that rental from this property will fall to the “pre-agreed” rent levels, which reflects a worst-case scenario, in our view. Deepening its presence in Australia to diversify and grow earnings stream. Cache has been able to diversify its earnings base through an acquisition of six properties in Australia, which now contribute close to 14% of top line. The acquisition of these properties in Australia has enabled the REIT to weather the downturn in Singapore better as the long leases from Australia helps provide the REIT with strong income visibility. DHL project a key driver of growth from FY16 onwards. Revenue contribution the DHL property will be a key earnings driver for Cache in 2016 and beyond. The weighted average occupancy for the property is >85% (100% for block 1 by DHL and the tenant is expected to take up the remaining space at block 2 in two years' time). The long 10-year lease, coupled with extension options to the end of the land lease offers strong income visibility for the REIT.




Interest Cover (x)


70.8%

75.8%

80.8%

85.8%

90.8%

95.8%

100.8%

0

10

20

30

40

50

60

70

80

90

100

2014A 2015A 2016F 2017F 2018F

S$ m


70%

75%

80%

85%

90%

95%

100%

18

19

20

21

22

23

24

2Q20

14

3Q20

14

4Q20

14

1Q20

15

2Q20

15

3Q20

15

4Q20

15

1Q20

16

2Q20

16

3Q20

16


0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

2014A 2015A 2016F 2017F 2018F

(x)

0.00

1.00

2.00

3.00

4.00

5.00

6.00

2014A 2015A 2016F 2017F 2018F

(x)


Company Guide


Balance Sheet:

Gearing close to optimal level of 40%; limited capacity to acquire further. Cache’s gearing is expected to hover around 40% in FY16-18F. We note that this is at the higher end of management’s comfortable range of 35-40%, and will likely mean that further acquisition capacity will be limited. However, given more acquisition opportunities on the horizon, we believe that new deals will be partly funded by raising new equity. No refinancing required in 2016. Cache has a weighted average debt to maturity of 2.4 years with no refinancing requirements till 2017. It has 64% of its borrowings hedged into fixed rates. Share Price Drivers:

Acquisition of assets in its ROFR. Cache has been granted the Rights of First Refusal (ROFR) to 15 properties by its Sponsor (CWT) and C&P in the Asia Pacific. These 15 properties can approximately contribute 5.7m sq ft in gross floor area which when acquired, is expected to significantly increase its portfolio size, earnings and thus provide uplift to share price. Beating market outlook. While the warehouse market is expected to see a deluge of new supply completions over 2016-2018, a majority of Cache’s leases are MNCs and 3PLs, and hence we believe occupancy rates should remain steady. Higher rents achieved given its quality portfolio could outperform market expectations that rents would moderate. Key Risks:

Interest rate risk Any increase in interest rates will result in higher interest payments for the REIT, hence reducing the income available for distribution, which will result in lower distribution per unit (DPU) for unitholders. Economic risk A weaker economic outlook could have a negative impact on industrial rents and occupancies as companies cut back on production and require less space. Industrial rents have a strong historical correlation with GDP growth. Company Background

Cache is a REIT whose investment mandate is to invest primarily in logistics properties located in the Pan Pacific region.


ROE (%)


PB Band (x)


10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

2014A 2015A 2016F 2017F 2018F

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2014A 2015A 2016F 2017F 2018F

Avg: 7.9%

+1sd: 9.1%

+2sd: 10.2%

‐1sd: 6.8%

‐2sd: 5.7%

5.1

6.1

7.1

8.1

9.1

10.1

11.1

2013 2014 2015 2016 2017

(%)

Avg: 1.11x

+1sd: 1.27x

+2sd: 1.43x

‐1sd: 0.96x

‐2sd: 0.8x

0.7

0.9

1.1

1.3

1.5

1.7


(x)


Company Guide



FY Dec 2014A 2015A 2016F 2017F 2018F Gross revenue 82.9 89.7 116 120 124 Property expenses (4.9) (13.6) (25.0) (30.4) (31.6) Net Property Income 78.0 76.2 91.1 89.1 92.5 Other Operating expenses (8.6) (9.5) (10.1) (10.2) (10.3) Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (12.2) (13.7) (18.9) (19.5) (20.1) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Net Income 57.2 53.0 62.1 59.4 62.1 Tax (0.5) (0.6) (0.6) (0.8) (0.8) Minority Interest 0.0 0.0 0.0 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Income After Tax 56.7 52.4 61.5 58.7 61.3 Total Return 65.7 (12.3) (2.5) 58.7 61.3 Non-tax deductible Items 1.07 75.2 6.00 6.05 6.09 Net Inc available for Dist. 66.8 67.9 70.8 67.7 68.2 Growth & Ratio Revenue Gth (%) 2.3 8.3 29.4 2.9 3.9 N Property Inc Gth (%) 1.5 (2.4) 19.7 (2.2) 3.8 Net Inc Gth (%) (0.4) (7.7) 17.3 (4.6) 4.6 Dist. Payout Ratio (%) 100.0 100.0 100.0 100.0 100.0 Net Prop Inc Margins (%) 94.1 84.9 78.5 74.6 74.6 Net Income Margins (%) 68.5 58.4 53.0 49.1 49.4 Dist to revenue (%) 80.6 75.7 61.0 56.7 55.0 Managers & Trustee’s fees 10.3 10.6 8.7 8.5 8.3 ROAE (%) 7.4 6.7 7.7 7.2 7.5 ROA (%) 5.1 4.3 4.6 4.3 4.5 ROCE (%) 6.3 5.4 6.0 5.8 6.0 Int. Cover (x) 5.7 4.9 4.3 4.0 4.1


Driven mainly from conversion of single user to multi-user properties


Company Guide



FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Gross revenue 23.1 24.0 27.9 28.1 28.0 Property expenses (4.4) (4.9) (5.8) (5.5) (6.0) Net Property Income 18.8 19.2 22.1 22.6 22.1 Other Operating expenses (2.0) (3.0) (2.6) (2.6) (3.0) Other Non Opg (Exp)/Inc 0.00 0.00 0.0 0.15 0.0 Net Interest (Exp)/Inc (4.1) (4.7) (4.8) (4.7) (4.9) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Net Income 12.6 11.5 14.6 15.5 14.2 Tax (0.2) (0.2) (0.4) 0.12 (0.3) Minority Interest 0.0 0.0 0.0 0.0 0.0 Net Income after Tax 12.4 11.3 14.2 15.6 13.9 Total Return 12.4 (53.4) 14.2 15.6 (22.2) Non-tax deductible Items 4.36 68.9 4.08 2.22 38.7 Net Inc available for Dist. 16.8 15.5 18.2 17.8 16.6 Growth & Ratio Revenue Gth (%) 7 4 16 1 0 N Property Inc Gth (%) 2 2 15 2 (2) Net Inc Gth (%) (8) (9) 25 10 (11) Net Prop Inc Margin (%) 81.2 79.8 79.1 80.3 78.7 Dist. Payout Ratio (%) 100.0 100.0 100.0 100.0 100.0

Balance Sheet (S$m)

FY Dec 2014A 2015A 2016F 2017F 2018F Investment Properties 1,122 1,311 1,345 1,345 1,346 Other LT Assets 0.24 1.84 1.84 1.84 1.84 Cash & ST Invts 11.3 8.05 7.37 6.09 6.99 Inventory 0.0 0.0 0.0 0.0 0.0 Debtors 3.46 4.98 2.90 2.99 3.10 Other Current Assets 0.09 0.42 0.42 0.42 0.42 Total Assets 1,137 1,326 1,357 1,356 1,358 ST Debt 6.62 8.31 8.31 8.31 8.31 Creditor 20.5 14.3 9.68 9.96 10.3 Other Current Liab 0.0 0.0 0.64 0.78 0.81 LT Debt 343 515 517 519 521 Other LT Liabilities 0.41 2.06 2.06 2.06 2.06 Unit holders’ funds 767 787 819 816 815 Minority Interests 0.0 0.0 0.0 0.0 0.0 Total Funds & Liabilities 1,137 1,326 1,357 1,356 1,358 Non-Cash Wkg. Capital (17.0) (8.9) (7.0) (7.3) (7.6) Net Cash/(Debt) (338) (515) (518) (521) (522) Ratio Current Ratio (x) 0.5 0.6 0.6 0.5 0.5 Quick Ratio (x) 0.5 0.6 0.6 0.5 0.5 Aggregate Leverage (%) 31.1 39.9 39.1 39.2 39.3 Z-Score (X) 1.5 1.1 1.3 1.2 1.2


Gearing level remains close to 40%.

Outlook remains flattish given limited expiries.


Company Guide



FY Dec 2014A 2015A 2016F 2017F 2018F Pre-Tax Income 57.2 53.0 62.1 59.4 62.1 Dep. & Amort. 0.22 0.65 0.0 0.0 0.0 Tax Paid (0.3) (0.6) 0.0 (0.6) (0.8) Associates &JV Inc/(Loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. 13.2 (8.1) (2.5) 0.20 0.27 Other Operating CF 3.51 30.1 6.00 6.05 6.09 Net Operating CF 73.8 75.1 65.6 65.0 67.7 Net Invt in Properties (63.5) (263) (97.5) (0.6) (0.6) Other Invts (net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc. & JVs 0.0 0.0 0.0 0.0 0.0 Other Investing CF 0.17 0.06 0.0 0.0 0.0 Net Investing CF (63.3) (263) (97.5) (0.6) (0.6) Distribution Paid (66.7) (74.2) (70.8) (67.7) (68.2) Chg in Gross Debt 42.2 173 2.00 2.00 2.00 New units issued 0.0 98.5 100 0.0 0.0 Other Financing CF (15.5) (12.8) 0.0 0.0 0.0 Net Financing CF (40.1) 185 31.2 (65.7) (66.2) Currency Adjustments 0.04 0.0 0.0 0.0 0.0 Chg in Cash (29.5) (3.2) (0.7) (1.3) 0.90 Operating CFPS (S cts) 7.76 10.6 7.58 7.19 7.42 Free CFPS (S cts) 1.33 (23.9) (3.5) 7.14 7.38



Source: DBS Bank

Analyst: Derek TAN


Mervin SONG CFA

S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 26 Jan 16 0.88 0.96 BUY

2: 25 Apr 16 0.89 0.93 BUY

3: 31 May 16 0.87 0.93 BUY

4: 21 Jul 16 0.88 0.93 BUY

5: 22 Aug 16 0.91 0.93 BUY

6: 28 Sep 16 0.91 0.93 HOLD

7: 24 Oct 16 0.87 0.93 HOLD


1

2

3

4 5

6

7

0.75

0.80

0.85

0.90

0.95


S$


HOLD

Last Traded Price (4 Jan 2017): S$0.54 (STI : 2,921.31)

Price Target 12-mth: S$0.54 (0% upside and 7.6% yield)

Potential Catalyst: Turnaround in rental prospects.

Where we differ: Estimates are below consensus Derek TAN +65 6682 3716 [email protected] Singapore Research Team [email protected]

Price Relative

Forecasts and Valuation FY Dec (S$m) 2015A 2016F 2017F 2018F

Gross Revenue 112 110 112 113 Net Property Inc 86.2 80.3 81.5 82.6 Total Return 52.5 52.2 53.2 53.1 Distribution Inc 61.8 53.2 54.2 54.1 EPU (S cts) 4.33 4.03 4.08 4.07 EPU Gth (%) 3 (7) 1 0 DPU (S cts) 4.79 4.11 4.16 4.15 DPU Gth (%) (4) (14) 1 0 NAV per shr (S cts) 67.7 66.9 66.8 66.7 PE (X) 12.6 13.5 13.3 13.4 Distribution Yield (%) 8.8 7.5 7.6 7.6 P/NAV (x) 0.8 0.8 0.8 0.8 Aggregate Leverage (%) 36.7 37.6 37.9 38.1 ROAE (%) 6.3 6.0 6.1 6.1 Distn. Inc Chng (%): 0 0 0 Consensus DPU (S cts): 4.20 4.20 4.30

Other Broker Recs: B: 3 S: 0 H: 2


Still Feeling the Pain of Transition Transitional pain to continue, HOLD. TP S$0.54. Cambridge Industrial Trust (CREIT) remains in the midst of a portfolio reposition in the midst of the current downtown in the industrial space. While portfolio occupancy remains fairly high, it is at the expense of declining rents, a painful but justified strategy for the REIT. A couple of roadbumps : (i) its Australian partner is terminating its joint venture, putting a pause to plans to develop and grow an Australian business; and (ii) more potential downside to DPUs on the back of more conversions from single-tenanted properties to multi-tenanted ones. Our TP and estimates are cut by 8% on the back of lower margin assumptions. Maintain HOLD, TP S$0.54. Asset recycling to redeploy capital; looking to Australia. CREIT has been active in acquisitions, and is focusing on optimizing its portfolio performance through strategic asset enhancement initiatives (AEIs) and divestments to redeploy capital to higher-yielding sources. While its Australia JV partner has ceased the partnership, the Manager remains committed to its long-term acquisition strategy in Australia and is actively exploring other opportunities. Outcome of strategic review key to re-rating. The Manager is conducting a strategic review of CREIT’s business and operations to fulfill its strategy of maximising value for its unitholders and has appointed Goldman Sachs (Singapore) Pte to assist in its analysis. The strategic review may open up a myriad of scenarios (M&A, trade sale or even an internalisation). Any incremental steps taken by the Manager to drive value should be well received by investors. Valuation:

Our DCF-backed TP is S$0.54. The stock is offering a forward yield

over 7.5%, which we believe will cap further downside to share

price. Maintain HOLD.


Interest rate risk. Any increase in interest rates will result in higher

interest payments which will reduce income available for

distribution and DPUs.

At A Glance Issued Capital (m shrs) 1,304

Mkt. Cap (S$m/US$m) 704 / 498


Jinquan Tong 17.84

Chan Wai Kheong 5.39

Credit Suisse Group AG 5.00

Free Float (%) 71.77


ICB Industry : Real Estate / Real Estate Investment Trust


Earnings Drivers:


4 Jan 2017


Cambridge Industrial Trust Version 5 | Bloomberg: CREIT SP | Reuters: CMIT.SI Refer to important disclosures at the end of this report

76

96

116

136

156

176

196

216

0.4

0.5

0.5

0.6

0.6

0.7

0.7

0.8

0.8

0.9

0.9


Relative IndexS$

Cambridge Industrial Trust (LHS) Relative STI (RHS)


Page 2

Company Guide

Cambridge Industrial Trust

Property conversions to cause headwinds to occupancy rates.

While we note that CREIT offers strong income visibility with a

relatively long weighted average lease expiry of 3.8 years,

property conversions (from single-tenanted properties to multi-

tenanted ones when the leases expire) which account for

11.3% and 23.6% of revenues over FY16-17F will translate to

near-term pressure to top line. This is due to the loss of property

efficiency and higher vacancy rates when these conversions take

place. However, the pace of conversions is expected to taper off

from FY17 onwards, meaning that further downside in vacancy

rates will likely be limited.

In view of the competitive environment, the Manager is

focusing on maintaining occupancy rates and thus rental

reversionary rates are likely to turn slightly negative over these

two years.

Optimal gearing level implies that upside from acquisitions is

likely to be limited. Gearing level of c.37% is within

management's comfortable range of 35-40% and is optimal, in

our view. This is likely to mean that while the Manager remains

keen to grow the portfolio via acquisitions and is looking to

venture overseas for potential opportunities, there is a cap to

the number of deals it can look at.

Asset rejuvenation strategy. CREIT has recently completed the

sale of 23 Tuas Ave 10. The divestment price is 5% above

valuation. Proceeds are expected to be utilised towards debt

repayment and/or asset enhancement opportunities. The

Manager will be embarking on asset enhancement initiative at

120 Pioneer Road (completing in 3Q17) which will increase the

property’s attractiveness to end-users.

Strategic review. The Manager is conducting a strategic review

of CREIT’s business and operations to fulfill its strategy of

maximising value for unitholders of CREIT and has appointed

Goldman Sachs (Singapore) Pte to assist in its analysis.




Interest Cover (x)


69.4%

71.4%

73.4%

75.4%

77.4%

79.4%

81.4%

83.4%

85.4%

0

10

20

30

40

50

60

70

80

90

100

2014A 2015A 2016F 2017F 2018F

S$ m


68%

70%

72%

74%

76%

78%

80%

82%

19

19

20

20

21

21

22

22

23

2Q20

14

3Q20

14

4Q20

14

1Q20

15

2Q20

15

3Q20

15

4Q20

15

1Q20

16

2Q20

16

3Q20

16


0.2

0.4

0.6

0.8

1.0

1.2

2014A 2015A 2016F 2017F 2018F

(x)

3.20

3.30

3.40

3.50

3.60

3.70

3.80

3.90

4.00

2014A 2015A 2016F 2017F 2018F

(x)


Company Guide


Balance Sheet:

Gearing remains stable Looking ahead, there is limited capacity to pursue acquisition opportunities with gearing at c.37%. Pro-active capital management. CREIT has refinanced most of its loans expiring and has no refinancing due till 2H18. In addition, the Manager has fixed c.88% of its interest rates over the next 3.2 years, meaning that volatility from a hike in interest rates to have a marginal impact to distributions. Share Price Drivers:

Pick-up in occupancy rate. We believe that expected vacancies and earnings weakness arising from property conversions from single-tenanted to multi-tenanted could be an overhang on the stock. The ability to retain tenants will alleviate such risks and may result in higher prices. Not likely to see acquisitions given gearing of 37%. The Manager remains keen to grow the portfolio through acquisitions. Given limited accretive deals in Singapore, CREIT has broadened its investment focus to Australia, Japan and Malaysia, which the Manager has identified as having similar sovereign risks and transparency characteristics with Singapore. Key Risks:

Interest rate risk. Any increase in interest rates will result in higher interest payments which will reduce income available for distribution and result in lower distribution per unit (DPU) to unitholders. That said, CREIT has substantially hedged its interest rate exposure. Economic risk. A deterioration in the economic outlook could have a negative impact on industrial rents and occupancies as companies cut back production and require less space. Industrial rents have a strong correlation with GDP growth. Company Background

Cambridge Industrial Trust (CREIT) is a real estate investment trust which invests primarily in income-producing industrial assets located in Singapore.


ROE (%)


PB Band (x)


10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

2014A 2015A 2016F 2017F 2018F

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

2014A 2015A 2016F 2017F 2018F

Avg: 7.4%

+1sd: 8.1%

+2sd: 8.8%

‐1sd: 6.6%

‐2sd: 5.9%

5.0

6.0

7.0

8.0

9.0

10.0

2013 2014 2015 2016

(%)

Avg: 0.97x

+1sd: 1.09x

+2sd: 1.22x

‐1sd: 0.85x

‐2sd: 0.72x

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5


(x)


Company Guide



FY Dec 2014A 2015A 2016F 2017F 2018F Gross revenue 99.3 112 110 112 113 Property expenses (21.5) (26.1) (29.7) (30.1) (30.6) Net Property Income 77.8 86.2 80.3 81.5 82.6 Other Operating expenses (9.7) (9.4) (7.7) (7.7) (7.7) Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (17.5) (22.1) (20.4) (20.6) (21.8) Exceptional Gain/(Loss) 1.14 0.40 0.0 0.0 0.0 Net Income 52.3 55.2 52.2 53.2 53.1 Tax (0.1) 0.0 0.0 0.0 0.0 Minority Interest 0.0 0.0 0.0 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Income After Tax 52.2 55.2 52.2 53.2 53.1 Total Return 45.3 52.5 52.2 53.2 53.1 Non-tax deductible Items 12.3 7.20 1.00 1.00 1.00 Net Inc available for Dist. 63.0 61.8 53.2 54.2 54.1 Growth & Ratio Revenue Gth (%) 3.0 13.0 (2.0) 1.5 1.4 N Property Inc Gth (%) (3.2) 10.7 (6.8) 1.5 1.4 Net Inc Gth (%) 4.2 5.8 (5.3) 1.9 (0.3) Dist. Payout Ratio (%) 100.0 100.0 100.0 100.0 100.0 Net Prop Inc Margins (%) 78.3 76.8 73.0 73.0 73.0 Net Income Margins (%) 52.5 49.1 47.5 47.7 46.9 Dist to revenue (%) 63.5 55.1 48.4 48.6 47.8 Managers & Trustee’s fees 9.7 8.4 7.0 6.9 6.8 ROAE (%) 6.0 6.3 6.0 6.1 6.1 ROA (%) 3.9 3.9 3.7 3.7 3.7 ROCE (%) 5.3 5.6 5.1 5.2 5.3 Int. Cover (x) 3.9 3.5 3.6 3.6 3.4


Earnings outlook to remain flattish in the absence of acquisitions


Company Guide



FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Gross revenue 28.5 28.5 28.4 28.3 27.6 Property expenses (6.8) (6.9) (6.9) (7.1) (7.7) Net Property Income 21.7 21.6 21.5 21.2 19.9 Other Operating expenses (2.3) (2.2) (2.3) (2.3) (2.3) Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (4.8) (5.3) (5.0) (5.5) (5.5) Exceptional Gain/(Loss) 0.0 (0.2) (0.4) (0.9) 0.0 Net Income 14.7 14.0 13.8 12.5 12.2 Tax 0.0 0.0 0.0 0.0 0.0 Minority Interest 0.0 0.0 0.0 0.0 0.0 Net Income after Tax 14.7 14.0 13.8 12.5 12.2 Total Return 14.7 12.5 13.8 12.5 12.9 Non-tax deductible Items 0.87 2.30 0.73 1.53 0.0 Net Inc available for Dist. 15.6 14.8 14.5 14.1 12.9 Growth & Ratio Revenue Gth (%) 2 0 0 0 (2) N Property Inc Gth (%) 1 (1) (1) (2) (6) Net Inc Gth (%) 37 (5) (1) (9) (3) Net Prop Inc Margin (%) 76.3 75.8 75.8 74.8 72.0 Dist. Payout Ratio (%) 100.0 100.0 100.0 100.0 100.0

Balance Sheet (S$m)

FY Dec 2014A 2015A 2016F 2017F 2018F Investment Properties 1,335 1,377 1,379 1,381 1,383 Other LT Assets 16.4 0.0 0.0 0.0 0.0 Cash & ST Invts 6.10 2.66 2.20 4.28 6.37 Inventory 0.0 0.0 0.0 0.0 0.0 Debtors 10.9 9.65 1.69 1.72 1.74 Other Current Assets 11.9 41.2 41.2 41.2 41.2 Total Assets 1,381 1,431 1,424 1,429 1,433 ST Debt 50.0 0.0 0.0 0.0 0.0 Creditor 26.4 24.0 7.58 7.70 7.80 Other Current Liab 0.0 0.0 0.0 0.0 0.0 LT Debt 426 525 536 541 546 Other LT Liabilities 12.3 8.74 8.74 8.74 8.74 Unit holders’ funds 866 873 872 871 870 Minority Interests 0.0 0.0 0.0 0.0 0.0 Total Funds & Liabilities 1,381 1,431 1,424 1,429 1,433 Non-Cash Wkg. Capital (3.6) 26.9 35.3 35.2 35.1 Net Cash/(Debt) (469) (523) (534) (537) (540) Ratio Current Ratio (x) 0.4 2.2 5.9 6.1 6.3 Quick Ratio (x) 0.2 0.5 0.5 0.8 1.0 Aggregate Leverage (%) 35.6 36.7 37.6 37.9 38.1 Z-Score (X) 1.0 1.0 1.1 1.1 1.1


Gearing to remain at the optimal level of c.38%

Lower distributable income mainly due to higher finance costs and zero management fees paid in units.


Company Guide



FY Dec 2014A 2015A 2016F 2017F 2018F Pre-Tax Income 52.3 55.2 52.2 53.2 53.1 Dep. & Amort. 0.0 0.0 0.0 0.0 0.0 Tax Paid 0.0 (0.1) 0.0 0.0 0.0 Associates &JV Inc/(Loss) (0.5) (0.1) 0.0 0.0 0.0 Chg in Wkg.Cap. (4.2) (0.3) (8.5) 0.09 0.08 Other Operating CF 19.3 24.5 0.0 0.0 0.0 Net Operating CF 66.9 79.1 43.8 53.3 53.2 Net Invt in Properties (195) (40.6) (2.0) (2.0) (2.0) Other Invts (net) 0.0 (10.6) 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc. & JVs 0.0 0.0 0.0 0.0 0.0 Other Investing CF 0.82 1.08 0.0 0.0 0.0 Net Investing CF (194) (50.1) (2.0) (2.0) (2.0) Distribution Paid (42.6) (48.4) (53.2) (54.2) (54.1) Chg in Gross Debt 102 16.1 11.0 5.00 5.00 New units issued (0.2) (0.3) 0.0 0.0 0.0 Other Financing CF 0.0 0.0 0.0 0.0 0.0 Net Financing CF 59.4 (32.6) (42.2) (49.2) (49.1) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash (67.9) (3.6) (0.5) 2.09 2.08 Operating CFPS (S cts) 5.73 6.23 4.03 4.08 4.07 Free CFPS (S cts) (10.3) 3.02 3.22 3.94 3.92 Source: Company, DBS Bank


Source: DBS Bank

Analyst: Derek TAN, Singapore Research Team

S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 28 Apr 16 0.55 0.56 HOLD

2: 25 Jul 16 0.56 0.60 HOLD

3: 22 Aug 16 0.55 0.60 HOLD

4: 26 Oct 16 0.55 0.54 HOLD

5: 28 Nov 16 0.53 0.54 HOLD


1

2

3

4

5

0.46

0.48

0.50

0.52

0.54

0.56

0.58

0.60


S$


BUY Last Traded Price ( 4 Jan 2017): S$1.51 (STI : 2,921.31) Price Target 12-mth: S$1.70 (13% upside and 6.2% yield) Potential Catalyst: Delivery of DPU growth in the midst of a downturn in the Singapore office market Where we differ: Above consensus after incorporating the acquisition of 60% interest in CapitaGreen Analyst Mervin SONG CFA +65 6682 3715 [email protected] Derek TAN +65 6682 3716 [email protected]

Price Relative

Forecasts and Valuation FY Dec (S$m) 2014A 2015A 2016F 2017F Gross Revenue 263 273 277 348 Net Property Inc 205 213 217 273 Total Return 449 307 241 259 Distribution Inc 249 254 266 280 EPU (S cts) 12.6 10.4 8.15 8.62 EPU Gth (%) 38 (18) (22) 6 DPU (S cts) 8.46 8.62 8.98 9.31 DPU Gth (%) 3 2 4 4 NAV per shr (S cts) 175 177 177 175 PE (X) 11.9 14.4 18.5 17.5 Distribution Yield (%) 5.6 5.7 6.0 6.2 P/NAV (x) 0.9 0.8 0.9 0.9 Aggregate Leverage (%) 30.4 30.0 37.5 37.5 ROAE (%) 7.3 5.9 4.6 4.9 Distn. Inc Chng (%): - - Consensus DPU (S cts): 8.90 9.10 Other Broker Recs: B: 13 S: 4 H: 7


Moving from green to gold

Timely acquisition of CapitaGreen. Despite the expected decline in the office market, we believe the timely acquisition of the remaining 60% in CapitaGreen not only helps to offset potential negative rental reversions and lower occupancies for the rest of CapitaLand Commercial Trust (CCT)’s portfolio but will allow CCT to deliver a 2-year DPU CAGR of 4% (2015-2017 excluding impact from redevelopment of Golden Shoe), which is among the highest in the office sector (average of 2%) and above the S-REIT DPU CAGR of 1%.

Trading at a discount to physical office transactions. Investors have been concerned over the value of CCT’s portfolio given falling office rents. We believe this is unwarranted given the resiliency of office property values in Singapore. CCT’s Singapore Grade A office portfolio trades at an implied value of c.S$1,900 per square foot (psf) compared to recent sales of between c.S$2,700 (adjusted for 99-year leasehold for CapitaGreen) and $3,500 psf. While CCT’s Grade A portfolio is unlikely to trade up to c.S$2,700 given the older profile of some of its properties, we believe the current strength of the physical market and 999-year leasehold status of some of its buildings, warrants CCT to trade close to its book value per unit of S$1.72 or an implied valuation of S$2,000 psf.

Medium term upside from redevelopment of Golden Shoe Car Park. CCT announced the redevelopment of its Golden Shoe Car Park property. Subject to obtaining the necessary government approvals, the property will be developed into one with c.1m square feet (sqft) of commercial space in terms of gross floor area (GFA) and comprise an office tower of up to 280 metres high. Upon completion in 2021, the property will provide a medium term uplift to CCT’s current NAV per unit of S$1.72.

Valuation:

Our DCF-based TP of S$1.70 implies a price of c.S$2,000 psf for CCT’s Singapore portfolio.


A key risk to our view is new office supply causing spot rents to fall below S$7 psf, which is likely to lead to lower-than-expected asking rents and rental income.

At A Glance Issued Capital (m shrs) 2,963 Mkt. Cap (S$m/US$m) 4,460 / 3,075 Major Shareholders (%) Capitaland Limited 31.1 Blackrock 6.6 CBRE Group Inc 4.9




CapitaLand Commercial Trust Version 6 | Bloomberg: CCT SP | Reuters: CACT.SI Refer to important disclosures at the end of this report

74

94

114

134

154

174

194

214

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2.0

2.1


Relative IndexS$

CapitaLand Commercial Trust (LHS) Relative STI (RHS)


Company Guide

CapitaLand Commercial Trust


Earnings Drivers:

Staggered weighted lease expiry profile to help mitigate negative rental reversions. We have factored in lower occupancies and negative reversions at Capital Tower, Six Battery Road, and One George Street for FY16 and FY17. CCT’s defensive weighted average lease expiry (WALE) of 6.8 years (by net lettable area (NLA)) should also help ensure that the negative impact from an anticipated decline in rents over the next two years will be gradual rather than immediate. Thus, CCT offers investors a measure of earnings stability and certainty amid record office completions over the next two years. Defensive portfolio with >70% of office leases expiring in FY19 and beyond, coinciding with the period when Singapore faces no new office supply. CCT has maintained a defensive leasing strategy amid stiff competition for larger tenants by locking in longer-term leases for most of its top 10 tenants. With proactive forward renewals, more than 70% of office leases now expire in FY19 and beyond. This fortuitously coincides with the period when the Singapore office market should be on an upturn as no new office buildings will be completed from FY18 onwards. CapitaGreen contribution to weather CCT through tough times. CCT’s near-term earnings will be driven by the acquisition of the 60% remaining interest in CapitaGreen. We believe the increased contribution from CapitaGreen will not only help offset potential negative rental reversions at CCT’s other properties but also contribute to 4% DPU CAGR over the next couple of years (excluding any loss of income from redevelopment of Golden Shoe). Beyond the boost from the higher equity interest in CapitaGreen (40% previously to 100%), CCT should benefit from the higher underlying earnings at CapitaGreen as tenants progressively move into the building and rent-free periods start to expire. Medium term upside from redevelopment of Golden Shoe Car Park. CCT announced the redevelopment of its Golden Shoe Car Park property. Subject to obtaining the necessary government approvals, the property will be developed into one with c.1m sqft of commercial GFA and comprise an office tower of up to 280 metres high. Upon completion in 2021, the property will provide a medium term uplift to CCT’s current NAV per unit of S$1.72 and earnings. This is on top of any value creation from disposal of its stake in One George Street (50% interest) and Wilkie Edge as speculated by the press.




Interest Cover (x)


74.0%

76.0%

78.0%

80.0%

82.0%

84.0%

86.0%

0

50

100

150

200

250

300

2013A 2014A 2015A 2016F 2017F

S$ m


75%

75%

76%

76%

77%

77%

78%

78%

79%

79%

80%

48

50

52

54

56

58

2Q20

14

3Q20

14

4Q20

14

1Q20

15

2Q20

15

3Q20

15

4Q20

15

1Q20

16

2Q20

16

3Q20

16


0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

2013A 2014A 2015A 2016F 2017F

(x)

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

2013A 2014A 2015A 2016F 2017F

(x)


Company Guide


Balance Sheet:

Increase in gearing post acquisition of CapitaGreen. Post acquisition of the remaining 60% interest in CapitaGreen, its gearing has risen to c.38% from c.30% previously. While this is higher than CCT’s average gearing over the last few years, we believe this remains prudent, as it is below the 45% gearing cap imposed by MAS and provides some buffer in the event of any decline in the value of CCT’s portfolio. Share Price Drivers:

Higher-than-average DPU growth. Following the acquisition of the remaining 60% interest CapitaGreen, CCT will have the highest 2-year DPU growth among the office REITs (average of 2%) which is also higher than the average S-REIT growth of 1.7%. With a superior growth profile in a slowing growth environment, we believe investors will gravitate towards CCT, causing the stock to re-rate. Key Risks:

Risk of higher vacancies and negative rental reversions for FY16. In FY16-17, c.10% of CCT’s office leases will be due for expiry, the majority of which stems from One George Street, Six Battery Road and Raffles City, where expiring rents are close to or higher than market rents. As the Manager has prioritised tenant retention, there is a possibility of negative rental reversions, which would impede earnings growth. Competition from other landlords. Between 2016 and 2018, c.5.3m sqft of office (NLA) will be completed within the downtown core, translating to a 15% increase in existing stock, or 3-year CAGR of 4.6%. Due to weaker net absorption rates of <1m sqft in recent years, CCT could face higher competition for large tenants from landlords of newer buildings, which have large floor plates of 30-40k sqft. Pressure on rents from shadow space. We see some downsizing activity from banks and financial institutions, and shadow space (particularly in the Marina Bay area) could put some pressure on rents for CCT’s portfolio, which is located primarily in the Raffles Place/Tanjong Pagar areas. Company Background

CapitaLand Commercial Trust (CCT) is a real investment trust investing exclusively in commercial properties in Singapore.


