CapitaMalls Asia

OCBC on 3rd Jul 2012

CMA announced it has established a USD1.0b CapitaMalls China Development Fund III (CMCDF III), in which it would hold a 50% stake. Three CMA shopping malls, Tianfu and Meilicheng (Chengdu) and Luwan (Shanghai), would be divested as seed assets to CMCDF III. We understand that these would be injected for S$749m, versus their current book value of S$640m. This would result in a net gain of ~S$72m, on a 100% basis for these properties, and a net cash inflow of ~S$335m to CMA for the sale of its stakes. We expect the market to react positively to this development, and believe divestment valuations would serve as key data-points validating CMA’s asset values in the market. Maintain BUY with a higher fair value estimate of S$1.79 (10% RNAV discount) versus S$1.76 previously, mostly due to stronger valuations for Chinese assets and listed entities.

Establishment of USD1.0b CapitaMalls China Development Fund III
CMA announced it has established a USD1.0b CapitaMalls China Development Fund III (CMCDF III), which would invest primarily in Chinese retail properties. CMA would hold a 50% stake with the remainder held by institutional investors from Asia and North America. Assuming a gearing of 40-50% for CMCDF III, the fund could allocate up to USD1.8b to USD2.0b in total capital (CMA has 50% commitment) during a 2-year investment period window with an IRR hurdle in the mid-teens.

Divestment of three malls; to book ~S$72m gains
CMA would divest three shopping malls, currently under development, as seed assets to CMCDF III. These are CapitaMall Tianfu and CapitaMall Meilicheng in Chengdu, and the Luwan integrated development in Shanghai (still subject to approval). We understand that these would be injected for S$749m, versus their current book value of S$640m. This would result in a net gain of ~S$72m, on a 100% basis for these properties, and a net cash inflow of ~S$335m to CMA for the sale of its stakes.

Key data-points for validating asset valuations
We expect the market to react positively to this development. In our view, divestment valuations are in line with the street’s and our estimates, and would serve as key data-points validating CMA’s asset values in the market. CMCDF III would also be an option for capital recycling ahead; however, we note divestment targets would likely be assets under development majority owned by CMA, and only Tiangongyuan (Beijing) fits this profile currently. In addition, we expect CMCDF III to be a potential JV partner for future developments, which would give CMA a larger scope for capital allocation for acquisitions ahead.

Maintain BUY at higher S$1.79 fair value estimate
CMA’s valuation remains undemanding, and we see significant upside as its asset pipeline transitions into an income-generating portfolio over FY12. Maintain BUY with a higher fair value estimate of S$1.79 (10% RNAV discount) versus S$1.76 previously, mostly due to stronger valuations for Chinese assets and listed entities.