Wang Jianlin

Wanda Commercial Properties faces tough challenge under new ‘asset-light’ strategy that focuses on service income

Property group’s shares drop 5.9 per cent following analysts’ downward revisions on share price outlook

PUBLISHED : Tuesday, 26 January, 2016, 8:34pm
UPDATED : Tuesday, 26 January, 2016, 10:15pm

The “asset-light” approach of Dalian Wanda Commercial Properties has come under fire from analysts who warn that the pioneering strategy that relies on management fees and other services income could negatively impact its bottom line.

Two investment banks lowered their target price for the company’s Hong Kong-listed shares, citing concerns over the strategy which relies solely on fees from services related to project management while working with a financial backer who will front capital and take full equity in the project.

“Wanda’s transition to an asset-light model could be bumpy,” Bank of America Merrill Lynch said in a report.

The company is controlled by China’s richest man Wang Jianlin.

Wanda’s shares plunged 5.9 per cent Tuesday to HK$34.40, their lowest since its listing in Hong Kong in 2014.

Investors will likely await evidence in the second half of 2016 or the first half of 2017 to see if its new single-mall format, which will allocated less space for achor tenants, can achieve the 10 per cent yield and meet the 7 per cent return target for project investors, said BofA Merrill Lynch.

BofA Merrill Lynch cut Wanda Commercial’s share target price 8 per cent to HK$55.

Wanda Commercial announced earlier a 39 per cent reduction in its 2016 sales target to 100 billion yuan.

The company is embracing an asset-light strategy whereby they use capital from external investors to finance construction while they act as developer overseeing design and build out, as well as project management upon completion, coordinating tenant leasing.

Jeffrey Gao, head of China property research at Nomura, said there was not yet a successful example of Wanda’s asset-light mall strategy. The company, it noted, will rely upon service fees as a pillar of future earnings growth.

Meanwhile, Fitch Ratings, said last month that Wanda’s income from the asset-light projects may not be stable as the rental income could miss expectations, which would result in lower fees for Wanda. Many of these projects are located in China’s smaller cities, where consumer spending power is weaker.

Nomura reduced its target price for Wanda Commercial by 11 per cent to HK$67.24, citing yuan depreciation and the company’s lowered sale forecasts. It added that the recent weakness in its stock price reflected investor concerns on its asset-light model and a potential slowdown in rental growth.

Wanda’s malls saw annual rental income growth of 31 per cent on a same-store basis in 2015, according to BofA Merrill Lynch. The broker expects Wanda’s rental reversions to moderate from a high base last year amid the slower growth environment.

Standard & Poor’s Ratings last Friday lowered Wanda Commercial’s long-term corporate credit outlook to “negative”, saying its high leverage was likely to remain for the next 12 months even as sales drop.