ROE (%)


PB Band (x)


10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

2013A 2014A 2015A 2016F 2017F

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2013A 2014A 2015A 2016F 2017F

Avg: 5.5%

+1sd: 6.1%

+2sd: 6.6%

‐1sd: 5%

‐2sd: 4.4%

3.9

4.4

4.9

5.4

5.9

6.4

6.9

7.4

2013 2014 2015 2016 2017

(%)

Avg: 0.89x

+1sd: 0.97x

+2sd: 1.05x

‐1sd: 0.8x

‐2sd: 0.72x

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3


(x)


Company Guide



FY Dec 2013A 2014A 2015A 2016F 2017F Gross revenue 251 263 273 277 348 Property expenses (54.3) (57.4) (60.5) (59.8) (74.6) Net Property Income 197 205 213 217 273 Other Operating expenses (15.2) (16.2) (17.6) (29.5) (25.1) Other Non Opg (Exp)/Inc (4.6) (3.5) 0.87 0.0 0.0 Net Interest (Exp)/Inc (46.3) (32.7) (32.1) (41.2) (77.4) Exceptional Gain/(Loss) 2.52 (2.5) 47.5 0.0 0.0 Net Income 261 368 309 242 260 Tax 0.0 0.0 (0.1) (0.7) (0.9) Minority Interest 0.0 0.0 0.0 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Income After Tax 261 368 307 241 259 Total Return 367 449 307 241 259 Non-tax deductible Items (139) (200) (52.8) 24.6 20.9 Net Inc available for Dist. 234 249 254 266 280 Growth & Ratio Revenue Gth (%) (33.1) 4.4 4.0 1.3 25.7 N Property Inc Gth (%) (33.3) 4.1 3.7 2.0 26.0 Net Inc Gth (%) 26.9 40.9 (16.4) (21.4) 7.4 Dist. Payout Ratio (%) 100.0 100.0 100.0 100.0 100.0 Net Prop Inc Margins (%) 78.4 78.2 77.9 78.4 78.6 Net Income Margins (%) 103.8 140.0 112.5 87.2 74.5 Dist to revenue (%) 93.1 94.9 93.1 96.1 80.5 Managers & Trustee’s fees 6.0 6.2 6.4 10.6 7.2 ROAE (%) 5.4 7.3 5.9 4.6 4.9 ROA (%) 3.9 5.8 4.7 3.3 3.3 ROCE (%) 2.8 3.0 3.0 2.6 3.1 Int. Cover (x) 3.9 5.8 6.1 4.6 3.2


Earnings growth will be driven by increased contribution from CapitaGreen, which should offset income loss from lower occupancies and negative rental reversions at existing office assets such as Capital Tower, 6 Battery Road and One George Street


Company Guide



FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Gross revenue 68.3 67.6 66.9 67.6 74.4 Property expenses (15.7) (15.3) (14.8) (16.1) (17.4) Net Property Income 52.7 52.3 52.0 51.5 57.0 Other Operating expenses (4.3) (4.4) (4.2) (4.5) (3.9) Other Non Opg (Exp)/Inc 0.11 (0.3) 1.66 0.0 1.22 Net Interest (Exp)/Inc (8.3) (8.5) (8.1) (8.3) (11.4) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 (13.5) Net Income 56.7 68.0 61.9 74.3 51.6 Tax 0.0 (0.1) (0.2) 0.0 (0.2) Minority Interest 0.0 0.0 0.0 0.0 0.0 Net Income after Tax 56.7 68.0 61.7 74.3 51.4 Total Return 0.0 0.0 0.0 0.0 0.0 Non-tax deductible Items 0.0 0.0 0.0 0.0 0.0 Net Inc available for Dist. 63.2 64.1 64.8 65.1 68.3 Growth & Ratio Revenue Gth (%) (1) (1) (1) 1 10 N Property Inc Gth (%) (2) (1) 0 (1) 11 Net Inc Gth (%) (26) 20 (9) 20 (31) Net Prop Inc Margin (%) 77.1 77.3 77.8 76.1 76.6 Dist. Payout Ratio (%) 100.0 100.0 100.0 100.0 100.0

Balance Sheet (S$m)

FY Dec 2013A 2014A 2015A 2016F 2017F Investment Properties 4,769 4,882 4,962 6,578 6,582 Other LT Assets 1,359 1,499 1,504 1,199 1,199 Cash & ST Invts 84.1 101 81.2 140 156 Inventory 0.0 0.0 0.0 0.0 0.0 Debtors 33.7 38.3 45.3 17.2 21.6 Other Current Assets 0.01 0.0 0.0 0.0 0.0 Total Assets 6,245 6,521 6,593 7,934 7,959 ST Debt 0.0 270 0.0 0.0 0.0 Creditor 50.9 47.4 37.3 64.2 80.7 Other Current Liab 12.0 11.4 8.68 9.34 9.47 LT Debt 1,218 970 1,255 2,546 2,379 Other LT Liabilities 51.6 68.6 57.6 57.6 57.6 Unit holders’ funds 4,913 5,153 5,234 5,257 5,432 Minority Interests 0.0 0.0 0.0 0.0 0.0 Total Funds & Liabilities 6,245 6,521 6,593 7,934 7,959 Non-Cash Wkg. Capital (29.1) (20.5) (0.7) (56.4) (68.6) Net Cash/(Debt) (1,134) (1,139) (1,174) (2,406) (2,223) Ratio Current Ratio (x) 1.9 0.4 2.8 2.1 2.0 Quick Ratio (x) 1.9 0.4 2.8 2.1 2.0 Aggregate Leverage (%) 30.3 30.4 30.0 37.5 37.5 Z-Score (X) 2.1 2.2 2.2 1.2 1.3


Increased gearing due the acquisition of remaining 60% interest in CapitaGreen


Company Guide



FY Dec 2013A 2014A 2015A 2016F 2017F Pre-Tax Income 261 368 307 242 260 Dep. & Amort. 1.39 3.51 3.51 3.51 3.51 Tax Paid (0.1) 0.0 0.0 (0.1) (0.7) Associates &JV Inc/(Loss) (127) (217) (97.3) (95.8) (89.2) Chg in Wkg.Cap. 7.68 (4.6) (19.8) 55.0 12.1 Other Operating CF 52.5 39.3 3.05 24.6 20.9 Net Operating CF 195 189 197 229 207 Net Invt in Properties (21.4) (29.8) (21.3) (401) (8.0) Other Invts (net) (1.0) 0.0 0.0 0.0 0.0 Invts in Assoc. & JV (526) (397) 0.0 0.0 0.0 Div from Assoc. & JVs 82.6 86.1 85.0 95.8 89.2 Other Investing CF 526 392 0.0 0.0 0.0 Net Investing CF 60.5 51.7 63.7 (305) 81.2 Distribution Paid (231) (243) (252) (266) (280) Chg in Gross Debt 40.2 50.3 5.00 401 8.00 New units issued 0.0 0.0 0.0 0.0 0.0 Other Financing CF (98.8) (30.7) (33.4) 0.0 0.0 Net Financing CF (290) (223) (280) 135 (272) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash (34.3) 17.0 (19.9) 59.2 15.7 Operating CFPS (S cts) 6.55 6.63 7.35 5.89 6.47 Free CFPS (S cts) 6.07 5.45 5.95 (5.8) 6.60



Source: DBS Bank


Derek TAN

S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 20 Jan 16 1.33 1.45 BUY

2: 15 Apr 16 1.43 1.53 BUY

3: 24 May 16 1.39 1.61 BUY

4: 21 Jul 16 1.56 1.70 BUY

5: 05 Sep 16 1.59 1.70 BUY

6: 19 Oct 16 1.58 1.70 BUY

7: 09 Nov 16 1.56 1.70 BUY


1

2

3

45

6

7

1.22

1.32

1.42

1.52

1.62

1.72


S$

Higher capex due to the acquisition of remaining 60% interest in CapitaGreen


BUY

Last Traded Price ( 4 Jan 2017): S$1.93 (STI : 2,921.31) Price Target 12-mth: S$2.25 (16% upside and 5.8% yield) Potential Catalyst: Delay in rate hike expectations; more uncertainties from Brexit execution plans; better-than-expected rental reversion Where we differ: We are line with consensus Analyst Singapore Research Team [email protected] Derek TAN +65 6682 3716 [email protected] Mervin SONG CFA +65 6682 3715 [email protected]

Price Relative

Forecasts and Valuation FY Dec (S$m) 2015A 2016F 2017F 2018F Gross Revenue 669 697 695 700 Net Property Inc 466 488 480 481 Total Return 580 413 418 417 Distribution Inc 405 417 418 421 EPU (S cts) 13.5 11.7 11.8 11.8 EPU Gth (%) 2 (14) 1 0 DPU (S cts) 11.1 11.2 11.2 11.3 DPU Gth (%) 2 1 0 1 NAV per shr (S cts) 192 189 190 190 PE (X) 14.3 16.5 16.4 16.4 Distribution Yield (%) 5.7 5.8 5.8 5.8 P/NAV (x) 1.0 1.0 1.0 1.0 Aggregate Leverage (%) 33.0 33.3 34.3 35.3 ROAE (%) 7.3 6.2 6.2 6.2 Distn. Inc Chng (%): - - - Consensus DPU (S cts): 11.0 11.0 11.2 Other Broker Recs: B: 10 S: 0 H: 12


Christmas Present is Still in the Box

Negative DPU in 3Q16 is a false alarm as retention is boxed for distribution in 4Q16. CapitaLand Mall Trust (CMT)’s reported 3Q16 DPU was 2.78Scts and 9M16 DPU was 8.25Scts, down 6.7% and 1.4% y-o-y, respectively. Investors should not be alarmed by the negative growth, as a higher base was set by the DPU in 3Q15 due to S$8.0m (or 0.23Scts) retention paid out in 3Q15, out of S$12.5m retained from 1Q15. Stripping out the payment of S$8m in 3Q15, DPU growth was up a marginal 1.1% in 3Q16. CMT retained S$12.0m of its taxable income in 1Q16, equivalent to c.0.34Scts in DPU terms, and will pay this out in the festive season next quarter. We expect flattish DPU growth for the full year. Funan’s redevelopment plans are within our expectations. Plans for Funan 2.0, including a cycle-through mall, two Grade A office towers, and co-living apartment units, were largely in line with our scenario study published on 1 July 2016 (Rhapsody of Funan 2.0). We are supportive of CMT’s decision to undertake the redevelopment. Apart from a potential 4 Scts (or 2.0%) boost to NAV, we applaud the proactive asset management strategy to turn the ageing mall into a ’lifestyle destination’. Gearing has room to finance asset enhancement programs and other developments. As CMT will fund Funan’s redevelopment cost of S$560m entirely with debt, which is comfortably below the S$800m headroom available, gearing is expected to increase to 38%, which is still healthy. Valuation:

We have a DCF-backed TP of S$2.25. The stock offers FY16/17F DPU yields over 5.0%. Key Risks to Our View:

A rate hike surprise before December. While consensus is still ruling out a hike in November just days before the US election, any surprise move by the Fed may cause ripples in the market. In the unlikely scenario of a rate hike ahead of consensus’ year-end expectation, we believe this will be an opportunity for investors to accumulate the stock on any dips. At A Glance Issued Capital (m shrs) 3,543 Mkt. Cap (S$m/US$m) 6,838 / 4,715 Major Shareholders (%) Capitaland 29.3 Blackrock 5.0 NTUC Enterprise Co-operativ 5.0




CapitaLand Mall Trust Version | Bloomberg: CT SP | Reuters: CMLT.SI Refer to important disclosures at the end of this report

79

99

119

139

159

179

199

219

1.6

1.7

1.8

1.9

2.0

2.1

2.2

2.3

2.4

2.5

2.6


Relative IndexS$

CapitaLand Mall Trust (LHS) Relative STI (RHS)


Company Guide

CapitaLand Mall Trust


Earnings Drivers:

Mall owner of choice despite retail headwinds. CMT’s portfolio of malls stands out in Singapore’s retail landscape due to its (a) accessibility, (b) excellent asset management track record, and (c) strong rewards/marketing programme. Despite recent retail headwinds, we believe that CMT’s malls will continue to see good demand as retailers look to consolidate their footprints within CMT’s malls. Ability to deliver value through AEIs. Strategic asset enhancement initiatives (AEIs) across its properties will result in increased shopper traffic in the medium term. For instance, the completion of AEI at IMM building in November 2015 has repositioned the mall as the largest outlet mall in Singapore with wider offerings, which should help to further differentiate the mall in the midst of new supply. The upcoming redevelopment of Funan 2.0 could also offer upside potential to the Trust. Expect rental reversions to underperform historical levels. CMT’s rental reversion trends have been moderating (3.7% for FY15 and 1.7% for 9M16) and as retailers’ profitability continues to be squeezed by high labour costs and falling retail sales. We believe that rental reversions are likely to fall within the 1-2% range in the next 1-2 years, compounded by pressure from escalating labour costs and labour shortage. NPI margins could decline as the Manager expands marketing efforts. The Manager is looking to ramp up marketing efforts to attract a younger audience by deploying various digital and social media initiatives and the rollout of the enhanced CapitaStar reward programme to attract and retain shoppers. In addition, the Manager intends to step up the installation and adoption of mobile and internet-enabled infrastructure within its malls to allow complementary e-commerce activities (J Avenue website for shoppers to buy online and collect in store). While the immediate benefits are not obvious and are likely to drive up operating expenses in the medium term, we laud the efforts of the management in embracing changes in shoppers' expectations.




Interest Cover (x)


64.6%

66.6%

68.6%

70.6%

72.6%

74.6%

76.6%

0

50

100

150

200

250

300

350

400

450

500

2014A 2015A 2016F 2017F 2018F

S$ m


60%

62%

64%

66%

68%

70%

72%

101

106

111

116

121

126

131

2Q20

14

3Q20

14

4Q20

14

1Q20

15

2Q20

15

3Q20

15

4Q20

15

1Q20

16

2Q20

16

3Q20

16


0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

2014A 2015A 2016F 2017F 2018F

(x)

3.60

3.80

4.00

4.20

4.40

4.60

4.80

2014A 2015A 2016F 2017F 2018F

(x)


Company Guide


Balance Sheet:

Gearing to remain stable. CMT’s gearing ratio is forecast to remain fairly stable at 35-38% over FY16-18F. This is after the placement of new units as consideration for the purchase of Bedok Mall in 3Q15 and assuming 100% debt financing for the redevelopment of Funan. Gearing level is within management's comfortable level of between 35% and 40%. Cost of debt to remain stable. The average debt cost is 3.2%, which should remain stable in the immediate term. With interest rates on the rise, we have priced in a 25 bps increase in average interest cost once hedges are rolled over in the coming two years. Share Price Drivers:

Acquisitions to drive earnings. CMT has the right of first refusal to acquire its Sponsor’s retail assets in Singapore. CapitaLand has several retail assets in its portfolio which could be injected into the REIT, including Star Vista and the remaining 70% stake in Westgate. Better-than-expected operational results. We believe that CMT’s portfolio will continue to remain resilient despite headwinds. The Trust's ability to maintain a steady growth in top line while holding occupancies will be a strong testament of the Manager's capability to stand out among its peers. IMM could be a positive surprise. With the completion of phase two, IMM is now the largest outlet mall in Singapore, with 85 outlet stores. Feedback has been positive as the mall renewed 22.0% of its NLA over 9M16 at 4.6% reversion rate which is highest among all properties. Key Risks:

Downside risk to rental reversions. A worse-than-expected slowdown in consumer sentiment and consumption outlook may result in lower reversionary potential (vs our 2% estimate) for leases expiring in 2016. Funan’s redevelopment could be a near-term catalyst. Further upside risk is from interest savings. The Trust has been proactive in extending its debt profile, locking in long-tenure MTNs at lower rates than previously achieved. Further interest savings from refinancing associate debt would offer upside to our estimates. The uncertainties from the implementation of Brexit following the referendum on 24 June 2016 will continue to cause ripples in the market. Company Background

CapitaMall Trust is a real estate investment trust which owns and invests in retail properties in the suburban areas and downtown core of Singapore.


ROE (%)


PB Band (x)


10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

2014A 2015A 2016F 2017F 2018F

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2014A 2015A 2016F 2017F 2018F

Avg: 5.2%

+1sd: 5.6%

+2sd: 6%

‐1sd: 4.9%

‐2sd: 4.5%

3.6

4.1

4.6

5.1

5.6

6.1

6.6

2013 2014 2015 2016 2017

(%)

Avg: 1.13x

+1sd: 1.21x

+2sd: 1.29x

‐1sd: 1.04x

‐2sd: 0.96x

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6


(x)


Company Guide



FY Dec 2014A 2015A 2016F 2017F 2018F Gross revenue 659 669 697 695 700 Property expenses (210) (203) (209) (215) (220) Net Property Income 448 466 488 480 481 Other Operating expenses (46.3) (45.8) (49.4) (49.2) (49.7) Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (99.3) (91.6) (103) (91.7) (94.1) Exceptional Gain/(Loss) 4.89 72.8 0.0 0.0 0.0 Net Income 457 473 413 418 417 Tax 0.0 (0.6) 0.0 0.0 0.0 Minority Interest 0.0 0.0 0.0 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Income After Tax 457 473 413 418 417 Total Return 619 580 413 418 417 Non-tax deductible Items (44.6) (68.3) 3.95 0.0 4.00 Net Inc available for Dist. 412 405 417 418 421 Growth & Ratio Revenue Gth (%) 3.3 1.5 4.2 (0.3) 0.8 N Property Inc Gth (%) 2.2 4.0 4.7 (1.7) 0.2 Net Inc Gth (%) 12.3 3.5 (12.6) 1.1 (0.2) Dist. Payout Ratio (%) 91.0 96.9 95.0 95.0 95.0 Net Prop Inc Margins (%) 68.1 69.7 70.1 69.0 68.6 Net Income Margins (%) 69.3 70.7 59.3 60.2 59.6 Dist to revenue (%) 62.6 60.5 59.9 60.2 60.2 Managers & Trustee’s fees 7.0 6.8 7.1 7.1 7.1 ROAE (%) 7.4 7.3 6.2 6.2 6.2 ROA (%) 4.8 4.7 4.0 3.9 3.8 ROCE (%) 4.3 4.2 4.3 4.2 4.1 Int. Cover (x) 4.1 4.6 4.3 4.7 4.6


Earnings from Bedok Mall will more than offset the loss of earnings from Funan for 3 years from 2H16. (Bedok's FY16 NPI was S$10.9m vs Funan's S$5.6m)


Company Guide



FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Gross revenue 162 180 180 171 170 Property expenses (48.4) (54.7) (51.9) (54.8) (50.2) Net Property Income 113 126 128 116 120 Other Operating expenses (11.1) (12.1) (12.1) (12.6) (12.1) Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (20.9) (25.3) (23.4) (23.0) (24.2) Exceptional Gain/(Loss) 0.0 72.7 (0.6) 0.06 (0.2) Net Income 101 181 111 98.2 104 Tax 0.0 (0.6) 0.0 0.0 0.0 Minority Interest 0.0 0.0 0.0 0.0 0.0 Net Income after Tax 101 180 111 98.2 104 Total Return 101 234 111 154 104 Non-tax deductible Items (0.7) (2.7) 1.31 1.80 (0.8) Net Inc available for Dist. 102 102 115 97.1 105 Growth & Ratio Revenue Gth (%) 1 12 0 (5) (1) N Property Inc Gth (%) 3 11 2 (9) 3 Net Inc Gth (%) 14 78 (38) (12) 6 Net Prop Inc Margin (%) 70.1 69.7 71.1 67.9 70.4 Dist. Payout Ratio (%) 101.4 100.0 84.0 99.9 93.8

Balance Sheet (S$m)

FY Dec 2014A 2015A 2016F 2017F 2018F Investment Properties 7,510 8,366 8,287 8,463 8,639 Other LT Assets 1,194 1,357 1,357 1,357 1,357 Cash & ST Invts 1,130 604 870 892 913 Inventory 0.0 0.0 0.0 0.0 0.0 Debtors 25.1 28.8 32.9 32.8 33.1 Other Current Assets 0.0 0.0 0.0 0.0 0.0 Total Assets 9,858 10,356 10,546 10,744 10,941 ST Debt 762 0.0 0.0 0.0 0.0 Creditor 217 200 282 281 283 Other Current Liab 35.8 3.56 0.0 0.0 0.0 LT Debt 2,407 3,312 3,405 3,581 3,757 Other LT Liabilities 153 147 147 147 147 Unit holders’ funds 6,282 6,693 6,712 6,735 6,754 Minority Interests 0.0 0.0 0.0 0.0 0.0 Total Funds & Liabilities 9,858 10,356 10,546 10,744 10,941 Non-Cash Wkg. Capital (228) (175) (249) (248) (250) Net Cash/(Debt) (2,040) (2,708) (2,536) (2,689) (2,844) Ratio Current Ratio (x) 1.1 3.1 3.2 3.3 3.3 Quick Ratio (x) 1.1 3.1 3.2 3.3 3.3 Aggregate Leverage (%) 33.0 33.0 33.3 34.3 35.3 Z-Score (X) 5.8 5.6 5.5 5.4 5.3


S$12m of 1Q16 taxable income has been retained for distribution in 4Q16, equivalent to c.0.34Scts in DPU terms


Company Guide



FY Dec 2014A 2015A 2016F 2017F 2018F Pre-Tax Income 457 473 413 418 417 Dep. & Amort. 0.0 0.0 0.0 0.0 0.0 Tax Paid (0.5) 0.0 (3.6) 0.0 0.0 Associates &JV Inc/(Loss) (149) (71.8) (77.9) (79.2) (80.5) Chg in Wkg.Cap. 5.21 0.91 78.0 (0.7) 1.89 Other Operating CF 96.3 19.9 0.0 0.0 0.0 Net Operating CF 409 422 410 338 339 Net Invt in Properties (64.7) (95.0) 79.0 (176) (176) Other Invts (net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 12.3 (17.6) 0.0 0.0 0.0 Div from Assoc. & JVs 96.6 70.8 77.9 79.2 80.5 Other Investing CF 6.47 (422) 0.0 0.0 0.0 Net Investing CF 50.6 (464) 157 (96.8) (95.4) Distribution Paid (370) (389) (397) (397) (400) Chg in Gross Debt 315 (890) 93.0 176 176 New units issued 0.0 151 1.88 1.89 1.91 Other Financing CF (105) 644 0.0 0.0 0.0 Net Financing CF (160) (484) (302) (219) (222) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash 300 (525) 265 22.1 20.9 Operating CFPS (S cts) 11.7 12.0 9.37 9.56 9.50 Free CFPS (S cts) 9.94 9.35 13.8 4.58 4.59



Source: DBS Bank

Analyst: Singapore Research Team

Derek TAN

Mervin SONG CFA

S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 22 Jan 16 1.97 2.10 BUY

2: 25 Jan 16 1.97 2.10 BUY

3: 18 Apr 16 2.16 2.10 HOLD

4: 01 Jul 16 2.17 2.20 HOLD

5: 25 Jul 16 2.15 2.23 HOLD

6: 22 Sep 16 2.12 2.25 BUY

7: 24 Oct 16 2.15 2.25 BUY


1

2

3 4

5

6

7

1.77

1.87

1.97

2.07

2.17

2.27


S$

Funan’s earnings have been removed for c.3.5 years from 2H16 (expected opening in 4QFY19). After which, our new forecasts for Funan 2.0 have been incorporated in the model


BUY Last Traded Price ( 4 Jan 2017): S$1.36 (STI : 2,921.31) Price Target 12-mth: S$1.59 (17% upside and 6.6% yield) Potential Catalyst: Recovery in the Singapore hospitality market, and acquisitions Where we differ: Below due to assumption of excess supply of new rooms in Singapore Analyst Mervin SONG CFA +65 6682 3715 [email protected] Derek TAN +65 6682 3716 [email protected]

Price Relative

Forecasts and Valuation FY Dec (S$m) 2015A 2016F 2017F 2018F Gross Revenue 172 175 174 182 Net Property Inc 137 136 135 143 Total Return 58.4 89.6 85.5 90.2 Distribution Inc 109 103 99.3 104 EPU (S cts) 8.99 9.02 8.56 8.97 EPU Gth (%) (16) 0 (5) 5 DPU (S cts) 10.1 9.37 8.95 9.33 DPU Gth (%) (8) (7) (5) 4 NAV per shr (S cts) 159 159 159 159 PE (X) 15.1 15.1 15.9 15.2 Distribution Yield (%) 7.4 6.9 6.6 6.9 P/NAV (x) 0.9 0.9 0.9 0.9 Aggregate Leverage (%) 36.2 35.9 35.7 35.5 ROAE (%) 5.6 5.7 5.4 5.6 Distn. Inc Chng (%): 0 0 0 Consensus DPU (S cts): 9.50 9.50 9.80 Other Broker Recs: B: 6 S: 2 H: 9


Unloved now but offers outstanding value Attractive valuations. We maintain our BUY call on CDL Hospitality Trusts (CDREIT) and TP of S$1.59. Although we now expect the Singapore market to only recover in 2018, we believe the current low share price has largely priced in the current downturn and CDREIT offers compelling long-term value given its Singapore portfolio trades on a heavily discounted implied price per key. In addition, CDREIT offers patient investors an attractive 6.8% yield (based on 90% payout ratio) ahead of the eventual upturn. Cheapest REIT to ride the eventual upturn. CDREIT’s implied price per key for its Singapore portfolio stands at less than c.S$500k which is below its replacement cost of c.S$700k, recent market transactions of above S$650k and that of other listed Singapore hospitality REITs of between S$650k and S$1m. Given the quality of the portfolio and CREIT’s long-term track record, we believe this discount is unwarranted. Thus, CDREIT is the cheapest REIT providing exposure to the eventual upturn in the Singapore hospitality market which we project will occur in 2018 as supply pressures ease. Several mitigating factors during downturn in the Singapore hospitality market. While CDREIT’s core Singapore market faces a downturn, we believe this will be tempered by higher earnings contribution from New Zealand, following the appointment of Millennium & Copthorne Hotels as the new operator of CDREIT’s Auckland property and the negotiation of a more favourable lease structure. In addition, we see upside to our DPU estimates should it decide to utilise its S$382m debt headroom for acquisitions.

Valuation:

We maintain our TP and DPU forecast which have incorporated the delayed expectations of the recovery of Singapore’s hospitality market. Key Risks to Our View:

Weaker-than-expected demand supply outlook in Singapore. The key risk to our view is a weaker-than-expected demand-supply outlook for the Singapore hospitality market. At A Glance Issued Capital (m shrs) 992 Mkt. Cap (S$m/US$m) 1,349 / 937 Major Shareholders (%) Hospitality Holdings Pte Ltd 31.7 Aberdeen 5.0 M & C Reit Management Ltd 5.0




CDL Hospitality Trusts Version 6 | Bloomberg: CDREIT SP | Reuters: CDLT.SI Refer to important disclosures at the end of this report


Company Guide

CDL Hospitality Trusts


Earnings Drivers:

Challenging near-term operating conditions in Singapore. CDREIT’s profitability is largely dependent on earnings from its Singapore hotels. Near term, we see headwinds to the group’s core operations due to the growth in new hotel room supply in Singapore (6-7% of existing supply). The more competitive landscape is likely to lead to pressure on ADRs (average room rates) and occupancies, which we estimate will result in a c.6% decline in RevPAR in 2016. Nevertheless, over the medium term, as the Singapore government has not released any land for hotel development over the past two years, supply pressures should ease from 2018 onwards. Softness from Maldives. The significant depreciation of the Russian rubble has resulted in a decline in the number of high-yielding Russian guests into the Maldives. Combined with a recent slowdown in Chinese visitors, we expect softness in CDREIT’s Maldives operations on the back of more aggressive price competition by other resorts. Nevertheless, this could be partially offset by a weakening of the SGD versus USD, as forecast by our DBS economists. CDREIT’s income from the Maldives is generated in USD. Boost from Japanese and UK acquisitions as well as reopening of Claymore Link mall. The timely acquisitions of two Japanese business hotels, Hotels MyStays Asakusabashi and Hotel MyStays Kamata in December 2014 worth c.S$64m, should help CDREIT buffer against the slowdown in its core Singapore operations. The expected growth in tourist arrivals into Japan should translate into higher room rates and occupancies for CDREIT’s properties in medium term albeit near term there may be some volatility in performance due to the recent strength in the JPY. Furthermore, CDREIT should benefit from the acquisition of Cambridge City Hotel and the recent appointment of Hilton as its operator. Moreover, the recent reopening of the Claymore Link, a retail mall in the heart of Orchard Road (after a 1.5-year renovation), is another positive for CDREIT’s earnings. Asset optimisation. In the medium term, we believe CDREIT can further maximise the returns of its portfolio by undertaking AEIs such as those being conducted at Grand Copthorne Waterfront Hotel and M Hotel in Singapore. In addition, at end-FY16, CDREIT should receive an earnings boost, following the appointment of Millennium & Copthorne Hotels as the new operator at its Auckland property with a new lease structure.




Interest Cover (x)



Company Guide


Balance Sheet:

Gearing within optimal range. CDREIT’s gearing at end-September 2016 stood at c.36%, which is within its optimal gearing range of 35-40%. However, should CDREIT gear up to 40%, it will have c.S$140m worth of debt headroom to pursue acquisitions. Moderate exposure to rising interest rates. Approximately 60% of CDREIT’s borrowings are on fixed interest rates. Thus, CDREIT has moderate exposure to rising interest rates. Share Price Drivers:

Near-term earnings risk priced in. While CDREIT’s earnings are expected to be under pressure near term due to projected supply and demand imbalance in Singapore, we believe this has largely been priced in. The implied price per key for CDREIT’s Singapore portfolio stands at c.S$510k, which is below its replacement cost of c.S$700k and recent market transactions of above S$650k. Unjustified discount to other hospitality REITs. Compared to other hospitality S-REITs, CDREIT offers the cheapest exposure to the eventual upturn in the Singapore market. The implied price per key for other S-REITs stands at between S$650k and S$1m versus c.S$500k for CDREIT. Given the mid-tier to luxury category of CDREIT’s room inventory and its successful track record, we believe this valuation discount is unjustified. Key Risks:

Interest rate risk. Any increase in interest rates will result in higher interest payments, which could result in lower distribution per unit (DPU) for unitholders. Currency risk. As CDREIT earns rental income in various currencies (AUD, GBP, JPY, NZD and USD), a depreciation of any foreign currency against the SGD could negatively impact distribution income, which is distributed in SGD. Brexit. CDREIT’s hotel in Cambridge, UK contributed c.6% of 9M16 group NPI. With the UK voting to exit EU (Brexit), this may negatively impact business activities in the UK and CDREIT’s property. In addition, Brexit may result in a depreciation of the GBP versus SGD, which will negatively impact distributions in SGD. Company Background

CDL Hospitality Trusts (CDREIT) is a stapled group comprising H-REIT and HBT. H-REIT is a real estate investment trust that invests in a portfolio of income-producing hospitality-related properties while HBT is a business trust.


ROE (%)


PB Band (x)



Company Guide



FY Dec 2014A 2015A 2016F 2017F 2018F Gross revenue 167 172 175 174 182 Property expenses (26.3) (35.4) (39.3) (38.6) (39.0) Net Property Income 141 137 136 135 143 Other Operating expenses (17.8) (25.2) (21.5) (21.5) (21.7) Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (16.4) (22.3) (22.6) (25.0) (27.3) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Net Income 106 89.6 91.9 89.0 93.8 Tax (1.4) (0.9) (2.3) (3.5) (3.6) Minority Interest 0.0 0.0 0.0 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Income After Tax 105 88.7 89.6 85.5 90.2 Total Return 122 58.4 89.6 85.5 90.2 Non-tax deductible Items 11.4 50.5 13.8 13.8 14.1 Net Inc available for Dist. 120 109 103 99.3 104 Growth & Ratio Revenue Gth (%) 12.1 3.4 1.6 (0.7) 4.5 N Property Inc Gth (%) 2.3 (2.5) (0.7) (0.4) 5.5 Net Inc Gth (%) 1.0 (15.4) 1.0 (4.5) 5.5 Dist. Payout Ratio (%) 90.0 90.0 90.0 90.0 90.0 Net Prop Inc Margins (%) 84.2 79.5 77.6 77.8 78.5 Net Income Margins (%) 62.8 51.4 51.1 49.1 49.6 Dist to revenue (%) 71.6 63.2 59.0 57.1 57.4 Managers & Trustee’s fees 10.7 14.6 12.3 12.3 11.9 ROAE (%) 6.5 5.6 5.7 5.4 5.6 ROA (%) 4.4 3.5 3.5 3.3 3.5 ROCE (%) 5.1 4.5 4.4 4.3 4.6 Int. Cover (x) 7.5 5.0 5.1 4.6 4.4


Improvement in earnings in FY18 due to a recovery in the Singapore hospitality market


Company Guide



FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Gross revenue 41.1 50.1 44.7 42.5 45.4 Property expenses (8.0) (12.3) (11.0) (11.1) (10.6) Net Property Income 33.1 37.8 33.7 31.3 34.8 Other Operating expenses (6.8) (8.6) (5.5) (6.2) (6.5) Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (4.7) (7.2) (6.3) (6.3) (5.8) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Net Income 21.6 22.0 21.9 18.9 22.6 Tax (0.3) 1.25 (1.0) (1.0) 0.0 Minority Interest 0.0 0.0 0.0 0.0 0.0 Net Income after Tax 21.4 23.3 20.9 17.9 22.6 Total Return 0.0 0.0 0.0 0.0 0.0 Non-tax deductible Items 4.51 38.8 3.44 5.84 4.31 Net Inc available for Dist. 25.9 31.8 24.4 23.7 26.9 Growth & Ratio Revenue Gth (%) 5 22 (11) (5) 7 N Property Inc Gth (%) 5 14 (11) (7) 11 Net Inc Gth (%) 14 9 (10) (15) 26 Net Prop Inc Margin (%) 80.5 75.4 75.5 73.8 76.7 Dist. Payout Ratio (%) 90.0 90.0 90.0 90.0 90.0

Balance Sheet (S$m)

FY Dec 2014A 2015A 2016F 2017F 2018F Investment Properties 2,206 2,177 2,182 2,187 2,193 Other LT Assets 146 278 278 278 278 Cash & ST Invts 76.5 72.0 86.8 94.9 104 Inventory 0.0 0.0 0.0 0.0 0.0 Debtors 20.0 19.1 21.1 20.9 21.8 Other Current Assets 1.37 1.28 1.28 1.28 1.28 Total Assets 2,450 2,547 2,570 2,583 2,599 ST Debt 317 219 219 219 219 Creditor 39.7 32.2 41.7 41.4 43.2 Other Current Liab 0.89 0.27 2.61 6.09 9.72 LT Debt 458 703 703 703 703 Other LT Liabilities 18.6 19.3 19.3 19.3 19.3 Unit holders’ funds 1,616 1,573 1,584 1,594 1,604 Minority Interests 0.0 0.0 0.0 0.0 0.0 Total Funds & Liabilities 2,450 2,547 2,570 2,583 2,599 Non-Cash Wkg. Capital (19.1) (12.1) (21.9) (25.3) (29.8) Net Cash/(Debt) (698) (850) (836) (827) (818) Ratio Current Ratio (x) 0.3 0.4 0.4 0.4 0.5 Quick Ratio (x) 0.3 0.4 0.4 0.4 0.5 Aggregate Leverage (%) 31.6 36.2 35.9 35.7 35.5 Z-Score (X) 1.3 1.2 1.2 1.2 1.2


Gearing within optimal 35-40% range


Company Guide



FY Dec 2014A 2015A 2016F 2017F 2018F Pre-Tax Income 106 89.6 91.9 89.0 93.8 Dep. & Amort. 0.0 0.0 0.0 0.0 0.0 Tax Paid (0.2) (1.0) 0.0 0.0 0.0 Associates &JV Inc/(Loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. 3.83 0.39 7.46 (0.2) 0.92 Other Operating CF 29.6 43.4 13.8 13.8 14.1 Net Operating CF 139 132 113 103 109 Net Invt in Properties (93.0) (150) (5.3) (5.2) (5.5) Other Invts (net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc. & JVs 0.0 0.0 0.0 0.0 0.0 Other Investing CF 0.35 (2.0) 0.0 0.0 0.0 Net Investing CF (92.6) (152) (5.3) (5.2) (5.5) Distribution Paid (106) (103) (93.0) (89.4) (93.9) Chg in Gross Debt 83.2 138 0.0 0.0 0.0 New units issued 0.0 0.0 0.0 0.0 0.0 Other Financing CF (16.6) (19.7) 0.0 0.0 0.0 Net Financing CF (39.1) 15.3 (93.0) (89.4) (93.9) Currency Adjustments 0.0 0.46 0.0 0.0 0.0 Chg in Cash 7.72 (4.0) 14.9 8.04 9.53 Operating CFPS (S cts) 13.9 13.4 10.6 10.3 10.7 Free CFPS (S cts) 4.75 (1.8) 10.9 9.75 10.3



Source: DBS Bank


Derek TAN

Increase in capex due to acquisition of Cambridge City Hotel

ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa: AS, PY

BUY Last Traded Price ( 4 Jan 2017): S$0.85 (STI : 2,921.31) Price Target 12-mth: S$0.99 (16% upside and 8.9% yield) Potential Catalyst: DPU accretive acquisitions Where we differ: Below on lower top line Analyst Mervin SONG CFA +65 6682 3715 [email protected] Derek TAN +65 6682 3716 [email protected]

Price Relative

Forecasts and Valuation FY Jun (JPYm) 2015A 2016A 2017F 2018F Gross Revenue 7,635 9,581 12,153 12,325 Net Property Inc 4,681 5,449 6,402 6,494 Total Return 7,579 6,003 3,666 3,735 Distribution Inc 3,358 3,981 4,957 5,034 EPU (S cts) 3.22 0.59 5.99 5.77 EPU Gth (%) (31) (82) 914 (4) DPU (S cts) 7.64 6.95 7.52 8.18 DPU Gth (%) (3) (9) 8 9 NAV per shr (S cts) 103 94.7 86.4 84.5 PE (X) 26.4 143.9 14.2 14.7 Distribution Yield (%) 9.0 8.2 8.9 9.7 P/NAV (x) 0.8 0.9 1.0 1.0 Aggregate Leverage (%) 47.3 45.3 45.1 45.2 ROAE (%) 3.3 0.6 6.6 6.8 Distn. Inc Chng (%): 0 0 Consensus DPU (S cts): 9.3 9.6 Other Broker Recs: B: 4 S: 0 H: 0


Onwards and upwards

Internally managed to improve alignment and removes one barrier to a takeover. We maintain our BUY call and TP of S$0.99. We believe the perception of a greater alignment between the interest of Croesus Retail Trust (CRT)’s unitholders and management following CRT’s move to be the first internally managed trust will help close the discount to our TP. This is despite dissatisfaction from some unitholders with the price paid to buy out CRT’s trustee-manager (c.S$50m) and concerns over the large upfront cash payment to the current management team for their stake in the trustee-manager. In addition, with CRT no longer having an external trustee-manager, we believe this may remove a hurdle to a potential takeover by a J-REIT as speculated by some market participants due to CRT’s persistent high yield and discount to its NAV. Boost from recent acquisitions. Going forward, CRT should benefit from the full-year contribution from the acquisition of Torius property in Fukuoka (7.8% yield based on net property income (NPI)) in Sep15 and recent purchase of three retail malls (Fuji Grand Natalie, Mallage Saga and Feeeal Asahikawa) on 7.1% NPI yield. In addition, with FY18 income hedged at SGD/JPY rate of 76.4, down from 83.6 in FY17, CRT has one of the highest growth rates among our SREIT universe with a two-year DPU CAGR of 8% in SGD terms. This is before any interest savings on the back of lower Japanese interest rates which we have yet to fully price in. Medium-term upside potential from asset enhancement initiatives (AEIs). Over the medium term, CRT should also receive a boost from potential AEI and/or tenant remixing at One’s Mall, Torius Mall and Feeeal Asahikawa. This is in addition to any further acquisitions.

Valuation:

We maintain our DCF-based TP of S$0.99. Key Risks to Our View:

The key risks to our view include: (1) weaker JPY versus SGD, (2) higher-than-expected take-up of its Dividend Reinvestment Plan (DRP) which we have assumed c.25% take-up and (3) lower-than-expected uplift in rents At A Glance Issued Capital (m shrs) 758 Mkt. Cap (S$m/US$m) 644 / 444 Major Shareholders (%) GKG Investment 6.8 Value Partners Group Ltd 6.2 DBS Group Holdings Ltd 5.7




Croesus Retail Trust Version 5 | Bloomberg: CRT SP | Reuters: CROE.SI Refer to important disclosures at the end of this report

88

108

128

148

168

188

208

0.7

0.8

0.8

0.9

0.9

1.0

1.0

1.1

1.1

1.2

1.2

May-13 May-14 May-15 May-16

Relative IndexS$

Croesus Retail Trust (LHS) Relative STI (RHS)


Company Guide

Croesus Retail Trust


Earnings Drivers: Strong cashflow visibility. CRT has a weighted average lease expiry (WALE) by net lettable area (NLA) of seven years, which is among the longest in the S-REIT market. Its occupancy of close to 100% provides investors with significant cashflow visibility. In addition, with c.88% and c.79% of FY17 and FY18 rents already locked in respectively, CRT offers a stable income stream. This, combined with lease expiry profile of 11.9%, 9.0% and 6.7% of leases (by NLA) in FY17, FY18 and FY19 respectively, gives CRT the opportunity to change the tenant mix and/or drive higher rentals. This in turn provides upside to our earnings and DPU estimates. Contribution from recent acquisitions and favourable hedges. Moving forward, CRT should also receive an earnings boost from the acquisition of Torius property in Fukuoka (7.8% NPI yield) in Sep15 and recent purchase of three retail malls (Fuji Grand Natalie, Mallage Saga and Feeeal Asahikawa) on a 7.1% NPI yield. In addition, with CRT having already hedged its FY18 income at SGD/JPY rate of 76.4, we project a two-year SGD DPU CAGR of 8%. Continued benefits from renewal of Mallage Shobu. CRT’s Mallage Shobu property which contributed c.26% of the trust’s 4Q16 NPI undertook a major renewal exercise in March 2015 which consisted of (1) AEI works including family-friendly improvement works to restrooms, nursing rooms and rest areas, as well as improved LED lightning facilities, (2) introduction of 69 new brands/tenants such as Toys R Us, Kurashiki Coffee and Majestic Legon (women’s apparel and fashion), (3) tenant renewal exercise for 155 out of 242 leases, and (4) positive rental reversions in the double digits. We believe CRT’s earnings should continue to benefit from this AEI as the mall gains further traction from its nearby residents. Favourable lease structures. Approximately 62% of the CRT’s leases are under fixed term leases. Under this lease structure, which are typically shorter in tenure (between 3-5 years), CRT has the flexibility to adjust rents and tenant composition upon expiry of leases. This compares to the standard lease, which is more favourable to tenants as upon expiry of the lease, the tenants can opt to stay and renew the lease at market rates. Medium-term upside at One’s Mall, Torius property and Feeeal Asahikawa. We understand there are opportunities to drive rents higher at One’s Mall, Torius property and Feeeal Asahikawa in the medium term. This will come primarily from the change in tenant mix as some tenants/anchor tenants are low yielding at the moment. At this stage, CRT has not provided any details on its AEI plans. Costs savings from internalisation. We expect CRT to benefit from its decision to bring in house its trustee-manager. This should result in costs savings as fees paid to a third party manager are now eliminated and replaced with lower internal overheads. Partially offset this benefit is the higher units on issue following the preferential offering use to help fund the purchase of the third party trustee-manager.




