Shenzhen International [152.HK]

Transcription

1 Shenzhen International [152.HK] Eyes on Higher 2017 DPS & Airlines Segment in Reiterate BUY. We met the management of Shenzhen International (SZI) recently, and we update our forecast accordingly. There was positive progress in the two real estate projects in late 2017, especially Qianhai, as the Company was able to realize a one-off HK$2.84bn pre-tax gain for FY2017. We expect the 2017 dividend to be more generous; we estimate it could be HK$0.91/ share, offering a 5.83% dividend yield. Furthermore, as a 49%-stake owner of Shenzhen Airlines (SZA), SZI is likely to benefit from fare liberalization. SZA s 2017 profit is likely to be solid thanks to FX gains, which will support the overall profit of SZI too. That said, we are less upbeat on the value of the property projects, as we see more restrictions in the property market. We still believe the stock is attractive, as it offers a decent near-term dividend yield (5.83% for 2017E), and the 26.7% CAGR of core profit in FY E is solid. We also see potential earnings upside in 2018 if (1) it disposes of a partial stake in the property projects, and (2) realizes further compensation in relation to the Qianhai project. We lift our TP slightly to HK$19.67 after we roll forward our forecast base year to Reiterate BUY. Investment Highlights Positive Profit Alert May be Too Conservative with Potential Upside in Dividend. In Dec 2017, SZI announced that its profit before tax would increase more than 60%, as the Company could realize a one-off HK$2,840m gain from the Qianhai land. This HK$2,840m gain is related to compensation received from the Shenzhen Government. After considering the performance of its solid core business, we expect the actual growth of net profit to be more than the disclosed 60%. Currently, we forecast that 2017E EPS will grow 107% YoY to HK$2.27 after this one-off gain is considered. As SZI management guided that the dividend pay-out ratio will be maintained (~40% in the past), we expect the 2017E DPS to be HK$0.91, equivalent to a 5.83% dividend yield using the market close of HK$15.6. Expect Shenzhen Airlines to Continue to Shine. The RMB strengthened throughout 2017, supporting the profit growth of SZA considerably, even though the oil price has rebounded. We expect SZA to provide HK$1,126m/1,231m profit contribution in 2017E & 2018E, respectively, accounting for 23.7%/24.5% of core net profit in the two years. We expect SZA, as a subsidiary of Air China, to be a beneficiary of airfare liberalization in 2018, and its operational figures may have the potential to improve too. Property Projects: More Activity Ahead but Likely with More Restrictions. We expect SZI to see more activity in 2018 to unlock the value of its property projects: (1) selling a partial stake in the Meilin Checkpoint Project to a third-party developer, with Vanke a potential candidate; and (2) realizing further compensation from the Shenzhen Government in relation to the Qianhai project (we expect HK$6,860m more to be recognized). However, the timing of these actions is highly uncertain, so we haven t included them in our earnings forecast. We also note that the property projects are likely to have more restrictions. In addition to building public housing and public facilities, we expect that SZI will be required to build more rental apartments, which are less profitable and have a long holding period. We therefore adjust our SOTP valuation accordingly. Valuation Still Undemanding. We believe the near-term profit of SZI will be driven by the decent performance of its core business (toll roads and SZA). If we don t consider adhoc items, SZI is now trading at 11x 2018E PER. We think this is undemanding when the 26.7% CAGR of core profit in FY E is considered. Year ended 31 December FY2015 FY2016 FY2017E FY2018E FY2019E Revenue (HKD m) 6,738 7,787 8,106 8,501 9,237 YoY Change 5.8% 15.6% 4.1% 4.9% 8.7% Core Profit Before Tax (HKD m) 2,719 3,256 4,751 5,027 6,630 YoY Change -5.3% 19.8% 45.9% 5.8% 31.9% Reported EPS (HKD) YoY Change -11.1% -5.2% 107.0% -37.3% 28.0% ROE 13.2% 11.7% 24.6% 13.2% 16.6% P/E 13.5x 14.2x 6.9x 11.0x 8.6x Dividend Yield 3.2% 2.8% 5.8% 3.6% 4.7% Sources: Company, CGIS Research BUY Close: HK$15.60 (9 Jan, 2018) Target Price: HK$19.67 (+26.1%) Price Performance (HK$) China Infrastructure Sector Logistics Market Cap Shares Outstanding Auditor US$4,047m 2,029.3m PwC Free Float 42.6% 52W range 3M average daily T/O HK$ US$1.89m Major Shareholding SIHCL (44.26%) Sources: Company, Bloomberg Tony Li, CFA Analyst (852) tonyli@chinastock.com.hk January 10, 2018 Wong Chi Man, CFA Head of Research (852) Turnover (RHS) cmwong@chinastock.com.hk Price (LHS) (HK$ million) Source: Bloomberg 0 1

