Broker's take: DBS maintains 'buy' on CapitaLand on its Shanghai ventures

DBS Group Research has maintained its "buy" rating on CapitaLand Limited with a target price of S$4.35, or a 24 per cent upside to its last traded price of S$3.51 a share on Dec 19. This comes on the back of news that CapitaLand has entered into an 838 million yuan (S$171 million) agreement to acquire a commercial land plot in Wujiaochang - one of Shanghai's most vibrant decentralised business district (DBD).

The commercial space is the group's second investment in Shanghai's suburban office market and located next to the group's property, Innov Centre. CapitaLand plans to develop the site into a Grade A office tower with a total gross floor area (GFA) of 37,765 square metres. Total investment for the new office, including land cost, will be about 1.3 billion yuan, with planned completion in 2020.

Upon completion of this acquisition, CapitaLand will have 19 properties and over 1.4 million sq m in GFA in Shanghai across retail, office and hospitality properties.

Analysts from DBS are positive on this investment as they view it as a value accretive deal.

"This empowers CapitaLand with the increased ability to tap a wider tenant base, potentially larger tenants who require bigger spaces. A target tenant market will be the financial technology firms (fintech), a fast-growing industry in China," DBS said.

The broker added that management's confidence in the Wujiaochang district will be boosted as Innov Centre was 40 per cent occupied within six months of its acquisition.

With the planned extension, CapitaLand will also be able to enjoy operational benefits including economies of scale in terms of on-site and asset management, DBS said.

It added that decentralised offices such as the one CapitaLand plans to acquire tend to have a longer operational runway.

"The high rents in the central business district (CBD) have pushed tenants to look at decentralised options and we believe that CapitaLand will capture this trend, especially when the properties are located in a sub-market with excellent connectivity to public transport," DBS said.

"In addition, Wujiaochang is seen as an upcoming technological and innovation business zone near top tertiary education institutions such as Fudan University, Tonji University, and Shanghai University of Finance and Economics. Most importantly, the sub-market has attracted a steady number of multinational companies including Deloitte, Nike, AECOM, IBM and Oracle."

This bodes well for the firm in the long run when the working population within Wujiaochang increases over time, which will encourage companies to set up shop there, DBS noted.

Assuming a market transaction level of close to 38,500 yuan per square metre achieved for Innov Tower, the group could potentially see a fair value gain of about 153 million yuan upon completion in the medium term, implying an estimated 15 per cent return on the project, the broker added.

As at 10.20am on Wednesday, the counter was trading 0.285 per cent, or S$0.01 higher at S$3.52 apiece. About 363,000 shares changed hands.