Wednesday, January 27, 2010

On Capitaland's selldown, and keeping some powder dry

The Singapore market continued its descent today, a sixth straight day of decline. The STI closed 27 January 2010 at 2706.26, 6.6% below the closing level of 2009. The purchase of Capitaland on 25 Jan now looks like a "silly" buy, the stock closing today at $3.74, some 7.4% lower than our recent buy price.

Capitaland hit a recent peak of $4.38 on 20 Jan, after announcing the acquisition of Orient Overseas' Chinese property assets. Sell side analysts were in a rush to upgrade the stock, citing the transaction as "accretive to RNAV". Of course, the People's Bank of China's hawkish approach to lending subsequently led to a 360-degree reversal in sentiment on Chinese property stocks, leading to a sell down in Capitaland and other property companies with exposure to Chinese real estate.

As mentioned briefly in our prior post, we like Capitaland for its strong management and good track record of execution. Its ability to spin-off assets to the wide range of trusts and privately-held property funds under management is also a major selling point. The "premature" tightening activity by the Chinese central bank should be seen as a positive move to allow for more sustained growth in the years to come, rather than to have the economy grow too fast in the short term. After all, we are looking to hold our position in Capitaland for many years to come, to benefit from the Chinese growth story. So in a twisted sort of way, early measures by the Chinese central bank are generally positive in our view, but the resulting correction in markets presents a short-term opportunity.

Today we sold one non-core holding, Micro-Mechanics (7,000 shares, $0.40) and two lots of CapitaMallsAsia ($2.28). While Micro-Mechanics possesses a uniquely shareholder-friendly management, we think that it would be good to keep some powder dry in the event of a larger-than-expected market correction. Exposure to CapitaMallsAsia was obtained through the recent IPO at $2.12, and while we regretfully failed to take profits at the recent peak of $2.70 (!), the stretched valuations of the stock make it a low-conviction stock in the portfolio. The valuation of the underlying Chinese property funds are difficult to value, and even with recent revaluation done, the stock trades at about 1.3X book. We prefer exposure to the parent Capitaland, and have thus sold two lots to build portfolio cash reseves.

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