2 Key financials Income Statement (HKD m) FY2015 FY2016 FY2017E FY2018E FY2019E Balance Sheet (HKD m) FY2015 FY2016 FY2017E FY2018E FY2019E Revenue 6,738 7,787 8,106 8,501 9,237 Bank Balances and Cash 13,254 8,254 8,928 7,891 11,273 Operating Costs (3,873) (4,657) (3,931) (4,272) (4,357) Account Receivables 1,879 2,243 2,048 2,451 2,438 SG&A (568) (583) (588) (643) (706) Inventories 1,399 2,919 3,039 3,187 3,463 Other Operating Items 1, , Other Current Assets 8,888 13,078 12,689 13,495 13,468 Operating Profit 3,703 3,525 6,543 3,707 4,304 Total Current Assets 21,661 22,009 22,608 22,122 25,766 Income from JV & Asso 789 1,225 1,698 1,994 3,079 PP&E 3,962 4,234 4,808 5,476 6,213 Finance Costs, Net (693) (996) (456) (674) (754) Long-term Equity Investments 5,673 7,490 12,912 13,007 13,092 Core Profit Before Tax 2,719 3,256 4,751 5,027 6,630 Intangible Assets 23,834 21,287 23,163 21,952 25,670 Net Profit Before Tax 3,799 3,755 7,786 5,027 6,630 Other Non Current Assets 3,868 5,721 4,627 6,390 4,426 Income Tax (736) (838) (1,568) (1,012) (1,335) Total Non Current Assets 37,337 38,732 45,510 46,827 49,401 Net Profit After Tax 2,198 2,116 4,577 2,955 3,897 Total Assets 58,998 60,741 68,118 68,948 75,167 Minority Interest (After Tax) ,641 1,060 1,397 Reported EPS (HKD) Account Payables 3,613 7,448 6,286 6,832 6,969 DPS (HKD) Short-term Borrowings 3,876 4,809 2,448 2,122 2,013 Other Current Liabilities EBITDA 6,081 6,619 10,006 7,488 9,326 Total Current Liabilities 8,059 12,819 9,477 9,447 9,619 EBIT 4,772 4,945 8,434 5,900 7,606 Long-term Borrowings 9,161 7,575 11,589 12,431 14,261 Other Non-current Liabilities 13,079 11,911 13,241 11,076 11,179 Revenue Growth 5.8% 15.6% 4.1% 4.9% 8.7% Total Non-current Liabilities 22,240 19,486 24,830 23,507 25,440 Operating Profit Growth -23.0% -4.8% 85.6% -43.3% 16.1% Total Liabilities 30,298 32,305 34,307 32,953 35,059 Core Profit Growth -5.3% 19.8% 45.9% 5.8% 31.9% Net Profit Growth -1.4% -3.8% 116.3% -35.4% 31.9% Total Common Equity 18,160 18,634 22,369 23,493 26,208 Reported EPS Growth -11.1% -5.2% 107.0% -37.3% 28.0% Minority Interest 10,539 9,802 11,443 12,502 13,899 EBITDA Margin 90.2% 85.0% 123.4% 88.1% 101.0% Total Equity 28,699 28,436 33,811 35,995 40,108 EBIT Margin 70.8% 63.5% 104.0% 69.4% 82.3% Total Equity & Liabilities 58,998 60,741 68,118 68,948 75,167 Operating Margin 54.9% 45.3% 80.7% 43.6% 46.6% Net Profit Margin 32.6% 27.2% 56.5% 34.8% 42.2% Ratios FY2015 FY2016 FY2017E FY2018E FY2019E Cash Flow Statement (HKD m) FY2015 FY2016 FY2017E FY2018E FY2019E ROE 13.2% 11.7% 24.6% 13.2% 16.6% Net Profit After Tax 2,198 2,116 4,577 2,955 3,897 ROA 6.1% 3.6% 7.5% 4.3% 5.7% D&A Add-back 1,309 1,673 1,572 1,588 1,720 Net Change in Working Capital (273) (4) 1,219 (1,581) 790 Net Debt / Equity -0.8% 14.5% 15.1% 18.5% 12.5% Other Items (1,104) (1,869) (250) (1,133) (1,904) EBITDA Interest Coverage 8.8x 6.6x 21.9x 11.1x 12.4x CFO 2,130 1,915 7,118 1,828 4,503 Rec. Turnover Days Purchase of PP&E & Subsidiaries (CAPEX) (2,358) (3,494) (10,129) (2,242) (2,700) Inventory Turnover Days Disposal 2, Payables Turnover Days Income from JV & Asso 789 1,225 1,698 1,994 3,079 Other Investing Items (3,892) (3,823) 2,018 (531) (1,332) Current Ratio 2.69x 1.72x 2.39x 2.34x 2.68x CFI (2,480) (5,689) (6,413) (779) (954) Quick Ratio 2.51x 1.49x 2.06x 2.00x 2.32x Dividends Paid (1,478) (950) (842) (1,831) (1,182) Net Change in Debt (3,478) (278) 1, ,721 Valuation FY2015 FY2016 FY2017E FY2018E FY2019E Other Financing Items 11, (843) (772) (707) P/E 13.5x 14.2x 6.9x 11.0x 8.6x CFF 6,443 (1,197) (31) (2,086) (168) P/B 2.75x 2.69x 2.50x 2.32x 2.15x Total Cash Flow 6,093 (4,971) 674 (1,037) 3,382 EV / EBITDA 7.4x 5.1x 5.1x 7.1x 5.7x Free Cash Flow 5,239 2,287 (1,012) 2,190 5,515 Dividend Yield 3.2% 2.8% 5.8% 3.6% 4.7% Sources: Company, Capital IQ, CGIS Research estimates 2

