City Development (CDL) shares recently dropped a lot – internal family disputes, corporate governance issues and a challenging real estate market have been a big drag on shares performance.
Good to buy today? Let’s dive in.
What’s driving CDL’s poor results?
First things first, CDL’s latest financial year results have been plain bad. Revenues were down 33% to S$3.2 billion, net profits down 36% to S$201 million.
The Singapore developer made less money from its property development in 2024 – owing to less projects being completed.
Meanwhile, the company also faced higher financing costs and construction delays.
Now, this is completely normal for a real estate developer. Property projects move in cycles.
Some years, the company complete multiple projects and post strong earnings.
Some years, it’s in a quiet phase — buying land and developing new projects. Pretty normal for a big developer.
The thing is, when results look bad, investors panic and sell. When they look great, everyone piles in. The truth is, CDL’s long-term value doesn’t change based on a single year’s earnings.
The key is looking beyond short-term earnings.
CDL’s hidden asset value nobody’s talking about
If you look closer, CDL’s balance sheet tells a far more compelling story.
A balance sheet shows a company’s assets and liabilities. Assets are what CDL owns, and liabilities are what it owes.
If CDL sells down all its assets and pays off all its debt and suppliers, its net asset value (NAV) of the company would be worth S$9.3 billion dollars.
The net asset value (NAV) per share would be worth $10.17 per share.
Now, here’s where it gets interesting.
CDL shares are currently trading at just S$4.95/shares. The last time CDL traded at this level was back in 2009, during the global financial crisis.
You’ll know CDL is a far better company — higher quality assets, bigger business — than it was 16 years ago.
Credit: Google Finance
Typically, Singapore blue-chip developers’ shares tend to trade below its NAV. This is often called a “conglomerate discount” – the idea that a company holding many different individual assets, but not actively selling them is worth less than the sum of its parts.
Now, the real interesting bit.
CDL’s net asset value (NAV) is severely understated
CDL’s reported NAV is actually valued at “cost”. What this means is a large portion of its assets are being recorded at the original purchase price rather than their true market value.
This is particularly significant for its hotel assets. Why? Accountants typically classify hotels as PPE (Property, Plant & Equipment) rather than investment properties.
This is because hotels generate operating income, rather than passive rental income. And accountants don’t require hotel assets to be recorded at market value in the same way property investments are.
Credit: City Development Financial Statements FY2024
This means while CDL’s hotel assets have likely appreciated significantly over the years, their balance sheet value hasn’t changed.
Management has also stated in their FY2024 financial results presentation: “If they accounted for fair value gains on investment properties and revalued the hotel portfolio, its true NAV could be as high as $19.86 per share.”
Based on an adjusted NAV, that’s almost four times its current share price.
CDL is a highly reputable developer. You’ll know its assets are high-quality – investment properties, land banks, development projects, hotels, joint ventures including office buildings, shopping malls, luxury residences across Singapore, UK and other developed markets.
You’ll know the value of these assets is REAL.
Yet, because the way accountants look at the company’s balance sheet, the market isn’t fully recognizing their true worth.
So… What’s CDL’s biggest concern?
One of the biggest overhangs on CDL’s shares has been the Sincere Property Group saga.
Long story short, in 2020, CDL’s investment in a Chinese real estate developer turned sour, which led to a massive write off from the company’s balance sheet. Also, over the last couple years, China’s property market has been in a dumps.
But let’s put this in context.
Even with the Sincere write-down of around S$1.7 billion, CDL remains a financially strong company, with far bigger asset base.
What if CDL family forces a breakup?
Yes, the internal family fight could force the company into a strategic shake-up. Could that mean an asset sale or restructuring? Perhaps.
But let’s be honest—this is after all, an Asian family-controlled business. They are unlikely to make irrational decisions that would destroy shareholders’ value, since a large part of the wealth is right to the company. My take? More likely, they’ll at least work things out. The market will move on.
Even in the absolute worst-case scenario, where the company is forced into liquidation — which is the least probable scenario — I believe that’s where the discount to its true NAV will narrow and investors would still walk away with a massive premium.
My final thoughts
The bad news is CDL shares are just going to get dragged in the mud for a while. I know, CDL is never the perfect business. And I don’t see any near-term catalyst, despite the fact shares are traded at a deep discount from its net assets.
The good news — Right now, CDL shares trade at S$4.95 per share today. That’s a 0.5x P/B ratio.
Historically, it trades close to 0.83x P/B ratio. Even if shares trade back to its historical average, that’s a 66% upside from current levels.
Let’s go further.
CDL shares have traded close to its P/B – 2015, 2018, 2020 and 2022 (see red circles below). Each time, investors realized shares were just trading in the bargain bin and shares shot up.
I don’t believe this cycle should be any different.
What if CDL returns to its adjusted NAV?
- Reported NAV: S$10.17/share
- Adjusted NAV (including hotel revaluations): S$19.86/share
Even if CDL trades at half of its adjusted NAV, that’s at least 90% upside from current share levels.
While CDL may not be a high yield stock, it has maintained a consistent S$0.08/share dividend payout over the last ten years, which is perhaps a plus point for investors looking for income while waiting for CDL shares to get revalued.
At its core, CDL holds an enormous amount of high-quality assets. At its core, this is a story of “riskless profits” — or as close as you can get in the stock market — whose shares are trading at a deep discount to well-backed tangible asset value.
There are times when CDL’s value is recognized, and its shares move back to its historical average P/B valuation.
Today, CDL is in one of those deep discount phases.
Sometimes, investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan
Willie, what is the probability of CDL going the direction of Hongkong Land and Capitaland Investment?
Hey Lawrence,
I think that’s anyone’s guess. I’m not sure tbh. But I won’t be surprised if CDL takes that direction — It’s a far superior model for property owners since you can monetize your assets, collect fees and create a stable, sustainable recurring income.
Cheers,
Willie