Red Star Macalline Group:Below expectation on margins;PM execution key to dividend

FY16 core profit was flat yoy at Rmb2.56bn, 6%/20% below GHe/BBGconsensus. 1. 6% yoy revenue growth was driven by 12% rise in rentals fromportfolio malls “PM” (+16% increase in operating areas) while dragged by13% decline in fees from managed malls “MM” (reduction in constructionconsultation fees). 2. GPM decreased 3pp yoy to 71% with PM’s (63% ofrevenue) GPM largely stable at 76% while MM (30% of revenue) was down8pp to 66% on both revenue mix change and decrease in margin of annualmgmt. fees. Together with higher admin expenses (12.4% of revenue vs. 10%in FY15), NM was -2pp yoy to 28% and 2pp below GHe. 3. (1) For PM, weexpect 12% rental CAGR in 17-19E on the back of 22 new malls and mgmt.

guidance of +5% yoy same mall rental (same as in FY16 but above prior GHeof 3%); (2) for MM, with property market recovery in lower tier cities, mgmt.

plans 35 mall openings in FY17 vs. 20 in FY15-16; given its consecutiveopenings misses in FY15-16, we assume 25 new malls. 4. DPS declined 11%yoy to Rmb0.42 on a 60% payout (vs. 67% in FY15). With the Rmb2.1bnacquisition of a Shanghai office building and Rmb4bn+ capex needs in FY17E,we expect its net gearing (net equity/debt) to further increase (41% at end-17Evs. 33% at end-16; excluding revaluations, 127% vs. 109%). RSM has plannedan A-share dual listing and, according to mgmt., now ranks No.157 in thelisting queue. Balance sheet improvement and solid execution/potentialmonetization of its PM (7% gross yield on carrying value) are key tosupporting its dividend visibility.

We fine tune 17-19E EPS by -2%/3%/3% and 12m SOTP TP to HK$9.2 fromHK$8.8 following our revised assumptions for PM rental and new MM growth.

RSM trades at 11.3X/1.8X 17E underlying PE/PB against 17% ROE vs offshoreavg. 8.5X/1.2X/13%. Retain Neutral. Risks: Rental & MM pipeline growth beator miss; dividend payout (5.6% 17E yield on 60% payout).