NEUTRAL Maintained
S$1.21 Target: S$1.34
Mkt.Cap: S$4,682m/US$3,612m
Property Devt & Invt
S$1.27bn JV in Suzhou mixed development
We expect accretion, but only just. CMA has announced a conditional agreement with a government-linked entity in Suzhou, SIPJUD, for a 50% stake in a mixed development in Suzhou Centre. The attributable price of S$637m values the completed mall at Rmb22+psm GFA with expected cap rates of 8-9%. We believe the project has a good location and strong positioning, with the price suggesting upside once it is completed in 2015. We expect CMA to clinch the deal. The positives, however, will not swing valuations, in our view. No change to our earnings estimates but our target price has been lowered from S$1.36 to S$1.34 (still on a 30% discount to RNAV) on lower valuations for its listed vehicles. We remain Neutral, still because of rising risk premiums in China and yield gestation. Reversal of these conditions could provide possible re-rating catalysts.
Strategically located. The proposed 50:50 JV is for a prime site located in the western CBD of Suzhou Industrial Park (SIP). The development is said to have around 250k sq m GFA of retail space and 60k sq m GFA of office space when completed in 2015. Our conversations with management suggest that the project possesses some strong location attributes. The completed property will have direct metro connection at the basement, which would result in high traffic-pass through. In fact, this is supposed to be the only mall with direct train connectivity. The development will be an hour’s drive from Shanghai and 30 minutes by train from Shanghai’s Hongqiao Airport. Flanked by residential and office buildings, management also believes that the development is one of only three organised shopping malls in the city. SIPJUD will be developing the remaining office and hotel components under the JV agreement, which are expected to further boost the asset value of the mixed development.
8-9% yield target should be easily achievable. Based on the purchase price of Rmb22k psm GFA (Rmb31k psm NLA), we see upside for CMA’s yield target of 8-9% by 2015 on completion. CMA guides that comparable retail rents are currently Rmb200-250 psm NLA, which should comfortably meet management’s cap-rate forecasts. Historically, the group managed to achieve 5-7% yoy growth for its Tier-2 malls, a reflection of its asset-management capabilities. Management has an IRR target of the mid-teens on a leveraged basis. It plans to build a mall offering necessity and luxury products.
How did this deal come about? Without going into specifics, management believes that it was the group’s expertise in managing retail malls that had won over the Suzhou government. The success of its Singapore malls was probably one main factor. It guides that there had been other offers for this asset, some at higher prices. CMA has been negotiating for this deal since the beginning of the year, which could explain the attractive pricing.
Funding. If approved, CMA will fund its 50% share of the development through debt and internal resources, at a proposed loan-to-value ratio of 40-50%. On a look-through basis, we estimate that its net gearing will rise from 55% to 60% by 2013, which is within CMA’s comfort level. Borrowing costs have gone up for the group, from 10-20% discounts to PBoC rates in the past to 10-20% premiums. At the project level, we expect eventual NPI yields to still show positive carry.
Valuation and recommendation
Muted accretion for now; maintain Neutral. The deal is now pending Suzhou government approval. However, we expect it to go through and have factored in accretion of 1.5% for RNAV. This is offset by lower valuations for its stakes in listed entities. Our target price thus drops from S$1.36 to S$1.34, still based on a 30% discount to RNAV. After acquiring the Suzhou site, CMA will have stakes in 55 malls in China. Around 59% (by NAV) is due for operations by end-2011, up from 43% in 1H11. This is encouraging, but is unlikely to swing valuations just yet, in our view. We remain Neutral, still because of rising risk premiums in China and yield gestation. Reversal of these conditions could provide re-rating catalysts.
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