What’s next for CapitaMalls Asia after its $2bn shopping spree in 2011?

Investment Merits

Hop onto the Chinese consumption bandwagon – China consumption growth averaging 16% over the past 10 years and CMA is a good proxy to retail spending growth with its extensive retail mall network of 53 malls, and growing, in China.

Extensive network of international retailers – The invaluable expertise in managing retail malls and the access to pool of international retailers enable CMA to formulate the right mix of tenants in each of the malls, thus maximizing malls’ human traffic and sales.

$2bil worth of acquisitions in 2011 – CMA acquired approximately S$2bil worth of assets in China, Malaysia and Singapore last year. It is targeting to spend the equivalent amount this year and its current strong cash position will enable CMA to do so comfortably. In the medium term, CMA is targeting to increase its portfolio of malls in China from the current 53 to 100 in five years.

Pipeline of malls opening – only 66 out of the 92 malls under CMA portfolio is currently operational and the remaining will be opened gradually over the next 4 years. This implies its recurring income will be further strengthened over the period.

Proposed 3G Malls to shorten construction time of malls from 3 years to 2 years. We see that as a potential for CMA to enhance capital turnover and improve ROE if implemented successfully.

Key Risks

Poor deployment of capital with possible investment in NAV destructive assets may impact our RNAV estimate. On the other hand, failure to deploy cash into investment will weigh on its ROE.

Longer gestation period of mall could slow yield growth, particularly in tier-3 cities where shoppers have yet to fully appreciate the culture of shopping mall. Inflationary pressures are prevalent in developing Asian countries like China and India may lead to higher borrowing costs.

We ascribe a 10% discount to RNAV to reflect the business’s inherent long capital commitment period, as well as CMA current underleveraged position. We initiate coverage on CMA with Buy recommendation at fair value of $1.76, pegged to 10% discount to RNAV of $1.95, representing a potential upside of 22.1% from its latest closing price.

We remain confident in China consumption growth in the long run and believe that the worries over slow down in China economic growth is short term and temporary. The recent plunge in CMA share price is excessive and the current trading price of S$1.44 is compelling in our view, which is at 0.9x of its FY11 book value.