China Resources Land (LHS)

Transcription

1 China / Hong Kong Company Guide Version 6 Bloomberg: 1109 HK EQUITY Reuters: 1109.HK Refer to important disclosures at the end of this report DBS Group Research. Equity 24 Aug 2017 BUY Last Traded Price ( 22 Aug 2017):HK$23.65 (HSI : 27,402) Price Target 12-mth: HK$28.79 (22% upside) (Prev HK$24.98) Analyst Carol WU carol_wu@dbs.com Danielle WANG CFA, danielle_wang@dbs.com Ken HE CFA, ken_he@dbs.com Trista QIN trista_qin@dbs.com What s New Valuable IP portfolio with high appreciation potential makes current stock valuation attractive Potential to speed up landbanking and presales growth with high profitability after passing high initial investment period for IP Unexciting 1H17 results due to low delivery; fullyear earnings growth intact Maintain BUY with a higher TP of HK$28.79 Price Relative HK$ Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 (LHS) Relative HSI (RHS) Relative Index %Forecasts and Valuation FY Dec (HK$ m) 2015A 2016A 2017F 2018F Turnover 103, , , ,058 EBITDA 34,080 39,025 39,014 48,470 Pre-tax Profit 32,722 38,387 37,949 47,404 Net Profit 17,698 19,501 19,027 21,930 Core Profit 14,206 16,270 19,027 21,930 Core Profit Gth (%) EPS (HK$) EPS (HK$) EPS Gth (%) (2.4) 15.3 PE (X) P/Cash Flow (X) 3.8 nm EV/EBITDA (X) DPS (HK$) Div Yield (%) Net Gearing (%) ROE (%) Book Value (HK$) P/Book Value (X) Earnings Rev (%): Nil Nil Consensus EPS (HK$) Other Broker Recs: B: 27 S: 0 H: 0 Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX Sustainable growth model BUY on valuable IP valuation and potential to speed up presales. China Resources Land (CR Land) recorded 13% y-o-y growth in rental income in 1H17 (22% for retail malls). The Investment Property (IP) segment excluding hotels, recorded significant margin improvement, from 67.7% in 1H16 to 70.2%. The IP value recorded on its book is HK$106bn (or 22% of CR Land s total asset value). We believe there is high revaluation potential as (1) current cap rates to derive valuation are % for completed IPs and 6.5% to 7% for IPs under construction, which we believe have room to compress; (2) same-store-sales growth in retail malls grew 27% y-o-y in 1H17 (27% for matured malls and 28% for immature malls). This, coupled with a lower occupancy cost of 14.3% in 1H17 (from 15.6% in FY16), could translate to future rental growth; and (3) the management has raised guidance for rental income expectations to HK$10bn-11bn (or 15% CAGR) by 2019, a level that is sufficient to consider a spinoff. The current fair value of IP accounts for 65% of CR Land s current market cap, which makes CR Land s valuation look attractive. Potential to speed up growth. The management senses that the market expects CR Land to speed up presales growth to maintain a relatively higher scale among peers. It is reviewing its business plan, investment strategy and balance sheet policies to improve its strategy to deliver higher growth including potential spinoff of its IP segment, introducing incentive policies/strategic investors, major M&As, and city redevelopment projects leveraging on its parent s support. CR Land added 4.4m sm to its land bank in 1H17 on an attributable basis compared with 4.4m sm GFA sold. We believe CR Land has moved past the high initial investment period for IP, and will have more resources available for land acquisitions to speed up presales growth. Double digit core EPS growth for the full year remains intact. 1H17 core earnings declined by 25%, as 1H17 deliveries accounted for only 27% of our full-year delivery target. The company has Rmb152.4bn of unbooked sales as at mid-17, of which Rmb66.8bn will be recognised in 2H17. Gross margin of the 39 major projects contributing to revenue in 2H17 average at 44%. Our projection of 17% full year earnings growth is achievable in our view. We revised our TP to HK$28.79, after rolling to our valuation base to FY18. Valuation: CR Land s current valuation is 7.5x FY18F PE, and the shares have underperformed the sector by 21% year-to-date. We believe CR Land's share price is attractive and worth accumulating at the current level. Key Risks to Our View: The Shenzhen market, if it weakens further, could impact the company s 2017 sales outlook. At A Glance Issued Capital (m shrs) 6,931 Mkt. Cap (HK$m/US$m) 163,917 / 20,946 Major Shareholders China Resources (Holdings) (%) 61.3 Free Float (%) m Avg. Daily Val. (US$m) 30.4 ICB Industry : Financials / Real Estate ed-js/ sa- AH

