CapitaMalls Asia - A growing presence in China - BUY ($1.76) TP $2.34 by RBS

A growing presence in China

We remain positive on CMA following our visit to some of its malls in China. In

Shanghai, we expect the company to replicate the success of its Raffles City

operation with other malls in the city. We also see substantial room to open new

malls in tier-two cities. Maintain Buy.

Key forecasts

FY09A FY10A FY11F FY12F FY13F

Total property income (S$m) 228.9 245.4 194.9 251.5 287.3

Reported net profit (S$m) 388.1 439.7 236.6 231.8 249.6

Reported EPS (S$) 0.10 0.11 0.06 0.06 0.06

Reported PE (x) 17.60 15.60 28.90 29.50 27.40

Dividend per share (S$) 0.01 0.02 0.01 0.01 0.01

Dividend yield (%) 0.57 1.14 0.69 0.68 0.73

Book value per share (S$) 1.41 1.50 1.55 1.60 1.65

Disc/(prem) to adj BV (%) -25.2 -17.4 -13.7 -10.3 -6.89

Accounting standard: IFRS

Source: Company data, RBS forecasts

year to Dec, fully diluted

Replicating success of RCS in Shanghai

We visited several of CMA’s malls in China, and left with an optimistic outlook. In Shanghai,

we expect the company to replicate the success of its Raffles City Shanghai (RCS) operation

with the 2011 opening of two new malls, Hongkou Plaza and Minhang Plaza – according to

the company, both have seen healthy pre-leasing figures. We believe two prime locations

CMA secured in 2010 at attractive prices should help it benefit from growth in Shanghai’s

prime retail rental market, which JLL estimates will expand 5-9% pa during 2011-14.

Substantial room for growth in tier-two city malls

Although malls in tier-two cities generate lower rents and shopper traffic, we expect

contributions from these operations to improve as these cities develop over the medium

term. Given the good locations of its malls, we believe CMA will benefit as tier-two city

markets mature over the next five years. In the shorter term, CMA is actively implementing

asset-enhancement initiatives (AEI) that we expect to improve NPI yields on these malls.

China malls to make more significant medium-term contributions

CMA has established a track record of delivering solid income growth since opening its first

mall in China in 2005. We note that less than 40% of its China portfolio is currently

operational and, hence, expect NPI contribution from China to rise going forward. Given that

retail malls generally need at least a three-year gestation period, we see China malls

contributing more to earnings in the medium term.

Buy maintained, TP S$2.34

We reiterate our positive view on CMA and maintain our Buy rating and target price of

S$2.34. We believe that the company is in a good position to expand, based on its debt

headroom of S$1bn (based on 30% gearing). As CMA intends to increase its portfolio to 100

malls in China (currently 53), we expect to see more acquisitions in tier-two and -three cities

due to the increasingly challenging acquisition climate in tier-one cities. We also view the

proposed secondary listing in Hong Kong as a potential share price catalyst. CMA is

currently trading at 1.1X P/B vs peer Hang Lung’s 1.4x and the China sector on 1.0x.