Building an edge in China
▊ Our recent ground checks on CMA’s retail malls in China reinforce our view that asset management remains its edge over local developers. Asset build is on track, footfalls are encouraging and more malls are maturing. We expect its operational metrics to improve in FY14-15. We tweak our FY13-15 core EPS by 1-2% and nudge up our target price (still based on 10% discount to RNAV) for slightly higher rental estimates after our China trip. We reiterate our Outperform rating, with rental yield improvements and potential asset recycling being the catalysts.
We toured some of CMA’s projects in Shanghai and Guangzhou, and also interacted with senior management and ground staff last week.
What We Think
We noticed distinct improvements in retail footfalls at CMA’s Raffles City (RC) Shanghai and Hongkou Plaza since our last visit in 2012. This asset, which was acquired at c.4.5% yield on cost in 2011, will be entering its first renewal cycle in 2014. Like its other more mature malls in its portfolio, CMA is confident of getting 15-20% rental reversions on the back of c.6-7% retail sales growth per year. We think this is achievable. We also visited its latest brownfield development in Guangzhou (Baiyun) and believe that this mall can achieve or even beat CMA’s growth targets come lease renewal season in 2017-18. A solid location (only mall in the area connected to a train station) and lack of comparable malls in the vicinity are the positives. We retain our view that CMA’s retail malls located in tier-1 cities in China are well managed and well positioned for rental growth. However, Tier-2 malls, while seeing better footfalls, have not yet reached the level seen in tier-1 cities. Overall, we believe the demand landscape for mid-tier malls and product offerings in China are stronger than the luxury segment as price points are more in sync with the reported median income. This, in our view, is CMA’s strong suit. Our walkabout in Shanghai’s more upscale malls on a Sat afternoon indicated low footfall. Our conversation with CMA’s CEO, Mr Lim Beng Chee, suggests a strong FY14-15 to come, underpinned by asset completions and rental reversions as the 2011 and 2012 batch of retail malls enter their first lease renewal cycle.
What You Should Do
We maintain an Outperform stance as more of its retail malls will mature in FY14-15.
Publish date: 27/11/13