Proven retail proposition featuring the Joy City brand: With the successful integrationof six Joy City malls under COFCO Corp in Dec-14, the company is today a specialistcommercial developer featuring urban mixed-use complexes. The Joy City brand has beenproven as underlined by the strong operating performance of the existing malls wheretotal annual sales and rental income both grew 20% y-o-y in 2014. In 2015, we forecastrental revenue to grow further by 13% y-o-y. Joy City is one of the purest commercialplays in China with rental income accounting for c40% of total revenue in 2015e, which issignificantly higher than other developers with commercial exposure such as Wanda,CRL, SOHO and Shui On Land.
Adoption of asset light model to aid growth in business scale: Strategically, thecompany is targeting to open 1-2 new malls per annum over the next five years, bringingthe total number of properties in its portfolio to 20, from 8 currently. This is done viaadoption of an asset light model which lowers the cost of new investments. During theprocess, Joy City will look to broaden its funding channels by introducing externalinvestors, while disposal of non-core assets will also be considered in order to preservecapital for development and future acquisition of Joy City malls.
Changes in our forecasts: We cut our 2015 EPS forecast by 67% to reflect the financialimpact from the asset injection which accounts for the dilutive impact from the rightsissue. However, our 2016 EPS forecast is largely unchanged as the dilutive impact of therights issue is being offset by our upward revision in property sales revenue. Our NAVhas been revised up 35% to reflect the value accretion from new assets.
Establishing a Buy rating: Under HSBC’s new rating system, we establish a Buy ratingon the stock (vs Neutral (V) under the prior system) and set our fair value, adjusted forrights issue, target price at HKD3.0 (previously HKD2.0 before right issue), based ontarget discount of 30% (35% previously), the average target discount taken for a basket offour SOE peers. Downside risks are slower-than-expected sales, weaker-than-expectedrental growth, and an overly aggressive acquisition strategy.