The acquisition by SM Prime Holdings Inc. of three malls in China from the Sy family for P10.8 billion is expected to generate a combined net income of P200 million this year, about three percent of the firm’s projected P6.7 billion profit for 2008.

Macquarie Research Equities said that despite initial dilution of earnings due to the issuance of new shares to the Sy family, it will maintain its ‘outperform’ rating for SM Prime as the stock is trading at a 43 percent discount to net asset value.

‘We see potential upside of 31 percent from the current level once market condition improves,’ Macquarie added. SMPH shares closed at R7.60 apiece at the Philippine Stock Exchange yesterday.

SM Prime’s acquisition of three malls in south China from the Sy family has been approved by the Securities and Exchange Commission (SEC). The next step is for the PSE to approve the listing of new shares in connection with the acquisition, which is expected to happen this month.

SMPH has issued a total of 913 million new shares to the Sy family (majority owner of SM Prime) in exchange for the three malls.

The new shares are equivalent to 7.34 percent of the current issued shares of the company and 6.8 percent of the expanded shares. This also effectively increases the ownership of SM group in SMPH to 71.8 percent from 65 percent.

Macquarie said the average rental rate for the China operations is well below the average rental at SM Prime malls in the Philippines, which is close to P800 per square meter a month for the mature malls and around P600/sqm/month for the newer malls.

Furthermore, the rental structure in China is very different from that in the Philippines. Rental in China is mostly on a fixed-rate basis, while in the Philippines, this is mostly on a percentage of tenants’ sales basis.

The study said there will be a likely earnings per share dilution of 4.3 percent in 2008. ‘However, the acquisition should be earnings-neutral beginning next year, when the Jinjiang and Chengdu occupancy levels hit the high 90’s versus last year’s average of only 75 percent,’ it added.

SMPH said the three malls will be consolidated beginning this year. In Macquarie’s pro-forma estimates for an expanded SM Prime in the first quarter of 2008, fixed assets were higher by 14.4 percent at P78.5 billion and total equity was higher by 13 percent at P78.5 billion.

First quarter 2008 total revenue was higher by 5 percent at P4 billion versus the actual P3.8 billion, translating to a net income P1.6 billion, up 1 percent versus the actual of P1.58 billion.

However, EPS was down by 5.8 percet at P0.12 due to the new shares. ‘We have not changed our NAV of P14.30 per share despite the new share issue as we plug-in the China malls at the acquisition level,’ Macquarie added.(JAL)