Interest Cover (x)


50.0%

55.0%

60.0%

65.0%

70.0%

0

1,000

2,000

3,000

4,000

5,000

6,000

2014A 2015A 2016A 2017F 2018F

JPY m


-350%

-300%

-250%

-200%

-150%

-100%

-50%

0%

50%

100%

150%

-589

-89

411

911

1,411

4Q20

14

1Q20

15

2Q20

15

3Q20

15

4Q20

15

1Q20

16

2Q20

16

3Q20

16

4Q20

16

1Q20

17


0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2014A 2015A 2016A 2017F 2018F

(x)

0.00

1.00

2.00

3.00

4.00

5.00

6.00

2014A 2015A 2016A 2017F 2018F

(x)


Company Guide


Balance Sheet:

Gearing on downtrend. Following proceeds from the recent rights issue, CRT’s gearing fell to 44.6% from 45.3% at end June 2016. While this is high compared to other S-REITs, given that CRT’s underlying properties are located in Japan, the willingness of Japanese banks to extend credit to CRT and its business trust structure provides CRT the ability to sustain a gearing closer to 50% level. 100% hedged. To manage its interest exposure, CRT has fully hedged all its borrowings, with its all-in cost of debt standing at c.1.9%. Share Price Drivers:

Re-rating on internally managed trust. With the recent buy-out of CRT’s trustee-manager, CRT will be the first trust in Singapore to be internally managed. We believe the improved perception that the management team of CRT is aligned with its unitholders, will help close the discount between CRT’s share price and its NAV per share of c.S$1.00 (JPY75.14). Inorganic growth through acquisitions. CRT continues to look for acquisition opportunities. Such DPU-accretive transactions should boost CRT’s DPU and help re-rate its share price. Near term it has the funding advantage to secure to pursue DPU accretive acquisitions as CRT is able to secure cheap debt (sub 1% interest rate). Key Risks:

Downturn in Japanese economy. The quantitative easing (QE) programme initiated by the BOJ was designed to boost the Japanese economy and inflationary expectations. Should the QE fail to deliver on its objectives, there is risk that a weaker economy may negatively impact rents and capital values of CRT’s portfolio. FX risks. While CRT has hedged its projected distributable income until June 2018, should the JPY depreciate against the SGD, going forward, CRT’s DPU would be negatively impacted. Company Background

Croesus Retail Trust is a business trust that focuses on income-generating retail assets in Japan. Its portfolio comprises seven assets which are close to fully occupied and backed by a long lease expiry profile.


ROE (%)


PB Band (x)


20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

2014A 2015A 2016A 2017F 2018F

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

2014A 2015A 2016A 2017F 2018F

Avg: 8.6%

+1sd: 9.2%

+2sd: 9.7%

‐1sd: 8.1%

‐2sd: 7.6%

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

2014 2015 2016

(%)

Avg: 0.91x

+1sd: 0.98x

+2sd: 1.06x

‐1sd: 0.84x

‐2sd: 0.76x

0.6

0.7

0.8

0.9

1.0

1.1

1.2

Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16

(x)


Company Guide


Income Statement (JPYm)

FY Jun 2014A 2015A 2016A 2017F 2018F Gross revenue 6,261 7,635 9,581 12,153 12,325 Property expenses (2,232) (2,954) (4,132) (5,751) (5,830) Net Property Income 4,029 4,681 5,449 6,402 6,494 Other Operating expenses (765) (720) (976) (775) (779) Other Non Opg (Exp)/Inc (44.4) 370 (1,239) 0.0 0.0 Net Interest (Exp)/Inc (705) (1,001) (1,096) (1,126) (1,129) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Net Income 2,515 3,330 2,137 4,501 4,586 Tax (1,551) (2,087) (1,840) (835) (851) Minority Interest 0.0 0.0 0.0 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Income After Tax 964 1,242 297 3,666 3,735 Total Return 4,793 7,579 6,003 3,666 3,735 Non-tax deductible Items 2,215 2,116 3,684 1,290 1,298 Net Inc available for Dist. 3,180 3,358 3,981 4,957 5,034 Growth & Ratio Revenue Gth (%) N/A 21.9 25.5 26.8 1.4 N Property Inc Gth (%) nm 16.2 16.4 17.5 1.4 Net Inc Gth (%) nm 28.8 (76.1) 1,134.5 1.9 Dist. Payout Ratio (%) 100.0 100.0 100.0 100.0 100.0 Net Prop Inc Margins (%) 64.3 61.3 56.9 52.7 52.7 Net Income Margins (%) 15.4 16.3 3.1 30.2 30.3 Dist to revenue (%) 50.8 44.0 41.5 40.8 40.8 Managers & Trustee’s fees 12.2 9.4 10.2 6.4 6.3 ROAE (%) 6.0 3.3 0.6 6.6 6.8 ROA (%) 2.5 1.4 0.3 2.8 2.8 ROCE (%) 3.6 1.9 0.6 4.2 4.3 Int. Cover (x) 4.6 4.0 4.1 5.0 5.1


Growth arising from acquisition of One’s Mall, Torius property, Fuji Grand Natalie, Mallage Saga and Feeeal Asahikawa


Company Guide


Quarterly / Interim Income Statement (JPYm)

FY Jun 1Q2016 2Q2016 3Q2016 4Q2016 1Q2017 Gross revenue 2,007 2,434 2,466 2,675 3,126 Property expenses (774) (1,066) (1,057) (1,236) (1,529) Net Property Income 1,233 1,368 1,409 1,440 1,596 Other Operating expenses (232) (246) (255) (300) (787) Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (257) (268) (264) (307) (316) Exceptional Gain/(Loss) (584) 136 29.2 (821) 14.0 Net Income 160 989 919 12.2 507 Tax (174) (248) (187) (1,231) (245) Minority Interest 0.0 0.0 0.0 0.0 0.0 Net Income after Tax (13.7) 741 732 (1,219) 262 Total Return (13.7) 794 732 4,434 262 Non-tax deductible Items 932 179 289 (3,366) 890 Net Inc available for Dist. 919 973 1,021 1,068 1,152 Growth & Ratio Revenue Gth (%) 1 21 1 9 17 N Property Inc Gth (%) 2 11 3 2 11 Net Inc Gth (%) 96 nm (1) nm nm Net Prop Inc Margin (%) 61.4 56.2 57.1 53.8 51.1 Dist. Payout Ratio (%) 100.0 100.0 100.0 100.0 100.0

Balance Sheet (JPYm)

FY Jun 2014A 2015A 2016A 2017F 2018F Investment Properties 68,870 87,930 112,640 112,762 113,008 Other LT Assets 3,335 5,063 6,628 6,628 6,628 Cash & ST Invts 2,754 2,942 5,385 6,046 6,069 Inventory 0.0 0.0 0.0 0.0 0.0 Debtors 708 491 1,655 1,736 1,761 Other Current Assets 2,883 3,975 4,866 4,866 4,866 Total Assets 78,551 100,401 131,175 132,038 132,332 ST Debt 358 647 8,337 8,337 8,337 Creditor 885 1,219 2,151 2,300 2,332 Other Current Liab 681 914 2,112 2,705 2,721 LT Debt 40,244 46,840 51,057 51,179 51,425 Other LT Liabilities 3,990 7,194 12,204 12,204 12,204 Unit holders’ funds 32,394 43,586 55,313 55,313 55,313 Minority Interests 0.0 0.0 0.0 0.0 0.0 Total Funds & Liabilities 78,551 100,401 131,175 132,038 132,332 Non-Cash Wkg. Capital 2,026 2,333 2,258 1,598 1,574 Net Cash/(Debt) (37,848) (44,546) (54,010) (53,471) (53,694) Ratio Current Ratio (x) 3.3 2.7 0.9 0.9 0.9 Quick Ratio (x) 3.3 2.7 0.9 0.9 0.9 Aggregate Leverage (%) 51.7 47.3 45.3 45.1 45.2 Z-Score (X) 0.5 0.6 0.4 0.5 0.5


Decline due to asset revaluation gains


Company Guide


Cash Flow Statement (JPYm)

FY Jun 2014A 2015A 2016A 2017F 2018F Pre-Tax Income 2,515 3,330 2,137 4,501 4,586 Dep. & Amort. 0.0 0.0 0.0 0.0 0.0 Tax Paid (148) (337) (400) (243) (835) Associates &JV Inc/(Loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. (2,661) (344) (1,588) 68.4 7.18 Other Operating CF 1,204 561 2,278 1,290 1,298 Net Operating CF 909 3,210 2,427 5,617 5,057 Net Invt in Properties (66,053) (11,712) (19,004) (122) (246) Other Invts (net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc. & JVs 0.0 0.0 0.0 0.0 0.0 Other Investing CF 0.0 0.0 0.0 0.0 0.0 Net Investing CF (66,053) (11,712) (19,004) (122) (246) Distribution Paid (1,810) (3,101) (4,652) (4,957) (5,034) Chg in Gross Debt 40,305 5,634 13,420 122 246 New units issued 29,404 6,108 10,273 0.0 0.0 Other Financing CF 0.0 0.0 0.0 0.0 0.0 Net Financing CF 67,898 8,642 19,040 (4,835) (4,787) Currency Adjustments 0.07 46.4 (19.5) 0.0 0.0 Chg in Cash 2,754 187 2,443 660 23.4 Operating CFPS (S cts) 17.3 9.21 7.98 9.06 7.80 Free CFPS (S cts) (316) (22.0) (33.0) 8.98 7.43



Source: DBS Bank

Analyst: Mervin SONG CFA, Derek TAN

S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 11 Feb 16 0.79 0.86 HOLD

2: 16 May 16 0.82 0.90 BUY

3: 13 Jun 16 0.81 0.90 BUY

4: 29 Aug 16 0.86 0.99 BUY

5: 08 Nov 16 0.87 0.99 BUY

6: 11 Nov 16 0.85 0.99 BUY


1

2

3

4

56

0.72

0.77

0.82

0.87

0.92


S$

Acquisition of Torius property, Fuji Grand Natalie, Mallage Saga and Feeeal Asahikawa

Two rights issues and placement for acquisitions and to fund internalisation of the trustee-manager


HOLD Last Traded Price (4 Jan 2017): S$0.595 (STI : 2,921.31)


Potential Catalyst: Recovery in the Singapore hospitality market, and

acquisitions

Where we differ: Below consensus due to expected decline in RevPAR

Analyst Mervin SONG CFA +65 6682 3715 [email protected] Derek TAN +65 6682 3716 [email protected]

Price Relative


Gross Revenue 115 111 109 114 Net Property Inc 104 100 97.9 103 Total Return 33.2 65.5 62.8 68.2 Distribution Inc 82.2 76.6 73.8 79.5 EPU (S cts) 4.20 3.65 3.48 3.75 EPU Gth (%) (5) (13) (5) 8 DPU (S cts) 4.60 4.26 3.95 4.23 DPU Gth (%) (11) (7) (7) 7 NAV per shr (S cts) 93.9 93.7 93.1 92.6 PE (X) 14.2 16.3 17.1 15.9 Distribution Yield (%) 7.7 7.2 6.6 7.1 P/NAV (x) 0.6 0.6 0.6 0.6 Aggregate Leverage (%) 32.4 32.8 33.3 33.3 ROAE (%) 4.4 3.9 3.7 4.0 DPU Chng (%): - 0 - Consensus DPU (S cts): 4.2 4.2 4.4 Other Broker Recs: B: 1 S: 2 H: 5


Headwinds still present Limited re-rating catalysts. We maintain our HOLD call and TP of S$0.62. As a Singapore-focused REIT and with competitive pressures in the Singapore hospitality market that are expected to persist, we believe there are limited re-rating catalysts for Far East Hospitality Trust (FEHT) in the near term. This is despite the inherent long-term value given that FEHT is trading at 0.6x P/BV. Competitive pressures to persist. While the majority of new hotel supply in Singapore this year is largely concentrated within the Singapore River precinct away from FEHT’s hotels, we believe the 5-6% increase in overall industry room inventory will still put pressure on FEHT’s operations. In addition, with new room supply not easing until 2018, corporate demand still soft and FEHT’s new hotel in Sentosa only completing in 2018, we expect FEHT’s DPU performance to remain muted over the coming year. Strong balance sheet. Even though we are cautious on FEHT’s near-term earnings, there is significant upside to our forecast if FEHT deploys its strong balance sheet well. FEHT’s gearing as at end-September 2016 stood at approximately 32% and its sponsor provides a clear and visible ROFR pipeline of seven properties. Valuation:

We maintain our DCF-based TP of S$0.62 which has

incorporated the delayed expectations of the recovery of the

Singapore office market from 2017 to 2018.


Rebound in demand and acquisitions. Our cautious stance on

FEHT is premised on a supply imbalance in the Singapore

hospitality market. However, a significant rebound in demand,

absorbing the new room supply, and FEHT utilising its strong

balance sheet, would lead to upside risks to our DPU estimates

and TP. At A Glance Issued Capital (m shrs) 1,801

Mkt. Cap (S$m/US$m) 1,072 / 750


Golden Development Pte Ltd 20.4

Golden Landmark Pte Ltd 10.7

Far East Organization 10.1

Free Float (%) 44.3


ICB Industry : Real Estate / Real Estate Investment Trusts


4 Jan 2017


Far East Hospitality Trust Version 5 | Bloomberg: FEHT SP | Reuters: FAEH.SI Refer to important disclosures at the end of this report

58

78

98

118

138

158

178

198

218

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3


Relative IndexS$

Far East Hospitality Trust (LHS) Relative STI (RHS)


Page 2

Company Guide

Far East Hospitality Trust


Earnings Drivers:

Downturn in the Singapore hospitality market. The Singapore

hospitality market faces the challenge of navigating a 5-6%

increase in hotel room supply this year but at the same time,

only a modest recovery in total visitors days and weak corporate

demand which is typically higher yielding. In such an

environment, we believe hotels including those owned by FEHT,

will face pressure on occupancy and ADRs. With supply

expected to increase by 6% in 2017, we believe pressure on

RevPAR will persist. Thus, we estimate that the price-heightened

competition will lead to 5-7% and 4% declines in FEHT’s FY16F

and FY17F hotel and serviced residence RevPAR/RevPAU.

Some cushion from asset enhancement initiatives. Partially

mitigating the effects of a supply imbalance in the Singapore

hospitality market are the asset enhancement initiatives (AEI)

that FEHT has undertaken. The refurbishments are expected to

help maintain FEHT’s relevance in the market place as well as

boost occupancy and ADR over the medium term. The following

are the AEIs that FEHT has completed across its portfolio: (1)

extension of outdoor refreshment area at Village Residence

Robertson Quay, (2) soft refurbishment of club & suite rooms

and meeting areas at Village Hotel Changi, (iii) reconfiguration

of the serviced office space to create nine additional units as

well as the upgrade of the main lobby, breakfast lounge and

pantry at Central Square (Village Residence Clarke Quay), (iv)

refurbishment of 2- and 3-bedroom units at Regency House,

and (v) upgrading of the swimming pool, function rooms, lobby

area and lobby bar.

Medium-term outlook remains bright. Despite the short-term

headwinds, the medium-term outlook for FEHT remains bright.

With no new hotel land sites being released by the Singapore

government over the last two years, supply could be

constrained from 2018 onwards. In addition, FEHT should

benefit from the opening of the 850-room Sentosa hotel

development in 2018.

Acquisitions yet to be priced in. With gearing at only 32%,

FEHT is well positioned to expand its portfolio through

acquisitions. Assuming FEHT gears up to the 40% level, we

estimate the trust to have c.S$300-350m of debt headroom.

Through its sponsor, Far East Organization, FEHT has a visible

acquisition pipeline. In particular, it has the right of first refusal

over seven properties.




Interest Cover (x)


85.4%

87.4%

89.4%

91.4%

93.4%

95.4%

97.4%

99.4%

0

20

40

60

80

100

120

140

160

180

200

2014A 2015A 2016F 2017F 2018F

S$ m


89%

89%

90%

90%

91%

91%

92%

22

23

24

25

26

27

28

29

2Q20

14

3Q20

14

4Q20

14

1Q20

15

2Q20

15

3Q20

15

4Q20

15

1Q20

16

2Q20

16

3Q20

16


0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

2014A 2015A 2016F 2017F 2018F

(x)

0.00

1.00

2.00

3.00

4.00

5.00

6.00

2014A 2015A 2016F 2017F 2018F

(x)


Page 3

Company Guide


Balance Sheet:

Gearing unchanged. FEHT’s gearing at end-3Q16 was stable at

c.32% which is comfortably below management’s 40% and

MAS’s new 45% gearing limit.

Moderate exposure to rising interest rates. Currently, 71% of

FEHT’s borrowings are under fixed rates, reducing its exposure

to volatility in interest rates.


Negative near-term sentiment. FEHT’s share price has been

weak over the past year due to a combination of soft tourist

arrivals and large new room supply which has translated into a

fall in RevPAR and DPU. While tourist arrivals are recovering,

new hotel supply should continue to outpace demand. Thus, we

believe there are limited re-rating catalysts for the stock in the

near term.

Key Risks:

Interest rate risk. Any increase in interest rates will result in

higher interest payments that the REIT has to make annually to

service its loans. This reduces the income available for

distribution, which will result in lower distribution per unit

(DPU) for unitholders.

Competitive landscape. The Singapore hospitality market has

been impacted by a decline in tourist arrivals in 2014 and 2015

thus far. With an increase in new hotel supply in 2016 and

2017 and if demand does not recover, FEHT’s earnings may be

impacted.

Company Background

Far East Hospitality Trust (FEHT) is a hospitality stapled group

comprising Far East H-REIT and Far East H-Business Trust. Far

East H-REIT is a Singapore-based real estate investment trust,

which invests in hospitality assets including both hotels and

serviced residences.


ROE (%)


PB Band (x)


10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

2014A 2015A 2016F 2017F 2018F

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

2014A 2015A 2016F 2017F 2018F

Avg: 6.1%

+1sd: 7.5%

+2sd: 9%

-1sd: 4.7%

-2sd: 3.3%

1.9

2.9

3.9

4.9

5.9

6.9

7.9

8.9

9.9

2013 2014 2015 2016

(%)

Avg: 0.82x

+1sd: 0.97x

+2sd: 1.12x

-1sd: 0.67x

-2sd: 0.53x

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4


(x)


Page 4

Company Guide



FY Dec 2014A 2015A 2016F 2017F 2018F

Gross revenue 122 115 111 109 114

Property expenses (11.7) (11.0) (11.0) (11.1) (11.5)

Net Property Income 110 104 100 97.9 103

Other Operating expenses (13.8) (13.1) (12.9) (12.8) (13.2)

Other Non Opg (Exp)/Inc (0.8) 4.93 0.0 0.0 0.0


Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0

Net Income 78.0 75.0 65.5 62.8 68.6

Tax 0.0 0.0 0.0 0.0 (0.4)

Minority Interest 0.0 0.0 0.0 0.0 0.0


Net Income After Tax 78.0 75.0 65.5 62.8 68.2

Total Return 71.3 33.2 65.5 62.8 68.2

Non-tax deductible Items 20.2 48.9 11.1 11.0 11.3

Net Inc available for Dist. 91.5 82.2 76.6 73.8 79.5

Growth & Ratio

Revenue Gth (%) (0.6) (5.8) (2.8) (2.2) 5.0

N Property Inc Gth (%) (1.7) (5.8) (3.1) (2.5) 5.2

Net Inc Gth (%) (15.5) (3.9) (12.6) (4.2) 8.6

Dist. Payout Ratio (%) 100.0 100.0 100.0 97.0 97.0

Net Prop Inc Margins (%) 90.4 90.4 90.1 89.8 90.0

Net Income Margins (%) 64.1 65.4 58.8 57.6 59.6

Dist to revenue (%) 75.2 71.7 68.7 67.7 69.5

Managers & Trustee’s fees to sales %)

11.3 11.4 11.6 11.8 11.5

ROAE (%) 4.5 4.4 3.9 3.7 4.0

ROA (%) 3.1 3.0 2.6 2.5 2.7

ROCE (%) 3.9 3.6 3.5 3.4 3.6

Int. Cover (x) 5.5 4.4 4.0 3.8 4.0


The decline in earnings is largely a result of a projected decline in FEHT’s FY16 and FY17 serviced residence and hotel RevPAR


Page 5

Company Guide



FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016

Gross revenue 29.7 28.9 27.4 26.1 28.0


Net Property Income 26.9 26.3 24.7 23.5 25.4


Other Non Opg (Exp)/Inc 2.78 0.60 (7.5) (1.2) (1.9)



Net Income 21.1 18.3 8.82 14.2 15.4

Tax 0.0 0.0 0.0 0.0 0.0


Net Income after Tax 21.1 18.3 8.82 14.2 15.4

Total Return 21.1 (23.5) 8.82 14.2 15.4



Growth & Ratio

Revenue Gth (%) 3 (3) (5) (4) 7

N Property Inc Gth (%) 3 (2) (6) (5) 8

Net Inc Gth (%) 30 (13) (52) 61 9

Net Prop Inc Margin (%) 90.7 91.1 90.2 89.8 90.5


Balance Sheet (S$m)

FY Dec 2014A 2015A 2016F 2017F 2018F Investment Properties 2,476 2,439 2,443 2,446 2,449

Other LT Assets 15.6 15.5 31.5 47.5 47.6

Cash & ST Invts 20.9 25.4 35.8 36.2 36.3

Inventory 0.0 0.0 0.0 0.0 0.0

Debtors 19.3 30.5 17.6 17.2 18.1

Other Current Assets 5.45 10.4 10.4 10.4 10.4

Total Assets 2,537 2,521 2,538 2,557 2,562

ST Debt

116 36.9 36.9 36.9 36.9

Creditor 3.28 2.80 3.01 2.94 3.09


LT Debt 680 780 797 814 815

Other LT Liabilities 8.49 7.21 7.21 7.21 7.21

Unit holders’ funds 1,724 1,684 1,684 1,686 1,688

Minority Interests 0.0 0.0 0.0 0.0 0.0

Total Funds & Liabilities 2,537 2,521 2,538 2,557 2,562

Non-Cash Wkg. Capital 15.2 27.9 14.9 14.5 14.8

Net Cash/(Debt) (774) (792) (798) (815) (816)

Ratio

Current Ratio (x) 0.4 1.3 1.3 1.3 1.3

Quick Ratio (x) 0.4 1.3 1.3 1.3 1.3

Aggregate Leverage (%) 31.3 32.4 32.8 33.3 33.3

Z-Score (X) 0.9 0.9 0.9 0.8 0.8


FEHT remains in a strong financial position with gearing in the low 30s


Page 6

Company Guide



FY Dec 2014A 2015A 2016F 2017F 2018F

Pre-Tax Income 78.0 75.0 65.5 62.8 68.6

Dep. & Amort. 0.0 0.0 0.0 0.0 0.0

Tax Paid 0.0 0.0 0.0 0.0 0.0

Associates &JV Inc/(Loss) 0.0 0.08 0.0 0.0 (1.5)

Chg in Wkg.Cap. 2.56 9.55 13.1 0.32 (0.7)

Other Operating CF 29.0 26.0 11.1 11.0 11.3

Net Operating CF 110 111 89.7 74.1 77.7

Net Invt in Properties (8.1) (5.0) (3.3) (3.3) (3.4)

Other Invts (net) 0.0 0.0 0.0 0.0 0.0

Invts in Assoc. & JV (15.6) (21.3) (16.0) (16.0) 0.0

Div from Assoc. & JVs 0.0 0.0 0.0 0.0 1.30

Other Investing CF 0.0 0.0 0.0 0.0 0.0

Net Investing CF (23.7) (26.3) (19.3) (19.2) (2.1)

Distribution Paid (93.4) (84.0) (76.6) (71.6) (77.1)

Chg in Gross Debt 15.6 21.3 16.6 17.1 1.59

New units issued 0.0 0.0 0.0 0.0 0.0

Other Financing CF (16.3) (17.1) 0.0 0.0 0.0

Net Financing CF (94.1) (79.8) (60.0) (54.5) (75.5)

Currency Adjustments 0.0 0.0 0.0 0.0 0.0

Chg in Cash (8.3) 4.54 10.4 0.41 0.08

Operating CFPS (S cts) 6.04 5.66 4.27 4.09 4.32

Free CFPS (S cts) 5.73 5.92 4.81 3.93 4.09



Source: DBS Bank


S.No.Date of

Report

Closing

Price

12-mth

Target

Price

Rat ing

1: 21 Jan 16 0.64 0.63 HOLD

2: 13 Apr 16 0.66 0.63 HOLD

3: 27 Apr 16 0.67 0.63 HOLD

4: 01 Aug 16 0.63 0.65 HOLD

5: 05 Sep 16 0.61 0.65 HOLD

6: 11 Nov 16 0.60 0.62 HOLD


1

23

4

5

6

0.54

0.56

0.58

0.60

0.62

0.64

0.66

0.68

0.70


S$

Equity contribution for FEHT’s 30% stake in the 850-room Sentosa hotel development


BUY Last Traded Price ( 4 Jan 2017): S$1.93 (STI : 2,921.31)


Potential Catalyst: Delay in rate hike expectations; better-than-expected

rental reversion

Where we differ: Lower cost of capital assumptions than consensus

Analyst Singapore Research Team [email protected] Derek TAN +65 6682 3716 [email protected]

Price Relative

Forecasts and Valuation FY Sep (S$m) 2015A 2016A 2017F 2018F

Gross Revenue 189 184 186 204 Net Property Inc 131 130 132 146 Total Return 171 123 95.7 107 Distribution Inc 106 108 109 112 EPU (S cts) 11.7 10.3 10.4 11.6 EPU Gth (%) 4 (12) 0 12 DPU (S cts) 11.6 11.8 11.8 12.1 DPU Gth (%) 4 1 0 3 NAV per shr (S cts) 191 193 191 191 PE (X) 16.5 18.7 18.6 16.7 Distribution Yield (%) 6.0 6.1 6.1 6.3 P/NAV (x) 1.0 1.0 1.0 1.0 Aggregate Leverage (%) 28.2 28.3 30.5 30.6 ROAE (%) 6.2 5.4 5.4 6.1 Distn. Inc Chng (%): 0 0 Consensus DPU (S cts): 12.0 12.2 Other Broker Recs: B: 13 S: 1 H: 3


Fruits from Floating Rates Ability to maintain stable DPUs. While many other S-REITs are expected to face declining DPUs over the next couple of years due to the slowing Singapore economy, Frasers Centrepoint Trust (FCT) offers investors a steady DPU profile. This is made possible by FCT’s conservative strategy of paying the majority of its management fees in cash, which enables FCT to temporarily increase payment of fees in units to sustain DPU. Near-monopoly of shopping malls in the north. Northpoint and Causeway Point together contribute c.70% of FCT’s Net Property Income (NPI). While it is still 15 months away until Northpoint completes its asset enhancement initiative (AEI), we believe strong rental reversion at Causeway Point will support earnings and cushion any pressures from any decline in occupancy rates. Significant reduction in cost of debt. The Manager has proactively reduced the percentage of borrowings hedged into fixed rates to 59% from 74%, to benefit from their view that interest rates may stay low for an extended period. As such, we have brought down our cost of debt assumptions to account lower interest expense in the near term. Valuation:

DCF-based TP of S$2.29. The stock offers a forward yield over

6.0%. Maintain BUY.


Lease renewal in FY17. We estimate that 39.6% of total gross

rent will be due for renewal in FY17. Reversion rate at

Northpoint will test tenant’s confidence in the mall after AEI,

whereas tactical lease management at Changi City Point and

Bedok Point will help in the repositioning of the two malls.

Interest rate risks. If expectations of rate hikes increase, the

41% exposure to floating interest rate will amplify the increase

in the REIT’s cost of debt, putting pressure on valuation. At A Glance Issued Capital (m shrs) 920

Mkt. Cap (S$m/US$m) 1,775 / 1,224


Frasers Centrepoint Ltd 41.5

Schroders Plc 5.6

Free Float (%) 52.9




4 Jan 2017


Frasers Centrepoint Trust Version 6 | Bloomberg: FCT SP | Reuters: FCRT.SI Refer to important disclosures at the end of this report

81

101

121

141

161

181

201

221

1.5

1.7

1.9

2.1

2.3

2.5


Relative IndexS$

Frasers Centrepoint Trust (LHS) Relative STI (RHS)


Page 2

Company Guide

Frasers Centrepoint Trust


Earnings Drivers:

Strong rental reversion at Causeway Point. FCT’s largest asset

(50% of top line) has achieved an average rental reversion of

9.6% in FY16, thanks to its low occupancy cost relative to its

near-monopolistic position in Woodlands, one of Singapore’s

most populous residential estates. FCT has a short Weight

Average Lease Renewal (WALE) of 1.38/1.36 years by NLA/Gross

Rent as 39.6% of the portfolio’s NLA will be due for renewal in

FY17, out of which, 161,501sqft comes from Causeway Point.

We believe the strong reversion trend at this mall is likely to

continue and should cushion any pressures from declining

portfolio occupancy rates and may even bring more earnings

surprise on the upside in the next 12-18 months.

Northpoint AEI is the turnkey to accelerate growth. We remain

excited about the planned AEI and integration of the Northpoint

asset with the extension wing currently being built by the

Sponsor. With an enlarged footprint, we see Northpoint as a

key driver in accelerating growth in the medium term. We are

positive on the AEI given that (i) the northern region has the

lowest retail space density in Singapore; (ii) the fast population

growth in the North region should support retail spending in

the medium term; and (iii) relatively low occupancy costs in the

15-17% range. FCT is in a strong negotiating position with

tenants who want a presence in the north where the group has

close to 75% market share of retail malls (For detailed analysis

on Northpoint’s AEI, please refer to the Company Focus Report:

Igniting the northern start, published on 7 Mar 2016).

Acquisition growth potential from Sponsor’s pipeline. FCT is

able to purchase retail assets from its Sponsor, Frasers

Centrepoint Limited (FCL). We believe a potential target is

Waterway Point, in which the Sponsor has a 33% stake, which

was completed in Jan 2016 and well received by shoppers and

tenants. Given a one- or two-year stabilisation period, a realistic

timeline for this acquisition would be in 2017-18. An acquisition

value of S$300-400m (given estimated development costs of

S$1bn) would allow FCT to grow its portfolio considerably. We

have not included this into our model.




Interest Cover (x)


65.8%

67.8%

69.8%

71.8%

73.8%

75.8%

77.8%

0

20

40

60

80

100

120

140

160

180

200

2014A 2015A 2016A 2017F 2018F

S$ m


64%

65%

66%

67%

68%

69%

70%

71%

72%

73%

28

29

30

31

32

33

34

35

3Q20

14

4Q20

14

1Q20

15

2Q20

15

3Q20

15

4Q20

15

1Q20

16

2Q20

16

3Q20

16

4Q20

16


0.4

0.5

0.6

0.7

0.8

0.9

1.0

2014A 2015A 2016A 2017F 2018F

(x)

5.00

5.20

5.40

5.60

5.80

6.00

6.20

6.40

6.60

6.80

2014A 2015A 2016A 2017F 2018F

(x)


Page 3

Company Guide


Balance Sheet:

Healthy balance sheet. Gearing to remain <30%, one of the

lowest in the S-REIT universe, and well within the Manager’s

comfortable level of 35%.

Increased floating rates exposure. Percentage of borrowings on

fixed rates has been reduced to 59% from 74% in 3QFY16.

This enables the REIT to benefit from lower cost of debt due to

lower expectations of rate hikes for now. Its average cost of

borrowings of 2.1% is among the lowest in S-REITs.


Keep an eye on the risk-free rate. As a yield play, FCT’s share

price is sensitive to fluctuations in the risk-free rate. Anticipated

hikes in the US Fed Funds rate have a negative impact on the

stock. Correspondingly, any delay in rate hikes would be a

positive catalyst for share price performance.

Key Risks:

Near-term fall in NPI margin. As Northpoint’s average

occupancy drops to 76% during its AEI period (Mar 2016-Sep

2017), some narrowing in the portfolio NPI margin is expected.

While we have priced in a temporary decline in occupancy at

Northpoint and generally weaker occupancy rates at other

malls in the next 2 years, any unexpected sharp decline in

occupancy and/or rents may drag down NPI margin and the

share price.

Interest rate risks. If expectations of rate hikes increase, the

41% exposure to floating interest rates will amplify the

increase in the REIT’s cost of debt, putting pressure on

valuation.

Company Background

Frasers Centrepoint Trust (FCT) is a retail real estate investment

trust with a portfolio of shopping malls located in suburban

areas in Singapore. Its two largest assets are Causeway Point

and Northpoint.


ROE (%)


PB Band (x)


10.0%

15.0%

20.0%

25.0%

30.0%

2014A 2015A 2016A 2017F 2018F

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

2014A 2015A 2016A 2017F 2018F

Avg: 5.8%

+1sd: 6.2%

+2sd: 6.6%

-1sd: 5.4%

-2sd: 5%

4.0

4.5

5.0

5.5

6.0

6.5

7.0

2013 2014 2015 2016 2017

(%)

Avg: 1.06x

+1sd: 1.15x

+2sd: 1.24x

-1sd: 0.98x

-2sd: 0.89x

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6


(x)


Page 4

Company Guide



FY Sep 2014A 2015A 2016A 2017F 2018F

Gross revenue 169 189 184 186 204


Net Property Income 118 131 130 132 146




Exceptional Gain/(Loss) 3.88 5.44 (1.9) 0.0 0.0

Net Income 95.6 107 95.0 95.7 107

Tax 0.0 0.0 0.0 0.0 0.0



Net Income After Tax 95.6 107 95.0 95.7 107

Total Return 165 171 123 95.7 107

Non-tax deductible Items 4.34 6.79 (12.9) 12.9 4.97

Net Inc available for Dist. 95.4 106 108 109 112

Growth & Ratio

Revenue Gth (%) 6.8 12.1 (2.9) 1.1 9.6

N Property Inc Gth (%) 5.8 11.0 (0.9) 1.4 11.3

Net Inc Gth (%) 3.8 12.4 (11.5) 0.7 12.2




Dist to revenue (%) 56.6 56.2 58.8 58.5 55.1


8.6 8.3 8.6 9.1 8.5

ROAE (%) 6.0 6.2 5.4 5.4 6.1

ROA (%) 4.1 4.2 3.7 3.6 4.0

ROCE (%) 4.6 4.6 4.5 4.5 4.9

Int. Cover (x) 5.6 6.0 6.6 6.0 5.9


Weak top line growth from the planned AEI at Northpoint over FY16- 17F

Expect lower interest expense due to a higher proportion of borrowings under floating rate interest vs fixed.


Page 5

Company Guide



FY Sep 4Q2015 1Q2016 2Q2016 3Q2016 4Q2016

Gross revenue 47.5 47.1 47.1 45.0 44.6






Exceptional Gain/(Loss) 1.07 0.15 (5.4) (0.4) (0.3)

Net Income 25.8 26.4 21.1 23.5 24.0

Tax 0.0 0.0 0.0 0.0 0.0



Total Return 25.2 26.8 29.2 25.6 89.8

Non-tax deductible Items (64.1) 1.29 7.88 2.27 (26.8)


Growth & Ratio

Revenue Gth (%) 1 (1) 0 (4) (1)

N Property Inc Gth (%) (4) 6 0 (7) 1

Net Inc Gth (%) 1 2 (20) 12 2



Balance Sheet (S$m)

FY Sep 2014A 2015A 2016A 2017F 2018F Investment Properties 2,400 2,464 2,509 2,591 2,595

Other LT Assets 74.7 63.2 60.0 60.0 60.0

Cash & ST Invts 47.1 21.6 18.7 17.4 19.4

Inventory 0.0 0.0 0.0 0.0 0.0

Debtors 0.0 0.0 6.80 6.80 6.80


Total Assets 2,522 2,549 2,594 2,675 2,681

ST Debt

95.0 278 218 218 218

Creditor 39.9 31.8 40.0 40.7 44.6


LT Debt 644 440 516 598 602





Non-Cash Wkg. Capital (58.2) (49.7) (54.0) (54.7) (58.7)

Net Cash/(Debt) (692) (696) (715) (799) (800)

Ratio

Current Ratio (x) 0.3 0.1 0.1 0.1 0.1

Quick Ratio (x) 0.3 0.1 0.1 0.1 0.1


Z-Score (X) 1.4 1.5 1.4 1.3 1.3


Payout ratios in 2HFY16 were greater than 100% thanks to cash conservation from the previous two quarters.


