Yields heading north
We expect new malls in Singapore and higher property yields in China to power CMA’s earnings in the next 12-15 months. In China, we believe CMA is gradually building an edge over the local developers through its expertise in asset management. Portfolio yields, while still not optimal, are on a rising trend.
We keep our earnings estimates and target price, still on a 10% discount to RNAV. Under our revised rating structure, our call changes from Outperform to Add, with rental yield improvements and potential asset recycling being the catalysts.
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, with encouraging footfalls for its completed malls. We retain our view that CMA’s retail malls in China’s tier-1 cities 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 that 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. 55% of its GAV comes from China retail malls.
More malls completing and maturing
Over 83% of CMA’s China retail malls are now operational. We estimate that around 25% (9 out of 36) of its malls built before 2011 will enter their first leasing cycle at end- 2013-14. Similar to its more matured malls, CMA is confident of achieving 15-20% rental reversions for first rental renewals on the back of 7-10% annual retail sales growth in the last few years. We see potential for upside surprise. China rental reversions, coupled with asset completions in Singapore (e.g. Bedok Mall and Westgate), should underpin growth in rental income in FY14.
Rising yield trend
On a same-mall basis, yield on costs for malls opened in 2005-2011 has improved from 3.5-9.7% to 4.2-10.1%. We expect this trend to continue. Better yields for new malls could also be a possibility. For example, CMA expects the new CapitaMall Jinniu to generate a c.7% NPI yield after its first year, a marked improvement on the 4-5% achieved for new malls opened in 2011-12.
Publish date: 02/12/13