First foray into Guangzhou
▊ CMA’s latest acquisition in Guangzhou is its first but is unlikely to be its last. The pricing looks reasonable for a site in a tier-1 city and leaves scope for yield enhancements after one leasing cycle. Earnings downtime is also reduced by partial completion slated for end-2014. We are overall positive on this deal though the immediate impact on RNAV is expected to be muted. We lift our target price (still based on a 10% discount to RNAV) and adjust our FY13-15 core EPS by +2%/-3% for this acquisition. We reiterate our Outperform rating, with rental yield improvements and potential asset recycling being the catalysts.
CMA announced that it will acquire in full a shopping mall at Baiyun Greenland Centre in Guangzhou, China. The vendor is Greenland Real Estate, a subsidiary of the Greenland Group. The total cost is expected to be RM2.64bn or S$534.1m on a completed basis. This works out to c.Rmb30k psm GFA or Rmb47k psm NLA. This is CMA’s first foray into Guangzhou though it owns five retail malls in the greater Guangdong area.
What We Think
Construction of this mall is at the final stages and the mail is expected to open in late 2014. Acquisition at this stage will allow CMA to reduce earnings downtime and lower pre-opening losses. Pricing-wise, the deal looks fine. Strata-titled retail units in the area have been sold at c.15% higher or Rmb35k psm GFA. We believe Chinese developers will continue to divest commercial properties to free up tied-up capital, presenting more opportunities for purer retail operators like CMA. Management indicated that comparable malls in the location are fetching gross rents of c.Rmb250-300 psm. CMA’s latest mall is strategically located, being connected to the Baiyun Park subway station. We think rents could be slightly higher than market. Assuming a gross rent of Rmb300psm, we estimate an initial yield of 4.9%, in line with its previous acquisitions. We expect its NPI yield to rise to c.6% after one rental cycle (typically three years). CMA’s track record in lifting yields has been good. Net gearing is expected to rise to c.60% in FY14 (look-through), manageable in our view, with more assets set to complete and Grand Canyon mall to be divested.
What You Should Do
We maintain an Outperform as more of its retail malls will mature in FY14-15.
Publish date: 21/11/13