Results Review, 21 May 2015 Central Pattana (CPN TB) Buy (Maintained) Consumer Cyclical - Leisure & Entertainment Target Price: THB57.40 Market Cap: USD5,784m Price: THB43.30 Macro Risks 2 Strong And Steady Wins The Race Growth . 2 0 Value . 03 0 . 03 0 1Q15 results are at 24% of our FY15 forecast, in line. Reiterate BUY . Central Pattana (CPN TB) 0 Price Close Relative to Stock Exchange of Thailand Index (RHS) with a DCF-derived TP of THB57.40 (33% upside). 1Q15 core PATMI 0 51 111 grew 22% YoY to THB2.0bn on 9% revenue growth and a 3.4ppts rise 0 in operating margin. We continue to expect 6% same-store rental 49 106 growth for FY15, partly driven by new initiatives to increase revenue from on-site media and maximise common area utilisation for 47 101 conventions and pop-up stores. 45 96 Total revenue up 9% YoY to THB5.8bn. The increase was led by 43 91 contribution from two new malls opened in 3Q14. Same-store rental also grew healthily at 6.5% YoY in the absence of discounts given to 41 86 CentralWorld (CTW) in 1Q14 as a result of a political protest that affected tenants’ sales. Occupancy rate dipped slightly to 94% due to 39 81 18 the current renovation works at CentralPlaza Pinklao. We expect 16 14 positive returns on this asset enhancement initiative which is slated to 12 10 be completed in 4Q15. 8 6 Good cost control results in higher-than expected margins. Gross 4 2 margin increased 1.9ppts to 50.3% while EBIT margins rose 3.4ppts to Volm 43.3%. This was driven by: i) normalised operations of CTW, ii) utilities 14 14 15 14 14 15 - - - - - - Jul Jan conservation measures, and iii) Central Pattana (CPN) tapping into Mar Nov Sep May Central Group to establish pooled procurement to achieve economies Source: Bloomberg of scale in marketing campaigns and supply chain management. Avg Turnover (THB/USD) 181m/5.53m Overall outlook. Management cited that its tenants are seeing overall Cons. Upside (%) 34.4 slower growth towards end-1Q15 but international fashion retailers Upside (%) 32.7 such as Uniqlo, Forever 21, Topshop are still experiencing rapid expansion. The major revamp of CentralPlaza Pinklao marked the end 52-wk Price low/high (THB) 40.0 - 49.5 of some long-term lease contracts and we expect positive rental Free float (%) 45 reversion from the new tenant mix. Share outstanding (m) 4,488 Shareholders (%) Reiterate BUY with THB57.40 TP. We continue to like CPN for its defensive nature against Thailand’s economic circumstances. There Chirathivat family 29.0 will be stronger contribution in 2H15 with three new malls coming on- Central Group 26.0 stream as well as the completion of the acquisition of CentralFestival Phuket 1. Maintain BUY with a DCF-derived TP of THB57.40. This values the company at 31x FY15F P/E and 27x FY16F P/E. Share Performance (%) YTD 1m 3m 6m 12m Forecasts and Valuations Dec-13 Dec-14 Dec-15F Dec-16F Dec-17F Total turnover (THBm) 19,913 22,308 25,915 30,031 35,579 Absolute (5.0) (3.9) (1.7) (8.0) (1.7) Relative (6.9) (1.7) 3.1 (5.3) (11.1) Reported net profit (THBm) 6,293 7,307 8,236 9,566 11,481 Recurring net profit (THBm) 5,916 7,231 8,236 9,566 11,481 Shariah compliant Recurring net profit growth (%) 34.1 