CapitaMalls Asia: Bumper revaluation gains (OCBC)

Adjusted 2Q11 PATMI up 37% YoY. CapitaMalls Asia (CMA) reported 2Q11 PATMI of S$164.9m, up 100.8% YoY versus restated 2Q10 PATMI of S$82.1m. There was a significant revaluation gain of S$142.3m, without which 2Q11 PATMI would be S$22.6m, up 37% YoY versus 2Q10 PATMI, similarly adjusted for gains and development profits by our estimates. 2Q11 results came in marginally below our expectations largely due to the frontloaded expenses associated with mall openings. Management recommended an interim dividend of 1.5 S cents.

S$142.3m of revaluation gains. CMA reported net revaluation gains of S$142.3m this quarter, of which 75% was attributed to completed malls and the remainder from three Chinese malls in the pipeline. By geographical breakdown, a major portion of the gains were taken from Chinese assets (62% or S$89m) with the bulk of the remaining from Singapore. Management indicated confidence in realizing these gains in cash ultimately from divestments and we think this is realistic given credible cap rates implied in the valuations.

Encouraging operational performance in China. In 1H11, the Chinese malls saw a 22% YoY increase in net property income (NPI), on a same mall basis, on the back of improved tenant sales and shopper traffic which grew >15% and >10% respectively. From a vintage breakdown perspective, we saw NPI yields increase across all vintages; in particular, malls that opened in 2009 clocked an increase in annualized yield from 3.4% (1H10) to 5.3% (1H11), indicating a faster NPI ramp-up for newer malls, in our view.

Front-loaded mall opening expenses. Minhang Shanghai was opened in 2Q11 and we expect to see Crystal Beijing, Hangkou Shanghai and Xuefu Harbin open later this year. Management indicated the need for frontloaded expenses in preparation for impending new malls in the pipeline (three malls in 2011 and six malls in 2012). We estimate these expenses to be considerable, relative to income from completed malls, given that these nine malls opening in FY11-12 make up a substantial 35% of CMA's Chinese portfolio by asset value. We expect this trend to continue over FY11-12 and to ease later as the base of completed malls increase and the rate of openings stabilize.

Maintain BUY. We continue to like CMA's assets and strategy, given expected tailwinds from China's continued consumption growth over the long term, and view concerns regarding a Chinese hard-landing to be overwrought at this juncture. We update assumptions and maintain a BUY rating at a fair value of S$2.09 (at parity to RNAV) versus S$2.15 previously.