CapitaMalls Asia

Kim Eng on 3 Jul 2012

Establishment of USD1b China fund. CMA announced that it has set up CapitaMalls China Development Fund III (CMCDF III), in which it will have a 50% stake. The fund will invest in the development of shopping malls in China and CMA will contribute three development properties valued at SGD749.4m (USD594.8m) as the seed assets. Affirm BUY.

Tapping on private equity demand. Management had previously communicated that there is significant private equity demand for investments into shopping malls in China. It has already secured a number of long-term Asian and American investors for CMCDF III, which will have a fund life of eight years. The transaction will expand CMA’s fund management business, while giving CMA greater investment capacity to seek further acquisition opportunities in China. On a leveraged basis, the fund’s AUM could potentially be USD1.8-2b, with a target IRR of ~15%. In the two-year investment period, CMCDF III will have first rights to invest in prospective deals secured by CMA.

CMA contributes three seed assets. The seed assets will be Meilicheng Mall and Tianfu Mall in Chengdu, and Luwan Integrated Development in Shanghai. Based on the latest valuations, CMA stands to book in a net divestment gain of SGD35.9m and a fair value gain of the same amount for its retained stake. CMA is also expected to get a positive cash flow of around SGD300m after subscribing for its 50% stake in CMCDF III, which is likely to be reinvested in later stages.

Validation of its business model. The transaction shows that CMA’s capital recycling model is not just restricted to divestments to its REITs, which usually takes place only when the properties are completed and rents have stabilized. In addition, the ability to recognize gains on these development properties is also validation that CMA’s original acquisition costs were at attractive levels and that they had not overpaid.
Reiterate BUY. CMA remains our top pick amongst property developers. We have raised our target price to SGD2.07 pegged to a 20% discount to RNAV, on the back of the gains from this transaction and higher trading prices of its REITs.