Capitamalls Asia Limited: Operational performance eroded by higher costs

- Results below our and market estimates

- Dragged by start-up costs in China

- Maintain Buy, TP S$2.51

Results below market and our expectations. CMA reported a 15% yoy drop in 4Q10 net profit to S$144m, bringing FY10 earnings to $422m (+9%). Stripping out the S$130m revaluation gain in FY10 (S$110m in 4Q10), net earnings in FY10 would have been S$292m, up 39% yoy. The higher earnings was due to greater fund management and project management fees in China as well as better income from ION Orchard but was partially offset by divestment of assets into CMMT, sale of Clarke Quay, lower profit recognition from Orchard Residences and one-off divestment gains.

Singapore on track, China dragged by start up costs. S'pore reported a 29% increase in NPI, thanks to better performance at ION Orchard while China's 17% growth was below expectations due to start-up costs while Japan remained lackluster. There were 5 new malls completed in China in 2010, bringing total operational properties to 38 in China and 91 across the portfolio. NPI yield trended lower to 3.3% in Japan to 6.4% in Malaysia due to sharper appreciation of asset values upon revaluation. Looking ahead, we expect another 6 malls to be operational in 2011 (5 China, 1 India). This should underpin NPI growth performance in the coming year. In addition, the group expects to invest in another S$2bn of new projects as part of its plan to double the number of malls in China to 100 in 6 regions over 3-5 years. Balance sheet remains strong with a S$618m net cash position as at Dec10. In reviewing its forward expansion programme, it plans to embark on a concept of a fast track ‘3G' mall model with better control over land cost and design through using a modular and standardized end-to-end approach for its developments. We believe this will take time to implement and the impact to be felt in the longer term.

Maintain Buy, S$2.51 TP. The investment case for CMA lies in its real estate niche in the pan Asian consumption growth story. In terms of valuation, the stock is trading at 1.28x P/Bk NAV. Our target price of S$2.51 is based on a 10% premium to RNAV of S$2.28. Key risk to our view remains a longer than expected operational ramp-up of its malls and slow deployment of its balance sheet capacity into new investments.

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