2 Cap rate applied for valuation of investment properties PUD or completed Asset type Cap rate Completed Retail mall % Office % PUD Mall/office % Hotel 7% Retail sales growth in its major retail malls in 1H17 Mall Retail sales growth in 1H17 Shenzhen 23% Hangzhou 24% Shenyang 35% Chengdu 37% Nanning 30% Saleable resources estimate for 2H17 (Rmb bn) 1H17 actual 2H17 target FY17 target Saleable resources old new Contracted sales 63.2 Target sales Actual/target sell-through 45.7% 54.2% Operating stats for 1H17 and target for the full year (m sm) 1H17 actual FY17 target % of target GFA completion % GFA new starts % Page 2

3 Cash flow projection (Rmb bn) 1H17 actual 2017 target Property sales Rental income Land premium Construction SG&A Tax Interest Dividend Operating cash flow Results vs. expectations Growth % of our estimate % of consensus forecast Below or above expectation Revenue -21% 26% 28% Below Core earnings -25% 19% 19% Below 1H16 1H17 Up/Down Below or above expectation Gross margin 33.9% 34.9% Up Above Core net margin 11.7% 10.5% Down Below SG&A as % of contracted sales 4.4% 4.0% Improved Above End-FY16 1H17 Up/Down Below or above expectation Cash level (HK$ m) 46,674 45,176 Down Largely in line Net debt ratio 23.8% 41.5% Up Largely in line Below or above 1H16 1H17 Up/Down expectation DPS (HKD) Up In line Page 3

4 1H17 results summary Restated F Y Dec (HK$ mn) 1H17 1H16 y-o-y % Comments Sales 35,259 44,624-21% - Development properties 29,087 39,242-26% GFA booked decreased by 10% while ASP recognized decreased by 18% - Property investment & Hotel 3,403 3,092 10% Retail malls' SSSG was 27.8% in 1H17 - Hotel % - Others 2,159 1,836 18% Cost of goods sold (22,943) (29,518) -22% Gross profit 12,316 15,105-18% Gross profit margin increased 1.0 ppt y-o-y to 34.9% in 1H17 SG&A (3,075) (3,028) 2% SG&A as % of contracted sales decreased by 0.5 ppt to 4.0% Other income 446 1,272-65% Operating profit 9,687 13,350-27% Fair value gain on investment properties 2,983 2,055 45% Exchange gain/loss (884) % mainly affected by offshore RMB debt Finance costs excl. exchange gain (727) (520) 40% Share of results of associates & J CE % Pretax profit 11,206 15,309-27% - Income Tax (2,433) (3,443) -29% - LAT (2,048) (2,783) -26% Taxation (4,482) (6,226) -28% Minority interests (1,108) (1,436) -23% Reported profit 5,616 7,647-27% Core earnings 3,707 4,951-25% Adjusted by revaluation gains and forex change Reported core earning 3,250 6,300-48% Adjusted by revaluation gains Gross profit margin (%) 34.9% 33.9% 1 ppts Reported profit margin (%) 16% 17% 1 ppts Core profit margin (%) 11% 11% 1 ppts Reported core profit margin 9% 14% 5 ppts SG&A as % of top line (%) 8.7% 6.8% 2 ppts SG&A as % of presales (%) 4.0% 4.5% 0 ppts Effective tax rate (%) 40% 41% 1 ppts EPS (HK$) % Reported Core EPS (HK$) % DPS (HK$) % Payout ratio 21% 10% 11 ppts Contracted sales (RMB mn) 63,218 55,560 14% ASP (RMB psm) 14,474 12,872 12% Booked ASP (HK$/sm) 11,757 14,270-18% Booked GFA ('000 sm) 2,474 2,750-10% 1H17 End-FY16 Net debt ratio 41% 24% 18 ppts Cash level 45,176 46,674-3% Page 4

