CentraLand: S$0.48 Unrated - J-Expo Exploration

source:DMG

We recently visited J-Expo, CentraLand’s first commercial development in the nucleus of Zhengzhou City, Henan province. Spanning 65,890 sm, the building comprises of six levels of 2,560 retail units and seven storeys of 192 office units. Although Zhengzhou is a lower tier and developing city, we were pleasantly surprised by the reasonable standards of J-Expo’s architecture, as well as its well-diversified and well-organized tenant mix. Further, as J-Expo represents CentraLand’s maiden foray into commercial properties, we believe that it is a commendable effort. At present, 93% of J-Expo’s 1,792 retail units for sale have already been snapped up and the 768 retail units for rental have a decent occupancy rate of ~ 90%. The robust demand is unsurprising given that it is located within the main wholesale centre of Zhengzhou, coupled with close proximity to key bus and rail transport stations. More importantly, Zhengzhou’s status as China’s transportation hub makes it one of the most vibrant wholesale centres in China, thus supporting a thriving demand for retail units within the city as people across China constantly travel there to purchase wholesale goods for resale in their respective provinces and cities. For CentraLand, we believe that this is also positive for its upcoming new development – Tianrong Fashion City, a fashion apparel wholesale centre. In the medium-long term, it could also look at acquiring or developing sites which can benefit from the wholesale trade.

On the back of the handing over of ~ 1,000 retail and office units in J-Expo, CentraLand recorded a 1,292% YoY surge in 3Q08 PATMI to RMB74.3m. For the next 2 - 3 quarters, we reckon CentraLand can still recognize income contribution from 803 pre-sold retail and office units which have yet to be delivered, as well as potential sales of 184 other unsold ones. However, we are less certain of its 2H09 performance, as J-Expo’s contribution should come only in the form of rental income (estimated at RMB20.9m p.a.) as a bulk of its sales contribution would have been recognized then. Simultaneously, we are not expecting a robust take-up for GLSS Phase 3. From our view, some of the more likely avenues for topline enhancement could be the acquisition of another commercial development which has a higher probability of asset turnaround, possible sales of some of J-Expo’s retail rental units and quickened finalization of Tianrong Fashion City.

Following a pledge to construct more low-income housing and cutting mortgage rates and down payments for first-time home buyers, the Chinese government has introduced more concrete measures. These include the trimming of business and transaction taxes for property sales, as well as policies to make it easier for developers to obtain credit. Given that real estate investment accounts for about 10% of China’s GDP, we are not surprised by the recent slew of favorable policies. Nonetheless, we believe that it could take a longer than expected time for the policies to fully filter to each individual province and city in China. As such, we estimate a recovery in China’s property sector sometime beginning 2H09. Chinese property developers on the SGX are currently trading at 1.2x their book value, while CentraLand has a P/B ratio of 3.4x. We do not have a rating for CentraLand. Catalysts for the counter include the finalization of the purchase of an adjacent site sitting next to Tianrong Fashion City, acquisitions of more commercial sites, as well as global recovery in buying sentiments within the property sector. Risks include its over-dependence on one city and two projects for its current income contribution.

The Material provided above is for information only and does not constitute an offer or solicitation to purchase or sell the shares mentioned