Page 6

Company Guide



FY Sep 2014A 2015A 2016A 2017F 2018F

Pre-Tax Income 95.6 107 95.0 95.7 107

Dep. & Amort. 0.0 0.0 (0.5) 0.0 0.0

Tax Paid 0.0 0.0 0.0 0.0 0.0

Associates &JV Inc/(Loss) (6.6) (5.8) (0.1) (0.1) (0.1)

Chg in Wkg.Cap. (6.4) 2.25 4.33 0.73 3.92


Net Operating CF 100 120 105 107 114

Net Invt in Properties (299) (5.4) (22.6) (82.0) (3.7)

Other Invts (net) 0.0 0.0 0.0 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0


Other Investing CF (1.5) 0.18 0.0 0.0 0.0

Net Investing CF (296) (0.6) (22.5) (81.9) (3.5)

Distribution Paid (94.5) (106) (108) (109) (112)

Chg in Gross Debt 150 (21.0) 22.6 82.0 3.66

New units issued 162 0.0 0.0 0.0 0.0


Net Financing CF 197 (145) (85.5) (26.7) (109)


Chg in Cash 2.03 (25.5) (3.3) (1.3) 1.92


Free CFPS (S cts) (23.4) 12.5 8.93 2.74 11.9



Source: DBS Bank


Derek TAN

S.No.Date of

Report

Closing

Price

12-mth

Target

Price

Rat ing

1: 08 Jan 16 1.83 2.04 BUY

2: 04 Feb 16 1.90 2.04 BUY

3: 07 Mar 16 1.93 2.11 BUY

4: 05 Apr 16 2.01 2.11 BUY

5: 25 Apr 16 2.00 2.10 BUY

6: 16 Jul 16 2.12 2.29 BUY

7: 18 Jul 16 2.17 2.29 BUY

8: 24 Oct 16 2.10 2.29 BUY

9: 07 Nov 16 2.03 2.29 BUY


1

2

3

4

5

67 8

9

1.73

1.83

1.93

2.03

2.13

2.23

2.33


S$


BUY Last Traded Price ( 4 Jan 2017): S$0.94 (STI : 2,921.31) Price Target 12-mth: S$1.10 (17% upside and 7.0% yield) Potential Catalyst: Acquisitions Where we differ: Estimates are more conservative than consensus Analyst Derek TAN +65 6682 3716 [email protected] Mervin SONG CFA +65 6682 3715 [email protected]

Price Relative

Forecasts and Valuation FY Sep (A$m) 2016A 2017F 2018F 2019F Gross Revenue 43.1 162 162 162 Net Property Inc 35.7 137 136 135 Total Return 3.87 83.3 86.5 90.2 Distribution Inc 26.4 95.0 98.3 102 EPU (S cts) 0.53 6.07 6.26 6.47 EPU Gth (%) nm nm 3 3 DPU (S cts) 1.85 6.61 6.79 7.0 DPU Gth (%) nm 258 3 3 NAV per shr (S cts) 87.0 87.0 87.0 87.0 PE (X) *15.8 15.5 15.0 14.5 Distribution Yield (%) *6.7 7.0 7.1 7.3 P/NAV (x) 1.0 1.0 1.0 1.1 Aggregate Leverage (%) 29.3 30.6 30.8 30.9 ROAE (%) 0.6 6.7 6.9 7.2 Distn. Inc Chng (%): 0 0 0 Consensus DPU (S cts): 6.91 6.70 7.02 Other Broker Recs: B: 4 S: 0 H: 1

*annualised


Positioned to grow

Maintain BUY, TP S$1.10. We believe that Frasers Logistics & Industrial Trust (FLT) offers good returns with a prospective yield of close to 7.0% which is attractive in the current low-yield environment. With an under-geared balance sheet, FLT is poised to grow through acquisitions from a visible pipeline of development and completed properties from their sponsor. Maintain BUY and TP at S$1.10. In addition, upside to earnings will come potentially from the rollover of forex hedges (currently A$1 to S$1) to current spot rates which are 6% higher. Maiden distribution exceeds forecasts. FLT’s maiden distribution (DPU ) of 1.84 Scts exceeds IPO forecasts by close to 2.8%. This was mainly due to lower-than-projected interest costs at 2.8% vs 3.4% (forecasted during IPO). Revenue and net property income of A$43.1m and A$32.7m were marginally ahead of IPO forecasts at +0.8% and 0.02% respectively. Portfolio occupancy increased marginally to 99.2%. The forward outlook remains stable given limited expiries over the coming year. Visible ROFR pipeline. The Sponsor has granted FLT a right of first refusal (ROFR) over any of the completed income-producing industrial properties it intends to divest. This currently comprises 11 properties which can be acquired in the medium term. Valuation:

BUY maintained, TP S$1.10. Our TP is based on DCF and we have not assumed any further acquisitions. Our TP offers 15% upside to current price. Key Risks to Our View:

Currency risk. As the manager pays its distributions in SGD but earns in AUD, the REIT is exposed to currency fluctuations. The manager attempts to reduce foreign fluctuations by hedging distributions regularly. At A Glance Issued Capital (m shrs) 1,427 Mkt. Cap (S$m/US$m) 1,342 / 925 Major Shareholders (%) FCL Investments (Industrial) Pte 20.5 TCC Group Investments Limited 6.3 Principal Financial Group 5.0

Free Float (%) 68.2 3m Avg. Daily Val (US$m) 2.7 ICB Industry : Financials / Real Estate Investment Trusts



Frasers Logistics & Industrial Trust Version 1 | Bloomberg: FLT SP | Reuters: FRAE.SI Refer to important disclosures at the end of this report

87

107

127

147

167

187

207

0.8

0.9

0.9

1.0

1.0

1.1

1.1

Jun-16 Sep-16 Dec-16

Relative IndexS$

Frasers Logistics & Industrial Trust (LHS) Relative STI (RHS)


Company Guide

Frasers Logistics & Industrial Trust


Earnings Drivers:

Unique pure-play Australia play. Frasers Logistics & Industrial Trust (FLT) offers investors the unique opportunity to invest in a portfolio of 53 assets (as at end of September 2016) that are concentrated within major industrial markets in Australia, including Melbourne, Sydney and Brisbane. Apart from a geographically diversified portfolio, the REIT’s tenants are mainly in the consumer and logistics sectors which are expected to remain resilient and continue growing as Australia’s economy transitions itself from being resource-led to consumption-led. Long WALE of 6.6 years with in-built organic growth a key trait in current uncertain environment. In our view, the long WALE by Adjusted Gross Rental Income of 6.6 years, which is longer than the majority of Singapore industrial REITs (between 2.9 and 4.7 years), provides strong cashflow visibility. In addition, FLT’s organic growth is underpinned by in-built rental escalations. All of the leases of the initial portfolio have fixed and/or Consumer Price Index-linked (CPI-linked) increments. The fixed rental increments, which are built into the existing leases, range from 2.5-3.75% which translates to an average annual rental increment of c.3.2% for the Initial Portfolio. Predominantly freehold and long leasehold land tenure is a positive. FLT’s portfolio predominantly comprises properties on freehold (60.0% by appraised value) and long leasehold land (30.2% on leasehold land with a tenure of more than 80 years). FLT’s weighted land lease expiry of c.82 years is double that of other industrial S-REITs' average of 41 years. Based on our estimates, the component of capital return based on the remaining leasehold tenure on FLT’s annual distribution yield (at c.0.5%) is much smaller than the average of 2-3% for most industrial S-REITs. Strong Sponsor with long track record of development and management of Australian Industrial assets. FLT's subsidiary Frasers Property Australia Pty Limited (FPA) offers FLT access to a strong and fully integrated real estate platform. In particular, FPA’s industrial business has an end-to-end capability and leadership in the development of industrial assets, having developed over A$3.5bn worth of industrial assets since 2001. The Sponsor has granted FLT a right of first refusal (ROFR) over any of the completed income-producing industrial properties it intends to divest. This currently comprises eleven existing properties in Australia.




Interest Cover (x)


78.7%

80.7%

82.7%

84.7%

86.7%

88.7%

90.7%

92.7%

0

20

40

60

80

100

120

140

160

180

200

2016A 2017F 2018F 2019F

A$ m


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

34

34

35

35

36

36

37

37

3Q20

14

4Q20

14

1Q20

15

2Q20

15

3Q20

15

4Q20

15

1Q20

16

2Q20

16

3Q20

16

4Q20

16


0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

2016A 2017F 2018F 2019F

(x)

5.60

5.80

6.00

6.20

6.40

6.60

6.80

7.00

2016A 2017F 2018F 2019F

(x)


Company Guide


Balance Sheet:

Balance sheet; gearing up for acquisitions. Gearing is projected to remain fairly stable at c.31% in the medium term. The low gearing level allows significant headroom for the manager to execute on opportunistic acquisitions when the time arises. The manager has a medium-term target gearing level of c.35-40%, implying there is headroom to gear up. Healthy financial metrics. The REIT has minimal debt expiries till FY19 with a weighted average cost of borrowing of 2.8%. Interest coverage ratio remains healthy at >7.0%. Close to 84% of the debt is hedged, implying minimal volatility to distributions in the event of an interest rate hike. Share Price Drivers:

Executing on acquisitions. FLT is looking to complete the planned acquisition of Martin Brower property in the coming quarter which will bring gearing up to the c.30-31% level. Despite this, we believe that the portfolio remains under-geared in relation to peers and optimal level. With opportunities abound in the market, we believe that the execution of more acquisitions which is projected to be accretive to earnings, will be a catalyst for its stock price. Key Risks:

Single-country concentration. While FLT provides exposure to the Australian industrial market, as a pure-play REIT, its portfolio is 100% concentrated in Australia. However, this risk is mitigated by the fact that its portfolio is diversified across five states in Australia and various industries. The geographic and tenant diversity across various industries imply that the REIT is not dependent and over-reliant on the performance of any particular industry. Company Background

Frasers Logistics & Industrial Trust (FLT) offers investors a unique opportunity to invest in a quality portfolio of industrial assets in Australia. FLT’s initial portfolio consists of 51 properties spread across five states in Australia with an appraised value of A$1,584.6m. The initial portfolio is well diversified across the key states of Victoria (40% of appraised value), New South Wales (28%) and Queensland (28%).


ROE (%)

Distribution Yield (%) PB Band (x)


10.0%

15.0%

20.0%

25.0%

30.0%

2016A 2017F 2018F 2019F

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2016A 2017F 2018F 2019F

Avg: 15.9x

+1sd: 17.5x

+2sd: 19.1x

-1sd: 14.2x

-2sd: 12.6x

11.3

12.3

13.3

14.3

15.3

16.3

17.3

18.3

19.3

20.3

21

-Ju

n-

20

16

23

-Ju

l-2

01

6

24

-A

ug

-2

01

6

25

-S

ep

-2

01

6

27

-O

ct-

20

16

(x)


Company Guide


Income Statement (A$m)

FY Sep 2016A 2017F 2018F 2019F Gross revenue 43.1 162 162 162 Property expenses (7.4) (24.9) (25.7) (26.5) Net Property Income 35.7 137 136 135 Other Operating expenses (12.8) (14.0) (14.2) (14.2) Other Non Opg (Exp)/Inc (5.7) 0.0 0.0 0.0 Net Interest (Exp)/Inc (3.8) (18.1) (18.3) (18.3) Exceptional Gain/(Loss) 0.0 (12.5) (7.7) (2.8) Net Income 13.4 92.5 96.2 100 Tax (6.1) (9.3) (9.6) (10.0) Minority Interest 0.0 0.0 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 Net Income After Tax 7.24 83.3 86.5 90.2 Total Return 3.87 83.3 86.5 90.2 Non-tax deductible Items 22.5 11.7 11.8 11.8 Net Inc available for Dist. 26.4 95.0 98.3 102 Growth & Ratio Revenue Gth (%) N/A 276.3 0.0 0.0 N Property Inc Gth (%) nm 284.2 (0.6) (0.6) Net Inc Gth (%) nm 1,049.9 3.9 4.2 Dist. Payout Ratio (%) 100.0 100.0 100.0 100.0 Net Prop Inc Margins (%) 82.9 84.6 84.1 83.6 Net Income Margins (%) 16.8 51.4 53.4 55.7 Dist to revenue (%) 61.3 58.6 60.7 62.9 Managers & Trustee’s fees 29.7 8.7 8.7 8.7 ROAE (%) 0.6 6.7 6.9 7.2 ROA (%) 0.4 4.7 4.8 5.0 ROCE (%) 0.7 6.3 6.1 6.1 Int. Cover (x) 6.0 6.8 6.7 6.6


Driven mainly by annual rental escalations coupled with acquisitions

Interest cost locked in


Company Guide


Quarterly / Interim Income Statement (A$m)

FY Sep 4Q2016 Gross revenue 43.1 Property expenses (7.4) Net Property Income 35.7 Other Operating expenses (12.8) Other Non Opg (Exp)/Inc (5.7) Net Interest (Exp)/Inc (3.8) Exceptional Gain/(Loss) 0.0 Net Income 13.4 Tax (6.1) Minority Interest 0.0 Net Income after Tax 7.24 Total Return 3.87 Non-tax deductible Items 22.5 Net Inc available for Dist. 26.4 Growth & Ratio Revenue Gth (%) N/A N Property Inc Gth (%) nm Net Inc Gth (%) nm Net Prop Inc Margin (%) 82.9 Dist. Payout Ratio (%) 100.0

Balance Sheet (A$m)

FY Sep 2016A 2017F 2018F 2019F Investment Properties 1,678 1,753 1,757 1,761 Other LT Assets 0.0 0.0 0.0 0.0 Cash & ST Invts 85.8 50.6 51.0 51.4 Inventory 0.0 0.0 0.0 0.0 Debtors 4.96 8.10 8.10 8.10 Other Current Assets 0.0 0.0 0.0 0.0 Total Assets 1,768 1,811 1,816 1,820 ST Debt 0.0 0.0 0.0 0.0 Creditor 2.24 8.10 8.10 8.10 Other Current Liab 17.2 9.25 9.62 10.0 LT Debt 492 537 541 545 Other LT Liabilities 8.21 8.21 8.21 8.21 Unit holders’ funds 1,249 1,249 1,249 1,249 Minority Interests 0.0 0.0 0.0 0.0 Total Funds & Liabilities 1,768 1,811 1,816 1,820 Non-Cash Wkg. Capital (14.5) (9.3) (9.6) (10.0) Net Cash/(Debt) (406) (486) (490) (493) Ratio Current Ratio (x) 4.7 3.4 3.3 3.3 Quick Ratio (x) 4.7 3.4 3.3 3.3 Aggregate Leverage (%) 29.3 30.6 30.8 30.9


Gearing to remain stable

Maiden distributions


Company Guide


Cash Flow Statement (A$m)

FY Sep 2016A 2017F 2018F 2019F Pre-Tax Income 13.4 92.5 96.2 100 Dep. & Amort. 0.0 0.0 0.0 0.0 Tax Paid 0.0 (17.2) (9.3) (9.6) Associates &JV Inc/(Loss) 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. 12.1 2.72 0.0 0.0 Other Operating CF 6.69 11.7 11.8 11.8 Net Operating CF 32.1 89.8 98.7 102 Net Invt in Properties (1,365) (75.0) (4.0) (4.0) Other Invts (net) 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 Div from Assoc. & JVs 0.0 0.0 0.0 0.0 Other Investing CF (29.6) 0.0 0.0 0.0 Net Investing CF (1,394) (75.0) (4.0) (4.0) Distribution Paid (26.4) (95.0) (98.3) (102) Chg in Gross Debt 491 45.0 4.00 4.00 New units issued 982 0.0 0.0 0.0 Other Financing CF (9.0) 0.0 0.0 0.0 Net Financing CF 1,438 (50.0) (94.3) (97.9) Currency Adjustments 0.0 0.0 0.0 0.0 Chg in Cash 75.8 (35.2) 0.36 0.40 Operating CFPS (S cts) 1.47 6.35 7.14 7.34 Free CFPS (S cts) (97.6) 1.08 6.85 7.05



Source: DBS Bank

Analyst: Derek TAN

Mervin SONG CFA

S.No. DateClosing

PriceTarget Price

Rat ing

1 29 Jul 16 0.99 1.10 BUY

Note: Share price and Target price are adjusted for corporate actions.

0.80

0.85

0.90

0.95

1.00

1.05

Jun-16 Jul-16 Aug-16 Sep-16 Oct-16

S$

Assumed acquisition of Martin Brower property

ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa: AS, PY

HOLD Last Traded Price ( 4 Jan 2017): S$0.72 (STI : 2,921.31)


Potential Catalyst: Acquisitions/increase in Germany’s CPI

Where we differ: In line with consensus


Price Relative

Forecasts and Valuation FY Dec (EURm) 2015A 2016F 2017F 2018F

Gross Revenue 26.9 33.1 33.4 33.7 Net Property Inc 24.0 30.3 30.6 30.9 Total Return 11.8 23.4 22.6 23.9 Distribution Inc 20.8 25.4 25.6 25.9 EPU (S cts) 3.03 5.77 5.49 5.78 EPU Gth (%) nm 90 (5) 5 DPU (S cts) 5.24 6.32 6.41 6.34 DPU Gth (%) 155 21 1 (1) NAV per shr (S cts) 61.8 63.4 62.7 62.2 PE (X) 23.8 12.5 13.1 12.5 Distribution Yield (%) 7.3 8.8 8.9 8.8 P/NAV (x) 1.2 1.1 1.1 1.2 Aggregate Leverage (%) 42.3 42.0 42.2 42.4 ROAE (%) 5.2 9.2 8.8 9.3 Distn. Inc Chng (%): 0 0 0 Consensus DPU (S cts): 6.34 6.34 - Other Broker Recs: B: 1 S: 0 H: 1


Waiting for new sponsor’s direction

Uncertainty over IREIT’s new sponsor. We maintain our HOLD

recommendation on IREIT Global (IREIT) and TP of S$0.75. While

IREIT offers an attractive yield in excess of 8%, uncertainty over

the direction of IREIT’s new sponsor Tikehau Capital, a European

investment manager, will likely cap IREIT’s near-term share price

performance. Furthermore, with IREIT’s gearing at c.42%, any

growth plans are likely to entail an equity-raising exercise to

fund the acquisition of new properties in Europe which may be

DPU dilutive in the near term, given IREIT’s already high

distribution yield.

Strong cashflow visibility. With a weighted average lease expiry

(WALE) by gross rental income of 6.2 years, IREIT provides

strong cashflow visibility. The strength of its cashflows is also

underpinned by its blue chip tenants, such as Allianz, Deutsche

Telekom, Deutsche Rentenversicherung Bund and ST

Microelectronics.

Full-year contribution from Berlin acquisition. IREIT's earnings

this year should benefit from the full-year contribution from a

Berlin property which was acquired in mid-2015 and on a

proforma 7.1% NPI yield. We estimate that this will translate to

a 21% uplift in FY16 DPU (SGD basis). Valuation:

We maintain our DCF valuation of S$0.75 to account for the

recent depreciation of the EUR versus SGD, after imputing a

new EURSGD rate of 1.51.


The key risk to our view is a significant depreciation of EUR

versus SGD. For every 0.10 change in the EURSGD FX rate, our

DCF valuation changes by 6%. In addition, a weaker-than-

expected inflation rate would also delay any increase in rents. At A Glance

Issued Capital (m shrs) 619

Mkt. Cap (S$m/US$m) 446 / 309


Jinquan Tong 55.9

Chap Huat Lim 18.4

Free Float (%) 25.7


ICB Industry : Financials / Real Estate Investment Trusts


4 Jan 2017


IREIT Global Version 5 | Bloomberg: IREIT SP | Reuters: IREI.SI Refer to important disclosures at the end of this report


Page 2

Company Guide

IREIT Global


Earnings Drivers:

Stable cash flow profile with inflation protection. IREIT’s

portfolio of five properties has a WALE by gross rental income

of 6.2 years (as at end-September 2016), which provides

investors with significant cashflow visibility. The portfolio is also

resilient as the majority of leases contain rent adjustment

clauses which are subject to indexation to the German CPI.

Rents are adjusted by a rise or a percentage of the change in

CPI, upon the CPI crossing a prescribed hurdle rate or a

prescribed percentage hurdle. Another attractive feature of

IREIT’s portfolio is that the properties are leased to blue chip

tenants such as Allianz, Deutsche Telekom, Deutsche

Rentenversicherung Bund and ST Microelectronics which

mitigate payment/credit risks for the REIT.

Boost from acquisition of Berlin property. IREIT purchased a

property in Berlin in mid-2015 for EUR144.2m (c.S$217.7m) on

a 7.1% proforma NPI yield. The full benefits from the

acquisition should accrue this year. Located in the district of

Lichtenberg, 6km east of Berlin city centre, the freehold

property consists of two fully connected building sections of

eight and 13 storeys respectively. Close to fully occupied

(c.99.2%), the property provides exposure to Berlin, one of the

strongest economic regions in Germany. The acquisition further

diversifies IREIT’s portfolio to five cities from its initial base of

four (Munster, Bonn, Darmstadt and Munich) and lengthens

IREIT’s WALE.

Hedges in place to mitigate against FX volatility. IREIT distributes

its income in SGD but its rental income is in EUR. To mitigate

this risk, IREIT has entered into hedges for 100% of 2016

distributable income at an average hedge rate of S$1.53. Going

forward, IREIT has also entered into hedges for 2017

distributions at an average hedge rate of S$1.55.

New sponsor. Tikehau Capital, a pan-European asset

management firm with over EUR9bn of assets under

management of which EUR900m are in real estate, recently

completed the purchase of an 80% stake in IREIT’s manager.

While Tikehau Capital’s European pedigree and larger business

potentially opens up greater opportunities for IREIT compared to

its previous sponsor, there remains significant uncertainty on

how Tikehau intends to grow the REIT and the strategic

direction of the REIT given a widening of its investment

mandate from purely office properties in Europe to now include

retail and industrial assets.




Interest Cover (x)



Page 3

Company Guide

IREIT Global

Balance Sheet:

Naturally hedged portfolio. As at end-September 2016, IREIT’s

gearing stood at 42.5%. While its gearing is higher than other

S-REITs, this risk is mitigated by the fact that all of IREIT’s

borrowings are in EUR. In addition, interest rate risk is managed

by having c.88% of its borrowings on fixed interest rates.


Uncertainty arising from IREIT’s new sponsor. Tikehau Capital, a

European investment manager, recently completed the

acquisition of an 80% stake in IREIT’s manager and announced

plans to broaden IREIT’s investment mandate beyond European

offices to include retail and industrial properties. Given the lack

of details over which asset classes Tikehau Capital plans to focus

on and how it intends to grow the REIT given IREIT’s already

high gearing, we believe IREIT’s share price performance will be

capped in the near term.

Boost to capital values from negative interest rates. As negative

interest rates in Europe incentivise investors to invest in riskier

assets, we believe this will lead to further cap rate compression

of European properties. As a German property REIT, IREIT is well

positioned to capture the expected increase in property values.

Key Risks:

Deflation risk. Should Germany experience another bout of

deflation, this may cause a delay a potential rise in rents in the

future. This would negatively impact projected distributions

going forward.

Interest rates risks. Any increase in interest rates will result in

higher interest payments and reduce the income available for

distribution, which will result in lower distribution per unit

(DPU) for unitholders.

Single-tenant leases. IREIT is reliant on GMG, a wholly owned

subsidiary of Deutsche Telekom for c. 60% of gross rental

income (GRI). Non-performance by GMG will negatively impact

distributions to unitholders.

Changes in tax regime. Any changes in the tax regime could

negatively impact IREIT’s distributions.

Company Background

IREIT is a Singapore REIT established with the investment

strategy of principally investing, directly or indirectly, in a

portfolio of income-producing real estate in Europe which is

used primarily for office purposes.


ROE (%)


PB Band (x)


Avg: 6.5%

+1sd: 8.3%

-1sd: 4.8%

-2sd: 3%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

Dec-14 Jun-15 Dec-15 Jun-16


Page 4

Company Guide

IREIT Global

Income Statement (EURm)

FY Dec 2015A 2016F 2017F 2018F

Gross revenue 26.9 33.1 33.4 33.7

Property expenses (2.9) (2.8) (2.9) (2.9)

Net Property Income 24.0 30.3 30.6 30.9

Other Operating expenses (3.0) (3.3) (4.5) (3.4)

Other Non Opg (Exp)/Inc (1.0) 0.0 0.0 0.0

Net Interest (Exp)/Inc (2.6) (4.0) (4.0) (4.0)

Exceptional Gain/(Loss) (5.2) 0.0 0.0 0.0

Net Income 12.2 23.0 22.1 23.5

Tax (0.4) 0.44 0.44 0.44

Minority Interest 0.0 0.0 0.0 0.0

Preference Dividend 0.0 0.0 0.0 0.0

Net Income After Tax 11.8 23.4 22.6 23.9

Total Return 11.8 23.4 22.6 23.9

Non-tax deductible Items 3.72 1.92 3.08 1.98

Net Inc available for Dist. 20.8 25.4 25.6 25.9

Growth & Ratio

Revenue Gth (%) 223.4 22.9 1.0 0.9

N Property Inc Gth (%) 219.3 25.9 1.0 1.0

Net Inc Gth (%) nm 98.2 (3.7) 6.0

Dist. Payout Ratio (%) 100.0 100.0 100.0 100.0

Net Prop Inc Margins (%) 89.2 91.4 91.4 91.5

Net Income Margins (%) 43.9 70.8 67.5 70.9

Dist to revenue (%) 77.2 76.6 76.7 76.8


11.1 9.9 13.3 9.9

ROAE (%) 5.2 9.2 8.8 9.3

ROA (%) 3.1 5.0 4.7 5.0

ROCE (%) 5.8 6.2 6.0 6.2

Int. Cover (x) 8.0 6.8 6.6 6.8


Increase in earnings from the acquisition of the Berlin property


Page 5

Company Guide

IREIT Global

Quarterly / Interim Income Statement (EURm)

FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016

Gross revenue 7.35 8.62 8.80 8.48 8.54




Other Non Opg (Exp)/Inc (1.0) (0.2) 0.41 0.71 (0.4)



Net Income 3.68 5.81 6.25 6.54 5.12

Tax 0.74 (0.7) (0.3) (1.7) (0.4)



Total Return (3.6) 6.65 5.83 13.0 4.60

Non-tax deductible Items 9.14 (0.2) 0.58 (6.6) 1.74


Growth & Ratio

Revenue Gth (%) 36 17 2 (4) 1

N Property Inc Gth (%) 34 17 (1) 0 0

Net Inc Gth (%) 35 16 15 (18) (3)



Balance Sheet (EURm)

FY Dec 2015A 2016F 2017F 2018F Investment Properties 441 450 452 454

Other LT Assets 2.30 2.30 2.30 2.30

Cash & ST Invts 21.2 19.8 19.8 19.8

Inventory 0.0 0.0 0.0 0.0

Debtors 1.56 2.76 2.79 2.81

Other Current Assets 0.0 0.44 0.44 0.44

Total Assets 466 475 477 479

ST Debt

0.0 0.0 0.0 0.0

Creditor 3.90 4.14 4.18 4.22

Other Current Liab 12.5 12.5 12.5 12.5

LT Debt 197 199 201 203

Other LT Liabilities 1.66 1.66 1.66 1.66

Unit holders’ funds 251 257 257 257

Minority Interests 0.0 0.0 0.0 0.0

Total Funds & Liabilities 466 475 477 479

Non-Cash Wkg. Capital (14.8) (13.4) (13.4) (13.4)

Net Cash/(Debt) (176) (180) (182) (184)

Ratio

Current Ratio (x) 1.4 1.4 1.4 1.4

Quick Ratio (x) 1.4 1.4 1.4 1.4

Aggregate Leverage (%) 42.3 42.0 42.2 42.4


Increase in gearing due to acquisition of the Berlin property


Page 6

Company Guide

IREIT Global

Cash Flow Statement (EURm)

FY Dec 2015A 2016F 2017F 2018F

Pre-Tax Income 17.4 23.0 22.1 23.5

Dep. & Amort. 1.00 1.00 1.00 1.00

Tax Paid (0.4) 0.44 0.44 0.44

Associates &JV Inc/(Loss) 0.0 0.0 0.0 0.0

Chg in Wkg.Cap. (0.2) (1.4) 0.01 0.01

Other Operating CF 6.06 1.92 3.08 1.98

Net Operating CF 23.9 25.0 26.7 26.9

Net Invt in Properties (156) (2.0) (2.0) (2.0)

Other Invts (net) 0.0 0.0 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0

Div from Assoc. & JVs 0.0 0.0 0.0 0.0

Other Investing CF 0.0 0.0 0.0 0.0

Net Investing CF (156) (2.0) (2.0) (2.0)

Distribution Paid (15.1) (25.4) (25.6) (25.9)

Chg in Gross Debt 101 2.00 2.00 2.00

New units issued 58.0 0.0 0.0 0.0

Other Financing CF (2.2) 0.0 0.0 0.0

Net Financing CF 142 (23.4) (23.6) (23.9)

Currency Adjustments 0.0 0.0 0.0 0.0

Chg in Cash 9.94 (0.4) 1.01 1.01

Operating CFPS (S cts) 6.18 6.49 6.48 6.50

Free CFPS (S cts) (33.9) 5.65 6.00 6.02



Source: DBS Bank


Derek TAN

Acquisition of Berlin property




Potential Catalyst: Acquisitions

Where we differ: Estimates are more conservative than consensus

Analyst Derek TAN +65 6682 3716 [email protected] Singapore Research Team [email protected] Mervin SONG CFA +65 6682 3715 [email protected]

Price Relative


Gross Revenue 102 102 136 141 Net Property Inc 86.9 83.5 115 120 Total Return 105 57.9 80.0 84.2 Distribution Inc 57.5 60.2 80.3 84.5 EPU (S cts) 7.17 6.55 7.98 7.50 EPU Gth (%) 32 (9) 22 (6) DPU (S cts) 6.51 6.81 7.15 7.52 DPU Gth (%) 20 5 5 5 NAV per shr (S cts) 92.1 92.1 97.0 97.0 PE (X) 16.7 18.3 15.0 16.0 Distribution Yield (%) 5.4 5.7 6.0 6.3 P/NAV (x) 1.3 1.3 1.2 1.2 Aggregate Leverage (%) 33.7 40.3 29.7 35.1 ROAE (%) 8.0 7.1 8.4 7.7 Distn. Inc Chng (%): 0 0 0 Consensus DPU (S cts): 6.60 7.20 7.40 Other Broker Recs: B: 9 S: 0 H: 1


Destiny in its own hands

BUY with S$1.33 TP. Keppel DC REIT (KDC REIT) remains one of

the few REITs in Singapore that is projected to deliver a solid 5%

CAGR in distributions supported by positive market dynamics.

Low gearing of c.30% and low cost of capital empower the REIT

with financial capacity to acquire accretive assets. Maintain BUY

and TP of S$1.33 which has already priced in the recently

announced acquisition of Keppel DC Singapore 3 (KDC SG 3).

Acquisition of KDC SG 3 to power earnings forward; impact on

DPUs estimated to be significant. The acquisition of KDC SG 3

further diversifies the REIT’s earnings base and fuels a stronger

earnings growth trajectory of 5% going forward. Apart from

being a significantly accretive deal, upside will come from the

ability for management to garner tax transparency status, which

allows an additional 3.5% upside to our estimates, which is not

factored in.

Further flexibility to acquire post balance sheet recapitalisation

exercise. The S$279.5m in new equity raised improved the

REIT’s liquidity and further strengthened its balance sheet,

positioning KDC REIT for another year of strong growth driven

from acquisitions. This is supported by low gearing of c.30%

coupled with low cost of capital. We have not factored in

further acquisitions in our estimates.

Valuation:

We currently have a BUY recommendation, with a DCF-backed

TP of S$1.33. The stock offers attractive FY17F yields of 6.0%

and upside will hinge on better-than-expected returns from

acquisitions.


Rising interest rates. A faster than anticipated rise in interest

rates will negatively impact distributions. At A Glance Issued Capital (m shrs) 1,125

Mkt. Cap (S$m/US$m) 1,350 / 938


Keppel Corp Ltd 27.5

Free Float (%) 72.5




4 Jan 2017


Keppel DC REIT Version 6 | Bloomberg: KDCREIT SP | Reuters: KEPE.SI Refer to important disclosures at the end of this report


Page 2

Company Guide

Keppel DC REIT


Earnings Drivers:

Tapping on global data storage and usage growth. As an owner

of data centres in key data gateways and financial centres

across Asia Pacific and Europe, KDC REIT is poised to ride the

wave of rising global data usage and demand for data centres.

The Trust offers investors a stable and visible earnings growth

profile, with 30% of NPI derived from long-dated master leases

with embedded rental step-ups of 2-4% p.a. With 61% of

leases by rental income due for renewal between 2015 and

2017, earnings will be further driven by positive rental

reversions and higher occupancies at its co-location data centres

in Singapore (T25, S25), Australia (part of Gore Hill), and Ireland

(Citadel 100). As it stands, the Trust has a WALE of 2.6 years for

co-location properties, 9.9 years for fully fitted properties, and

16 years for shell & core properties.

Strong ambitions to grow portfolio. The acquisition of KDC SG

3 for S$202.5m is well anticipated but highly accretive to

portfolio earnings estimates, given the high initial yield of

10.25%. The REIT raised S$279.5m which will fully fund the

acquisition with equity. The remaining S$65m will be utilised to

pay down short-term loans for the purchase of Intellicentre 2

(previously announced) and future acquisitions which are not

factored in at this point.

We estimate the deal to be accretive and project the full-year

impact from this acquisition to grow FY17F DPU by 5.0%

(FY16F DPU estimate of 6.8 Scts vs FY17F DPU of 7.2 Scts).

Assuming that IRAS approves tax transparency status for the

REIT, impact to DPU is estimated to be close to 8.5%.

Occupancy saw marginal improvement to 92.7% from 92.3%,

mainly due to the take-up of half of the lease renewal (6,800

sqft in total or 6.2% of the property NLA) at Keppel DC

Singapore 1 (aka S25) that was previously committed and

announced. The remaining half is intended to be taken up in

2H17. WALE remains healthy at 8.6 years.

Expansion to Italy and the UK: The REIT had recently announced

acquisitions in two new markets, a shell and core building of a

data centre in Milan, Italy, and another one in Cardiff, UK. Both

backed by long master leases with embedded rental escalations,

the former has been fully leased to one of the world’s largest

telecommunications companies for 12 years, whereas the latter

has been fully leased to one of the largest global cloud service

providers for 15 years.




Interest Cover (x)



Page 3

Company Guide

Keppel DC REIT

Balance Sheet:

Conservative hedging policies. Major currencies that will impact

earnings - AUD and EUR - have been hedged for two years at

better-than-current spot rates, minimising any currency

fluctuations going forward. While the Manager has hedged the

majority of its foreign-sourced income until 1H17, we note that

the REIT could face translation losses upon rolling forward these

hedges if the AUD and EUR remain at current levels.

Conservative balance sheet. KDC REIT’s gearing stands at below

c.30%, with an all-in cost of debt of 2.4%. As at end-3Q16,

87% of the Trust’s borrowings were hedged into fixed rate

debt, which will provide earnings visibility in a volatile interest

rate environment.


Acquisitions to be a key share price driver. Given that earnings

profile is fairly stable; growth in DPUs is likely to be driven by

acquisitions, which the Manager alludes to be considering.

Given its current share price, target acquisition returns of c.7-

8% should mean that acquisitions are likely to be accretive.

Key Risks:

Higher maintenance capex relative to other asset classes. Due

to the shorter lifespan of a datacentre’s infrastructure, it is

possible that the REIT may have to rely on borrowings to fund

maintenance capex at certain properties, which could impact

gearing.

Competition from larger third-party data centre players. The

data centre market is dominated by several large international

operators which have been aggressively expanding into

markets where KDC REIT has a presence. KDC REIT may face

higher barriers to entry and stiffer competition to attract and

retain tenants.

Company Background

Keppel DC REIT (KDC REIT) is a Singapore-based real estate

investment trust (REIT), established with the principal

investment strategy of investing, directly or indirectly, in a

portfolio of income-producing real estate assets which are

used primarily for data centre purposes, with an initial focus on

Asia Pacific and Europe.


ROE (%)


PB Band (x)



Page 4

Company Guide

Keppel DC REIT


FY Dec 2015A 2016F 2017F 2018F

Gross revenue 102 102 136 141


Net Property Income 86.9 83.5 115 120


Other Non Opg (Exp)/Inc 0.77 0.0 0.0 0.0


Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0

Net Income 69.0 61.3 87.0 91.5

Tax (5.6) (3.4) (7.0) (7.3)

Minority Interest 0.0 0.0 0.0 0.0



Total Return 105 57.9 80.0 84.2

Non-tax deductible Items (46.9) 2.30 0.30 0.30


Growth & Ratio

Revenue Gth (%) 28.2 (0.7) 33.8 3.8

N Property Inc Gth (%) 28.8 (3.9) 38.2 4.3

Net Inc Gth (%) 32.3 (8.6) 38.2 5.2




Dist to revenue (%) 56.1 59.1 59.0 59.7


7.1 12.5 12.2 11.6

ROAE (%) 8.0 7.1 8.4 7.7

ROA (%) 5.4 4.6 5.6 5.3

ROCE (%) 6.4 5.3 6.4 6.0

Int. Cover (x) 7.0 7.5 8.4 8.4


Earnings growth mainly from KDC SG 3 acquisition


Page 5

Company Guide

Keppel DC REIT


FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016

Gross revenue 25.7 24.6 24.8 24.9 22.7



Other Operating expenses (1.0) (3.7) (3.6) 0.31 4.87




Net Income 17.5 15.3 15.5 19.6 22.0

Tax (0.6) (2.4) (0.9) (1.2) (0.9)

Minority Interest 0.0 0.0 0.0 0.0 (0.1)


Total Return 16.9 54.8 14.6 18.4 21.0

Non-tax deductible Items (2.4) (40.3) 0.13 (3.6) (4.3)


Growth & Ratio

Revenue Gth (%) (1) (5) 1 0 (9)

N Property Inc Gth (%) (3) 2 (3) 4 (10)

Net Inc Gth (%) 10 (24) 13 26 14



Balance Sheet (S$m)

FY Dec 2015A 2016F 2017F 2018F Investment Properties 1,103 1,224 1,431 1,550

Other LT Assets 17.3 17.3 17.3 17.3

Cash & ST Invts 37.2 41.9 34.1 32.8

Inventory 0.0 0.0 0.0 0.0

Debtors 53.1 40.7 54.5 56.5


Total Assets 1,211 1,325 1,538 1,657

ST Debt

33.6 33.6 33.6 33.6

Creditor 17.8 6.78 9.08 9.42


LT Debt 338 460 392 510


Unit holders’ funds 813 813 1,089 1,089

Minority Interests 0.37 0.41 0.45 0.49

Total Funds & Liabilities 1,211 1,325 1,538 1,657

Non-Cash Wkg. Capital 36.1 31.4 39.3 40.7

Net Cash/(Debt) (335) (451) (391) (511)

Ratio

Current Ratio (x) 1.8 1.9 1.8 1.8

Quick Ratio (x) 1.7 1.9 1.8 1.8


Z-Score (X) 1.9 1.5 1.9 1.7


Gearing to remain within comfortable range


Page 6

Company Guide

Keppel DC REIT


FY Dec 2015A 2016F 2017F 2018F

Pre-Tax Income 69.0 61.3 87.0 91.5

Dep. & Amort. 0.0 0.0 0.0 0.0

Tax Paid (0.2) 0.0 (3.4) (7.0)


Chg in Wkg.Cap. (24.4) 1.36 (11.5) (1.7)


Net Operating CF 56.3 64.9 72.5 83.1

Net Invt in Properties (477) (121) (207) (118)

Other Invts (net) (8.8) 0.0 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0


Other Investing CF (47.6) 0.0 0.0 0.0

Net Investing CF (533) (121) (207) (118)


Chg in Gross Debt 149 121 (68.1) 118

New units issued 507 0.0 275 0.0

Other Financing CF (118) 0.0 0.0 0.0

Net Financing CF 507 61.2 127 33.9

Currency Adjustments (0.7) 0.0 0.0 0.0

Chg in Cash 29.7 4.76 (7.8) (1.3)


Free CFPS (S cts) (47.6) (6.4) (13.4) (3.1)



Source: DBS Bank

Analyst: Derek TAN


Mervin SONG CFA

Investments in KDC SG 3 (2017) and mainCubes (2018)




Potential Catalyst: Better than expected rental reversions, resilient office

property values

Where we differ: In line with consensus


Price Relative

Forecasts and Valuation FY Dec (S$m) 2014A 2015A 2016F 2017F

Gross Revenue 184 170 159 158 Net Property Inc 151 137 130 129 Total Return 372 337 161 158 Distribution Inc 206 217 212 216 EPU (S cts) 5.46 3.71 4.95 4.77 EPU Gth (%) 0 (32) 33 (4) DPU (S cts) 7.23 6.76 6.51 6.51 DPU Gth (%) (8) (7) (4) 0 NAV per shr (S cts) 154 143 139 136 PE (X) 18.7 27.5 20.6 21.4 Distribution Yield (%) 7.1 6.6 6.4 6.4 P/NAV (x) 0.7 0.7 0.7 0.7 Aggregate Leverage (%) 43.3 40.0 38.9 38.9 ROAE (%) 3.8 2.6 3.5 3.4 DPU Chng (%): (2) (2) Consensus DPU (S cts): 6.70 6.50 Other Broker Recs: B: 8 S: 4 H: 9


Money left on the table

Recent rally to continue. Keppel REIT (KREIT)’s share price has

rallied over 25% since its lows in January 2016. KREIT’s

valuation is still attractive on the basis of its cheap valuation on

a per square foot (sqft) basis and decent yield of c.6.5%. In

addition, through proactive lease renewals, KREIT has derisked

its portfolio to mitigate against potential downside from

occupancies and rental rates. Thus, we maintain our BUY call

with a TP of S$1.23.

