2 macroeconomic trends threaten to hurt CapitaLand sales

China and Singapore sales vulnerable.

Firstly, Chinese efforts to lower the country's growth pace to a more sustainable level will likelyl increase the downside risks for CapitaLand's Chinese residential sales and rental outlooks, according to OCBC Investment Research,

Second, on the Singapore front, rising mortgage rents also threaten to dampen primary sales volume.

Here's more from OCBC:

Chinese authorities gunning for sustainable growth. Last week, the flash Chinese PMI reading for May came in below view at 48.3 – a ninemonth low and the second consecutive month of a below-50 reading (signalling contraction). Moreover, Chinese credit conditions have been tight over Jun so far with the overnight repo rate touching 11.7% last Thursday. While these datapoints point to significant discipline from Chinese authorities in curbing economic excesses, we see increasing uncertainties creeping into the macro picture as the government attempts to engineer a more sustainable albeit slower tempo of growth. This being so, we see heightened downside risks for CAPL’s Chinese residential sales and rental outlooks.

Rising mortgage rates in Singapore could weigh on sales. In Singapore, while the Fed fund rate is seen to be kept low till 2015, increasing visibility of a QE exit scenario have moved bond yields to recent highs. Going forward, we believe a trend of rising mortgage rates would likely ensue from here. From our sensitivity analysis, for a S$1m loan, an increase of 50 bps would increase monthly mortgage payment by around 7%. Our judgment is that while rising rates alone are unlikely to trigger dramatic residential price downside, it would likely weigh on primary sales volume ahead.

Maintain BUY on lower S$3.77 fair value estimate. We update our RNAV valuation model with softer cap rates and ASP assumptions and hence lower our fair value estimate to S$3.77 with a higher RNAV discount of 30% versus S$4.29 (20% RNAV disc.) previously. However, we maintain a BUY rating as we consider CAPL shares to be likely oversold at this juncture at a 45% discount to RNAV. Note that 36% of CAPL’s value is constituted by its stake in listed CapitaMalls Asia (CMA) which has dipped 8.2% YTD versus CAPL’s whopping 19.5% correction. Moreover, we highlight that CAPL continues to hold a strong balance sheet (S$5.4b cash, 44% net gearing) which would buttress its businesses through potential headwinds.

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