5 CRITICAL FACTORS TO WATCH Critical Factors Raised 2017 sales target by 10% to Rmb132bn. This represents 22% y-o-y growth from Rmb108bn in We think this is achievable based on Rmb243bn saleable resources and a targeted 54% sell-through rate. It achieved 73.9bn in 7M17, locking in 56% of the revised sales target. With more new saleable resources to be launched (Rmb105bn in 2H17, vs. Rmb31bn in 1H17), we expect sales to pick up in 2H17. Target double digit growth for core earnings and EPS over the mid-term. Management aims to maintain its top 10 ranking in the top sales list in the mid-term and has sped up land acquisitions to drive future growth. Management has budgeted Rmb80bn for land acquisitions (achieved c.61% of its 2017 sales target) in 2017 to fuel future growth. Management will not relax their criteria for landbanking, as its strategy is to achieve quality growth. Management aims to deliver double digit growth for its core earnings or EPS. Rental income growth supported by strong pipeline. Rental income from malls increased by 17% y-o-y to in 1H17 on a liketo-like basis. Same-store-sales growth at its retail malls grew 27.8% y-o-y in 1H17. As a result, tenants occupancy cost dropped to 14.3% in 1H17 from 15.6% in FY16, which offers room for rental increases in the future. Management guided up rental income expectations to HK$10bn-11bn (or 15% CAGR) by 2019, based on the current pipeline. Gross margin of IP (excl. hotels) improved to 70.7% in 1H17. Contracted sales Rmb mn % 120, , , ,000 40, , FY12 FY13 FY14 FY15 FY16 Gross margins 40% 35% 30% 25% 20% 15% 10% 5% 0% FY12 FY13 FY14 FY15 FY16 FY17E FY18E SG&A as % of contracted sales 10% 8% 6% 4% 2% High revenue lock-in with decent margins. In 1H17, overall gross profit margins improved to 34.9% from 33.9% in 1H16. As of end-1h17, total unbooked sales amounted to Rmb152.4bn, with Rmb66.8bn to be recognised in 2H17. In addition, gross margin of 39 major projects contributing to revenue in 2H17 average at 44%. Therefore, gross margin should continue to be maintained at a high level (30-35%) in FY17/18F. 0% 6% 4% 2% FY12 FY13 FY14 FY15 FY16E FY17E Average funding costs Low funding cost and SG&A expense. Average funding cost edged down to 4.13% in 1H17 from 4.23% in CR Land could leverage on its low funding cost to support the development of investment properties in the future. SG&A as a percentage of contracted sales decreased to 4.0% in 1H17 from 4.5% in 1H16. The overall cost structure still has room to improve. More potential in urban redevelopment business. It currently has more than 10 potential urban redevelopment projects, with total GFA of 9m sm. In Shenzhen, it has 9 projects under negotiation. It also actively seeks for M&A opportunities. 0% FY12 FY13 FY14 FY15 FY16 Effective tax rate 50% 40% 30% 20% 10% 0% FY12 FY13 FY14 FY15 FY16E FY17E FY18E Page 5

6 Balance Sheet: Healthy balance sheet. CR Land s net debt ratio went up to 41% at end-1h17 from 24% as at end-2016, due to accelerated landbanking. It will continue to gear up for growth, and will closely monitor its key financial matrix to maintain its investment grade. Improving debt structure. The HK$/US$-denominated debt portion further declined from 31% as at end-2016 to 27% at end-1h17. Share Price Drivers: Continued recovery in retail sales in shopping malls. Recovery in retail sales in China may change investors view on mall operators. CR Land will be the largest beneficiary. Leverage & Asset Turnover (x) A 2015A 2016A 2017F 2018F Gross Debt to Equity (LHS) Asset Turnover (RHS) HK$m 0.0-5,000.0 Capital Expenditure Key Risks: Policy risk in Tier I/2 cities. Tightening policies in Tier I/2 cities, such as Shenzhen, Shanghai and Suzhou may affect CR Land s sales. Company Background CR Land is a PRC developer focusing on nationwide residential developments and shopping mall investments (MixC and Hi 5). As a state-owned red-chip, the company has been enjoying strong support from its parent company through asset injections over the past few years. -10, , , , , % 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% (x) A 2015A 2016A 2017F 2018F Capital Expenditure (-) ROE 2014A 2015A 2016A 2017F 2018F Forward PE Band +2sd: 11.8x +1sd: 10.3x Avg: 8.8x 1sd: 7.2x Aug-13 Aug-14 Aug-15 Aug-16 (x) 1.9 PB Band 2sd: 5.7x sd: 1.54x +1sd: 1.38x Avg: 1.22x 1sd: 1.06x 2sd: 0.9x 0.7 Aug-13 Aug-14 Aug-15 Aug-16 Page 6

7 Segmental Breakdown (HK$ m) FY Dec 2014A 2015A 2016A 2017F 2018F Revenues (HK$ m) Sale of developed properties 81,759 94,019 98, , ,340 Property investments and management 4,673 5,716 6,267 7,578 8,940 Hotel operations ,035 1,086 Construction, decoration services and others 2,463 3,202 3,348 3,515 3,691 Others Total 89, , , , ,058 Income Statement (HK$ m) FY Dec 2014A 2015A 2016A 2017F 2018F Turnover 89, , , , ,058 Cost of Goods Sold (62,351) (71,562) (72,439) (87,526) (103,147) Gross Profit 27,353 32,345 36,889 45,734 53,911 Other Opg (Exp)/Inc (5,324) (6,398) (6,328) (7,164) (5,885) Operating Profit 22,029 25,946 30,561 38,570 48,026 Associates Inc Net Interest (Exp)/Inc (832) (930) (193) (621) (622) Exceptional Gain/(Loss) 6,106 7,407 7, Pre-tax Profit 27,366 32,722 38,387 37,949 47,404 Tax (10,887) (13,160) (15,888) (17,486) (22,291) Minority Interest (1,338) (1,864) (2,998) (1,436) (3,183) Net Profit 15,141 17,698 19,501 19,027 21,930 Core Profit 11,915 14,206 16,270 19,027 21,930 Sales Gth (%) Net Profit Gth (%) (2.4) 15.3 Core Profit Gth (%) Gross Mgn (%) Core Profit Margin (%) Tax Rate Page 7