Tenancy risk in 2017 and 2018 significantly reduced. The impact

on DPU from the potential loss of key tenants in 2017 and 2018

has been reduced considerably. With forward renewal efforts

year-to-date, there are only 5% of leases left for renewal in

each of 2017 and 2018 with no further leases due for the

remainder of 2016. While expiring rents over the next two

years are in the low S$9 level, close to current Grade A rents of

S$9.30, we believe premium status of KREIT’s properties will

help mitigate the potential decline in overall office rents.

Furthermore, with S$50-60m of disposal gains yet to be

distributed, KREIT has the flexibility to stabilise its DPU going

forward.

Compelling valuations on per sqft valuation basis. KREIT’s

Singapore Grade A office portfolio is trading at an implied value

of c.S$2,400 per sqft compared to recent office market

transactions including the sale of Asia Square Tower 1, 60%

interest in CapitaGreen and Straits Trading Building at between

S$2,700 (adjusted for 99-year leasehold for CapitaGreen) to

S$3,500 psf. With abundant liquidity as well as long term

investors being positive on the Singapore office market and

looking beyond short term supply headwinds, we believe capital

values for office properties will remain resilient near term and

KREIT’s discount to the physical market is unwarranted.

Valuation:


incorporated higher number of shares on issue and near term

drag from loss of California Fitness at Bugis Junction Towers.

Our TP implies a valuation of c.S$2,500 per sqft for KREIT’s

Grade A offices in Singapore.


A key risk to our view is new offices supply causing spot rents

to fall below S$7 per sqft, which will likely lead to lower asking

rents, coming in below our expectations.

At A Glance

Issued Capital (m shrs) 3,292

Mkt. Cap (S$m/US$m) 3,357 / 2,315


Keppel Land 46.0

Free Float (%) 54.0




4 Jan 2017


Keppel REIT Version 6 | Bloomberg: KREIT SP | Reuters: KASA.SI Refer to important disclosures at the end of this report

70

90

110

130

150

170

190

210

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8


Relative IndexS$

Keppel REIT (LHS) Relative STI (RHS)


Page 2

Company Guide

Keppel REIT


Earnings Drivers:

Factors mitigating potential impact on occupancies and rents.

On the back of forward renewals in 9M16, KREIT no longer has

any leases up for renewal for the remainder of 2016. This is

down from 13.6% at the start of the year. Thus, we believe

KREIT’s risk profile near term has reduced significantly. In

addition, the forward renewal strategy has also resulted in only

5% of leases up for renewal in 2017 and 2018 respectively,

which in our view will help KREIT navigate the impending 2.8m

sqft of new office supply. Furthermore, tenancy risks are

partially mitigated by the fact that the majority of the leases due

in 2017 and 2018 are in their first renewal cycle. With tenants

in relatively new offices and having made considerable

investments in fit-outs, there is potentially less incentive for

them to relocate. In addition, we understand expiring rents for

FY17 and FY18 leases are in the low S$9’s which means if

Grade A office rents bottom out close to our expectations of

around S$9 per sqft, risk of negative rental reversions will be

minimised.

Long WALE offers income visibility. K-REIT has a long weighted

average lease expiry (WALE) of c.6 years, with c.95% of leases

due only from FY18F and beyond. Despite the increase in grade

A office supply in Singapore in 2016-2017, the Manager

remains optimistic on its future outlook as it believes that its

assets will continue to be well coveted due to their location in

Marina Bay.

Stable income from Australia. KREIT's Australian properties have

a WALE profile of c.10 years, with a majority of leases having

annual rental escalation clauses, which provides income stability

for the REIT. In 2016, KREIT should also benefit from the

recently opened office tower on the Old Treasury Building site in

Perth, which incidentally has been renamed as the David

Malcolm Justice Centre. However, contribution in SGD terms

could potentially be erorded due to the depreciation of the AUD

against the SGD.

Divestment gains to smooth future distributions. We

understand KREIT has c.S$50-60m of divestment gains which it

has yet to pay out to unitholders. These gains are from past

disposals such as the sale of Prudential Tower and the recent

sale of 77 George Street. We believe these gains provide KREIT

with the flexibility to smooth future distributions, providing

income stability in the event of an unexpected rise in interest

rates and/or lower than projected rents.




Interest Cover (x)


75.5%

77.5%

79.5%

81.5%

83.5%

85.5%

87.5%

89.5%

0

20

40

60

80

100

120

140

160

180

200

2013A 2014A 2015A 2016F 2017F

S$ m


77%

78%

79%

80%

81%

82%

83%

84%

30

32

34

36

38

40

2Q20

14

3Q20

14

4Q20

14

1Q20

15

2Q20

15

3Q20

15

4Q20

15

1Q20

16

2Q20

16

3Q20

16


0.6

1.1

1.6

2.1

2.6

3.1

3.6

4.1

4.6

5.1

2013A 2014A 2015A 2016F 2017F

(x)

0.00

1.00

2.00

3.00

4.00

5.00

6.00

2013A 2014A 2015A 2016F 2017F

(x)


Page 3

Company Guide

Keppel REIT

Balance Sheet:

Gearing now below 40%. With recent asset revaluation gains

and the disposal of 77 King Street in Sydney, KREIT’s gearing is

now at c.39%. Going forward, we expect gearing to remain

below 40%.

Decent debt maturity. KREIT has a weighted average debt to

expiry of 3.7 years, with c.74% of debt on fixed rates.


Sentiment too negative on office capital values? With the

looming new office supply and spot Grade A office rents

declining recently, investors have generally avoided the office

sector. However, with KREIT’s share price having already

corrected significantly from peak levels in 2013 causing KREIT to

trade at 0.8x P/BV, and evidence that physical office asset values

are unlikely to correct further near term based on recent market

transactions, we believe KREIT’s decent 5.8% yield deserves

another relook by investors.

Key Risks:

Risks to capital values. Should an increase in office supply and

a persistently weak office market outlook lead to a larger than

expected fall in rents, valuers could downgrade rental and

growth outlook, and this could trigger a decline in capital

values, which would put the REIT’s NAV at risk.



service its loans. Nevertheless, the risk is partially mitigated by

the fact that c.74% of the KREIT’s debt is on fixed rates.

Currency risk. As KREIT earns rental income from its Australian

assets in AUD, any depreciation in the AUD would result in

relatively lower contributions from Australia to K-REIT's total

distributable income. To manage this risk, almost all of KRETI’s

income from Australia has been hedged for 2016.

Company Background

Keppel REIT is a real estate investment trust investing in

predominantly commercial properties in Singapore and key

gateway cities in Australia.


ROE (%)


PB Band (x)


20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

2013A 2014A 2015A 2016F 2017F

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

2013A 2014A 2015A 2016F 2017F

Avg: 6.3%

+1sd: 6.8%

+2sd: 7.4%

-1sd: 5.8%

-2sd: 5.3%

4.3

4.8

5.3

5.8

6.3

6.8

7.3

7.8

8.3

2013 2014 2015 2016 2017

(%)

Avg: 0.8x

+1sd: 0.91x

+2sd: 1.03x

-1sd: 0.69x

-2sd: 0.58x

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4


(x)


Page 4

Company Guide

Keppel REIT


FY Dec 2013A 2014A 2015A 2016F 2017F

Gross revenue 174 184 170 159 158




Other Non Opg (Exp)/Inc 28.0 12.6 5.60 1.17 (0.1)

Net Interest (Exp)/Inc (18.2) (22.7) (30.4) 8.24 7.29


Net Income 163 171 149 172 170

Tax (16.8) (11.6) (28.0) (3.7) (3.9)

Minority Interest 0.0 (0.1) (0.1) 0.0 0.0

Preference Dividend 0.0 0.0 (1.2) (7.5) (7.5)

Net Income After Tax 146 160 119 161 158

Total Return 535 372 337 161 158

Non-tax deductible Items 132 (166) (120) 50.8 57.5

Net Inc available for Dist. 214 206 217 212 216

Growth & Ratio

Revenue Gth (%) 10.9 5.8 (7.5) (6.9) (0.5)

N Property Inc Gth (%) 10.9 9.5 (9.2) (5.7) (0.6)

Net Inc Gth (%) 25.5 9.4 (25.1) 35.0 (1.9)




Dist to revenue (%) 123.0 112.0 127.5 133.7 136.8


28.6 28.8 33.3 31.5 31.7

ROAE (%) 4.0 3.8 2.6 3.5 3.4

ROA (%) 2.3 2.3 1.6 2.2 2.2

ROCE (%) 1.3 1.3 0.9 1.1 1.1

Int. Cover (x) 4.9 4.3 2.7 NM NM


We expect distribution income to be fairly stable going forward, as KREIT’s portfolio average rents are below market. This limits downside from negative reversions as well as KREIT’s ability to payout past disposal gains


Page 5

Company Guide

Keppel REIT


FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016

Gross revenue 42.2 42.8 41.2 40.6 39.5







Net Income 34.6 36.7 36.6 39.4 41.8

Tax (4.5) (19.8) (7.0) (3.0) (1.8)

Minority Interest 0.0 (0.1) 0.0 0.0 0.0


Total Return 51.0 213 56.0 96.5 40.0

Non-tax deductible Items 3.42 (159) (1.6) (44.0) 12.5


Growth & Ratio

Revenue Gth (%) (2) 1 (4) (1) (3)

N Property Inc Gth (%) (4) 4 (5) (1) (3)

Net Inc Gth (%) (19) (48) 77 24 16



Balance Sheet (S$m)

FY Dec 2013A 2014A 2015A 2016F 2017F Investment Properties 4,015 3,614 3,691 3,551 3,554

Other LT Assets 2,635 3,490 3,570 3,570 3,570

Cash & ST Invts 90.6 200 145 152 121

Inventory 0.0 0.0 0.0 0.0 0.0

Debtors 33.9 25.0 18.1 26.4 26.3


Total Assets 6,776 7,329 7,425 7,301 7,273

ST Debt

282 275 25.4 25.4 25.4

Creditor 94.3 84.5 51.2 96.4 96.1


LT Debt 2,401 2,390 2,464 2,314 2,314






Net Cash/(Debt) (2,592) (2,466) (2,345) (2,188) (2,219)

Ratio

Current Ratio (x) 0.3 0.6 1.8 1.3 1.1

Quick Ratio (x) 0.3 0.6 1.8 1.3 1.1


Z-Score (X) 0.7 0.8 0.9 1.0 1.0


Expected decline in gearing due to recent revaluation gains and disposal of 77 George Street


Page 6

Company Guide

Keppel REIT


FY Dec 2013A 2014A 2015A 2016F 2017F

Pre-Tax Income 163 171 149 172 170

Dep. & Amort. 0.0 0.0 0.0 0.0 0.0

Tax Paid (15.4) (14.3) (7.6) (3.7) (3.9)

Associates &JV Inc/(Loss) (64.2) (70.6) (92.9) (83.3) (83.5)

Chg in Wkg.Cap. (45.3) (74.0) (5.5) 36.9 (0.2)


Net Operating CF 60.3 42.6 114 153 112

Net Invt in Properties 504 504 (12.1) 140 (3.2)

Other Invts (net) 0.0 0.0 0.0 0.0 0.0

Invts in Assoc. & JV (585) (585) 63.2 0.0 0.0


Other Investing CF (208) 99.6 0.0 0.0 0.0

Net Investing CF (224) 92.2 141 223 80.4

Distribution Paid (211) (215) (204) (212) (216)

Chg in Gross Debt 258 (20.9) (346) (150) 0.0

New units issued 173 225 150 0.0 0.0

Other Financing CF (54.9) (56.5) 0.0 (7.5) (7.5)

Net Financing CF 165 (67.4) (400) (369) (223)

Currency Adjustments (12.4) 41.7 0.0 0.0 0.0

Chg in Cash (11.3) 109 (145) 6.99 (30.7)


Free CFPS (S cts) 21.1 18.7 3.18 9.00 3.29



Source: DBS Bank


Derek TAN

S.No.Date of

Report

Closing

Price

12-mth

Target

Price

Rat ing

1: 15 Apr 16 1.01 1.11 BUY

2: 20 Jul 16 1.08 1.26 BUY

3: 22 Jul 16 1.07 1.26 BUY

4: 29 Aug 16 1.07 1.26 BUY

5: 05 Sep 16 1.12 1.26 BUY

6: 26 Sep 16 1.10 1.26 BUY

7: 19 Oct 16 1.10 1.23 BUY

8: 08 Nov 16 1.09 1.23 BUY


1

2

3

4

56 7

8

0.81

0.86

0.91

0.96

1.01

1.06

1.11

1.16


S$

Net gain of c.S$140m from the disposal of 77 George Street


BUY Last Traded Price ( 4 Jan 2017): US$0.84 (STI : 2,921.31)

Price Target 12-mth: US$0.93 (12% upside and 7.3% yield)

Potential Catalyst: Exceeding IPO forecasts, and acquisitions

Where we differ: na Analyst Mervin SONG CFA +65 6682 3715 [email protected] Derek TAN +65 6682 3716 [email protected]

Price Relative

Forecasts and Valuation FY Dec (US$m) 2015P* 2016F* 2017F 2018F

Gross Revenue 71.0 78.7 79.3 80.7 Net Property Inc 44.2 48.7 48.6 49.5 Total Return 26.0 27.2 30.8 33.9 Distribution Inc 34.3 35.4 38.4 38.8 EPU (US cts.) 4.15 4.32 4.84 5.29 EPU Gth (%) nm 4 12 9 DPU (US cts.) 5.48 5.61 6.05 6.06 DPU Gth (%) nm 2 8 0 NAV per shr (US cts.) 78.4 82.0 80.8 80.2 PE (X) 20.1 19.3 17.2 15.8 Distribution Yield (%) 6.6 6.7 7.2 7.3 P/NAV (x) 1.1 1.0 1.0 1.0 Aggregate Leverage (%) 36.6 36.2 37.1 37.6 ROAE (%) 10.6 5.4 6.0 6.6 Distn. Inc Chng (%): - - - Other Broker Recs: B: 4 S: 0 H: 0

* FY15 numbers are on a proforma basis while FY16 are on an annualised basis


America’s office is great Play on exposure to an improving US office market. We maintain our BUY call and TP of US$0.93. We continue to like Manulife US REIT's (MUST) attractive prospective 7.3% yield, strong organic growth prospects and exposure to the favourable demand and supply fundamentals in the US office markets where MUST’s properties are located. This translates to an 8% DPU growth in FY17, one of the highest among REITs in Singapore. The expected strength of the USD/SGD exchange rate could also result in inflows into the stock. Increased confidence on the REIT’s ability to deliver. Our recent visit to properties in the US and meetings with various property brokers as well as MUST’s strong maiden results indicate that market fundamentals remain firm. We believe that MUST's properties in Midtown Atlanta and Downtown Los Angeles submarkets will continue to see steadily increasing rents, continued expansionary tenant demand, increased employment opportunities and also a lack of competitive new supply. Apart from upside when leases come due, 84.2% of leases (by NLA) have annual rental escalations of around 3%, and 15.0% have provisions for mid-term or period rent increases. Acquisitions to be the next driver of growth. The manager has been disciplined towards acquisitions and with the recent decline in gearing to 34.6%, MUST is well placed to execute on DPU-accretive acquisitions. Apart from that, we expect any acquisition to diversify the REIT’s geographic earnings base and tenant concentration. Markets that are of interest are core submarkets that enjoy demand from a diversified type of industries (i.e. manufacturing, financial, technology and law firms) which imply stability across market cycles. We have not priced in acquisitions in our forecasts. Valuation: TP is maintained at US$0.93 based on DCF. The stock offers attractive FY16-17F yields of 6.8-7.3%. Key Risks to Our View: Lower-than-expected rental income. The key risk to our view is lower-than-expected rental income, arising from the non-replacement/renewal of leases and/or slower-than-expected recovery of office rents in the US. At A Glance Issued Capital (m shrs) 628

Mkt. Cap (US$m) 524


Manulife International 7.5

Free Float (%) 92.5




4 Jan 2017


Manulife US Real Estate Inv Version 3 | Bloomberg: MUST SP | Reuters: MANU.SI Refer to important disclosures at the end of this report


Page 2

Company Guide

Manulife US Real Estate Inv


Earnings Drivers:

Exposure to the recovery of US real estate market. According to

Colliers International (Colliers), the office market outlook for

Downtown Los Angeles, Orange County and Atlanta are

attractive given (i) rising demand due to projected falling

unemployment rates on the back of a pick-up in business

activities, and (ii) a deep pool of local talents and skilled workers

which attract companies to set up and maintain their presence

there.

The sub-markets where Manulife US REIT’s properties are

located are also characterised by a lack of new competitive

supply due to limited land availability and high construction

costs. Given supportive market dynamics, Colliers expects Class

A rents in the respective markets to improve by 1.5-23.0% per

annum over 2015-2017. Through the initial portfolio and

potential acquisitions in the future, we believe that MUST offers

a cyclical recovery story, with rents and capital values at or close

to an upswing, underpinned by improved business activity in the

US and real estate values that are off previous highs.

Inbuilt organic growth. MUST’s properties are well positioned to

experience strong organic growth delivered through built-in

rental escalations embedded into their lease contracts. As at 30

September 2016, (1) approximately 84.2% of leases (by NLA)

for the initial portfolio had built-in annual rental escalations,

mostly between 2.5% and 3.5%, and (2) 15% of leases (by

NLA) had mid-term or period rent increases, thus providing a

visible and growing rental income stream.

Long WALE of 6.1 years offers strong income visibility. With

leases typically signed on a 3- to 10-year lease and some in

excess of 10 years, the initial portfolio enjoyed a long WALE of

6.1 years (by NLA) as at 30 September 2016. As such, the initial

portfolio has minimal expiries in the following years - only 5.1%

and 1.7% of its leases (by cash rental income) are expiring in

2017 and 2018 respectively, and we are expecting these leases

to revert positively when leases are due for renewal.

Growth through acquisitions by tapping into the expertise of its

Sponsor. MUST’s Sponsor is The Manufacturer’s Life Insurance

Company, which is part of Manulife Financial Group, a Canada-

based financial services group. Through its subsidiary, Manulife

Real Estate (MRE), the Sponsor has a strong acquisition

capability and track record, demonstrated by the acquisition of

85 properties worth US$6.2bn since 2010. This has resulted in a

CAGR of 17.5% per annum in the value of MRE’s AUM.

Therefore, we believe MUST will be able to tap on its Sponsor’s

real estate platform, to source deals, access local market

expertise and gain assistance in securing financing to grow its

portfolio through DPU-accretive acquisitions in the US.




Interest Cover (x)



Page 3

Company Guide


Balance Sheet:

Stable gearing. Post recent portfolio revaluation gains, MUST’s

gearing has fallen to 34.7% from 36.8% as at end-December

2015. This provides for a debt headroom of c.US$75m should

MUST increase its gearing back up to 40%.

Conservative interest rate profiles. To manage its interest rate

risks, MUST has hedged 100% of its interest exposure at an

average interest rate of 2.46% till 2019.


Establishing a track record. A key pushback from potential

investors is the lack of familiarity with the US office market,

which we believe after a few quarters of strong results, will allay

most of investors' concerns. This may lead to a re-rating of the

stock. Another key share price driver is the potential

outperformance relative to MUST’s IPO forecast. This could be

driven by stronger-than-expected recovery of the US office

market leading to higher rental reversions.

Key Risks:

Risk of non-renewal and non-replacement of leases. MUST’s

financials, results of operations, and capital growth may be

adversely affected by bankruptcy, insolvency or downturn in

the businesses of one or more of the tenants, as well as the

decision by one or more of these tenants not to renew their

lease/s at the end of a lease cycle.

Foreign currency risks. All of the REIT’s assets are located in the

US and generate revenues in USD. Thus, investors who elect to

receive distributions in SGD have exposure to volatility in the

USD/SGD FX rate. This is mitigated should investors elect to

receive distributions in USD.

Regulatory risks. MUST's tax efficiency relies in part on its

Parent US REIT and Sub-US REITs being able to maintain their

status as US REITs as well as qualifying for US portfolio interest

exemption when repatriating cashflows back to Singapore as

interest. Should there be any changes in tax or REIT

regulations in either the US or Singapore which affects the

current REIT structure or ability to repatriate cash in a tax-

efficient manner, distributions paid to MUST’s unitholders may

be adversely impacted.

Company Background

Manulife US REIT (MUST) is the first pure-play US office REIT

listed in Asia. Its portfolio consists of three freehold, Class A or

Trophy quality office properties in Atlanta, Los Angeles, and

Orange County with aggregate net lettable area (NLA) of

c.1.8m sqft.


ROE (%)


PB Band (x)


Avg: 6.7%

+1sd: 6.9%

+2sd: 7%

-1sd: 6.6%

-2sd: 6.4%

6.2

6.3

6.4

6.5

6.6

6.7

6.8

6.9

7.0

7.1

7.2

May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16

(%)

Avg: 1.03x

+1sd: 1.05x

+2sd: 1.07x

-1sd: 1.01x

-2sd: 0.98x

0.90

0.95

1.00

1.05

1.10

May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16

(x)


Page 4

Company Guide


Income Statement (US$m)

FY Dec 2016F 2017F 2018F

Gross revenue 78.7 79.3 80.7

Property expenses (30.0) (30.7) (31.1)

Net Property Income 48.7 48.6 49.5

Other Operating expenses (5.4) (5.4) (5.7)

Other Non Opg (Exp)/Inc 0.0 0.0 0.0

Net Interest (Exp)/Inc (8.2) (8.3) (8.7)

Exceptional Gain/(Loss) (6.6) (2.9) 0.0

Net Income 28.6 32.1 35.2

Tax (1.3) (1.3) (1.2)

Minority Interest 0.0 0.0 0.0

Preference Dividend 0.0 0.0 0.0

Net Income After Tax 27.2 30.8 33.9

Total Return 27.2 30.8 33.9

Non-tax deductible Items 8.14 7.65 4.91

Net Inc available for Dist. 35.4 38.4 38.8

Growth & Ratio

Revenue Gth (%) 11.0 0.8 1.7

N Property Inc Gth (%) 10.4 (0.2) 1.9

Net Inc Gth (%) 4.9 13.1 10.2

Dist. Payout Ratio (%) 100.0 100.0 100.0

Net Prop Inc Margins (%) 61.9 61.3 61.4

Net Income Margins (%) 34.6 38.8 42.1

Dist to revenue (%) 44.9 48.4 48.2


6.9 6.8 7.0

ROAE (%) 5.4 6.0 6.6

ROA (%) 3.3 3.7 4.0

ROCE (%) 5.3 5.2 5.2

Int. Cover (x) 5.3 5.2 5.1


Growth driven by recovery in the US office market


Page 5

Company Guide


Quarterly / Interim Income Statement (US$m)

FY Dec 3Q2016

Gross revenue 28.2

Property expenses (10.6)

Net Property Income 17.6

Other Operating expenses (1.7)

Other Non Opg (Exp)/Inc 0.0

Net Interest (Exp)/Inc (3.1)

Exceptional Gain/(Loss) 0.0

Net Income 12.8

Tax (12.0)

Minority Interest 0.0

Net Income after Tax 0.85

Total Return 33.7

Non-tax deductible Items (21.1)

Net Inc available for Dist. 12.6

Growth & Ratio

Revenue Gth (%) N/A

N Property Inc Gth (%) nm

Net Inc Gth (%) nm

Net Prop Inc Margin (%) 62.4

Dist. Payout Ratio (%) 100.0

Balance Sheet (US$m)

FY Dec 2016F 2017F 2018F Investment Properties 813 821 827

Other LT Assets 0.0 0.0 0.0

Cash & ST Invts 20.3 20.3 20.4

Inventory 0.0 0.0 0.0

Debtors 3.15 3.17 3.23

Other Current Assets 0.70 0.70 0.70

Total Assets 837 845 851

ST Debt

0.0 0.0 0.0

Creditor 7.87 7.93 8.07

Other Current Liab 4.34 4.34 4.34

LT Debt 303 314 320

Other LT Liabilities 5.10 5.10 5.10

Unit holders’ funds 517 514 514

Minority Interests 0.0 0.0 0.0

Total Funds & Liabilities 837 845 851

Non-Cash Wkg. Capital (8.4) (8.4) (8.5)

Net Cash/(Debt) (283) (294) (299)

Ratio

Current Ratio (x) 2.0 2.0 2.0

Quick Ratio (x) 2.0 2.0 2.0

Aggregate Leverage (%) 36.2 37.1 37.6



Page 6

Company Guide


Cash Flow Statement (US$m)

FY Dec 2016F 2017F 2018F

Pre-Tax Income 35.1 35.0 35.2

Dep. & Amort. 0.0 0.0 0.0

Tax Paid (1.3) (1.3) (1.2)

Associates &JV Inc/(Loss) 0.0 0.0 0.0

Chg in Wkg.Cap. (4.3) 0.04 0.08

Other Operating CF 1.56 4.79 4.91

Net Operating CF 31.1 38.5 38.9

Net Invt in Properties (0.6) (2.1) (0.8)

Other Invts (net) 0.0 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0

Div from Assoc. & JVs 0.0 0.0 0.0

Other Investing CF (8.8) (8.4) (5.0)

Net Investing CF (9.4) (10.6) (5.8)

Distribution Paid (35.4) (38.4) (38.8)

Chg in Gross Debt 9.44 10.6 5.83

New units issued 0.0 0.0 0.0

Other Financing CF 0.0 0.0 0.0

Net Financing CF (25.9) (27.9) (33.0)

Currency Adjustments 0.0 0.0 0.0

Chg in Cash (4.3) 0.04 0.08

Operating CFPS (US cts.) 5.61 6.05 6.06

Free CFPS (US cts.) 4.84 5.72 5.95



Source: DBS Bank


Minimal capex due to recently refurbished buildings


BUY Last Traded Price ( 4 Jan 2017): S$1.42 (STI : 2,921.31) Price Target 12-mth: S$1.62 (14% upside and 6.2% yield) Potential Catalyst: Stronger-than-expected rental reversion; further delay in interest rate hike expectations Where we differ: We have slightly more optimistic assumptions in our earnings forecast than consensus. Analyst Singapore Research Team [email protected] Derek TAN +65 6682 3716 [email protected] Mervin SONG CFA +65 6682 3715 [email protected]

Price Relative

Forecasts and Valuation FY Mar (S$m) 2016A 2017F 2018F 2019F

Gross Revenue 288 375 446 458 Net Property Inc 221 291 346 356 Total Return 299 198 246 255 Distribution Inc 172 219 260 270 EPU (S cts) 7.46 6.83 8.38 8.57 EPU Gth (%) 1 (8) 23 2 DPU (S cts) 8.13 8.72 8.94 9.13 DPU Gth (%) 2 7 2 2 NAV per shr (S cts) 130 130 130 130 PE (X) 19.0 20.7 16.9 16.5 Distribution Yield (%) 5.7 6.2 6.3 6.4 P/NAV (x) 1.1 1.1 1.1 1.1 Aggregate Leverage (%) 35.1 37.3 36.7 36.2 ROAE (%) 5.9 6.0 6.4 6.5 Distn. Inc Chng (%): 19 38 Consensus DPU (S cts): 8.80 8.90 Other Broker Recs: B: 10 S: 1 H: 3


An Eye on the Future MBC I is a rare gem. We believe the acquisition of Mapletree Business City – Phase 1 (MBC I) represents a rare gem, not only due to the scarcity of supply in Grade A Business Parks, but also adds diversification to the portfolio by adding a new property type. After the acquisition, the portfolio breakdown by valuation will be 22.2% for business parks, 58.2% office and 42.1% retail from 40.2% office and 59.8% retail. This acquisition is expected to be DPU accretive and is reflected in our TP of S$1.62 and forecasted DPU which translates to DPU growth of 7-10% for the next two years from the pre-acquisition level in FY16. VivoCity a preferred retail destination: As anticipated, the REIT has utilised the opportunity of lease expiries to rebalance the tenant mix at VivoCity. This has enabled it to achieve a whopping rental reversion of 13.8% in 1H17 without compromising on the occupancy rate. Adequate debt headroom: As the S$1.8bn acquisition of MBC I was financed by approximately 45/55 split in debt and equity, gearing edged up to 37.3% from 35.0%, which translates to a debt headroom of S$487.9m based on the regulatory cap of 45%. This gives the REIT adequate debt headroom to finance future asset enhancement initiatives. Valuation: We maintain our DCF-backed target price to S$1.62. The stock offers a dividend yield of 6.2-6.3% for FY17-18F at the current price. BUY call maintained. Key Risks to Our View: Weaker operational performance from VivoCity While VivoCity’s performance has been very encouraging, the mall is gradually phasing into a matured stage with potential decline in growth ahead. Nonetheless, the acquisition of MBC I, still a segment in high demand, would mitigate the slowdown in growth at VivoCity. At A Glance


Mkt. Cap (S$m/US$m) 4,061 / 2,800


Mapletree Investments Pte Ltd 38.38

AIA Group Ltd 6.00

Schroders Plc 5.98

Free Float (%) 49.64




4 Jan 2017


Mapletree Commercial Trust Version 5 | Bloomberg: MCT SP | Reuters: MACT.SI Refer to important disclosures at the end of this report


Company Guide

Mapletree Commercial Trust


Earnings Drivers:

VivoCity a preferred destination mall in Singapore. MCT

achieved a credible 12.3% in retail rental reversions in FY16

(from 142 leases) on the back of a retention rate of 87.9%

despite the current tough operating climate. The success

continues to 1H17 where 114 leases were renewed with a

reversion rate of 13.8%. Occupancy cost for the mall was stable

at 19%, in line with its peers. While the performance growth of

the mall will gradually slowdown as it enters into a more

matured stage, VivoCity will prove its resilience to the retail

headwinds as one of the most popular retail destinations in

Singapore.

Minimal office expiries until FY17/FY18. Over FY16/17,

office/business park’s lease expiries will only account for less

than 10% of the Trust’s leases by gross rental revenue. This will

help to minimise the risk of negative office rental reversions,

particularly at Mapletree Anson, should CBD office rents start to

decline across the market. Amid potential volatility in office

rents and vacancies due to (a) lack of strong demand drivers,

and (b) large office supply completing over the next two years,

MCT offers investors both earnings visibility as well as downside

protection.

Potential acquisitions from the Sponsor. While we applaud to

the yield accretive acquisition of Mapletree Business City –

Phase 1, Mapletree Investments’ progressive redevelopment of

the Harbourfront and Alexandra precincts ensures a steady

pipeline of refurbished or newly developed assets ready to be

injected into the REIT.




Interest Cover (x)



Company Guide


Balance Sheet:

MBC I acquisition edged up gearing slightly. As MBC was

funded by approximately 45/55 in debt and equity, a healthy

balance sheet is maintained with 37.7% aggregate leverage, up

from 35.0%. This level is within the Management’s comfortable

range of below 40% and gives adequate debt headroom based

on the regulatory 45%.

Average debt maturity extended to four years. MBC I’s

acquisition has brought the weighted average all-in cost of debt

down to 2.66% from 2.73%, and extended MCT’s debt tenure

to 4.3 years from 3.7 years. More than 95% of its total debt will

due only from FY18/19 onwards.


We have made a conservative assumption of low single-digit

rental reversion at VivoCity over the next two years. Any

improvement in the rent renewals may bring upside to share

price.

Moreover, the Management has guided for c.40% top line

growth as a result of the MBC I acquisition. Better performance

realised from the new asset could be a positive catalyst.

Key Risks:

Sustained drop in CBD office rents could impact office

earnings in the medium term. Although the REIT’s office

portfolio is largely located outside the CBD and therefore less

exposed to the large office supply completing from 2016

onwards, any prolonged decline in CBD rents would have a

negative spillover effect to the city fringe, as narrowing rental

differentials could entice tenants to relocate to the CBD

instead.

Company Background Mapletree Commercial Trust (MCT) is a real estate investment trust that invests in income-producing office and retail properties in Singapore. The majority of its earnings are derived from VivoCity, the largest retail mall in Singapore, and the recent acquisition of Mapletree Business City – Phase 1.


ROE (%)


PB Band (x)



Company Guide



FY Mar 2015A 2016A 2017F 2018F 2019F

Gross revenue 282 288 375 446 458

Property expenses (70.8) (67.1) (84.3) (100) (102)






Net Income 156 159 198 246 255

Tax 0.0 0.0 0.0 0.0 0.0




Total Return 312 299 198 246 255



Growth & Ratio

Revenue Gth (%) 5.7 1.9 30.3 18.9 2.6

N Property Inc Gth (%) 8.4 4.3 31.7 19.0 2.8

Net Inc Gth (%) 9.3 1.9 24.6 24.3 3.6




Dist to revenue (%) 59.6 59.9 58.4 58.4 58.9


7.1 9.1 11.0 8.3 8.1

ROAE (%) 6.2 5.9 6.0 6.4 6.5

ROA (%) 3.7 3.7 3.7 3.9 4.0

ROCE (%) 4.6 4.5 4.7 5.0 5.1

Int. Cover (x) 5.4 5.0 4.8 4.9 5.0


Increase in top line due to MBC I acquisition


Company Guide



FY Mar 2Q2016 3Q2016 4Q2016 1Q2017 2Q2017

Gross revenue 71.3 73.8 73.0 73.4 88.1




Other Non Opg (Exp)/Inc (6.9) 0.0 0.0 (9.9) (3.5)


Exceptional Gain/(Loss) 8.57 (0.2) 0.73 10.6 2.64

Net Income 41.3 41.3 37.7 40.9 48.9

Tax 0.0 0.0 0.0 0.0 0.0



Total Return 41.3 198 178 40.9 48.9



Growth & Ratio

Revenue Gth (%) 2 3 (1) 1 20


Net Inc Gth (%) 7 0 (9) 9 20



Balance Sheet (S$m)

FY Mar 2015A 2016A 2017F 2018F 2019F

Investment Properties 4,199 4,342 6,129 6,140 6,152

Other LT Assets 4.91 3.52 3.52 3.52 3.52

Cash & ST Invts 54.9 63.6 92.7 110 113

Inventory 0.0 0.0 0.0 0.0 0.0

Debtors 3.29 5.04 6.56 7.81 8.01


Total Assets 4,263 4,415 6,302 6,332 6,346

ST Debt 189 355 355 355 355

Creditor 61.7 51.8 65.1 77.3 78.9


LT Debt 1,358 1,197 1,993 1,972 1,944






Net Cash/(Debt) (1,492) (1,488) (2,255) (2,216) (2,186)

Ratio

Current Ratio (x) 0.2 0.2 0.2 0.3 0.3

Quick Ratio (x) 0.2 0.2 0.2 0.3 0.3


Z-Score (X) 1.3 1.2 1.2 1.2 1.3


Both new asset (MBC I) and existing assets contributed to the positive performance over the quarter


Company Guide



FY Mar 2015A 2016A 2017F 2018F 2019F

Pre-Tax Income 156 159 198 246 255

Dep. & Amort. 0.0 0.0 0.0 0.0 0.0

Tax Paid 0.33 0.0 0.0 0.0 0.0

Associates &JV Inc/(Loss) 0.0 0.0 0.0 0.0 0.0

Chg in Wkg.Cap. 3.07 3.81 11.8 11.0 1.39


Net Operating CF 204 213 231 271 271

Net Invt in Properties (7.9) (7.4) (1,856) (11.2) (11.4)

Other Invts (net) 0.0 0.0 0.0 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0



Net Investing CF (7.8) (6.9) (1,856) (11.2) (11.4)


Chg in Gross Debt (40.0) 0.0 797 (21.7) (27.6)

New units issued 0.0 0.0 1,044 0.0 0.0


Net Financing CF (211) (197) 1,655 (243) (257)


Chg in Cash (15.6) 8.72 29.1 17.2 2.75


Free CFPS (S cts) 9.26 9.64 (56.1) 8.87 8.73



Source: DBS Bank


Derek TAN

Mervin Song


ed: JS / sa: JC, PY

BUYLast Traded Price ( 4 Jan 2017): S$0.95 (STI : 2,921.31)


Potential Catalyst: Acquisitions and delivery of positive rental reversions

despite concerns over a downturn in the HK retail market

Where we differ: Below consensus due to impact of higher property taxes at

Gateway Plaza


Price Relative

Forecasts and Valuation FY Mar (S$m) 2015A 2016A 2017F 2018F

Gross Revenue 281 337 351 365 Net Property Inc 229 277 283 295 Total Return 319 415 152 155 Distribution Inc 178 200 200 205 EPU (S cts) 4.55 6.40 5.46 5.54 EPU Gth (%) 4 41 (15) 1 DPU (S cts) 6.54 7.25 7.17 7.27 DPU Gth (%) 4 11 (1) 1 NAV per shr (S cts) 120 124 123 121 PE (X) 20.8 14.8 17.3 17.1 Distribution Yield (%) 6.9 7.7 7.6 7.7 P/NAV (x) 0.8 0.8 0.8 0.8 Aggregate Leverage (%) 36.2 39.4 39.3 39.3 ROAE (%) 4.0 5.3 4.4 4.5

Distn. Inc Chng (%): 0 0 Consensus DPU (S cts): 7.20 7.30 Other Broker Recs: B: 7 S: 0 H: 2


Only a speed hump

Quality will shine through. We maintain our BUY call and TP of S$1.11 for Mapletree Greater China Commercial Trust (MAGIC). While MAGIC faces the challenge of a stronger SGD and higher property taxes at Gateway Plaza, we believe these factors are only speed humps in the near term. As MAGIC cycles through these headwinds over the next few quarters, the strength of core asset Festival Walk (c.70% of net property income (NPI)) as well as the boost from the Sandhill acquisition will shine through. Moreover, MAGIC offers an attractive yield in excess of 6% which we believe is high considering that its portfolio of quality properties is still delivering healthy (7-23%) rental reversions.

