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CapitaMalls Asia: China Is The Name Of The Game

Contributed by Shares Investment

By Choo Hao Xiang  

For those who seek to benefit from the consumption shift while preferring to err on the side of caution, real estate investment trusts (Reits), or more specifically retail Reits, certainly qualify as potential considerations under such uncertain times. These Reits, besides dishing out decent dividend payouts, offer exposure to a more diversified base of retail spending.

With Asian consumerism, particularly China, being the focal point, it is fitting to bring in one of the largest listed shopping mall developers, owners and managers in the region that is rapidly expanding in China – CapitaMalls Asia (CMA).

Being a manager of three listed Reits (CapitaMall Trust, CapitaRetail China Trust and CapitaMalls Malaysia Trust) and five private funds, CMA has a portfolio of shopping malls that spans across 51 cities in Singapore, China, Malaysia, Japan and India. Enjoying an extensive network of tenants that boasts premium brands like Charles & Keith, Dolce & Gabbana as well as Cartier, CMA has $26.5 billion worth of total property value in assets and an aggregate gross floor area of 78.9 million square feet. As of end-September, the company has $19.2 billion worth of assets under management, generating recurring management fee income of $53 million for the first nine months of 2011.

Results Buoyed By Revaluation Gains

CMA’s recently announced third quarter performance indicated its malls have healthy occupancy rates of over 95%. More importantly, tenants sales in Singapore, China and India registered accelerated rises of 6.7%, 13.3% and 16.8% respectively.

As for the headline figures, the nine months ended 30 September saw CMA chalked up turnover of $179.9 million, in-line with consensus projections, though declining 5.4% year-on-year. Still, higher fair value gain on its China properties of $152.3 million was enough to bolster net profit, which gained 25.7% to $250.6 million.

The latest results also took into account the one-off provision for its Hong Kong listing expenses of $13 million. Successfully making a debut on the Hong Kong Stock Exchange on 18 October, CMA aims to utilise the platform for its future expansion plan which includes boosting its asset size to US$16 billion over the next three to five years.

China-Focused

As part of its wider plan to double its portfolio in China to over 100 malls in the coming two to four years, CMA has a pipeline of 15 malls under various stages of development, with nine targeted to be open by 2012. For the remaining of this year, CMA intends to open three more malls in China, taking its total number of operational malls in China to 43.

Having already committed more than $1.2 billion in four new projects last year, CMA continues to ramp up its presence in the country this year, through the acquisition of the remaining stakes in two prime Shanghai properties and a site for the development of Suzhou’s largest shopping mall. It also gained interest in New Minzhong Leyuan Mall through CapitaRetail China Trust’s purchase.

So far, projects in China have been yielding encouraging results. According to a report by CIMB, CMA has been able to increase its net property income (NPI) yields on costs consistently, for its China malls over the past five to six years. However, the research house noted that CMA’s China portfolio yields on costs, based on its estimates, are still sub-optimal at 6% and lower for new malls at 5%.

(1) NPI Yields not representative of full-year actual performance

(2) Tenant sales are based on a same-mall basis (100%) and excludes sales from supermarkets and department stores

(3) Excludes Raffles City Shanghai

(4) Excludes malls under or previously under master lease namely CapitaMall Shuangjing, CapitaMall Anzhen, CapitaMall Erqi and CapitaMall Saihan

This presents two potential catalysts. IIFL Research is of the view that as the properties stabilise, CMA will be able to book fair value gains on the back of NPI growth for its China portfolio, which will be book value accretive over the medium term. Moreover, CMA, being well-capitalised with its net gearing at only 6%, may have gained the upper hand in acquisition opportunities as developers in China face credit squeeze.

Regional Developments

Turning to the local scene, asset enhancement works for JCube and The Atrium@Orchard are on track to complete on schedule next year. Despite difficult external conditions, CMA expects its Singapore properties to be underpinned by strong forecasted tourist arrivals of 12 to 13 million for the year, as well as positive sign from retail sales which grew 7.4% year-on-year in August.

Meanwhile, for its India operations, CMA will focus on completing the leasing of The Celebration Mall, Udaipur and to move forward the construction of the remaining projects under development in the coming months.

On to valuations, CMA is currently trading at around 0.9 times historic book value, well below its two-year average of 1.33 times. Its share price of $1.34 as at 28 October is also at a 10.7% discount to its net asset value. CIMB has tweaked its target price a tad higher to $1.16, maintaining its ‘Neutral’ rating on CMA while IIFL Research maintained its ‘Add’ rating with a target price of $1.48.