China is the key growth market. We recently visited eight CMA malls in China to review mall performances and its growth strategy. For CMA, China is the key growth market - 53 out of 92 malls in CMA's portfolio are in China, taking up 70% of GFA and 37% of property value (on an effective basis). Moreover, CMA aims to grow its Chinese portfolio to 100 malls over three to five years.
Three key operational advantages. We observe that CMA has three key operational advantages in China. First, it has the ability to leverage on its extensive tenant network to expand successful brands and tenant mixes efficiently across its malls. This is especially effective in major cities such as Shanghai and Beijing where CMA has deep presence. Secondly, CMA has demonstrated diligence and success in using asset enhancement initiatives (AEIs) to grow its net property income (NPI). Because of its operating scale, CMA could learn quickly about what works and apply successful AEI strategies throughout its network of malls. Finally, we believe there would be a trend of decreasing dependence on anchor tenants as malls mature, giving CMA increased flexibility to rationalize anchor tenants' rental spaces and/or raise rents, which would further boost NPI.
Strong niche in the mid-upper income segment. We think CMA has a strong niche in China; its growth strategy is mainly focused on "suburban malls" that serves the mid to high income segment, similar to the Junction 8 mall in Singapore. Unlike other mall developers operating at a similar scale like Dalian Wanda Group and Hang Lung, CMA does not develop "destination malls" fronted by luxury retailers (Louis Vuitton, Gucci etc). CMA's malls are typically located at strategic public transportation nodes with captive residential demand and potential for retail growth, away from mature retail centers. In our view, CMA's business model in China is a resilient one due to its focus on mid-high income segment instead of the volatile high growth-high margin luxury segment. While its downside is sheltered, CMA is poised to benefit from the expected steady growth in China's retail consumption and middle class population.
Maintain BUY. We formalize our view that CMA has a well thought out growth strategy in China underpinned by fundamentals and significant operational advantages. We update assumptions and incorporate a new fair value of $2.00 for CapitaMall Trust (CMT). Maintain a BUY rating on CMA with a revised fair value of $2.17 (at parity to RNAV) versus $2.15 previously
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