Festival Walk’s defensive positioning. The strong market positioning of Festival Walk makes it well placed to weather the headwinds in the HK retail market. Located in Kowloon Tong’s mid to upper residential area and next to City University of Hong Kong, it serves the needs of the local community rather than mainland Chinese tourists which have been the main reason for the fall in HK retail sales. In addition, due to the mall’s strong track record, we understand there remains a queue of potential tenants eager to be located within the mall. Combined with occupancy costs of c.19% which is in the middle of the 16-22% range for other malls in HK, this bodes well for rents going forward. This is evidenced by rental reversions of 15% in 1H17.

Full contribution from Sandhill Plaza yet to be realised. With the S$412m acquisition of Sandhill Plaza in Shanghai only completed in June 2015, MAGIC’s earnings should receive a boost over the coming year, which should help mitigate any potential slowdown in HK, negative drag from higher property taxes in Beijing, and a strengthening SGD.

Valuation: We maintain our DCF-based TP of S$1.11 which has incorporated lower occupancy and higher taxes at Gateway Plaza partially offset by higher occupancies at Sandhill Plaza.

Key Risks to Our View: The key risk to our view is a significant downturn in the HK and Chinese economies, causing a decline in rents at Festival Walk, Gateway Plaza and Sandhill Plaza.

At A Glance Issued Capital (m shrs) 2,787

Mkt. Cap (S$m/US$m) 2,633 / 1,816


Mapletree Investment Pte Ltd 30.6

Norges Bank 7.7

AIA Co Ltd 6.0

Free Float (%) 55.7




4 Jan 2017


Mapletree Greater China Commercial Trust Version 6 | Bloomberg: MAGIC SP | Reuters: MAPE.SI Refer to important disclosures at the end of this report

80

100

120

140

160

180

200

220

0.7

0.8

0.9

1.0

1.1

1.2

1.3

Mar-13 Mar-14 Mar-15 Mar-16

Relative IndexS$

Mapletree Greater China Commercial Trust (LHS)

Relative STI (RHS)


Page 2

Company Guide

Mapletree Greater China Commercial Trust


Earnings Drivers:

Festival Walk still the star. Investors have raised concerns over

the slowing retail market in Hong Kong impacting MAGIC’s

core property Festival Walk. However, we believe Festival Walk

will continue to deliver, although achieving lower rental

reversions (estimated at 10-15%) than the 20-21% delivered

over the past two years. We believe overall rental income will

remain on an uptrend and not turn negative due to the

following factors: (1) the mall’s prime location in Kowloon Tong

offering tenants exposure to nearby established upscale

residential areas, students and staff from the nearby City

University of Hong Kong, and high transit crowd as the mall is

located next to Kowloon Tong Station which is an interchange

between Kwun Tong Line (which serves Kowloon East) and East

Rail Line (which connects to the Shenzhen border) and, (2) the

mall’s strong track record and resiliency. During the SARS

epidemic and GFC, tenant sales were flattish.

Full-year contribution from Sandhill Plaza. This year, MAGIC’s

earnings should receive a boost from the full year contribution

of the Sandhill Plaza acquisition which was only completed in

June 2015. MAGIC should also benefit from positive rental

reversions as passing rents are approximately 10% below

market rates.

Past rental reversions still provide support to Gateway Plaza’s

earnings. Gateway Plaza has achieved 25-33% uplift in rents

over the past two years. The benefits from the positive rental

reversions should continue to flow through, despite potential

headwinds in the near term due to increase in supply within the

Beijing office market and recent jump in vacancy. In the

medium/long term, Gateway Plaza should remain well placed

given the recent decision in August 2015 by the Beijing

Municipal Commission of Development and Reform to ban new

large-scale public developments including office buildings within

the East Fifth Ring Road, West Fifth Ring Road, North Fifth Ring

Road and South Fourth Ring Road which covers the central area

of six urban districts of Beijing.

Acquisition pipeline from sponsor. MAGIC’s sponsor has several

malls, office buildings and business parks in China and HK

which have yet to be stabilised or are in the process of being

constructed. Subject to the price paid, these properties could

potentially provide MAGIC with a pipeline of DPU-enhancing

acquisitions.




Interest Cover (x)


76.6%

78.6%

80.6%

82.6%

84.6%

86.6%

88.6%

90.6%

0

50

100

150

200

250

300

2014A 2015A 2016A 2017F 2018F

S$ m


79%

80%

80%

81%

81%

82%

82%

83%

83%

84%

50

55

60

65

70

75

1Q20

15

2Q20

15

3Q20

15

4Q20

15

1Q20

16

2Q20

16

3Q20

16

4Q20

16

1Q20

17

2Q20

17


0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

2014A 2015A 2016A 2017F 2018F

(x)

0.00

1.00

2.00

3.00

4.00

5.00

6.00

2014A 2015A 2016A 2017F 2018F

(x)


Page 3

Company Guide


Balance Sheet:

Optimised gearing levels. As at end-September 2016, MAGIC’s

gearing stood at c.40% which is at an optimal level.

Nevertheless, given the new 45% gearing limit for S-REITs in

January 2016, MAGIC’s ability to pursue further acquisitions

without further equity raisings is constrained.

Moderate exposure to rising interest rates. Currently, 85% of

the MAGIC’s borrowings are on fixed rates which partially

insulates the REIT against rising interest rates in the near term.


Festival Walk continuing to deliver. Investors have been

concerned over the outlook for retail rents in Hong Kong and

risk of negative rental reversions at Festival Walk. While

acknowledging a moderating outlook, we think these fears are

overplayed given Festival Walk’s suburban location, low

exposure to tourists (c.10-15% of tenant sales) and lack of

exposure to luxury products. Evidence of this can be seen by the

ability to achieve 15% positive rentals reversions in 1H17. This

and continued delivery of DPU growth over the coming few

quarters should allay the growth fears and trigger a re-rating.

Key Risks:

Foreign exchange risks. While FX over the past two years has

been a tailwind, the depreciation of the HKD and CNY would

negatively impact MAGIC’s DPU and NAV per share on a

lagged basis. MAGIC hedges its income to smooth out the

volatility from movements in FX rates.

Economic risks. A significant economic downturn in Hong

Kong and China would cause a decline in rents for retail and

office properties. This in turn would negatively impact

MAGIC’s earnings and DPU.

Company Background

MAGIC is a Singapore real estate investment trust (S-REIT)

established with the investment strategy of principally

investing, directly or indirectly, in a diversified portfolio of

income-producing commercial real estate in the Greater China

region.


ROE (%)


PB Band (x)


10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

2014A 2015A 2016A 2017F 2018F

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

2014A 2015A 2016A 2017F 2018F

Avg: 6.1%

+1sd: 8.1%

+2sd: 10.1%

-1sd: 4.1%

-2sd: 2.1%

0.0

2.0

4.0

6.0

8.0

10.0

2013 2014 2015 2016 2017

(%)

Avg: 0.85x

+1sd: 0.94x

+2sd: 1.04x

-1sd: 0.75x

-2sd: 0.65x

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

Apr-13 Apr-14 Apr-15 Apr-16

(x)


Page 4

Company Guide



FY Mar 2014A 2015A 2016A 2017F 2018F

Gross revenue 268 281 337 351 365




Other Non Opg (Exp)/Inc (2.0) (7.0) 40.7 0.0 0.0



Net Income 148 157 213 187 192

Tax (30.5) (33.8) (37.8) (35.9) (37.0)




Total Return 387 319 415 152 155



Growth & Ratio

Revenue Gth (%) 137.0 5.1 19.7 4.2 4.1


Net Inc Gth (%) 113.4 4.9 42.5 (13.6) 2.4




Dist to revenue (%) 62.9 63.3 59.4 57.0 56.2


9.1 8.9 12.1 6.6 6.6

ROAE (%) 4.4 4.0 5.3 4.4 4.5

ROA (%) 2.5 2.4 3.0 2.5 2.5

ROCE (%) 3.5 3.3 3.6 3.7 3.9

Int. Cover (x) 4.6 5.1 3.7 3.6 3.5


Recovery in distributable income on the back of positive rental reversions at Festival Walk, improvement in occupancy at Gateway Plaza as well as increased contribution from the recently acquired Sandhill Plaza


Page 5

Company Guide



FY Mar 2Q2016 3Q2016 4Q2016 1Q2017 2Q2017

Gross revenue 84.6 88.2 87.8 85.0 83.1







Net Income 45.6 49.5 52.6 47.1 45.8

Tax (7.1) (7.5) (16.4) (7.7) (7.6)



Total Return 38.5 42.0 276 39.4 38.3



Growth & Ratio

Revenue Gth (%) 11 4 0 (3) (2)

N Property Inc Gth (%) 11 4 1 (5) (3)

Net Inc Gth (%) (46) 9 (14) 9 (3)



Balance Sheet (S$m)

FY Mar 2014A 2015A 2016A 2017F 2018F Investment Properties 4,722 5,349 5,922 5,927 5,932

Other LT Assets 8.00 1.00 9.30 9.30 9.30

Cash & ST Invts 133 125 207 208 203

Inventory 0.62 0.77 0.85 0.85 0.85

Debtors 8.33 11.1 10.7 11.2 11.6


Total Assets 4,873 5,488 6,154 6,160 6,161

ST Debt

0.0 274 462 462 462

Creditor 64.0 76.3 147 153 154


LT Debt 1,853 1,710 1,960 1,960 1,960

Other LT Liabilities 79.0 122 130 130 130




Non-Cash Wkg. Capital (91.8) (109) (169) (175) (175)

Net Cash/(Debt) (1,720) (1,859) (2,215) (2,214) (2,219)

Ratio

Current Ratio (x) 1.4 0.3 0.3 0.3 0.3

Quick Ratio (x) 1.4 0.3 0.3 0.3 0.3


Z-Score (X) 0.9 0.7 0.6 0.6 0.6


Increase in gearing on the back of the debt-funded acquisition of Sandhill Plaza




Potential Catalyst: Better than expected results

Where we differ: Our estimates more conservative than consensus


Price Relative


Gross Revenue 332 343 362 378 Net Property Inc 245 253 262 274 Total Return 273 196 202 213 Distribution Inc 198 203 208 217 EPU (S cts) 10.6 10.9 11.2 11.8 EPU Gth (%) 4 3 3 5 DPU (S cts) 11.2 11.3 11.5 12.0 DPU Gth (%) 8 1 2 4 NAV per shr (S cts) 137 137 136 136 PE (X) 15.6 15.2 14.7 14.0 Distribution Yield (%) 6.8 6.8 7.0 7.3 P/NAV (x) 1.2 1.2 1.2 1.2 Aggregate Leverage (%) 30.3 30.2 30.3 30.4 ROAE (%) 8.0 8.0 8.2 8.6 Distn. Inc Chng (%): - - - Consensus DPU (S cts): 11.1 11.8 12.3 Other Broker Recs: B: 9 S: 1 H: 7


Bring on HP! Maintain BUY, TP S$1.90. We maintain our BUY call and TP of S$1.90 on Mapletree Industrial Trust (MINT) on the back of a steady DPU growth profile of 2.3% over FY17-19F (vs 1.2% industrial REIT average). The REIT offers high earnings visibility and we have confidence that the Manager has the flexibility to execute on more developments to exploit its conservative balance sheet. This implies potential upside to earnings. Steady set of results with upside from 3QFY17 onwards. 2QFY17 (FYE Mar) topline and net property income (NPI) was up 1.8% and 4.3% to S$84.2m and S$63.6m respectively, mainly on the back of higher rentals achieved coupled with better cost containment. As a result, NPI margins came in higher at 75.6% vs 73.8% a year ago. Interest costs were fairly stable. As a result, distributable income was 3.4% higher at S$50.6m, but DPU rose a slower 1.4% mainly due to higher units in issue (dividend reinvestment scheme coupled with management fees issued in units previously). Flexibility from low gearing. MINT’s balance sheet is lowly geared at c.30%, which is one of the lowest in the industrial REIT sector, and gives the Manager significant debt-funded capacity for acquisitions or to undertake developments by taking part in built-to-suit projects (BTS) or asset enhancement initiatives. We have not assumed any further acquisitions or developments (apart from those announced) in our forecast. Valuation:

MINT’s resilience is a value trait in this market and has yet to

be reflected in its current share price. We maintain our BUY

call and TP S$1.90.


Rising interest rates An increase in refinancing rates will

negatively impact distributions. However, we note that MINT

has minimised these risks by having c.68% of its interest cost

hedged into fixed rates. At A Glance Issued Capital (m shrs) 1,802

Mkt. Cap (S$m/US$m) 2,964 / 2,082


Mapletree Investments Pte Ltd 34.2

Schroders Plc 7.0

AIA Group 5.0

Free Float (%) 53.8




4 Jan 2017


Mapletree Industrial Trust Version 7 | Bloomberg: MINT SP | Reuters: MAPI.SI Refer to important disclosures at the end of this report

87

107

127

147

167

187

207

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2.0


Relative IndexS$

Mapletree Industrial Trust (LHS) Relative STI (RHS)


Page 2

Company Guide

Mapletree Industrial Trust


Earnings Drivers:

Modest organic growth outlook. MINT has consistently

delivered strong returns to shareholders post IPO, driven mainly

from the marking to market of its leases which were below

market rates. As most of its properties have already undergone

at least one round of reversions, most of the leases are now at

or near-market levels in our view.

With the softening of market rents due to a slowing economy,

we are forecasting rental reversions to moderate further and

expect the Manager to be increasingly focused on maintaining

occupancies, a strategy which we believe will result in the trust

delivering steady dividends in an increasingly competitive

environment.

MINT’s earnings growth outlook is double that of the industrial

REIT average. With organic growth slowing, the next thrust of

growth will come from the completion of its built-to-suit project

from HP, which emerges from the redevelopment of the Telok

Blangah cluster (expected TOP for phases 1 and 2 in 2H16 and

1H17 respectively).

Contribution from the new HP property will be timely just when

the REIT is facing rental pressure on its portfolio. The

restructuring of the rent free is a positive surprise. The

redistribution of the six-month rent free for both phase 1

(completing in 4QCY16) and phase 2 (completing in 2QCY17)

over the first 18 months will mean a more even distribution in

topline and costs for the REIT. This implies minimal downside

risk to DPUs in 2017 which has been a concern for investors.

Instead, we now see a steady growth profile of 2.3% over

FY17-FY19 vs industrial average of 1.2%.

Development projects in Kallang Basin cluster to optimise

portfolio rent. MINT has also kick-started the development of a

new hi-tech building at Kallang Basin cluster 4 at an estimated

cost of S$77m, returning c.8% when completed in 4Q17. We

believe that demand for the property will be strong given the

good location in the central part of Singapore. The Manager has

ample headroom to fund this development.

Low gearing a positive. MINT’s gearing is low at close to 30%,

makes it one of the lowest-geared industrial REITs, offering the

Manager significant debt-funded capacity for acquisitions or to

undertake development by taking part in built-to-suit projects

(BTS) or asset enhancement initiatives. With a centrally located

industrial portfolio, we believe that there is an opportunity to do

more re-development projects which will be value accretive (to

NAV and DPUs).




Interest Cover (x)


68.8%

70.8%

72.8%

74.8%

76.8%

78.8%

80.8%

0

50

100

150

200

250

300

2015A 2016A 2017F 2018F 2019F

S$ m


70%

71%

72%

73%

74%

75%

76%

77%

53

55

57

59

61

63

65

1Q20

15

2Q20

15

3Q20

15

4Q20

15

1Q20

16

2Q20

16

3Q20

16

4Q20

16

1Q20

17

2Q20

17


0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

2015A 2016A 2017F 2018F 2019F

(x)

7.70

7.80

7.90

8.00

8.10

8.20

8.30

8.40

8.50

8.60

2015A 2016A 2017F 2018F 2019F

(x)


Page 3

Company Guide


Balance Sheet:

Low gearing allows for opportunistic acquisitions,

developments. Current gearing is conservative, implying that

the Manager has the capability to take on debt-funded

acquisitions when the opportunity arises. The Manager will be

utilising its headroom towards higher-yielding development

projects (built-to-suit project for HP and Kallang Basin cluster 4)

which we estimate to yield 8-9%, which is higher than

acquisitions. Post development, we believe gearing will still be

within management's comfortable level at around 30%.

Stable weighted average debt-to-maturity. MINT has a well-

staggered debt profile with a majority of debt due for

repayment only from FY17/18 onwards. With c.68% of its

borrowings on fixed interest rates, MINT is well protected

against future increases in interest rates.


Better-than-expected rental reversions/acquisitions will boost

earnings and share price. We are forecasting modest rental

uplifts of 0-3%. The REIT's ability to maintain or beat

expectations will mean upside to our/consensus forecasts. In

addition, acquisitions or further development projects which are

accretive to earnings will likely result in upside to TP and share

price.

Key Risks:

Rising interest rates. An increase in refinancing rates will

negatively impact distributions. However, MINT has minimised

the impact as c.80% of its interest cost has been fixed.

Economic risk. A deterioration of the economic outlook could

have a negative impact on industrial rents and occupancies as

companies cut back on production and require less space.

Industrial rents have a strong historical correlation with GDP

growth.

Company Background

Mapletree Industrial Trust (MINT) is a real estate investment

trust which invests primarily in income-producing industrial

assets located in Singapore. Its portfolio includes a diverse mix

of business parks, science parks, ramp-up warehouses and

flatted factories.


ROE (%)


PB Band (x)


10.0%

15.0%

20.0%

25.0%

30.0%

2015A 2016A 2017F 2018F 2019F

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

2015A 2016A 2017F 2018F 2019F

Avg: 6.9%

+1sd: 7.2%

+2sd: 7.6%

-1sd: 6.6%

-2sd: 6.2%

5.2

5.7

6.2

6.7

7.2

7.7

8.2

2013 2014 2015 2016

(%)

Avg: 1.19x

+1sd: 1.26x

+2sd: 1.32x

-1sd: 1.13x

-2sd: 1.06x

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6


(x)


Page 4

Company Guide



FY Mar 2015A 2016A 2017F 2018F 2019F

Gross revenue 314 332 343 362 378

Property expenses (85.3) (86.5) (90.1) (99.8) (103)






Net Income 178 191 196 202 213

Tax (1.1) 0.0 0.0 0.0 0.0




Total Return 374 273 196 202 213

Non-tax deductible Items (194) (74.8) 6.99 5.53 4.06


Growth & Ratio

Revenue Gth (%) 4.9 5.6 3.5 5.5 4.4


Net Inc Gth (%) 8.2 7.7 2.9 3.1 5.1




Dist to revenue (%) 57.6 59.7 59.2 57.4 57.3


8.6 8.7 8.9 8.6 8.3

ROAE (%) 8.2 8.0 8.0 8.2 8.6

ROA (%) 5.2 5.3 5.3 5.4 5.6

ROCE (%) 6.0 6.2 6.2 6.3 6.6

Int. Cover (x) 8.6 8.4 8.4 8.0 8.0


Driven mainly from the contribution from HP building


Page 5

Company Guide



FY Mar 2Q2016 3Q2016 4Q2016 1Q2017 2Q2017

Gross revenue 82.7 83.3 84.0 84.1 84.2







Net Income 47.4 48.2 48.3 50.1 49.7

Tax 0.0 0.0 0.0 0.0 0.0



Total Return 47.4 48.2 130 50.1 49.7

Non-tax deductible Items 1.51 2.08 (79.9) 1.38 0.89


Growth & Ratio

Revenue Gth (%) 1 1 1 0 0

N Property Inc Gth (%) 1 1 0 3 0

Net Inc Gth (%) 2 2 0 4 (1)



Balance Sheet (S$m)

FY Mar 2015A 2016A 2017F 2018F 2019F Investment Properties 3,424 3,558 3,660 3,702 3,706

Other LT Assets 3.63 0.36 0.36 0.36 0.36

Cash & ST Invts 72.0 54.3 78.8 38.6 42.5

Inventory 0.0 0.0 0.0 0.0 0.0

Debtors 16.2 11.4 16.4 17.3 18.1


Total Assets 3,516 3,624 3,755 3,758 3,767

ST Debt

125 47.4 47.4 47.4 47.4

Creditor 70.3 79.7 100 106 110


LT Debt 949 974 1,089 1,089 1,094






Net Cash/(Debt) (1,003) (967) (1,057) (1,098) (1,099)

Ratio

Current Ratio (x) 0.5 0.5 0.6 0.4 0.4

Quick Ratio (x) 0.5 0.5 0.6 0.4 0.4


Z-Score (X) 1.7 1.9 1.7 1.7 1.7


Gearing to remain steady at close to 30%.


Page 6

Company Guide



FY Mar 2015A 2016A 2017F 2018F 2019F

Pre-Tax Income 178 191 196 202 213

Dep. & Amort. 0.0 0.0 0.0 0.0 0.0

Tax Paid (1.0) 0.0 0.0 0.0 0.0


Chg in Wkg.Cap. (4.7) 14.3 15.6 4.58 3.90


Net Operating CF 205 220 215 210 219

Net Invt in Properties (54.5) (43.5) (102) (42.1) (3.8)

Other Invts (net) 0.0 0.0 0.0 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0



Net Investing CF (54.5) (43.5) (102) (42.1) (3.8)

Distribution Paid (97.5) (115) (203) (208) (217)

Chg in Gross Debt (54.3) (53.5) 115 0.0 5.00

New units issued 0.0 0.0 0.0 0.0 0.0


Net Financing CF (174) (194) (88.1) (208) (212)


Chg in Cash (23.8) (17.6) 24.5 (40.2) 3.95


Free CFPS (S cts) 8.62 9.78 6.25 9.29 11.9



Source: DBS Bank

Analyst: Derek TAN


Mervin SONG CFA

S.No.Date of

Report

Closing

Price

12-mth

Target

Price

Rat ing

1: 26 Apr 16 1.64 1.64 BUY

2: 12 Jul 16 1.79 1.81 HOLD

3: 27 Jul 16 1.78 1.90 BUY

4: 22 Aug 16 1.77 1.90 BUY


1

2

3

4

1.40

1.50

1.60

1.70

1.80

1.90

Oct-15 Feb-16 Jun-16 Oct-16

S$




Potential Catalyst: In line

Where we differ: Estimates are in line with consensus


Price Relative


Gross Revenue 350 360 375 390 Net Property Inc 291 299 316 327 Total Return 190 172 182 187 Distribution Inc 183 179 185 188 EPU (S cts) 7.66 6.91 7.29 7.53 EPU Gth (%) 20 (10) 5 3 DPU (S cts) 7.38 7.19 7.41 7.57 DPU Gth (%) (2) (3) 3 2 NAV per shr (S cts) 102 101 101 101 PE (X) 13.3 14.8 14.0 13.5 Distribution Yield (%) 7.2 7.1 7.3 7.4 P/NAV (x) 1.0 1.0 1.0 1.0 Aggregate Leverage (%) 39.5 37.0 37.5 37.5 ROAE (%) 7.5 6.8 7.2 7.4 Distn. Inc Chng (%): - - - Consensus DPU (S cts): 7.30 7.50 7.80 Other Broker Recs: B: 7 S: 0 H: 9


Firepower to acquire

Maintain BUY, TP S$1.15. Mapletree Logistics Trust (MLT) is

emerging stronger post balance sheet recapitalisation and we

see acquisitions as a catalyst to drive earnings and share price

upside. With firepower to execute on strategic purchases, MLT

remains on a growth path. BUY maintained, yield of 7.0-7.2% is

attractive for a strong quality name.

Acquisitions and developments to drive growth The issuance of

S$250m perpetual securities in May 2016 @ 4.18% has enabled

MLT to lock in attractive long-term funding for the REIT. Since

then, MLT has deployed close to S$161m and we see more

acquisitions in the pipeline. We believe that opportunities will

come from its Sponsor, and third parties in Australia, Korea, and

China. Acquisitions should more than compensate for

weaknesses in the various markets that MLT operates in.

2Q16 results in line. Top line and net property income are up

4.7% and 5.3% y-o-y to S$91.5m and S$76.8m respectively.

Higher revenues were mainly driven from acquisitions

(portfolio expanded by six properties to 124 as of 2QFY17).

Distributable income is up by 1.0% while DPU is flat mainly

due to higher interest incurred on the issuance of close to

S$250m worth of perpetual securities.

Valuation:

We upgrade our BUY call and TP at S$1.15 which has imputed

acquisitions in our forecasts.


Acquisitions ramping up faster than expected. A faster-than-

projected acquisition pace or a better-than-expected outlook

for the Singapore warehouse market will translate to positive

surprises to earnings estimates, and re-rate the stock higher. At A Glance Issued Capital (m shrs) 2,500

Mkt. Cap (S$m/US$m) 2,550 / 1,785


Temasek Holdings Private Ltd 39.4

Free Float (%) 60.5




4 Jan 2017


Mapletree Logistics Trust Version 5 | Bloomberg: MLT SP | Reuters: MAPL.SI Refer to important disclosures at the end of this report

82

102

122

142

162

182

202

222

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5


Relative IndexS$

Mapletree Logistics Trust (LHS) Relative STI (RHS)


Page 2

Company Guide

Mapletree Logistics Trust


Earnings Drivers:

Pressure on margins to ease as pace of property conversions

slow. We are forecasting a modest decline/flattish outlook for

distributions over FY17F-18F on the back of ongoing headwinds

from a weakening rental outlook in Singapore and also Korea.

However, downside risk is expected to ease given the lower

pace of conversions. This stems from efficiency loss and higher

vacancy rates as master-tenants look to return un-utilised space

in the assets. Looking ahead, with only 10.1% of leases left to

be renewed in FY17, we believe downside risk should be

marginal.

Acquisitions to buffer against modest organic growth prospects.

The issuance of S$250m perpetual securities in May 2016 was

locked in at 4.18%, a good rate in our view. Since then, MLT

has deployed close to S$161m into four properties in Australia

(c.S$84.4m), and one each in Vietnam and Malaysia at yields of

c.7.1-9.9%. The Manager remains on a lookout for acquisitions,

targeting to deploy capital from its recent perpetual issuance.

Based on a S$161m worth of deals announced year-to-date, the

Manager is looking to deploy a further S$90m in opportunities.

Markets of Australia and from the Sponsor's pipeline remain key

sources of acquisition possibilities. Apart from that, the

Manager is keen to re-deploy capital through selective

divestments. They are reviewing potential sale of mature, low-

yielding assets in Japan, China and Malaysia.

In the longer term, we see a sizeable and growing pipeline of

development properties from the Sponsor, Mapletree

Investments that is available for MLT to acquire in the medium

term. Potential assets for acquisitions are mainly in the

development stages across Asia, especially in China, Japan, HK

and Vietnam, where demand for logistics warehouses remains

robust. China remains a key growth area, where the

proliferation of e-commerce will drive demand for more logistic

space.

Development projects to drive value in the medium term. MLT

has completed the AEI at Mapletree Logistics Hub in Toh Guan

(GFA expanded by 2.7x to 63,500 sqm). Occupancy is estimated

to be c.92% as of 2Q16. There is another development project

in the works at 76 Pioneer Road, which will develop into a 5-

storey ramp-up warehouse, increasing its GFA by 1.8x to

72,000 sqm. This project will complete in 3QFY18F.




Interest Cover (x)


79.0%

81.0%

83.0%

85.0%

87.0%

89.0%

91.0%

0

50

100

150

200

250

300

350

400

2015A 2016A 2017F 2018F 2019F

S$ m


81%

81%

82%

82%

83%

83%

84%

84%

85%

85%

86%

65

67

69

71

73

75

77

79

1Q20

15

2Q20

15

3Q20

15

4Q20

15

1Q20

16

2Q20

16

3Q20

16

4Q20

16

1Q20

17

2Q20

17


0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

2015A 2016A 2017F 2018F 2019F

(x)

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

2015A 2016A 2017F 2018F 2019F

(x)


Page 3

Company Guide


Balance Sheet:

Gearing of c.38% remains within management's comfortable

range. Post the issuance of S$250m in perpetual securities to

fund acquisitions, we project gearing to settle around c.38%.

With a fairly optimised balance sheet, we believe that the

Manager may need to raise new equity if any acquisition

opportunity arises in the medium term.

Well-staggered debt maturity profile; interest cost remains

stable. Interest rates remain stable at 2.3%, and are expected to

remain low given that a majority of its debts are in JPY, HKD

and RMB, where interest rates in those currencies are still soft.

To hedge against currency volatility, the Manager typically takes

on local-denominated loans (pegged to the maximum of asset

values in each overseas market).

MLT has a long debt-to-maturity (3.76 years as at end-2QFY17)

and proactively renews its loans ahead of time.

Potential buy-back of perpetual in September 2017. Given the

strong demand for launch of perpetual securities (S$250m @

4.18%), we see the potential for MLT to refinance its first

tranche of perpetual securities (S$350m @ 5.375%) to a lower

rate. The first callable date will be in September 2017. A 1%

drop in coupon will mean S$3.5m in savings (c.1.5% of

distributions).


Ability to drive growth through acquisitions. We remain

optimistic on the Trust's ability to drive growth through

acquisitions. After its first foray into Australia, we see the Trust

further deepening its exposure through strategic purchases over

the medium term. The Manager is also looking to divest low-

yielding assets in Singapore and Japan, and re-cycle the

proceeds into higher-yielding assets.

The deployment of proceeds from recent perpetual issues will

mean upside to earnings.

Key Risks:

Rise in interest rates. The Manager has hedged the majority of

its debt into fixed rates but is expected to see increased cost of

funds when these loans are rolled over in the coming year.

Company Background

Mapletree Logistics Trust (MLT) is a real estate investment trust

which invests in logistics warehouses in the Asia Pacific region.

It currently owns warehouses in Singapore, Japan, China,

South Korea, Vietnam, Australia and Hong Kong.


ROE (%)


PB Band (x)


10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

2015A 2016A 2017F 2018F 2019F

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2015A 2016A 2017F 2018F 2019F

Avg: 6.7%

+1sd: 7.3%

+2sd: 7.9%

-1sd: 6.1%

-2sd: 5.5%

4.6

5.1

5.6

6.1

6.6

7.1

7.6

8.1

8.6

2013 2014 2015 2016

(%)

Avg: 1.11x

+1sd: 1.23x

+2sd: 1.34x

-1sd: 1x

-2sd: 0.88x

0.7

0.9

1.1

1.3

1.5

1.7


(x)


Page 4

Company Guide



FY Mar 2015A 2016A 2017F 2018F 2019F

Gross revenue 330 350 360 375 390







Net Income 205 235 214 227 234

Tax (29.1) (25.8) (15.0) (15.9) (16.4)


Preference Dividend (18.8) (18.9) (26.7) (29.3) (29.3)


Total Return 241 190 172 182 187

Non-tax deductible Items (56.1) (6.9) 2.00 1.00 1.00


Growth & Ratio

Revenue Gth (%) 6.2 6.0 2.9 4.2 3.8


Net Inc Gth (%) (16.2) 21.1 (9.5) 5.5 3.3




Dist to revenue (%) 56.0 52.4 49.8 49.2 48.4


7.4 16.3 12.1 11.5 11.1

ROAE (%) 6.4 7.5 6.8 7.2 7.4

ROA (%) 3.4 3.8 3.3 3.4 3.5

ROCE (%) 4.9 4.3 4.6 4.9 5.0

Int. Cover (x) 7.8 5.4 6.2 5.9 5.6


Growth driven mainly from acquisitions as organic growth remains modest


Page 5

Company Guide



FY Mar 2Q2016 3Q2016 4Q2016 1Q2017 2Q2017

Gross revenue 87.5 88.9 88.5 89.6 91.6




Other Non Opg (Exp)/Inc (1.5) 3.44 (5.0) (17.2) (9.2)



Net Income 42.3 52.6 37.4 30.9 37.2

Tax (4.5) (6.0) (11.8) (3.5) (4.8)



Total Return 32.9 49.1 57.2 21.5 24.8

Non-tax deductible Items 13.2 (2.6) (12.4) 24.6 21.8


Growth & Ratio

Revenue Gth (%) 3 2 (1) 1 2


Net Inc Gth (%) (35) 27 (50) 3 15



Balance Sheet (S$m)

FY Mar 2015A 2016A 2017F 2018F 2019F Investment Properties 4,631 5,070 5,311 5,355 5,359

Other LT Assets 12.4 14.8 14.8 14.8 14.8

Cash & ST Invts 107 93.3 3.83 6.89 11.3

Inventory 0.0 0.0 0.0 0.0 0.0

Debtors 20.5 18.2 9.00 9.38 9.74


Total Assets 4,788 5,207 5,350 5,397 5,406

ST Debt

56.7 234 234 234 234

Creditor 164 154 120 125 130


LT Debt 1,575 1,824 1,747 1,791 1,795

Other LT Liabilities 94.6 111 111 111 111




Non-Cash Wkg. Capital (136) (130) (116) (121) (126)

Net Cash/(Debt) (1,525) (1,965) (1,978) (2,018) (2,018)

Ratio

Current Ratio (x) 0.6 0.3 0.1 0.1 0.1

Quick Ratio (x) 0.6 0.3 0.0 0.0 0.1


Z-Score (X) 1.0 0.8 0.8 0.8 0.8


Gearing remains stable


Page 6

Company Guide



FY Mar 2015A 2016A 2017F 2018F 2019F

Pre-Tax Income 205 235 214 227 234

Dep. & Amort. 0.0 0.0 0.0 0.0 0.0

Tax Paid (3.9) (3.7) (5.2) (15.0) (15.9)


Chg in Wkg.Cap. (0.8) (7.0) (24.5) 4.65 4.45


Net Operating CF 236 231 185 217 222

Net Invt in Properties (247) (389) (242) (43.8) (3.9)

Other Invts (net) 0.0 0.0 0.0 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0


Other Investing CF 0.82 (0.6) 0.0 0.0 0.0

Net Investing CF (246) (390) (242) (43.8) (3.9)


Chg in Gross Debt 207 426 (76.8) 43.8 3.90

New units issued 0.0 17.9 0.0 0.0 0.0

Other Financing CF (29.9) (18.9) 223 (29.3) (29.3)

Net Financing CF 0.08 242 (32.5) (170) (214)


Chg in Cash (7.4) 83.3 (89.5) 3.06 4.39


Free CFPS (S cts) (0.5) (6.4) (2.3) 6.95 8.76



Source: DBS Bank

Analyst: Derek TAN


Mervin SONG CFA

S.No.Date of

Report

Closing

Price

12-mth

Target

Price

Rat ing

1: 08 Jan 16 0.99 1.15 BUY

2: 04 Feb 16 0.94 1.15 BUY

3: 03 May 16 1.05 1.10 HOLD

4: 31 May 16 0.98 1.10 HOLD

5: 27 Jul 16 1.08 1.15 BUY

6: 22 Aug 16 1.08 1.15 BUY

7: 26 Oct 16 1.06 1.15 BUY


1 2

3

4

5

6

7

0.86

0.91

0.96

1.01

1.06

1.11


S$





Where we differ: In line with consensus Analyst Mervin SONG CFA +65 6682 3715 [email protected] Derek TAN +65 6682 3716 [email protected]

Price Relative


Gross Revenue 101 177 178 177 Net Property Inc 75.6 137 138 137 Total Return 79.2 43.0 42.2 39.8 Distribution Inc 56.1 69.0 68.3 65.9 EPU (S cts) 5.09 3.31 3.23 3.02 EPU Gth (%) nm (35) (3) (7) DPU (S cts) 4.38 5.30 5.22 4.99 DPU Gth (%) (8) 21 (2) (4) NAV per shr (S cts) 94.6 93.6 92.7 91.9 PE (X) 13.7 21.0 21.5 23.1 Distribution Yield (%) 6.3 7.6 7.5 7.2 P/NAV (x) 0.7 0.7 0.7 0.8 Aggregate Leverage (%) 37.5 37.5 37.5 37.6 ROAE (%) 5.2 3.5 3.4 3.2 Distn. Inc Chng (%): 0 0 0 Consensus DPU (S cts): 5.1 5.2 5.2 Other Broker Recs: B: 1 S: 0 H: 3


Concerns to weigh on share price Impediments to re-rating. We maintain our HOLD call for OUE Commercial REIT (OUECT) and a TP of S$0.74. While we see long term value in OUECT as it trades at over 20% discount to its book value and offers >7% yield, we believe the stock will be range bound near term, due to its above-average gearing (around 41%), relatively small capitalisation and fears over falling office rents ahead of new office supply in 2017. Uplift from One Raffles Place (ORP). With an income support arrangement providing income stability to OUE Bayfront, contributing a third of net property income (NPI) till 2018, earnings upside would come from driving a better performance at ORP. With initial yield estimated at 3.4%, the Manager is actively seeking to push occupancy rates closer to c.95% from c.91% currently. Earnings risk possible in FY17. As OUECT’s proactive forward renewals have reduced the number of leases expiring in FY16, the greatest earnings risk for OUECT is in FY17. There are approximately 16% of leases by net lettable area (NLA) at OUE Bayfront and 26% at ORP that are up for renewal in FY17. The risk of negative rental reversions arises as rents for these leases were signed during the better times in FY14/15. The potential magnitude of falling rents is still uncertain as it is unclear how aggressive the management of the new office buildings will be in discounting rental rates. Valuation:

We maintain our DCF-based TP of S$0.74.


The key risk to our view is a greater-than-expected fall in spot

Grade A office rents to below S$7 per square foot per month

(psf/mth). At A Glance Issued Capital (m shrs) 1,298

Mkt. Cap (S$m/US$m) 902 / 622


OUE Realty Pte Ltd 65.1

Tong Gordon 5.9

Free Float (%) 29.0




4 Jan 2017


OUE Commercial REIT Version 6 | Bloomberg: OUECT SP | Reuters: OUEC.SI Refer to important disclosures at the end of this report


Page 2

Company Guide

OUE Commercial REIT


Earnings Drivers:

Prime office assets in the Central Business District (CBD). OUE

Commercial Trust (OUECT) comprises three Grade A commercial

assets – OUE Bayfront Property and One Raffles Place (ORP) in

downtown Central Business District in Singapore, and Lippo

Plaza Property in Shanghai, China. The REIT’s total asset under

management (AUM) is S$3.4bn, where Singapore contributes

close to c.84% of the value.

Better earnings diversity from the acquisition of a quality asset.

The acquisition of ORP (completed in October 2015) was a

significant milestone for OUECT as the acquisition more than

doubled OUECT’s Singapore NLA (to c.1m sqft from c.400k

presently) and portfolio size. From an operational standpoint,

we see increased flexibility for the property manager to cross-

sell and expand its addressable tenant base, as ORP is a

different office product when compared to OUE Bayfront. This

will thus improve its product offerings to existing and

prospective tenants, as well as result in a higher portfolio

retention rate.

