While we are lowering our estimates for Joy City, given more downwardpressures on the Chinese economy and the RMB, we maintain our positivestance on Joy City on good fundamentals and sound defensiveness. In ourview, Joy City stands out from the private developers on the back of growingrecurrent income, low average funding cost, sound debt maturityprofile/currency exposure and strong growth potential from its developing IPportfolio and potential further asset injections from COFCO. We see strongdefensiveness of Joy City relative to the private developers, which is importantamid current economic, stock and currency market volatilities.Strong performances from Joy City Shopping Malls in 1H15
In 1H15, despite the tough macroeconomic and retail market environmentsand intensive competition in the shopping mall market in most mainland cities,Joy City achieved continued strong performances for its shopping mallportfolio – with average occupancy of 96% and unit rental growth of 11% YoY.For example, Xidan Joy City had average occupancy of 93% and an 8% YoYunit rental growth, Chaoyang Joy City had average occupancy of 99% and unitrental growth of 1%, Tianjin Joy City had average occupancy of 99% and unitrental growth of 13%, Shenyang Joy City had average occupancy of 94% andunit rental growth of 29%, Shanghai Joy City had average occupancy of 97%and unit rental growth of 3%, while Yantai Joy city (which opened in July2014) had occupancy of 94%. These figures reaffirm our view that the primelocation, high quality and right tenant mix of Joy City’s shopping malls shouldenable it to differentiate itself against other retail malls in the different cities.Also stable and solid performances from other investment propertiesAmong other IPs, Beijing COFCO recorded average occupancy of 73% in 1H15– lower but that was due to the company’s tenant adjustment, which broughtin a 9% YoY increase in unit rental. Fraser Suites Top Glory Shanghai’soccupancy remained high at 89%, with a unit rental rise of 3%.Attractive valuations at 75% NAV discount and 0.6x P/B
We base our new HK$3.61 target price (from HK$4.05) on a 30% discount toour estimated NAV of HK$5.16 (from HK$5.79), mainly as we adjust our rentaland hotel assumptions given the latest economic conditions and we furtheradjust our RMB exchange rate movement assumption to an RMB/USD rate of6.9 by end-2016. Despite this, we think Joy City’s valuations are attractive, andwe see potential positive surprises from additional macro policy support by thecentral government. Risks: unexpected economic and policy volatility.