Keppel foray into Nanjing residential market comes at high price: UOB KayHian

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Keppel’s acquisition of a 40 percent stake in a Nanjing, China, residential project has some positives, but the region’s weak property market and the high price mean the deal isn’t overly positive, UOB KayHian said in a note on Friday.

Keppel Land China formed a joint venture with Gemdale (Group) to develop an 8.8 ha residential site in Nanjing, China, in an around 1.414 billion yuan, or S$283 million, deal, it said in a filing to SGX Thursday.

One of the positives is the ability to monetize the project within months of acquisition as it will get to market with “high speed,” the brokerage said.

“This is different from past acquisitions in China, which tend to have a longer gestation period. Due to the accounting treatment, earnings from the initial launch will likely manifest earliest in late-2019 or 2020,” the note said.

But it added that the acquisition price appeared high compared with recent transactions.

“While Keppel has been selective with the project location, we are cautious on being overly positive. The disposal by Gemdale reflects its need to de-risk, given the weakening property market sentiment and its net gearing of 69 percent,” the note said.

It noted Keppel’s purchase price is an implied 18,300 yuan per square meter, with a premium for the location and the high speed to market, but that was “markedly higher” than land sales in September, such as a winning bid of 13,993 yuan per square meter from Longfor Properties.

Property demand in Nanjing was also weakening, UOB KayHian said, citing recent government property cooling measures. Only 5,211 new homes were sold there in August, down 40 percent on-month, the brokerage said, citing data from China Real Estate Information Corp.

“Recent land purchases also saw lower bids from developers. Buyers are reportedly taking a wait-and-see approach following the cheaper land sales as they anticipate home prices to decline,” the note said.

The brokerage said it left its 2018 and 2019 core earnings forecasts for Keppel unchanged at S$526 million and S$792 million, respectively, but raised its 2020 estimate by 1.4 percent to S$999 million.

“Keppel continues to face weak earnings for its offshore and marine business, and the weakening earnings outlook for its property business gives us pause. Land sales from Tianjin Eco City have also been lackluster,” the brokerage said. “Despite this, a higher-than-expected final dividend payout as part of its 50th anniversary could provide short-term uplift for share price.”

It kept a Hold call with an unchanged S$7.37 target price; it tipped an entry price of S$6.60.

Shares of Keppel were up 1.32 percent at S$6.89 at 9:42 A.M. SGT.

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