CMA is currently trading at a 42% discount

J.P Morgan - Price Target: S$2.35

Company description
CapitaMalls Asia is an integrated real estate company purely focused on the development, operation and investment management of shopping malls across Asia. CMA has interests in and manages a portfolio of 94 retail properties across 49 cities in Singapore, China, Malaysia, Japan and India. CMA is part of the CapitaLand group.

Key drivers of performance in an equity market recovery
We believe that the performance of CMA’s China portfolio will be the key share price driver in the coming year. With 3 malls, accounting for 28% of CMA’s China NAV, to be opened by 4Q11, more than 40% of the group’s China NAV will be operational in 2012. This together with stable and strong same store NPI growth of c. 20% and a stabilizing cost base, we do see the group more than double its China income in 2012 and achieving a 30% core earnings growth in 2012.

How much recovery has already been priced in, what are the key metrics?
The stock is currently trading at a 42% discount to our SOTP valuation of S$2.35/unit, and0.9x historical book. In fact, if we were to value the listed part of CMA at current market value, the implied discount to the unlisted book is 27%, an undemanding level that has priced in certain execution risk in our view.

Where’s the earnings risk for 2012?
Our call is predicated on the view that the operation in CMA’s China portfolio will start to stabilize in the next 12 months with cost well contained. The challenging operating environment for the sector and the risks of further cost escalation would be the key risks in our view for the group's earnings outlook.

Price target and key recovery risks
Our Dec-12 price target is based off our SOTP valuation at S$2.35/share. Key risks to our rating and price target include the group's inability to turn around the China operations in the next 6-12 months and the group's inability to deploy surplus capital.