Immediate earnings uplift from ORP to drive earnings growth

through operational optimisation. OUECT's acquisition of the

c.68% beneficial interest in ORP at an average valuation of

S$2,382 psf is attractive in our view. While initial yield is

estimated to be c.3.4%, the Manager has continued to deliver

operationally, through optimising occupancy and rents since

taking over.

Earnings visibility through Sponsor’s income support for OUE

Bayfront till 2018. OUE Bayfront is under an income support

arrangement, whereby the Sponsor has undertaken to top up

any revenue shortfall below S$14.25m per quarter (or S$57m a

year) for a period of five years, up to a maximum sum of

S$50m. This provides earnings visibility and downside protection

amid potential supply-induced market volatility in 2016-17.

With OUECT outperforming its initial estimates and thus

drawing less from the annual income support amount, this

demonstrates the Manager’s flexibility in leasing arrangements

in order to maintain a steady earnings profile going forward.




Interest Cover (x)



Page 3

Company Guide

OUE Commercial REIT

Balance Sheet:

Gearing remains high compared to peers. At c.41% post

acquisition of ORP, OUECT has one of the highest gearing levels

among S-REIT peers, which average in the mid-30’s.

Long debt tenure minimises refinancing risk. OUECT’s weighted

average debt-to-expiry was 1.8 years in 3Q16, with c.78% of

debt hedged into fixed rates for 2.7 years. The REIT will have no

debt expiring until FY17, reducing near-term refinancing risk.


Lower gearing level will partly allay concerns. We believe that

the recent lacklustre share price performance could be due to

OUECT’s higher gearing versus the S-REITs’ average of c.35%.

Given a deteriorating office outlook, investors are concerned

that OUECT may need to raise further equity to shore up its

balance sheet in the event of deterioration in office values,

resulting in the REIT breaching the 45% gearing limit.

Rebound in operational results. The office market is on a

downtrend, in our view, given looming supply in the midst of

weak demand for space. While OUECT has still been able to

achieve positive rental reversions for 9M16, we believe this will

moderate with risk of negative reversions ahead.

Key Risks:

Concentration risk. While the acquisition of ORP will diversify

asset-specific risks, OUECT is still heavily exposed to

Singapore’s CBD office market via ORP and OUE Bayfront,

which account for >80% of earnings. Any downturn or

weakness in the Singapore office market could have a

significant negative impact on ORP, and the REIT.

Decline in office rents. Given the expected increase in office

supply over the next two years, there is risk that office rents

could fall beyond our expectations, causing OUECT to miss our

DPU estimates.

Interest rate risk. A rise in interest rate will have a negative

impact on distributions. However, the Manager is actively

overseeing its exposure through forward hedges and has

c.78% of its interest cost hedged into fixed rates with a fairly

long duration of 2.7 years.

Company Background

OUE Commercial REIT (OUECT) is an office REIT with a

portfolio of office assets located in prime CBD locations in

Singapore and China.


ROE (%)


PB Band (x)



Page 4

Company Guide

OUE Commercial REIT


FY Dec 2015A 2016F 2017F 2018F

Gross revenue 101 177 178 177


Net Property Income 75.6 137 138 137


Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0


Exceptional Gain/(Loss) 32.1 0.0 0.0 0.0

Net Income 69.3 63.7 63.5 61.0

Tax (10.4) (13.4) (13.9) (13.9)

Minority Interest (1.5) (7.3) (7.3) (7.3)



Total Return 79.2 43.0 42.2 39.8

Non-tax deductible Items (21.8) 31.3 31.4 31.4


Growth & Ratio

Revenue Gth (%) 41.2 75.0 0.8 (0.8)

N Property Inc Gth (%) 40.5 81.0 0.8 (0.8)

Net Inc Gth (%) nm (25.1) (1.7) (5.7)




Dist to revenue (%) 55.5 39.0 38.3 37.3


12.3 10.4 9.6 8.9

ROAE (%) 5.2 3.5 3.4 3.2

ROA (%) 2.2 1.2 1.2 1.1

ROCE (%) 2.1 2.7 2.8 2.7

Int. Cover (x) 2.4 2.2 2.1 2.0


Driven mainly by better performance at Lippo Plaza, offsetting weakness in Singapore


Page 5

Company Guide

OUE Commercial REIT


FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016

Gross revenue 20.6 40.3 42.9 45.7 44.2



Other Operating expenses 0.03 (9.3) (3.5) (4.4) (4.1)

Other Non Opg (Exp)/Inc 0.28 30.6 (0.4) (0.3) 0.01



Net Income 10.4 61.4 15.7 16.8 17.1

Tax (1.3) (6.5) (3.9) (4.5) (4.4)



Total Return 8.04 53.5 9.97 10.7 11.0

Non-tax deductible Items 5.05 (34.6) 8.44 8.45 7.58


Growth & Ratio

Revenue Gth (%) 5 96 6 6 (3)

N Property Inc Gth (%) 6 91 12 6 0

Net Inc Gth (%) (3) 502 (79) 5 3



Balance Sheet (S$m)

FY Dec 2015A 2016F 2017F 2018F Investment Properties 3,403 3,408 3,414 3,419

Other LT Assets 21.4 21.4 21.4 21.4

Cash & ST Invts 25.9 48.8 56.5 63.3

Inventory 0.0 0.0 0.0 0.0

Debtors 13.6 12.3 12.4 12.3


Total Assets 3,464 3,491 3,504 3,516

ST Debt

1.73 1.73 1.73 1.73

Creditor 54.1 68.2 68.8 68.2


LT Debt 1,302 1,307 1,313 1,318


Unit holders’ funds 1,762 1,762 1,762 1,762

Minority Interests 233 240 248 255

Total Funds & Liabilities 3,464 3,491 3,504 3,516

Non-Cash Wkg. Capital (51.4) (66.9) (67.3) (66.9)

Net Cash/(Debt) (1,278) (1,260) (1,258) (1,257)

Ratio

Current Ratio (x) 0.6 0.8 0.8 0.9

Quick Ratio (x) 0.6 0.8 0.8 0.9




Page 6

Company Guide

OUE Commercial REIT


FY Dec 2015A 2016F 2017F 2018F

Pre-Tax Income 69.3 63.7 63.5 61.0

Dep. & Amort. 4.24 0.0 0.0 0.0

Tax Paid (1.6) (13.4) (13.9) (13.9)


Chg in Wkg.Cap. (3.4) 15.5 0.45 (0.5)


Net Operating CF 77.6 97.1 81.3 78.0

Net Invt in Properties (594) (5.3) (5.4) (5.3)

Other Invts (net) 0.0 0.0 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0


Other Investing CF (1.2) 0.0 0.0 0.0

Net Investing CF (595) (5.3) (5.4) (5.3)


Chg in Gross Debt 363 5.31 5.35 5.30

New units issued 212 0.0 0.0 0.0

Other Financing CF (12.6) (5.3) (5.3) (5.3)

Net Financing CF 512 (69.0) (68.2) (65.9)

Currency Adjustments 2.50 0.0 0.0 0.0

Chg in Cash (2.8) 22.8 7.78 6.81


Free CFPS (S cts) (45.8) 7.08 5.81 5.50



Source: DBS Bank


Derek TAN




Potential Catalyst: Acquisitions and better than expected results

Where we differ: Below consensus on expectations of recovery in the

Singapore hospitality market in 2018


Price Relative


Gross Revenue 125 116 120 125 Net Property Inc 109 101 105 109 Total Return 77.7 62.5 67.8 69.6 Distribution Inc 87.4 77.2 81.6 83.7 EPU (S cts) 5.21 3.86 3.76 3.84 EPU Gth (%) (6) (26) (2) 2 DPU (S cts) 6.07 4.30 4.52 4.60 DPU Gth (%) (3) (29) 5 2 NAV per shr (S cts) 83.6 80.1 79.4 78.7 PE (X) 13.2 17.8 18.2 17.8 Distribution Yield (%) 8.9 6.3 6.6 6.7 P/NAV (x) 0.8 0.9 0.9 0.9 Aggregate Leverage (%) 41.8 37.6 37.7 37.7 ROAE (%) 6.2 4.7 4.7 4.9 Distn. Inc Chng (%): (1) 0 - Consensus DPU (S cts): 44.5 5.0 5.2 Other Broker Recs: B: 3 S: 0 H: 4


Keep the faith Boost from timely acquisition. We reiterate our BUY call with a TP of S$0.72. While we now expect the recovery in the Singapore hospitality market to only occur in 2018 from 2017, OUE Hospitality Trust (OUEHT) is one of the best-positioned hospitality REITs to ride out near term headwinds. In fact, through the rebasing of its DPU in FY16 and its timely acquisition of Crown Plaza Changi Airport extension (CPEX) OUEHT should still deliver healthy 5% growth in DPU in 2017. Multiple levers to pull to drive earnings in 2017. We expect Mandarin Orchard Singapore (MOS) to report a 4% decline in revenue per available room (RevPAR) in FY17 versus 0% growth previously. However, we believe DPU growth is still achievable in 2017. This is underpinned by full year contribution of CPEX, draw down of S$7.5m income support for CPEX, as well as the increased contribution from Mandarin Gallery following the opening of the Michael Kors and Victoria Secret stores in 2H16. Removal of overhang. OUEHT’s share price corrected over the past year due to the overhang from (1) potential capital raising to fund the acquisition of CPEX, and (2) gearing that was over 40%. However, these concerns have now been addressed, following the recent rights issue which resulted in OUEHT’s gearing falling to c.37%. Valuation:


incorporated delayed expectations for a recovery in the

Singapore hospitality market from 2017 to 2018.


Competitive landscape. The key risk to our view is a weaker-

than-expected outlook for the Singapore hospitality market. In

addition, rents at Mandarin Gallery may fall below

expectations if there is a significant deterioration in the

Singapore retail scene. At A Glance Issued Capital (m shrs) 1,790

Mkt. Cap (S$m/US$m) 1,226 / 852


OUE Realty Ptd Ltd 40.0

Free Float (%) 60.0




4 Jan 2017


OUE Hospitality Trust Version 6 | Bloomberg: OUEHT SP | Reuters: OUER.SI Refer to important disclosures at the end of this report

75

95

115

135

155

175

195

215

0.6

0.7

0.7

0.8

0.8

0.9

0.9

1.0

1.0

Aug-13 Aug-14 Aug-15 Aug-16

Relative IndexS$

OUE Hospitality Trust (LHS) Relative STI (RHS)


Page 2

Company Guide

OUE Hospitality Trust


Earnings Drivers:

Increased contribution from Crowne Plaza Changi Airport. The

main earnings driver for OUEHT over the coming year is the

increased contribution from the acquisition of the Crown Plaza

Changi Airport extension (CPEX) in August 2016 which will add

another 243 rooms to the 320-room Crowne Plaza Changi

Airport (CPCA) acquired on 30 January 2015. The enlarged

CPCA caters to transit passengers as well as visitors to the

Singapore Expo and businesses at Changi Business Park. The

property offers OUEHT exposure to a submarket that has limited

competition, and is a diversification away from Mandarin

Orchard which is more focused on the tourism market. While

underlying contribution from CPEX is likely to be lower than

originally anticipated, this is mitigated by S$7.5m worth of

income support that OUEHT is available for draw down over

three years.

Stability from fixed rentals. Besides having a more diversified

portfolio following the acquisitions of CPCA and CPEX, a

significant proportion of OUEHT’s earnings is stable and visible.

This arises from minimum S$45m rental from its Sponsor for

Mandarin Orchard, and S$22.5m from Crown Plaza Changi

Airport.

Recovery at Mandarin Gallery. In 2016, Mandarin Gallery Mall

suffered from a dip in occupancies, negative rental reversions

and fit out period associated with the new Michael Kors and

Victoria Secret stores. Nevertheless, earnings from the property

should recover in 2016, as occupancies have since recovered

and the retail mall will no longer contend with the loss of

income from the fit out period for Michael Kors and Victoria

Secret.

Short-term headwinds at Mandarin Orchard but supply

constrained in the medium term. OUEHT’s Mandarin Orchard

(MOS) hotel faces some short-term headwinds due to the 5-6%

p.a. growth in new hotel rooms in 2016 and 2017 as well as

weak corporate demand. This is likely to result in a decline in

RevPAR for MOS. Nevertheless, with the Singapore government

not releasing any new hotel sites for development over the last

two years constraining supply in the medium term, and supply

only projected to only increase by 0.3% in 2018, we expect a

recovery for MOS and the Singapore hospitality market in a

couple of years’ time.

Expansion through acquisitions. Over the medium term, we

expect OUEHT to make DPU-accretive acquisitions to expand its

portfolio of properties. Its sponsor, OUE Limited, owns service

residences at OUE Downtown and a 30% stake in Marina

Mandarin, which are potential acquisition targets for OUEHT. In

addition, we understand the REIT is exploring acquisition

opportunities in Europe, Japan and the US.




Interest Cover (x)


82.7%

84.7%

86.7%

88.7%

90.7%

92.7%

94.7%

96.7%

0

20

40

60

80

100

120

140

160

180

200

2014A 2015A 2016F 2017F 2018F

S$ m


85%

85%

86%

86%

87%

87%

88%

88%

89%

89%

90%

22

23

24

25

26

27

28

29

30

2Q20

14

3Q20

14

4Q20

14

1Q20

15

2Q20

15

3Q20

15

4Q20

15

1Q20

16

2Q20

16

3Q20

16


0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

2014A 2015A 2016F 2017F 2018F

(x)

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

2014A 2015A 2016F 2017F 2018F

(x)


Page 3

Company Guide


Balance Sheet:

Equity raising to fund acquisition. Following the recent S$239m

rights issue (441.9m units at S$0.54 per unit) and acquisition of

Crown Plaza Changi Airport extension, OUEHT’s gearing has

settled around the 37% level.


Delivery of DPU. OUEHT’s share price corrected over the past

year due to the overhang from (1) the potential capital raising

to fund the acquisition of CPEX, (2) gearing that was over 40%

and (3) weakness in the overall Singapore hospitality market.

While the Singapore market is likely to remain weak, having

taken the dilution associated with the rights issue and suffered

lower occupancies and earnings at Mandarin Gallery to secure

Michael Kors and Victoria Secret as tenants in 2016, OUEHT is

poised to deliver DPU growth on the back of the acquisition of

CPEX as well as full contribution from new stores at Mandarin

Gallery. We believe the delivery of an increase in DPU in 2017,

will re-rate OUEHT ahead of a potential recovery in the

Singapore hospitality market in 2018.

Influx of tourists and lack of new supply. The performance of

hospitality REITs is correlated to the growth in tourist arrivals

and hotel supply. Should Singapore receive an influx of tourists,

sentiment towards OUEHT’s stock price will improve. In

addition, with no hotel sites being released by the government

over the last two years, this will constrain supply in the medium

term which should increase OUEHT’s scarcity value over time.

Key Risks:



service its loan. This reduces the income available for

distribution, which will result in lower DPU for unitholders. We

understand c.90% of the group’s borrowings are on fixed

rates.

Competitive landscape. The Singapore hospitality market has

been impacted by a decline in tourist arrivals this year. Any

further deterioration in demand would pose a downside risk to

our earnings estimates.

Company Background

OUE H-Trust is a Singapore-based REIT, with the principal

investment strategy of investing, directly or indirectly, in a

portfolio of income-producing hospitality assets.


ROE (%)


PB Band (x)


10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

2014A 2015A 2016F 2017F 2018F

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

2014A 2015A 2016F 2017F 2018F

Avg: 5.2%

+1sd: 8.3%

+2sd: 11.5%

-1sd: 2%

-1.0

1.0

3.0

5.0

7.0

9.0

11.0

2013 2014 2015 2016 2017

(%)

Avg: 0.93x

+1sd: 1.01x

+2sd: 1.1x

-1sd: 0.84x

-2sd: 0.76x

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

Dec-13 Dec-14 Dec-15 Dec-16

(x)


Page 4

Company Guide



FY Dec 2014A 2015A 2016F 2017F 2018F

Gross revenue 116 125 116 120 125







Net Income 78.7 74.8 62.5 67.8 69.6

Tax 0.0 0.0 0.0 0.0 0.0




Total Return 78.6 77.7 62.5 67.8 69.6



Growth & Ratio

Revenue Gth (%) 128.8 7.5 (6.8) 3.7 4.0


Net Inc Gth (%) 166.5 (5.0) (16.4) 8.4 2.7




Dist to revenue (%) 76.8 70.1 66.5 67.8 66.8


9.6 9.7 11.6 8.4 8.2

ROAE (%) 6.5 6.2 4.7 4.7 4.9

ROA (%) 4.3 3.8 2.8 2.9 3.0

ROCE (%) 5.3 5.1 4.1 4.2 4.4

Int. Cover (x) 6.9 4.4 3.5 3.5 3.4


Growth in distributable income largely due to the full year contribution from recently acquired Crown Plaza Changi extension as well as drawdown of S$7.5m worth of income support.


Page 5

Company Guide



FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016

Gross revenue 32.7 33.0 30.1 26.9 33.3







Net Income 19.9 19.3 16.8 13.2 20.0

Tax 0.0 0.0 0.0 0.0 0.0



Total Return 19.9 22.2 16.8 13.2 19.0



Growth & Ratio

Revenue Gth (%) 10 1 (9) (11) 24

N Property Inc Gth (%) 12 0 (9) (12) 27

Net Inc Gth (%) 17 (3) (13) (22) 52



Balance Sheet (S$m)


Other LT Assets 0.0 6.25 6.25 6.25 6.25

Cash & ST Invts 31.3 31.4 52.2 46.3 39.7

Inventory 0.0 0.0 0.0 0.0 0.0

Debtors 9.27 8.88 8.88 8.88 8.88


Total Assets 1,797 2,101 2,332 2,329 2,326

ST Debt

0.0 292 292 292 292

Creditor 7.19 11.4 11.4 11.4 11.4


LT Debt 583 585 585 585 585






Net Cash/(Debt) (552) (846) (825) (831) (838)

Ratio

Current Ratio (x) 4.2 0.1 0.2 0.2 0.2

Quick Ratio (x) 4.2 0.1 0.2 0.2 0.2


Z-Score (X) 1.2 0.7 0.8 0.8 0.8


Decrease in gearing due to the recent S$239m rights issue


Page 6

Company Guide



FY Dec 2014A 2015A 2016F 2017F 2018F

Pre-Tax Income 78.7 74.8 62.5 67.8 69.6

Dep. & Amort. 0.0 0.0 0.0 0.0 0.0

Tax Paid 0.0 0.0 0.0 0.0 0.0


Chg in Wkg.Cap. (13.8) 0.76 0.0 0.0 0.0


Net Operating CF 87.9 108 74.4 78.8 80.8

Net Invt in Properties (0.1) (293) (210) (3.0) (3.8)

Other Invts (net) 0.0 0.0 0.0 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0



Net Investing CF (0.1) (293) (210) (3.0) (3.8)

Distribution Paid (104) (88.2) (77.2) (81.6) (83.7)

Chg in Gross Debt 0.0 292 0.0 0.0 0.0

New units issued 0.0 0.0 234 0.0 0.0


Net Financing CF (117) 185 156 (81.6) (83.7)


Chg in Cash (29.5) 0.06 20.8 (5.9) (6.6)


Free CFPS (S cts) 6.17 (12.8) (8.4) 4.21 4.25



Source: DBS Bank


Derek TAN

S.No.Date of

Report

Closing

Price

12-mth

Target

Price

Rat ing

1: 06 Jan 16 0.71 0.85 BUY

2: 21 Jan 16 0.69 0.85 BUY

3: 09 May 16 0.67 0.75 BUY

4: 02 Aug 16 0.69 0.75 BUY

5: 05 Sep 16 0.68 0.75 BUY

6: 01 Nov 16 0.69 0.72 BUY


1 2

3

4

5

6

0.60

0.62

0.64

0.66

0.68

0.70

0.72

0.74

0.76

0.78


S$

Net proceeds from recent right issue (441.9m units at S$0.54 per unit)

ASIAN INSIGHTS VICKERS SECURITIES ed: JS/ sa: YM, PY


Price Target 12-mth: S$0.75 (15% total return and 9.3% yield )


Where we differ: More conservative estimates than consensus


Price Relative


Gross Revenue 79.3 85.8 92.7 95.3 Net Property Inc 67.8 72.7 79.4 81.6 Total Return 51.7 51.0 55.7 57.5 Distribution Inc 57.9 58.4 63.3 64.5 EPU (S cts) 5.28 5.32 5.38 5.51 EPU Gth (%) 2 1 1 2 DPU (S cts) 6.49 6.09 6.11 6.18 DPU Gth (%) 5 (6) 0 1 NAV per shr (S cts) 79.8 84.5 78.4 78.4 PE (X) 12.4 12.3 12.2 11.9 Distribution Yield (%) 9.9 9.3 9.3 9.4 P/NAV (x) 0.8 0.8 0.8 0.8 Aggregate Leverage (%) 36.2 35.8 35.6 35.5 ROAE (%) 6.7 6.5 6.9 7.0 Distn. Inc Chng (%): 0 0 0 Consensus DPU (S cts): 6.10 6.30 5.90 Other Broker Recs: B: 4 S: 0 H: 1


A helping hand from the sponsor

Negatives priced in, BUY and TP of S$0.75 maintained. With a

dividend yield of close to 9.0%, Soilbuild Business Space Reit

(SBREIT) offers one of the highest in the industrial space. Despite

operational headwinds, we believe that the worst is over.

SBREIT’s recent asset acquisition will diversify its portfolio, and

updates on back-filling of vacated space at 72 Loyang Way will

increase investor confidence for the stock. Maintain BUY.

Acquisition of Bukit Batok Connection to drive earnings as

portfolio undergoes tenant churn. The timely acquisition of

Bukit Batok Connection from sponsor Soilbuild Group will

diversify the REIT’s earnings and lengthen its weighted average

lease expiry (WALE) to 4.7 years. This more than compensates

for potential operational headwinds from other assets in the

portfolio. In addition, the Manager is actively re-tenanting 72

Loyang Way where Technics is expected to progressively vacate.

We understand that the Manager has found tenants for a

substantial portion of the space but at lower rents.

Look out for asset revaluation. We believe that portfolio

valuation could soften come year end, mainly from weaker net

property income portfolio-wide, and from 72 Loyang Way after

the loss of income from its master tenant. Based on our

estimates, a 10%-20% drop in valuations in its properties will

only result in gearing rising to 37% (from 36% currently), which

is well within the REIT’s comfortable level. Valuation:

We have a DCF-backed TP of S$0.75 which has factored in the

likely NAV devaluation. Maintain BUY, supported by an

attractive yield of over 9.0%.


Interest rate risks. Rise in interest rates in the medium term will

have a negative impact on distributions but the Manager has

substantially hedged out these risks with a high percentage of

fixed-rate borrowings. At A Glance


Mkt. Cap (S$m/US$m) 683 / 471


Chap Huat Lim 24.9

Schroders Plc 8.0

Jinquan Tong 6.9

Free Float (%) 59.4




4 Jan 2017


Soilbuild Business Space Reit Version 6 | Bloomberg: SBREIT SP | Reuters: SBSR.SI Refer to important disclosures at the end of this report


Page 2

Company Guide

Soilbuild Business Space Reit


Earnings Drivers:

Well-staggered lease expiry profile offers income stability.

SBREIT has a healthy weighted average lease-to-expiry (WALE)

profile of 4.7 years by gross rental income as at 3Q16. Within

SBREIT’s portfolio, 49% of net property income is derived from

master lease agreements that provide long-term leases ranging

from 5-15 years which contain annual escalations in the range

of 2.0-5.0%, ensuring a steady growth profile.

Steady occupancy rates; Manager to focus on tenant retention

rate. In view of the increasing supply outlook, the Manager of

SBREIT is looking to forward renew expiring leases with the aim

of maintaining a high level of portfolio occupancy.

Outlook remains modest with rental reversions expected to

moderate for its main properties (West Park Biz Central and

Tuas Connection). Given the competitive industrial landscape,

the Manager is aiming to retain tenants rather than pushing

rents higher, which in our view, is a right strategy to underpin

earnings resiliency.

Acquisitions to drive earnings. The acquisition of Bukit Batok

Connection will contribute from 4Q16. We expect distributions

(and DPUs) to increase q-o-q from the full-quarter contribution

of Bukit Batok Connection. This is expected to compensate for

the expected weakness in rental reversions from WestPark Biz

Central and Tuas Connection 9 and back-filling of vacated

space at 72 Loyang Way. While the property will be leased-back

to the sponsor on a 7–year lease, we understand that

underlying occupancy is improving, currently at c.43%-44%

with tenants from diversified industries taking up space. We

believe that the acquisition provides much needed stability and

visibility to the REIT’s earnings especially coming from the

uncertainty regarding 72 Loyang Way and the general negative

rental reversions felt across the assets in the portfolio

Technics re-tenanting update. Impact of Technics not paying

rent is compensated by the drawdown of cash from 18-month

deposit that SBREIT has called on. As at 3Q16, we understand

that the Manager is already in discussions with a number of

tenants who might be interested to take up the vacated space

as 72 Loyang Way (Technics’ Property) is undergoing a judicial

management process. If these discussions are concluded, most

of the vacated space is expected to be filled up. However, rental

rates are expected to be lower that the estimated c. S$3.0psf

that Technics was paying. That said, we believe that the

successful back-filing of space at 72 Loyang Way will provide

investors with increased comfort on the income stability going

forward.




Interest Cover (x)



Page 3

Company Guide


Balance Sheet:

Gearing remains within management's comfort level. SBREIT's

current gearing remains at the lower end of management’s

range of 35-40% which provides sufficient headroom and

financial flexibility for the REIT to acquire opportunistically.

Prudent capital management; 100% of interest costs hedged

into fixed rates. All-in cost of debt fell marginally to 3.42% from

3.44%. Average debt maturity stays at 3.1 years and interest

rate for 88.5% of borrowings has been fixed.


High yields of >8.0%; one of the highest among S-REITs. SBREIT

currently offers one of the highest yields among industrial REITs.

We believe this is unjustified given the REIT’s superior portfolio

of high-quality industrial assets with a niche exposure in the

business park segment, which is expected to deliver a more

resilient performance than peers. In addition, with 49% of its

income pegged to single-tenant properties, we believe that

SBREIT offers one of the strongest income visibilities among

industrial REITs.

Better-than-expected operational performance. Better-than-

projected rental reversions from its main assets - namely West

Park Biz Central and Tuas Connection - will mean upside to our

DPU forecasts, implying higher TPs. In addition, with investors’

concerns of rising vacancy risks due to increased competition

from new completing supply, the ability to maintain a sustained

occupancy profile will lift investors’ confidence in SBREIT’s ability

to deliver consistent returns over time.

Key Risks:

Higher interest rates. Any increase in refinancing rates will

negatively impact distributions. The Manager has put in place

interest rate swaps/MTNs of 1-4 years to essentially convert

c.98% of its debt into fixed rates.

Company Background

Soilbuild Business Space REIT is a real estate investment trust

that invests in income-producing real estate used primarily for

business space purposes in Singapore. Its flagship asset is

Solaris, located in the one-north business park. The REIT is

backed by Soilbuild Group, a household name in the

construction and real estate business in Singapore.


ROE (%)


PB Band (x)



Page 4

Company Guide



FY Dec 2014A 2015A 2016F 2017F 2018F

Gross revenue 68.1 79.3 85.8 92.7 95.3







Net Income 42.1 47.1 51.0 55.7 57.5

Tax 0.0 0.0 0.0 0.0 0.0




Total Return 42.1 51.7 51.0 55.7 57.5



Growth & Ratio

Revenue Gth (%) 177.4 16.4 8.1 8.1 2.7


Net Inc Gth (%) 180.7 12.0 8.2 9.3 3.2




Dist to revenue (%) 73.6 72.9 68.1 68.3 67.7


9.6 9.8 9.9 9.1 8.0

ROAE (%) 6.5 6.7 6.5 6.9 7.0

ROA (%) 4.2 4.2 4.0 4.2 4.3

ROCE (%) 5.1 5.3 5.1 5.4 5.6

Int. Cover (x) 5.3 4.7 4.9 4.7 4.5


Driven by acquisitions


Page 5

Company Guide



FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016

Gross revenue 20.7 20.4 20.1 19.6 19.7







Net Income 12.5 12.0 12.4 12.4 12.1

Tax 0.0 0.0 0.0 0.0 0.0



Total Return 12.5 16.5 12.4 12.4 12.1

Non-tax deductible Items 2.65 (1.4) 2.24 2.31 2.47


Growth & Ratio

Revenue Gth (%) 6 (1) (1) (3) 1

N Property Inc Gth (%) 6 (2) (2) 1 0

Net Inc Gth (%) 8 (4) 3 0 (3)



Balance Sheet (S$m)


Other LT Assets 0.96 3.41 3.41 3.41 3.41

Cash & ST Invts 21.0 16.8 23.1 27.0 29.9

Inventory 0.0 0.0 0.0 0.0 0.0

Debtors 0.82 2.44 0.86 0.93 0.95


Total Assets 1,054 1,215 1,318 1,324 1,329

ST Debt

94.6 0.0 0.0 0.0 0.0

Creditor 8.68 10.1 8.58 9.27 9.53


LT Debt 274 399 439 439 439


Unit holders’ funds 651 746 811 816 821




Net Cash/(Debt) (348) (382) (415) (412) (409)

Ratio

Current Ratio (x) 0.2 1.6 2.2 2.4 2.6

Quick Ratio (x) 0.2 1.5 2.1 2.3 2.5


Z-Score (X) 0.9 1.0 1.0 1.0 1.1


Gearing to remain steady


Page 6

Company Guide



FY Dec 2014A 2015A 2016F 2017F 2018F

Pre-Tax Income 42.1 47.1 51.0 55.7 57.5

Dep. & Amort. 0.0 0.0 0.0 0.0 0.0

Tax Paid 0.0 0.0 0.0 0.0 0.0


Chg in Wkg.Cap. 3.41 (0.7) 0.04 0.63 0.23


Net Operating CF 53.9 57.1 56.6 62.1 63.0

Net Invt in Properties (94.8) (124) (98.3) (2.0) (2.0)

Other Invts (net) 0.0 0.0 0.0 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0



Net Investing CF (94.8) (124) (98.3) (2.0) (2.0)

Distribution Paid (49.4) (55.7) (58.4) (63.3) (64.5)

Chg in Gross Debt 91.5 29.6 40.0 0.0 0.0

New units issued (0.1) 90.0 66.4 7.07 6.52

Other Financing CF 0.0 (1.6) 0.0 0.0 0.0

Net Financing CF 41.9 62.3 48.0 (56.2) (58.0)


Chg in Cash 1.00 (4.2) 6.33 3.90 2.95


Free CFPS (S cts) (5.1) (7.5) (4.3) 5.80 5.84



Source: DBS Bank

Analyst: Derek TAN


Mervin SONG CFA


HOLD

Last Traded Price ( 4 Jan 2017): S$0.96 (STI : 2,921.31)


Potential Catalyst: Better-than-expected rental reversion; acquisition of

Seletar Mall

Where we differ: More bullish on rents at selected Orchard Rd malls

Analyst Singapore Research Team Derek TAN +65 6682 3716 [email protected]

Price Relative

Forecasts and Valuation FY Aug (S$m) 2015A 2016A 2017F 2018F

Gross Revenue 205 210 226 231 Net Property Inc 156 161 164 168 Total Return 154 128 127 129 Distribution Inc 139 141 145 148 EPU (S cts) 6.08 5.02 4.97 5.02 EPU Gth (%) (29) (17) (1) 1 DPU (S cts) 5.47 5.55 5.66 5.72 DPU Gth (%) 1 1 2 1 NAV per shr (S cts) 94.3 93.4 92.7 92.1 PE (X) 15.7 19.0 19.2 19.0 Distribution Yield (%) 5.7 5.8 5.9 6.0 P/NAV (x) 1.0 1.0 1.0 1.0 Aggregate Leverage (%) 25.5 25.5 26.0 26.2 ROAE (%) 6.5 5.3 5.3 5.4 Distn. Inc Chng (%): - - Consensus DPU (S cts): 5.7 5.7 Other Broker Recs: B: 3 S: 0 H: 3


Potential influx of new traffic to Paragon Stock is fairly priced. We currently have a HOLD recommendation, with TP of S$1.00. SPH REIT's dividend yield of 5.7% reflects the strength of its assets and stability of earnings. However, at this point we believe that comparable retail S-REITs offer more attractive yields. Paragon to continue to drive earnings growth. We believe that Paragon will continue to outperform the rest of Orchard Road for both retail and office assets, due to its (a) location and frontage in the prime Orchard Road shopping district, as well as (b) proximity to the Mount Elizabeth medical cluster. As such, we assume reversions of 3.5-4.0% for Paragon. A linkbridge connecting Cairnhill redevelopment and Paragon, to be opened in November/December 2016, may draw new traffic to the mall. At Clementi Mall, more than 50% lease expirations in FY17 could set a new base for rent. Potential acquisition a catalyst. With a healthy gearing of 25.7% and cost of debt of 2.82%, SPH REIT is well poised for debt-funded acquisitions. The next growth catalyst for the REIT will be the acquisition of the Sponsor’s 70% stake in Seletar Mall. However, we believe this acquisition is likely to be more of a medium term-prospect, as the mall was only completed in December 2014 and is still on its first lease cycle. Valuation:

We have a DCF-backed target price of S$1.00, implying a

dividend yield of 5.7% for FY17F-18F. Due to the lack of near-

term catalysts and limited upside to TP, we maintain our HOLD

call.


Short WALE due to lease expirations at Clementi Mall. The

portfolio has a relatively short WALE of 2.3 years by NLA.

18.5% of portfolio NLA (c.166,000 sqft) will expire in FY17.

The majority comes from Clementi Mall where more than 50%

or close of 104,000 sqft of the mall’s NLA are due in the next

12 months. At A Glance Issued Capital (m shrs) 2,551

Mkt. Cap (S$m/US$m) 2,436 / 1,692


Singapore Press Holdings 68.7

Free Float (%) 31.3




4 Jan 2017


SPH REIT Version 4 | Bloomberg: SPHREIT SP | Reuters: SPHR.SI Refer to important disclosures at the end of this report


Page 2

Company Guide

SPH REIT


Earnings Drivers:

Maximising mall efficiency to generate higher yields. At the

Paragon, the additional 7k sqft of net lettable area (NLA) to be

generated by the chiller decanting project is progressing as

scheduled. Once completed, it is expected to generate

additional revenue of c.S$1m p.a. and ROI of >7%. This project

will be spread over three years from September 2015 to March

2018, in order to coincide with various lease expiries of tenants

in the area.

Stable earnings profile over FY17 and FY18. SPH REIT secured

overall rental reversions 5.4% for FY16 (5.2% for Paragon;

7.8% for Clementi Mall) while maintaining a track record of

100% occupancy. As at 31 August 2016, the REIT’s portfolio

had a weighted average lease expiry (WALE) of 2.3 years and

2.2 years by NLA and gross rental income respectively. We

expect earnings to be stable over the next two years. The next

largest leasing tranche will be in FY17, when 51.6% of the

mall’s NLA will come up for renewal. Regardless of the results,

earnings next year should be stable due to the income support

from the Sponsor at Clementi Mall. However, reversion levels

are still crucial as they could set a new base for Clementi Mall

when the income support ends in 2018.

Healthy occupancy costs ensure a vibrant medium-term outlook

for the malls. While Paragon’s occupancy costs rose to 19.6%

as tenant sales grew at a slower rate than rents, we note that

this is still within the healthy range for a mall in Orchard Road,

where tenants are typically willing to count higher rents as part

of marketing costs. Higher sales growth in subsequent years will

allow the REIT to generate higher rental revenue in a sustainable

manner.

Revitalised tenant mix. The REIT has a strategy to continuously

restructure the tenant mix to keep its investment properties

relevant to respective target shoppers. The aim is to enable the

REIT to reap better tenant synergies to improve traffic and

potentially boost the attractiveness of its malls which can lead

to higher rental reversions and renewals.




Interest Cover (x)



Page 3

Company Guide

SPH REIT

Balance Sheet:

Gearing. SPH REIT has maintained a healthy gearing ratio at

25.7% that is well within the Manager’s comfortable range of

up to 40%. This provides the REIT with significantly larger

headroom for debt financing should it decide to gear up on

acquisitions.

Net Asset Value (NAV) per unit. NAV of S$0.94 is underpinned

by stable asset valuations.


Potential acquisitions. With a healthy gearing at 25.7% and cost

of debt of 2.82%, SPH REIT is well poised for debt-funded

acquisition activities. The next growth catalyst for the REIT will

be the acquisition of the Sponsor’s 70% stake in Seletar Mall,

which was completed in December 2014. However, this

acquisition is likely to be more of a medium-term prospect, as

the mall is still in its first leasing cycle and has yet to stabilise.

Key Risks:

Interest rate risk. The REIT has muted exposure to changes in

interest rates with no debt maturing until 2018 and 85.9% of

its S$850m debt facility on a fixed rate basis.

Visitor traffic is trending down by 2.5% and 2.4% for FY16

full year at Paragon and Clementi Mall respectively. However,

we do not believe it is a concern. Paragon’s tenant sales

registered a positive growth of 1.4%, and more traffic could

be drawn from the opening of the linkbridge. Decline at

Clementi Mall was most likely from the unproductive traffic as

a new MRT exit at Clementi station opened early in the year

provides an alternative route for the train passengers.

Short WALE mainly due to Clementi Mall. The portfolio has a

relatively short WALE of 2.3 years by NLA. 18.5% of portfolio

NLA (c.166,000 sqft) will expire in FY17. The majority comes

from Clementi Mall.

Management fees payable in units. The REIT is one of the few

S-REITs that pays 100% of management fees in units as

opposed to cash (S$16.3m in FY16, 11.7% boost to

distributions). We believe that DPU growth may not be

sustainable in the longer term due to continuous share dilution

and the Management has no plans to tweak the payment

structure.

Company Background

SPH REIT is a real estate investment trust that invests in

income-producing retail malls in Singapore. It currently owns

the Paragon Mall within the Orchard Road district, as well as

Clementi Mall, located in the west of Singapore.


