Central Pattana

Central Pattana Plc

 

Investment thesis

We accompanied CPN CFO Naparat Sriwanvit to meet investors in Singapore. We feel that most of the fund managers were impressed with the firm’s operations, which is resilient from weak domestic consumption—same-store rental rate grew 2.5% in 4Q15. However, most of them currently are without holdings in CPN shares, so there should be only limited risk of selling pressure among foreign investors. In our view, now is a great time to be bottom fishing for the stock. CPN’s FY16 PER is only 21.6x, 1.1SD below long-term average of 26.5x, while its growth profile should be improving on the back of expansion and new strategies to focus more on asset enhancement, merchandising mix and tenant development (see our report on 29 January; Takeaways from CEO forum).

Robust growth confirmed

The CFO is confident that CPN’s five-year top-line CAGR target of 15% is achievable. New projects are anticipated to boost revenue by 8-9%, while the remainder would come from existing assets. However, during the current environment (weak consumption and low inflation), the same-store rental rate is expected to grow in the range of 3-4%, below its 10-year average of 6%. As such, CPN aims to fill the gap with asset enhancement. Normally, rental rate increases by 10-15% after facelifts and this year, CPN plans to renovate its Bangna phase 3, Phuket phase 1, Pattaya Center and Rama III. However, given that its Rama III unit is under the CPNRF property fund, its renovation is subject to conversion of the fund to a REIT as a property fund is banned from increasing capital to finance renovation.

Condos to top up FY18 earnings by 5%

Most investors were surprised at the successful launches of CPN condos amid weak consumption upcountry. The current take-up rates of its projects in Chiang Mai, Khon Kaen and Rayong are 81%, 60% and 50%, respectively. Management said that good location (built on vacant land in CPN’s shopping malls) and competitive prices (starting at 70k/sqm) were major factors behind the high take-up rates. Project profitability would also be above the industry average thanks to cheap land costs given that the land was acquired many years ago. Management guided for condo GM of 40% and net margin of around 20%. As such, condo profit should supplement FY18 earnings by 5%.

Overseas expansion is major concern

Three out of the 15 new malls to be opened during FY16-20 will be located overseas. The first CPN mall in Malaysia has had its groundbreaking ceremony and is expected to open in late FY17 or early FY18. CPN is also seeking an opportunity to have shopping malls in Vietnam and Indonesia, either from greenfield developments or acquisitions. However, most investors are averse to CPN going abroad as the risk-return profile of overseas projects seems inferior to those of domestic developments.