CapitaMalls Asia Limited – Forays into Suzhou retail scene (POEMS)

Buy (Maintained)

Closing Price S$1.20

Target Price S$1.76 (+46.7%)

CMA to develop largest mall in Suzhou via 50:50 JV, costs Rmb6,740 mil

Strategically located in Suzhou Industrial Park CBD, with direct metro line access

Spent ~$2.3bil YTD, surpassed its target of $2bil investment in 2011

Maintain Buy with fair value unchanged at S$1.76

CMA to develop Suzhou’s largest retail mall

CMA had on 28 Sept 2011, through its wholly-owned subsidiary, entered into a conditional agreement with SIPJUD, to jointly develop (50:50) a prime development comprising a shopping mall and two 20-storey office towers in Suzhou Industrial Park Central Business District. The total development cost of the 310,000sqm project is expected to be about Rmb6,740 mil (S$1,275 mil). That works out to ~Rmb22,000 sqm per GFA. Assuming average rental of Rmb200psm and Rmb150psm for the retail and office space respectively, we estimate the project could provide ~7-8% gross yield on cost after gestation period. The JV is subject to relevant government approvals.

Poise to be the commercial hub of the city

The subject development is next to Jinji Lake, strategically located in the heart of the western CBD of the SIP and near traditional city centre in Suzhou, and has the potential catchments of about 700,000 from both the SIP and the traditional city centre. The development will be directly connected to two metro lines, Line 1 (operational by next year) and a future Line 6, that will further extend the potential catchment to the 10.5mil residents in Suzhou. The subject retail mall aims to cater to both mid-upper and high-end shoppers, mall positioning will be similar to ION Orchard in Singapore.

Demonstrate the ability to acquire asset in prime location

We believe the latest JV demonstrates again CMA’s ability in securing prime assets in key cities of China, by leveraging on its established branding and retail expertise. Post acquisition, CMA has committed to total investment of ~$2.3bil YTD, surpassed its target of $2bil investment in 2011. We estimate CMA to reverse from the current net cash position to 0.22x geared by end-FY11, and still has room for another $2bil spending in FY12 before reaching 0.4x geared. That is before monetizing some of the stabilized assets in its stable.

Maintain Buy with fair value unchanged at $1.76

We expect the latest JV to contribute positively to its RNAV upon completion in 2015, but has minimal impact currently (<1 cent). Our RNAV estimates remain unchanged at $2.07, and fair value is thus maintained at $1.76, with the same 15% discount to RNAV applied to account for the current weak sentiment in the market due to debt concerns in developed countries. We maintain our Buy recommendation on CMA given its strong retail mall development pipeline and great exposure to retail consumption growth in developing countries.