Investment view
Joy City (JC) is a quality operator of fashionable shopping malls in someof China’s most affluent cities. With its strong brand, support from itsparent (state-owned enterprise COFCO) and a proven track record inM&A, we think JC could buy up rivals amid a wave of M&A in the retailproperty industry. JC is aiming to operate 20 malls in 5 years, from just 8currently, and proactively carry out an asset-light strategy. Howeverwithout better cost controls, its returns will remain as one of the lowest inour coverage and hence keeps us sidelined. We initiate on JC at Neutralwith a 12-m TP of HK$1.70.
Core drivers of growth
We estimate a 136% CAGR for underlying profit growth in 15-17E, drivenby both top line growth (40% CAGR on doubled property sales given alow base and 14% CAGR for rental properties with three new malls’contributing) and underlying margin recovery from a trough in 15E.Overall rental contributes an avg c.60% of total earnings in 15-17E.
Risks to the investment case
Upside: Valuation alignment with A-share peers hinged on SOE reform.Rental performance and portfolio growth above (+)/below(-) expectations.
Valuation
We set our TP disc. to NAV at 30% vs. 0-20% for CRL/Wanda after crosschecking implied P/B-ROE. JC trades at 48% disc. to end-15E NAV, 0.7X15-17E P/B (excl. revaluations) against avg. 3.5% ROE vs. avg 31%/1.5Xagainst 16% ROE for CRL/Wanda, 46%/0.9X against avg. 13% ROE foroffshore peers.
Industry context
We expect subdued organic growth of retail rents in 15-17E and think anadjustment to the supply level is justified. That could result in M&Aactivity in the industry that would potentially benefit the leaders.INVESTMENT LIST MEMBERSHIP
Neutral