Keppel Land gnawed by Chinese market uncertainties

The company will be hand tied between two strategies: slash prices or accept slower sales.

Growing Chinese government restrictions on housing and the fallout of prices will hurt the profitability of its roughly 7,000 home portfolio in 2012, according to OCBC.

Luckily, this vulnerability is balanced out by strong balance sheet fundamentals that will help create opportunities should markets worsen next year.

Here's more from OCBC:

Sufficiently attractive entry point. KPLD is trading at a 55% discount to RNAV and 0.8 times trailing book value. We judge this to be a sufficiently attractive entry point for accumulation as valuation ratios are unlikely to reach last crisis' troughs, due to a stronger balance sheet and lower likelihood of a rights issue this time round. KPLD's net gearing, after the OFC divestment, is ~10% - much stronger than the 40%-50% range in 2008. A net cash inflow of S$1,115m from the divestment would also bump KPLD's cash position from S$800m to ~S$1.9bn.

Balance sheet strength = capital deployment options. This balance sheet strength provides capital deployment flexibility in a likely dynamic environment ahead. Management views long-term prospects in Singapore and China positively, and could purchase bargain assets should macro conditions deteriorate further. With the bumper OFC divestment gains (S$492.7m), there is also good potential for a special dividend ahead - likely a positive catalyst for the share price – though we prefer to see cash retained given its opportunity cost in volatile times.

Tough residential outlook but projects mostly sold. We see domestic residential sales slowing down in FY12-13 but note the bulk of KLPD's projects are already sold. Reflections@ Keppel (1,129 units) is 74% sold, Lakefront Residences (629 units) 99%, Marina Bay Suites (221 units) 69% and Luxurie (622 units) 39%. Progress billings would underpin earnings over FY12-13. KPLD's domestic residential landbank consists of 1,225 units; this works out to a relatively low 737 units, on effective stake basis, which should limit value drag as the residential outlook deteriorates.

China: tricky year ahead but long term strategy intact. We expect KPLD to launch ~7k Chinese homes next year with the bulk coming from the Botanica, Chengdu (1,747 units) and Tianjin Eco-City (1,220 units). China home prices fell for the third month in Nov 11 (57 of 100 cities tracked by SouFun Research) while, in the meantime, the Chinese government reiterated their stand on housing restrictions. Against this backdrop, we see a difficult year ahead in China. Management could have to choose between lower prices or slower sales, but we believe that KPLD has sufficient financial strength to bear out their long-term strategy there.

Maintain BUY with S$3.21 fair value. Maintain BUY on KPLD with a lower fair value estimate of S$3.21 versus S$4.11 previously, due to lower prices of K-REIT holdings, softer residential ASP assumptions and a higher 35% discount to RNAV reflecting heightened downside risks from recent cooling measures and continued macro volatility.