22.2 13.9 16.2 20.0 Recurring EPS (THB) 1.34 1.61 1.84 2.13 2.56 DPS (THB) 0.55 0.65 0.73 0.85 1.02 Veena Naidu, License No. 24418, +66 2862 9752 Recurring P/E (x) 32.3 26.8 23.6 20.3 16.9 [email protected] P/B (x) 5.37 4.73 4.22 3.75 3.31 Juliana Cai +65 6232 3871 Dividend Yield (%) 1.3 1.5 1.7 2.0 2.4 [email protected] Return on average equity (%) 20.5 18.9 18.9 19.6 20.8 James Koh +65 6232 3839 Return on average assets (%) 8.6 8.8 8.4 8.5 9.4 [email protected] Net debt to equity (%) 49.1 32.4 56.0 54.5 51.5 Our vs consensus EPS (adjusted) (%) (4.0) (4.0) (6.2) Source: Company data, RHB See important disclosures at the end of this report Powered by EFATM Platform 1 Central Pattana (CPN TB) 21 May 2015 Figure 1: Central Pattana’s new mall projects Location Opening Year GFA (sq m) Investment Cost (THBm) CentralPlaza Rayong May 2015 33,000 2,400 CentralFestival Phuket 1 June 2015 44,347 6,669 CentralPlaza WestGate July 2015 82,000 7,200 CentralFestival East Ville October 2015 34,500 3,200 CentralPlaza Nakorn Si Thammarat 2Q16 26,000 1,900 CentralPlaza Nakhonratchasima 4Q16 55,000 5,000 CentralFestival Phuket 2 2017 TBC TBC CentralPlaza i-City 2Q17 89,700 7,400 Source: Company data Figure 2: Central Pattana’s 1Q15 results summary FYE Dec (THBm) 1Q14 4Q14 1Q15 QoQ (%) YoY (%) Comments Revenue 5,273.5 5,754.7 5,761.4 0.1 9.3 Higher rental income from two new malls, absence of rebates to CTW tenants and same-store rental growth. Gross profit 2,550.1 2,761.2 2,897.3 4.9 13.6 Conservation in energy and utilities. Gross Margin 48.4 48.0 50.3 EBIT 2,103.6 1,978.7 2,493.7 26.0 18.5 Cost savings from pooled procurement with Central Group. EBIT Margin (%) 39.9 34.4 43.3 Net Interest (173.5) (75.1) (88.7) 18.0 (48.9) JV and Associates 178.4 212.2 209.7 (1.2) 17.6 Pretax profit 2,108.4 2,115.5 2,614.6 23.6 24.0 Tax (370.1) (261.6) (412.6) 57.7 11.5 Effective tax rate (%) (17.6) (12.4) (15.8) Less: Minorities (28.1) (33.0) (55.0) 66.6 95.4 PATMI 1,710.2 1,820.9 2,147.0 17.9 25.5 Core PATMI 1,644.2 1,734.0 2,013.0 16.1 22.4 Reversal of provision for impairments. Net Margin (%) 31.2 30.1 34.9 Source: Company data See important disclosures at the end of this report 2 Central Pattana (CPN TB) 21 May 2015 Figure 3: Central Pattana’s DCF assumptions FY15F FY16F FY17F FY18F FY19F FY20F FY21F FY22F FY23F FY24F Net Income 8,236 9,566 11,481 13,777 16,533 19,343 22,631 26,253 30,400 34,961 + Non-Cash Charges 5,704 6,363 7,089 8,507 10,209 11,944 13,975 16,210 18,772 18,772 + Fixed Capital Investment -23,650 -14,650 -16,150 -12,000 -12,000 -8,000 -8,000 -8,000 -8,000 -8,000 + Change in net working capital 898 937 1,157 1,388 1,666 1,949 2,280 2,645 3,063 3,522 + Change in debt 11,977 3,000 1,500 1,500 0 0 0 0 0 0 FCFE 3,164 5,217 5,077 13,172 16,407 25,236 30,886 37,108 44,235 49,255 Terminal Value 525,658 PV 2,809 4,111 3,551 8,179 9,044 12,348 13,416 14,308 15,141 174,680 Total discounted FCFE 257,588 Value/Share 57.40 Cost of equity 12.65% Risk free rate 3.00% Beta 1.040 Market return 12.28% Terminal growth 3.00% Source: RHB See important disclosures at the end of this report 3 Central Pattana (CPN TB) 21 May 2015 Financial Exhibits Profit & Loss (THBm) Dec-13 