8 Balance Sheet (HK$ m) FY Dec 2014A 2015A 2016A 2017F 2018F Fixed Assets 88,440 99, , , ,869 Invts in Assocs & JVs 3,551 10,527 10,066 10,066 10,066 Other LT Assets 1,811 2,480 12,604 12,604 12,604 Cash & ST Invts 44,857 47,058 46,674 50,360 56,905 Other Current Assets 223, , , , ,526 Total Assets 362, , , , ,971 ST Debt 21,219 14,190 11,988 13,988 15,988 Creditors 45,683 52,193 58,645 61,578 64,657 Other Current Liab 97, , , , ,872 LT Debt 67,682 62,855 67,763 67,763 67,763 Other LT Liabilities 13,023 13,352 16,015 16,015 16,015 Minority Interests 11,492 16,914 22,721 24,157 27,340 Shareholder s Equity 105, , , , ,336 Total Capital 362, , , , ,971 Share Capital (m) 6,535 6,764 6,931 6,931 6,931 Net Cash/(Debt) (44,043) (29,987) (33,077) (31,391) (26,846) Working Capital 80,387 63,680 59,150 69,268 77,997 Net Gearing (%) Cash Flow Statement (HK$ m) FY Dec 2014A 2015A 2016A 2017F 2018F Profit Before Tax 27,366 32,722 38,387 37,949 47,404 Assoc. & JV Inc/(loss) (62) (298) (601) 0 0 Tax Paid (8,718) (11,070) (13,822) (17,486) (22,291) Depr/Amort Chg in Wkg.Cap. (5,788) 25,119 (20,009) (10,117) (8,730) Other Non-Cash (4,930) (4,911) (3,467) Operating CF 8,318 41,989 (4,243) 11,411 17,450 Net chg in inv Assoc, MI, Invsmt (13,920) (27,954) (814) (3,967) (6,361) Investing CF (13,544) (27,929) (814) (3,967) (6,361) Net Chg in Debt 20,337 (1,023) 2,707 2,000 2,000 New Capital Dividend (2,751) (3,760) (4,879) (5,137) (5,921) Other Financing CF 3,451 (4,293) (193) (621) (622) Financing CF 21,038 (9,077) (2,365) (3,758) (4,543) Chg in Cash 15,540 4,068 (384) 3,686 6,546 Chg in Net Cash (4,649) 14,057 (3,090) 1,686 4,546 Page 8

9 Target Price & Ratings History HK$ Aug-16 1 Sep-16 Oct-16 Nov-16 2 Dec-16 3 Jan-17 Feb-17 Mar Apr-17 May-17 Jun-17 Jul-17 6 Aug-17 S.No. Date Closing 12-mth Rating Price Target Price 1: 29-Aug-16 HK$21.45 HK$29.65 Buy 2: 24-Nov-16 HK$18.98 HK$29.65 Buy 3: 29-Dec-16 HK$17.42 HK$23.52 Buy 4: 23-Mar-17 HK$22.05 HK$24.98 Buy 5: 7-Apr-17 HK$21.95 HK$24.98 Buy 6: 31-Jul-17 HK$24.35 HK$24.98 Buy Source: DBS Vickers Analyst: Carol WU Page 9

10 DBSVHK recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends Completed Date: 24 Aug :46:39 (HKT) Dissemination Date: 24 Aug :29:27 (HKT) Sources for all charts and tables are DBS Vickers unless otherwise specified. GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Vickers (Hong Kong) Limited ( DBSV HK ). This report is solely intended for the clients of DBS Bank Ltd., DBS Bank (Hong Kong) Limited (DBS HK), DBSV HK, and DBS Vickers Securities (Singapore) Pte Ltd. ( DBSVS ), its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSV HK. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd., DBS HK, DBSV HK, DBSVS, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the DBS Group ) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. 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11 ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate 1 does not serve as an officer of the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or his associate does not have financial interests 2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the DBS Group. COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd, DBS HK, DBSVS, DBSV HK or their subsidiaries and/or other affiliates have a proprietary position in China Resources Land Limited (1109 HK) recommended in this report as of 21 Aug Neither DBS Bank Ltd, DBS HK nor DBSV HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report. 3. Compensation for investment banking services: DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. 4. Disclosure of previous investment recommendation produced: DBS Bank Ltd, DBSVS, DBSVHK, their subsidiaries and/or other affiliates of DBSVUSA may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBSVHK, their subsidiaries and/or other affiliates of DBSVUSA in the preceding 12 months. 1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst. 2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant. Page 11

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