CapitaMalls Asia Ltd - A transitional 4Q ahead (OCBC)

Maintain BUY

Previous Rating: BUY

Current Price: S$1.25

Fair Value: S$1.48

Positive set of 3Q results. CapitaMalls Asia (CMA) reported 3Q11 PATMI of S$36.5m which came in above our expectations, mostly due to improved gross margins and lower admin expenses, partially offset by a larger than expected forex loss. 3Q11 topline of S$66.9m was in line as YTD revenue now constitute 75% of our FY11 forecast. We were mildly surprised that mall opening costs have stopped escalating this quarter given the heavy pipeline of malls in 4Q11 and that management fee and property income EBIT from China has improved on a QoQ basis (management fee: S$2m in 2Q11 to S$4m in 3Q11; property income: S$-1m in 2Q11 to S$4m in 3Q11) despite Minhang Mall being only newly opened.

Focus on Hongkou opening ahead. Judging from the price reaction yesterday, we believe the market viewed 3Q results in a positive light. Looking ahead to 4Q11, we expect three malls to start operations: Hongkou (Shanghai), CapitaMall Crystal (Beijing) and CapitaMall Xuefu (Harbin). The market would likely focus on management's plans to start operations at Hongkou in 4Q11 given that it is a key component of CMA's Chinese portfolio by value. We had visited Hongkou last month during a fact-finding trip and believe that it is on course to open in 4Q11.

A transitional 4Q11 as portfolio matures. In our view, a key transition would occur in CMA's Chinese portfolio in 4Q11. By end FY11, 59% of CMA's Chinese portfolio is slated to be made up of operational malls, in terms of NAV, as compared to only 35% now. The implication is that, with an increasingly operational portfolio, we would see reduced drag on CMA's return on assets and increased operational traction as income from operational malls offsets opening costs at uncompleted malls. In addition, we note that CMA has slipped into a net debt position versus net cash end of 2Q11. Including the recent Suzhou acquisition, we estimate CMA's outstanding capital commitment at ~S$2.7b over the next three years and this could suggest a phase of capital recycling over FY12-13, especially if management wishes to continue in an active acquisition stance while staying under 30% net gearing.

Maintain BUY at S$1.48 fair value. We raise our FY11 PATMI forecast by 5.9% but pare our fair value estimate to S$1.48, versus S$1.54 previously, due to changes in values of REIT holdings and an increased weight of 30% to our bear case scenario given heightened macro-economic risks since our last update. We use a scenario-weighted sum-of-the part RNAV model to value CMA. Maintain BUY.