ROE (%)


PB Band (x)


Avg: 5.5%

+1sd: 5.8%

+2sd: 6.1%

-1sd: 5.2%

-2sd: 4.9%

4.5

4.7

4.9

5.1

5.3

5.5

5.7

5.9

6.1

6.3

2013 2014 2015 2016

(%)


Page 4

Company Guide

SPH REIT


FY Aug 2014A 2015A 2016A 2017F 2018F

Gross revenue 202 205 210 226 231






Exceptional Gain/(Loss) 103 36.6 7.69 0.0 0.0

Net Income 217 154 128 127 129

Tax 0.0 0.0 0.0 0.0 0.0




Total Return 217 154 128 127 129



Growth & Ratio

Revenue Gth (%) (6.7) 1.4 2.2 7.7 2.4

N Property Inc Gth (%) (5.2) 3.3 3.4 1.8 2.4

Net Inc Gth (%) 85.0 (29.1) (16.9) (0.3) 1.7




Dist to revenue (%) 67.4 67.5 67.3 64.4 63.9


8.5 8.6 8.6 7.5 7.4

ROAE (%) 9.6 6.5 5.3 5.3 5.4

ROA (%) 6.8 4.7 3.9 3.8 3.9

ROCE (%) 4.2 4.2 4.4 4.5 4.6

Int. Cover (x) 6.8 6.6 6.2 7.5 7.1



Page 5

Company Guide

SPH REIT


FY Aug 4Q2015 1Q2016 2Q2016 3Q2016 4Q2016

Gross revenue 50.8 52.1 53.1 52.2 52.2







Net Income 64.7 29.8 30.3 29.6 37.9

Tax 0.0 0.0 0.0 0.0 0.0



Total Return 132 28.6 30.7 29.3 28.1



Growth & Ratio

Revenue Gth (%) (1) 3 2 (2) 0

N Property Inc Gth (%) (3) 5 1 (1) 0

Net Inc Gth (%) 121 (54) 1 (2) 28



Balance Sheet (S$m)

FY Aug 2014A 2015A 2016A 2017F 2018F Investment Properties 3,159 3,213 3,230 3,240 3,245

Other LT Assets 13.5 14.4 7.99 7.99 7.99

Cash & ST Invts 90.7 77.4 67.4 43.3 46.6

Inventory 0.0 0.0 0.0 0.0 0.0

Debtors 5.91 5.01 5.89 5.89 5.89


Total Assets 3,269 3,310 3,311 3,297 3,305

ST Debt

0.0 249 0.0 0.0 0.0

Creditor 35.1 30.2 34.2 11.9 12.2


LT Debt 843 596 846 856 866






Net Cash/(Debt) (752) (768) (779) (813) (819)

Ratio

Current Ratio (x) 2.7 0.3 2.1 4.1 4.3

Quick Ratio (x) 2.7 0.3 2.1 4.1 4.3


Z-Score (X) 3.5 3.4 3.5 3.5 3.5



Page 6

Company Guide

SPH REIT


FY Aug 2014A 2015A 2016A 2017F 2018F

Pre-Tax Income 114 117 120 127 129

Dep. & Amort. 0.12 0.16 0.21 0.0 0.0

Tax Paid 0.0 0.0 0.0 0.0 0.0


Chg in Wkg.Cap. 21.0 1.28 (1.9) (22.3) 0.29


Net Operating CF 175 158 134 121 146

Net Invt in Properties (2.7) (15.3) (8.5) (9.9) (5.0)

Other Invts (net) (0.2) (0.1) (0.1) 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0



Net Investing CF (2.7) (14.8) (7.8) (9.9) (5.0)


Chg in Gross Debt 0.0 (0.2) (1.0) 10.0 10.0

New units issued (9.0) (18.8) (22.3) 0.0 0.0

Other Financing CF (17.8) 0.0 0.0 0.0 0.0

Net Financing CF (142) (157) (162) (135) (138)


Chg in Cash 29.8 (13.3) (35.6) (24.1) 3.37


Free CFPS (S cts) 6.82 5.66 4.95 4.35 5.48



Source: DBS Bank


Derek TAN




Potential Catalyst: Better-than-expected operational results

Where we differ: Estimates in line with consensus


Price Relative

Forecasts and Valuation FY Dec (S$m) 2014A 2015A 2016F 2017F

Gross Revenue 282 330 344 352 Net Property Inc 192 229 243 250 Total Return 317 354 192 200 Distribution Inc 230 252 256 259 EPU (S cts) 9.18 8.95 7.56 7.77 EPU Gth (%) (8) (2) (16) 3 DPU (S cts) 9.40 10.0 10.0 10.0 DPU Gth (%) 1 6 0 0 NAV per shr (S cts) 216 215 210 206 PE (X) 18.0 18.4 21.8 21.2 Distribution Yield (%) 5.7 6.1 6.1 6.1 P/NAV (x) 0.8 0.8 0.8 0.8 Aggregate Leverage (%) 34.7 35.8 37.5 38.0 ROAE (%) 4.3 4.2 3.6 3.7 Distn. Inc Chng (%): 0 0 Consensus DPU (S cts): 10.0 10.0 Other Broker Recs: B: 0 S: 9 H: 12


Fairly priced

Range bound for now. We maintain our HOLD call with a TP of

S$1.71. We believe Suntec REIT’s share price will be range

bound in the near term due to headwinds in the retail sector,

which will likely cap its earnings as Suntec mall’s rents have

underperformed the Manager’s initial target. In addition, there

could be downside risk for the REIT’s office assets, which are

expected to see some volatility in rents and occupancies when

new office supply enters the CBD from 2016 onwards.

Weak retail outlook to cap upside from asset enhancement

initiative. Assuming a typical 3-year lease cycle, tenants at phase

1 and 2 of the Suntec mall will be entering their first

reversionary cycle in 2016 and 2017. We understand that rental

reversion trends have been mixed, given the weak operating

climate. The Manager is looking to tweak the tenant mix going

forward.

But expect stable DPU through increased contribution from

Australian assets and capital distributions. Despite potential

downside risk to earnings at Suntec REIT’s Singapore properties,

we expect a stable DPU profile going forward. This will be

achieved through (i) increased earnings contribution from the

completion of 177 Pacific Highway (Sydney) project in 2H16 and

the recent acquisition of a 25% stake in the Southgate Complex

in Melbourne, and (ii) payout of proceeds from the disposal of

Park Mall.

Valuation:

With limited upside to our DCF-based TP of S$1.71 we

maintain our HOLD recommendation.


Upside risk from acquisitions and better rental performance.

The key risks to our neutral view are DPU accretive acquisitions

and/or better rental performance achieved despite the

headwinds in the Singapore office and retail market. At A Glance Issued Capital (m shrs) 2,534

Mkt. Cap (S$m/US$m) 4,180 / 2,904


Gorden Tang Ltd 11.0

Blackrock 6.9

ARA Re Investment 6.0

Free Float (%) 71.1




4 Jan 2017


Suntec REIT Version 5 | Bloomberg: SUN SP | Reuters: SUNT.SI Refer to important disclosures at the end of this report


Page 2

Company Guide

Suntec REIT


Earnings Drivers:

Office portfolio faces some earnings risk. Suntec REIT currently

owns three office assets in Singapore’s CBD – Suntec Office,

One Raffles Quay (ORQ; 33%), and MBFC Towers 1 and 2

(33%). With the expected oversupply of the Singapore office

market upon the completion of several new offices at the end

of 2016 and 2017, Suntec REIT’s properties may face stiffer

competition for its tenants as well as downward pressure on

rents. Partially mitigating this is the significant forward renewals

already completed at ORQ and MBFC Tower 2 as well as the

strong positioning of Suntec Office which has the advantage of

ample car parking spaces, connectivity to two MRT stations and

a wide choice of amenities given its location next to Suntec City

Mall.

Retail headwinds. With Singapore consumers cutting back on

discretionary spending and compared to the initial rents signed

at Suntec Mall during more buoyant times, rents at Suntec Mall

will likely continue to be under pressure. Nevertheless, with the

recent appointment of Mr Chan Kong Leong formerly of

CapitaMalls Asia, recent changes in tenant mix including the

introduction of new to market retail brands, improved

marketing, greater number of events as well as better

engagement with its tenants, tenant sales and foot traffic have

improved. This should largely arrest the decline in rents,

signaling a potential a stabilisation of retail rents if the

improvement in tenant sales and foot traffic is sustained.

Secure income contribution from 177 Pacific Highway. Suntec

REIT’s 177 Pacific Highway property located in North Sydney

which was finally completed in August 2016 will provide

geographic diversification to its portfolio and improve the REIT’s

income stream. The property is anchored by Leighton Holdings

will take up 76% of the net lettable area for an approximate

lease period of 10 years.

30% stake in redevelopment of Park Mall offers development

upside. Suntec REIT completed the sale of Park Mall for S$412m

in 4Q15, and has taken a 30% stake in the JV which will

completely redevelop Park Mall into a commercial development

comprising two office towers with an ancillary retail podium.

Suntec REIT will subsequently have the option to acquire one of

the two office towers. While details of this redevelopment

project have yet to be finalised, acquisition of the office tower

will be a long-term growth driver for the REIT.

Recent acquisition of Southgate property in Melbourne. Suntec

REIT recently announced the acquisition of 25% stake in

Southgate, a mixed office retail property in Melbourne for

A$154.9m. This acquisition adds another leg of growth that will

mitigate the slowdown faced by Suntec REIT in Singapore.




Interest Cover (x)



Page 3

Company Guide

Suntec REIT

Balance Sheet:

Comfortable level of gearing. Post the acquisition of 25%

interest in the Southgate Complex, Suntec REIT’s gearing is

expected to stabilise around the 37% level.

Minimal refinancing needs in FY16-17. Suntec REIT has more

than 60% of its borrowings hedged and minimal refinancing

requirements for the remainder of FY16 and in FY17. As such,

the REIT is fairly well protected against near-term interest rate

volatility.


Better-than-expected performance at Suntec City retail. Higher

occupancy rates at Suntec City retail, as well as better-than-

expected rental reversions, would present upside to our

earnings estimates.

Acquisitions. The Manager could redeploy remaining proceeds

of c.S$284m from the divestment of Park Mall into yield-

accretive acquisitions, which would boost DPU growth and

diversify the REIT’s earnings base.

Key Risks:

Retail rental reversion risk. With a slowdown in retail sector,

rents at Suntec City Mall may face downward pressure causing

weakness in Suntec REIT’s DPU.

Vacancies at Suntec office. While we have flagged MBFC and

ORQ as key earnings risks in the Trust’s office portfolio, we

believe that occupancy and rents will remain stable at Suntec

Towers (office) due to its more differentiated product

offerings. Thanks to Suntec office’s staggered lease expiry

profile, any decline in rents will not be evident immediately.

However, higher vacancies could present some downside risks

to our earnings assumptions.

Company Background

Suntec REIT has a portfolio of office and retail properties in

Singapore and Australia. Its most prominent asset is Suntec

City, which comprises four office towers, a retail mall, and a

convention centre, located close to the city area of Singapore.


ROE (%)


PB Band (x)



Page 4

Company Guide

Suntec REIT


FY Dec 2013A 2014A 2015A 2016F 2017F

Gross revenue 234 282 330 344 352

Property expenses (85.4) (90.8) (100) (101) (102)






Net Income 239 225 244 210 219

Tax 4.72 (7.0) (6.7) (10.2) (11.7)

Minority Interest (17.6) 1.75 (12.1) (7.5) (7.9)



Total Return 364 317 354 192 200

Non-tax deductible Items (172) (97.6) (121) 63.8 58.9


Growth & Ratio

Revenue Gth (%) (10.6) 20.6 16.7 4.3 2.5

N Property Inc Gth (%) (9.0) 28.9 19.6 5.8 3.1

Net Inc Gth (%) (6.7) (2.8) 2.7 (14.6) 3.8




Dist to revenue (%) 90.2 81.5 76.5 74.6 73.5


24.7 27.3 17.9 13.4 13.3

ROAE (%) 4.7 4.3 4.2 3.6 3.7

ROA (%) 2.8 2.6 2.6 2.1 2.2

ROCE (%) 1.1 1.3 1.9 2.1 2.1

Int. Cover (x) 1.6 2.6 3.6 4.5 3.7


Driven mainly from the contribution of 177 Pacific Highway and Southgate in Australia


Page 5

Company Guide

Suntec REIT


FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016

Gross revenue 86.1 87.5 78.3 78.9 82.4






Exceptional Gain/(Loss) 5.08 (2.9) (2.1) (1.7) 1.33

Net Income 51.2 94.1 35.0 46.2 55.3

Tax (2.0) (1.6) (1.3) (1.4) (1.7)



Total Return 46.9 216 32.4 43.4 52.2


Net Inc available for Dist. 63.6 228 51.1 67.4 64.3

Growth & Ratio

Revenue Gth (%) 6 2 (11) 1 4

N Property Inc Gth (%) 3 7 (14) (2) 9

Net Inc Gth (%) 6 86 (63) 34 20



Balance Sheet (S$m)

FY Dec 2013A 2014A 2015A 2016F 2017F Investment Properties 5,741 5,948 5,800 5,852 5,854

Other LT Assets 2,370 2,488 2,704 2,859 2,859

Cash & ST Invts 181 150 445 396 395

Inventory 0.01 0.0 0.0 0.0 0.0

Debtors 29.1 16.7 12.8 13.4 13.7


Total Assets 8,322 8,602 8,965 9,123 9,125

ST Debt

772 0.0 370 370 370

Creditor 91.2 107 108 109 110


LT Debt 2,389 2,981 2,843 3,048 3,098



Minority Interests 141 113 119 126 134


Non-Cash Wkg. Capital (82.9) (113) (114) (123) (125)

Net Cash/(Debt) (2,980) (2,831) (2,767) (3,022) (3,072)

Ratio

Current Ratio (x) 0.2 1.3 0.9 0.8 0.8

Quick Ratio (x) 0.2 1.3 0.9 0.8 0.8


Z-Score (X) 0.8 0.9 0.9 0.8 0.8


Gearing to inch higher to 38%


Page 6

Company Guide

Suntec REIT


FY Dec 2013A 2014A 2015A 2016F 2017F

Pre-Tax Income 239 225 244 210 219

Dep. & Amort. 0.0 0.0 0.0 0.0 0.0

Tax Paid (4.1) 0.0 (1.8) (1.3) (10.2)

Associates &JV Inc/(Loss) (172) (139) (100) (57.2) (70.5)

Chg in Wkg.Cap. (1.3) 14.4 3.70 0.25 0.87


Net Operating CF 153 196 231 152 140

Net Invt in Properties (189) (96.4) (40.8) (52.0) (2.0)

Other Invts (net) 0.0 0.0 304 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 (15.0) (155) 0.0


Other Investing CF (32.6) 30.5 (123) 0.0 0.0

Net Investing CF (222) (65.9) 181 (150) 68.5


Chg in Gross Debt 260 98.2 139 205 50.0

New units issued 0.0 342 0.0 0.0 0.0

Other Financing CF (1.0) (376) (7.1) 0.0 0.0

Net Financing CF 50.6 (160) (115) (51.4) (209)

Currency Adjustments 0.0 (1.7) (1.7) 0.0 0.0

Chg in Cash (18.6) (31.6) 296 (49.2) (0.8)


Free CFPS (S cts) (1.6) 4.15 7.57 3.93 5.34



Source: DBS Bank


Derek TAN


BUY

Last Traded Price ( 4 Jan 2017): S$0.76 (STI : 2,921.31)

Price Target 12-mth: S$0.87 (15% upside and 6.9% distribution

yield)

Potential Catalyst: Turnaround signals at Wisma Atria; appreciation of

MYR and/or AUD against SGD

Where we differ: We are largely in line with consensus

Analyst Singapore Research Team [email protected] Derek TAN +65 6682 3716 [email protected]

Price Relative

Forecasts and Valuation FY Jun (S$m) 2015A* 2016A 2017F 2018F

Gross Revenue 295 220 228 234 Net Property Inc 238 170 176 182 Total Return 175 164 117 122 Distribution Inc 172 117 117 122 EPU (S cts) 7.68 3.94 5.37 5.59 EPU Gth (%) 40 (49) 36 4 DPU (S cts) 7.60 5.18 5.20 5.43 DPU Gth (%) 52 (32) 0 4 NAV per shr (S cts) 91.6 92.5 92.7 92.8 PE (X) 9.8 19.2 14.1 13.5 Distribution Yield (%) 10.1 6.9 6.9 7.2 P/NAV (x) 0.8 0.8 0.8 0.8 Aggregate Leverage (%) 36.0 36.1 36.1 36.2 ROAE (%) 8.3 4.3 5.8 6.0 Distn. Inc Chng (%): 0 0 Consensus DPU (S cts): 5.20 5.40 Other Broker Recs: B: 8 S: 0 H: 3

*FY2015A contains six quarters due to rebasing of financial year.


The Magic of Payout Ratio BUY for asset diversification and high income visibility from master leases. We like YTL Starhill Global REIT (SGREIT) for its diversified portfolio of prime retail and office assets in the Asia Pacific region. Singapore, Australia, and Malaysia which accounted for 62.6%, 19.5%, and 14.6% of net property income (NPI) in FY16 (FYE June) respectively, limiting exposure and thereby risk to any single country. With c.45% of top line derived from master leases or long leases, the REIT offers investors income stability and visibility, as well as upside potential from rental reversions embedded in the master leases. Wisma Atria turning positive as occupancy edged back up. Wisma Atria (Retail)’s occupancy improved to 99.5% from 94.9% over the last three quarters and footfall has increased by 6.6% y-o-y, thanks to the tenant mix reconfiguration and the reopening of Isetan department store in the same mall. We understand that the decline in revenue was a result of converting level 1 from Fashion into F&B, which consists of stickier tenants but yields lower rents. This is expected to drive higher footfall for the floor going forward. The gradual re-opening of Isetan should drive more footfall into the mall and eventually translate to higher rents on other floors. Tasting the sweetness of prudent payout. SGREIT has been retaining 3-5% of distributable income to fund working capital, and it therefore has certain flexibility to manage future distributions without touching its capital. In addition, it has been paying management fees in cash, not units, hence there is no pressure from any dilution in its equity base. Valuation:

Our DCF-derived TP is S$0.87. Maintain BUY.


Upside risk from AUD and MYR currency appreciation. As c.34% of net

property income is derived from assets in Malaysia and Australia, an

appreciation of any of these currencies versus SGD would present

upside to our estimates. At A Glance Issued Capital (m shrs) 2,181

Mkt. Cap (S$m/US$m) 1,647 / 1,135


YTL Corp Bhd 35.8

AIA Group Ltd 8.0

Free Float (%) 56.2




4 Jan 2017


YTL Starhill Global REIT Version 4 | Bloomberg: SGREIT SP | Reuters: STHL.SI Refer to important disclosures at the end of this report


Page 2

Company Guide

YTL Starhill Global REIT


Earnings Drivers:

Strong performance from local assets. SGREIT is primarily

exposed to Ngee Ann City and Wisma Atria in Singapore, which

together account for 63% of top line and 68% of asset value.

These assets offer a mix of stability from Toshin’s master lease

at Ngee Ann City and upside potential from Wisma Atria,

whose shorter leases provide exposure to strong retailer

demand for prime Orchard Road space in Singapore.

Weaker reversions for Wisma Atria on the horizon. That said,

we would not be surprised if reversions in upcoming quarters

turn negative, as a portion of leases expiring in the year ahead

will come from fashion tenants on the first floor, whose

performances have been generally weak. These tenants are

more reticent about committing to space given (a) lacklustre

fashion sales, and (b) uncertainty over the outcome of the newly

renovated Isetan. However, we expect earnings at Wisma to still

see good growth, driven by stronger reversions from tenants on

the basement and second floors (selling watches & jewellery).

Growing presence in Australia. The REIT acquired Myer Centre

Adelaide for A$288m, located in Adelaide’s prime CBD retail

core, in May 2015. With the inclusion of the Myer Centre

acquisition, rental income contribution from Australia doubled

from 10% to 20% in FY16.

Visible earnings growth from rental reviews at master leased

assets. In FY16, the base rent for Toshin (master tenant at Ngee

Ann City, Singapore) increased 5.5%, whereas Katagree (master

tenant at Starhill Gallery and Lot 10, Malaysia) extended its

lease with 6.7% rental uplift. Looking ahead, SGREIT has annual

rent review for key tenants in Australia; David Jones’ next lease

review is in August 2017.




Interest Cover (x)



Page 3

Company Guide


Balance Sheet:

Future acquisitions to be partly funded via equity. Gearing rose

to 35% after the acquisition of Myer Centre Adelaide. Given

the Manager’s comfortable range of 35% gearing, any further

acquisitions or developments could trigger an equity fund

raising exercise.

Debt free in FY2017. Weighted debt tenure is 3.4 years at an

average interest cost of 3.06%. With 96% of debt hedged into

fixed rates and less than 1% of total debt requiring refinancing

in FY16/17, exposure to volatile short rates is minimised.


Development/ AEI opportunities in Singapore and Australia. The

Manager has several AEI opportunities to improve portfolio

performance in the near and medium term. SGREIT will be

undertaking AEI works in Central Plaza, Perth, renovating the

shop façade to incorporate anchor tenants, as well as

converting some of the upper floors from office and storage to

retail use. Other potential development/AEI opportunities

include activating 116k sqft of vacant retail space in the fourth

and fifth floors of Myer Centre, Adelaide, as well as developing

the Spanish Steps between Wisma Atria and Ngee Ann City,

where the REIT has unutilised gross floor area of c.100k sqft.

Key Risks:

Currency risk. SGREIT’s overseas properties have been affected

by forex volatility and operational headwinds. In Malaysia and

Australia, stable underlying asset performance has been

masked by the depreciation of the MYR and AUD against the

SGD, resulting in currency translation losses and weaker DPU

performance.

Macroeconomic risks in China – retail oversupply and austerity

hits Chengdu asset. Contributions from Chengdu have been

hit by ongoing austerity measures and oversupply of retail

space, resulting in steady declining earnings contribution since

2013. The property in Chengdu has revalued downwards from

S$66.3m to S$44.7m as at 30 Jun 2016. The property will be

converted from a fashion retailer to a home furnishing mall,

with a 10-year tenancy. While the asset’s contribution to

portfolio NPI is expected to drop to 1% from 1.5%, we believe

the long-term tenancy has mitigated any further downside risk.

Company Background

Starhill Global REIT is a real estate investment trust that invests

in income-producing upscale retail and/or office assets in the

Asia Pacific region. In Singapore, it owns portions of Ngee Ann

City and Wisma Atria. It also owns assets in Malaysia, Australia,

Japan and China.


ROE (%)


PB Band (x)



Page 4

Company Guide



FY Jun 2014A 2015A 2016A 2017F 2018F

Gross revenue 201 295 220 228 234







Net Income 115 165 83.6 117 122

Tax (2.9) 0.56 2.32 0.40 0.41



Net Income After Tax 112 165 85.9 117 122

Total Return 250 175 164 117 122

Non-tax deductible Items (139) (3.0) (47.4) 0.0 0.0


Growth & Ratio

Revenue Gth (%) 7.9 46.9 (25.5) 3.8 2.7


Net Inc Gth (%) 5.1 47.1 (48.1) 36.2 4.2




Dist to revenue (%) 55.3 58.2 53.0 51.3 52.1


8.8 9.0 22.2 9.5 9.3

ROAE (%) 5.8 8.3 4.3 5.8 6.0

ROA (%) 3.9 5.4 2.7 3.7 3.8

ROCE (%) 4.8 7.0 3.8 4.8 5.0

Int. Cover (x) 4.7 4.7 3.2 4.1 4.2


FY2015 consists of 6 quarters due to the revision of its financial year end.

Room to increase payout ratio in order to maintain DPU when necessary


Page 5

Company Guide



FY Jun 1Q2016 2Q2016 3Q2016 4Q2016 1Q2017

Gross revenue 56.8 55.6 53.6 53.7 55.3






Exceptional Gain/(Loss) (2.2) 1.74 (9.7) (19.4) (3.3)

Net Income 27.1 31.1 17.4 8.03 25.4

Tax (0.9) (0.9) (0.2) 4.21 (0.3)



Total Return 0.0 0.0 0.0 0.0 0.0

Non-tax deductible Items 3.81 (0.2) 10.7 (61.8) 4.33


Growth & Ratio

Revenue Gth (%) 10 (2) (4) 0 3


Net Inc Gth (%) (7) 15 (43) (29) 105



Balance Sheet (S$m)

FY Jun 2014A 2015A 2016A 2017F 2018F Investment Properties 2,854 3,116 3,137 3,139 3,151

Other LT Assets 20.5 20.4 2.54 2.54 2.54

Cash & ST Invts 58.0 51.6 77.0 18.4 19.0

Inventory 0.0 0.0 0.0 0.0 0.0

Debtors 10.2 5.18 5.93 29.7 30.5


Total Assets 2,943 3,193 3,222 3,190 3,203

ST Debt

53.6 146 15.4 15.4 25.4

Creditor 43.0 37.2 39.5 3.53 3.63


LT Debt 792 983 1,108 1,108 1,108





Non-Cash Wkg. Capital (35.0) (34.1) (36.1) 23.6 24.3

Net Cash/(Debt) (788) (1,078) (1,046) (1,105) (1,114)

Ratio

Current Ratio (x) 0.7 0.3 1.4 2.2 1.6

Quick Ratio (x) 0.7 0.3 1.4 2.2 1.6


Z-Score (X) 1.1 1.0 0.9 1.0 1.0


Revenue consists of a one-off compensation of S$1.9m from an early termination at Wisma Atria which has been filled up


Page 6

Company Guide



FY Jun 2014A 2015A 2016A 2017F 2018F

Pre-Tax Income 115 165 83.6 117 122

Dep. & Amort. 0.0 0.0 0.28 0.0 0.0

Tax Paid (3.5) (3.8) (1.7) 0.40 0.41


Chg in Wkg.Cap. 24.6 52.3 73.1 (59.8) (0.7)

Other Operating CF 4.68 (1.0) 0.0 0.0 0.0

Net Operating CF 141 212 155 57.3 121

Net Invt in Properties (59.4) (317) 27.2 (2.3) (12.3)

Other Invts (net) 0.0 (0.8) 0.0 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0



Net Investing CF (58.9) (316) 28.0 (2.3) (12.3)


Chg in Gross Debt 38.4 308 (9.8) 0.0 10.0

New units issued 0.0 0.0 0.0 0.0 0.0

Other Financing CF (39.9) (45.9) (37.3) 0.0 0.0

Net Financing CF (102) 99.8 (160) (114) (108)

Currency Adjustments (1.8) (2.8) 2.15 0.0 0.0

Chg in Cash (21.3) (6.5) 25.4 (58.5) 0.62


Free CFPS (S cts) 3.99 (4.8) 8.36 2.52 5.00



Source: DBS Bank


Derek TAN

S$10m AEI on Australia property

Industry Focus



Research Team Directory Analyst Sector E-mail Regional Timothy Wong Head, Group Research [email protected] Joanne Goh Regional Equity Strategist [email protected] Paul Yong, CFA Transport [email protected] Ben Santoso Plantations, Animal Protein [email protected] Sachin Mittal Telecoms [email protected] Lim Sue Lin Banking [email protected] Chong Tjen-San, CFA infrastructure, Conglomerates [email protected] Hong Kong / China Carol Wu Head of Research, China Property [email protected] Alice Hui, CFA Deputy HOR, Consumer [email protected] Addison Dai Basic materials, Clean energy (wind power, nuclear) [email protected] Alexander Lee, CFA Strategy [email protected] Alison Fok Consumer [email protected] Andy Yee, CFA China Property [email protected] Chris Ko Small Mid Caps [email protected] Danielle Wang, CFA China Property [email protected] Dennis Lam Small Mid Caps [email protected] Eric Yee Consumer [email protected] Ian Chui Hong Kong Property [email protected] Jeff Yau, CFA Hong Kong Property [email protected] Keith Tsang Automobile, Infrastructure, Machinery [email protected] Ken HE, CFA China Property [email protected] Mark Kong, CFA Healthcare [email protected] Mavis Hui Consumer [email protected] Patricia Yeung Environmental, Industrial [email protected] Rachel Miu Automobile, Infrastructure, Machinery [email protected] Susanna Chui Telecom/Media/Tech [email protected] Tam Tsz-Wang, CFA Telecom/Media/Tech [email protected] Tony Wu, CFA Small Mid Caps [email protected] Trista Qin China Property [email protected] Indonesia Maynard Arif Head of Research, Strategy, Automotive, Consumer [email protected] Tiesha Narandha Putri Infrastructure, Transportation, Consumer [email protected] William Simadiputra Telecommunications, Mining [email protected] Benedictus Agung Swandono Banks and Multifinance [email protected] Research Team Infrastructure, Transportation, Consumer, Bank & Multifinance Plantation, Animal Protein, Telecommunications, Property & Industrial [email protected] Estate, Healthcare Malaysia Wong Ming Tek Executive Director [email protected] Bernard Ching Head of Malaysian Research [email protected] Cheah King Yoong, CFA Consumer, Gaming [email protected] Quah He Wei, CFA Property, Utilities [email protected] Toh Woo Kim Telecommunication, Media, Technology [email protected] Lynette Cheng Banks, Non-bank Financials [email protected] Marvin Khor Transport , Plantation [email protected] Ruzanna Faruk Auto, Rubber Glove [email protected] Inani Rozidin Oil & Gas [email protected] Singapore Janice Chua Head of Research, Strategy, Industrials [email protected] Andy Sim, CFA Consumer Services [email protected] Derek Tan Property, Reits [email protected] Ho Pei Hwa Industrials [email protected] Mervin Song, CFA Property, Reits [email protected] Rachel Tan Property, Healthcare [email protected] Suvro Sarkar Industrials, Transport [email protected] Allfie Yeo Consumer Services [email protected] Thailand Chanpen Sirithanarattanakul Head of Research, Strategy, Property, REITs [email protected] Thanawat Patchimkul Oversea research [email protected] Thaninee Satirareungchai Banking & Finance [email protected] Chaipat Thanawattano Energy & Utilities, Petrochemicals [email protected] Namida Artispong Food and Beverage, Tourism, Commerce [email protected] Wasu Mattanapotchanart Telecom, Property, REITs [email protected] Apichaya Ketruttanaborvorn Construction, Healthcare, Small-caps [email protected] Research Team Commerce, Electronics, Air Transportation, Small-caps [email protected] Korea Lee Eun Young Basic Materials, Utilities [email protected]

Industry Focus



DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends Completed Date: 6 Jan 2017 18:50:56 (SGT) Dissemination Date: 6 Jan 2017 20:15:55 (SGT) GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”)) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report. This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk

assessments stated therein. Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making.

Industry Focus



ANALYST CERTIFICATION

The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in the report. The DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. As of 6 Jan 2017, the analyst(s) and his/her spouse and/or relatives who are financially dependent on the analyst(s), do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities). The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. COMPANY-SPECIFIC / REGULATORY DISCLOSURES

1. DBS Bank Ltd., DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), their subsidiaries and/or other affiliates have proprietary positions in CapitaLand Commercial Trust, Frasers Commercial Trust, Keppel REIT, Suntec REIT, CapitaLand Retail China Trust, CapitaLand Mall Trust, Croesus Retail Trust, Frasers Centrepoint Trust, SPH REIT, Mapletree Commercial Trust, Mapletree Greater China Commercial Trust, YTL Starhill Global REIT, Ascendas REIT, Cache Logistics Trust, Cambridge Industrial Trust, Frasers Logistics & Industrial Trust, Mapletree Industrial Trust, Mapletree Logistics Trust, Soilbuild Business Space Reit, Ascendas Hospitality Trust, Ascott Residence Trust, CDL Hospitality Trusts, Far East Hospitality Trust, Frasers Hospitality Trust, OUE Hospitality Trust, Parkway Life Real Estate Investment Trust, RHT Health Trust, Keppel DC REIT, Manulife US REIT, CapitaLand, City Development, Global Logistic Properties, UOL Group, Wing Tai recommended in this report as of 30 Nov 2016.

2. DBS Bank Ltd does not market make in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.

3. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates have a net long position exceeding 0.5% of the total issued share capital in Frasers Commercial Trust, CapitaLand Retail China Trust, Croesus Retail Trust, Mapletree Greater China Commercial Trust, YTL Starhill Global REIT, Ascendas REIT, Frasers Logistics & Industrial Trust, Mapletree Logistics Trust, Soilbuild Business Space Reit, Ascott Residence Trust, CDL Hospitality Trusts, Frasers Hospitality Trust, RHT Health Trust, Keppel DC REIT, Manulife US REIT, CapitaLand recommended in this report as of 30 Nov 2016.

4. DBS Bank Ltd., DBSVS, DBSVUSA, their subsidiaries and/or other affiliates beneficially own a total of 1% of any class of common equity securities of Frasers Commercial Trust, Croesus Retail Trust, YTL Starhill Global REIT, Frasers Logistics & Industrial Trust, Soilbuild Business Space Reit, Ascott Residence Trust, CDL Hospitality Trusts, Frasers Hospitality Trust, Keppel DC REIT, Manulife US REIT as of 30 Nov 2016.

5. DBS Bank Ltd., DBSVS, DBSVUSA, their subsidiaries and/or other affiliates beneficially own a total of 5% of any class of common equity securities of Croesus Retail Trust as of 30 Nov 2016. Compensation for investment banking services:

6.

DBS Bank Ltd., DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past 12 months for investment banking services from CapitaLand Commercial Trust, Frasers Commercial Trust, OUE Commercial REIT, CapitaLand Mall Trust, Croesus Retail Trust, Mapletree Commercial Trust, Mapletree Greater China Commercial Trust, YTL Starhill Global REIT, Ascendas REIT, Frasers Logistics & Industrial Trust, Mapletree Industrial Trust, Mapletree Logistics Trust, Soilbuild Business Space Reit, Ascendas Hospitality Trust, Ascott Residence Trust, Frasers Hospitality Trust, OUE Hospitality Trust, Parkway Life Real Estate Investment Trust, RHT Health Trust, Keppel DC REIT, Manulife US REIT, City Development, United Engineers as of 30 Nov 2016.

7. DBS Bank Ltd., DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have managed or co-managed a public offering of securities for CapitaLand Commercial Trust, Frasers Commercial Trust, Suntec REIT, CapitaLand Mall Trust, Croesus Retail Trust, Mapletree Commercial Trust, Mapletree Greater China Commercial Trust, YTL Starhill Global REIT, Ascendas REIT, Frasers Logistics & Industrial Trust, Mapletree Industrial Trust, Mapletree Logistics Trust, Soilbuild Business Space Reit, Ascendas Hospitality Trust, Ascott Residence Trust, Frasers Hospitality Trust, OUE Hospitality Trust, Parkway Life Real Estate Investment Trust, RHT Health Trust, Keppel DC REIT, Manulife US REIT, City Development, United Engineers in the past 12 months, as of 30 Nov 2016

8. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

Directorship/trustee interests

9. Euleen Goh Yiu Kiang, a member of DBS Group Holdings Board of Directors, is a Non-Exec Director of CapitaLand as of 1 Jan 2017.

Industry Focus



10 Disclosure of previous investment recommendation produced

DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.

RESTRICTIONS ON DISTRIBUTION

General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

Australia This report is being distributed in Australia by DBS Bank Ltd. (“DBS”) or DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), both of which are exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. Both DBS and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.

Hong Kong This report is being distributed in Hong Kong by or on behalf of, and is attributable to DBS Vickers (Hong Kong) Limited which is licensed and regulated by the Hong Kong Securities and Futures Commission and/or by DBS Bank (Hong Kong) Limited which is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission. Where this publication relates to a research report, unless otherwise stated in the research report(s), DBS Bank (Hong Kong) Limited is not the issuer of the research report(s). This publication including any research report(s) is/are distributed on the express understanding that, whilst the information contained within is believed to be reliable, the information has not been independently verified by DBS Bank (Hong Kong) Limited. This report is intended for distribution in Hong Kong only to professional investors (as defined in the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) and any rules promulgated thereunder.) For any query regarding the materials herein, please contact Paul Yong (CE. No. ASE988) at [email protected].

Indonesia This report is being distributed in Indonesia by PT DBS Vickers Securities Indonesia.

Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.

Wong Ming Tek, Executive Director, ADBSR

Industry Focus



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198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report.

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Other jurisdictions

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e-mail: [email protected] Company Regn. No. 196800306E

Industry Focus



Asian Equities Sales, Sales Trading and Research Contacts Sales Heads Tel: Email: Singapore Kenneth Tang 65-6398 6951 [email protected] Hong Kong Andrew Au 852-2820 4992 [email protected] London Graham Booth 44-20-7618 1881 [email protected] New York Elaine Yu 1-212-826 3553 [email protected] Thailand Narisara Viseskosin 662 657 7759 [email protected] Sales Trading Contacts Tel: Email: Singapore Vivian Goh 65-6398 6927 [email protected] Hong Kong Franco Law 852-2971 1828 [email protected] London Charles Davies 44 20 7618 1883 [email protected] New York Brenda Wong 1 212 826 3558 [email protected] Research Contacts Tel: Email: Regional Timothy Wong 65 6682 3691 [email protected] Singapore Janice Chua 65 6682 3692 [email protected] Hong Kong Carol Wu 852-2863 8841 [email protected] Malaysia Wong Ming Tek 603-2711 0956 [email protected] Thailand Chanpen Sirithanarattanakul 662-657 7824 [email protected] Indonesia Maynard Priajaya Arif 6221 3003 4930 [email protected] DBS Vickers Securities – Regional Offices HONG KONG MALAYSIA SINGAPORE DBS Vickers (Hong Kong) Ltd AllianceDBS Research Sdn Bhd DBS Bank Ltd 18th Floor Man Yee Building 19th Floor, Menara Multi-Purpose 12 Marina Boulevard 68 Des Voeux Road Central Capital Square, 8 Jalan Munshi Abdullah Level 40, Marina Bay Financial Central Tower 3 Central, Hong Kong 50100 Kuala Lumpur Singapore 018982 Tel: 852-2820 4888 Tel: 603 2604 3333 Tel: 65-6878 8888 Fax: 852-2868 1523 Fax: 603 2604 3921 Member of The Stock Exchange of Hong Kong INDONESIA THAILAND PT DBS Vickers Securities (Indonesia) DBS Vickers Securities (Thailand) Co Ltd DBS Bank Tower, Ciputra World 1, 32/F 15th Floor Siam Tower Jl. Prof. Dr. Satrio Kav. 3-5, 989 Rama 1 Road Jakarta 10350, Indonesia Pathumwan, Bangkok 10330 Tel. 6221-3003 4900, Tel: 66-2-658 1222 Fax: 6221-3003 4943 Fax: 66-2-658 1269 UNITED STATES UNITED KINGDOM DBS Vickers Securities (USA) Inc DBS Vickers Securities (UK) Ltd 777 Third Avenue 4th Floor Paternoster House Suite 26A 65 St Paul's Churchyard New York, New York 10017 London EC4M 8AB United Kingdom Tel: 1-212-826 1888 Tel: 44-20-7618 1888 Fax: 1-212-826 8704 Fax: 44-20-7618 1900 Member of FINRA and SIPC The Financial Conduct Authority (FCA)

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