Dec-14 Dec-15F Dec-16F Dec-17F Total turnover 19,913 22,308 25,915 30,031 35,579 Cost of sales (10,542) (11,616) (13,394) (15,415) (18,006) Gross profit 9,372 10,691 12,521 14,616 17,573 Gen & admin expenses (3,446) (3,667) (4,198) (4,835) (5,728) Other operating costs 1,698 1,584 1,663 1,746 1,834 Operating profit 7,624 8,608 9,986 11,528 13,678 Operating EBITDA 11,308 12,628 15,690 17,891 20,767 Depreciation of fixed assets (2,614) (3,075) (4,695) (5,292) (5,957) Amortisation of intangible assets (1,070) (944) (1,009) (1,071) (1,132) Operating EBIT 7,624 8,608 9,986 11,528 13,678 Net income from investments 686 814 936 1,076 1,238 Interest income 98 61 87 62 79 Interest expense (813) (677) (1,092) (1,147) (1,170) Pre-tax profit 7,595 8,807 9,916 11,519 13,824 Taxation (1,206) (1,378) (1,547) (1,797) (2,157) Minority interests (97) (121) (134) (156) (187) Profit after tax & minorities 6,293 7,307 8,236 9,566 11,481 Reported net profit 6,293 7,307 8,236 9,566 11,481 Recurring net profit 5,916 7,231 8,236 9,566 11,481 Source: Company data, RHB Cash flow (THBm) Dec-13 Dec-14 Dec-15F Dec-16F Dec-17F Operating profit 7,624 8,608 9,986 11,528 13,678 Depreciation & amortisation 3,684 4,019 5,704 6,363 7,089 Change in working capital 1,670 11,604 901 941 1,162 Other operating cash flow (765) (791) (3) (4) (5) Operating cash flow 12,213 23,441 16,588 18,828 21,924 Interest received 93 55 87 62 79 Interest paid (1,176) (845) (1,092) (1,147) (1,170) Tax paid (1,188) (1,675) (1,547) (1,797) (2,157) Cash flow from operations 9,942 20,977 14,036 15,946 18,676 Capex (9,695) (10,025) (23,650) (14,650) (16,150) Other new investments 1,198 (1,166) - - - Other investing cash flow (1,406) (2,718) 218 - - Cash flow from investing activities (9,902) (13,909) (23,432) (14,650) (16,150) Dividends paid (2,070) (2,508) (3,294) (3,827) (4,592) Proceeds from issue of shares 6,616 - - - - Increase in debt (5,723) (3,823) 11,977 3,000 1,500 Other financing cash flow (5) (1) - - - Cash flow from financing activities (1,181) (6,332) 8,683 (827) (3,092) Cash at beginning of period 2,894 1,752 2,488 1,774 2,244 Total cash generated (1,141) 736 (714) 470 (566) Implied cash at end of period 1,752 2,488 1,774 2,244 1,677 Source: Company data, RHB See important disclosures at the end of this report 4 Central Pattana (CPN TB) 21 May 2015 Financial Exhibits Balance Sheet (THBm) Dec-13 Dec-14 Dec-15F Dec-16F Dec-17F Total cash and equivalents 1,752 2,488 1,774 2,244 1,677 Accounts receivable 3,630 3,245 3,438 3,692 3,985 Other current assets 117 1,285 1,285 1,285 1,285 Total current assets 5,499 7,018 6,497 7,221 6,948 Total investments 68,513 78,289 97,375 106,957 117,489 Tangible fixed assets 2,353 2,140 1,936 1,717 1,483 Total other assets 1,174 1,588 1,588 1,588 1,588 Total non-current assets 72,040 82,017 100,899 110,262 120,560 Total assets 77,539 89,035 107,396 117,483 127,508 Short-term debt 6,058 4,683 6,000 6,000 6,500 Accounts payable 5,756 5,719 6,594 7,589 8,864 Other current liabilities 3,645 3,725 3,943 3,943 3,943 Total current liabilities 15,458 14,126 16,536 17,531 19,307 Total long-term debt 13,788 11,340 22,000 25,000 26,000 Other liabilities 11,469