3 Update on Shenzhen Property Projects Meilin Checkpoint In Oct 2017, China Vanke became involved in the Meilin Checkpoint Project; it will be responsible for the entrustment of construction management. According to media reports, the project will be a complex, including various elements, like public housing and apartments. In the latest guidance by SZI, the first phase will have a GFA of 110,000 sqm. Pre-sales are expected in 2H 2018 with delivery by the end of We note that the project is still subject to uncertainties at this stage. First, SZI hasn t decided whether or not it will sell its project stake to Vanke, or the exact timetable for such a disposal. The direction of the overall project will also depend on the developer introduced. Second, as the property market in Shenzhen is under stricter control, we expect the project to have additional restrictions, such as the selling price and the time required to get the necessary permits. The inclusion of 112k sqm of rental apartments is somewhat negative, in our view. The reasons are (1) that net rental yields for residential apartments in China are likely to be low, or even negative; and (2) that it lowers the ratio of salable resources. We therefore lower our estimate of the value of the Meilin Checkpoint Project. We also don t include property sales from the project or the disposal of SZI s project stake in our earnings model due to the uncertain timing and details. This may provide additional upside to our earnings forecast for 2018E and 2019E, Figure 1: Analysis on Meilin Checkpoint Project Background Information Land area (sqm) 96,000 GFA (sqm) 486,400 Plot ratio Stake owned by SZI 51% Stake owned by SZE 49% Effective stake owned by SZI 75.9% Breakdown of GFA (Unit: sqm) Residential (including 42k sqm public housing) 245,603 Commercial 34,460 Office 78,000 Apartment 112,000 Public Facilities and Others 16,337 Total 486,400 Cost Breakdown: Total Cost (RMB m) 5,107 Land Cost per GFA (RMB/sqm) 10,500 Total Cost per GFA (RMB/sqm) 18,485 Scenario Analysis ASP (RMB/sqm) 61,665 Gross Margin 70% Profit After LAT (RMB/sqm) 19,444 Profit attributable to SZI (HKD m) 5,491 *Assuming SZI sells all its stake to third-party *Assuming HKDCNY = 0.85 Sources: Company, CGIS Research estimates 3

4 Qianhai Project One of the investment highlights for SZI is the monetization of the Qianhai project, and there was positive progress in late We expect SZI to receive more compensation from the government in relation to the Qianhai land, and it will allow SZI to book more profits in the future (though the timing is uncertain at present). In summary, SZI is entitled to compensation of approximately HK$9,730m, as it needs to relocate its Western Logistics Park. The first part of the compensation amounted to HK$2,870m, which was allowed to be booked as a HK$2,840m pre-tax gain in The timing of booking the remaining balance of HK$6,860m depends on the government s decision. We expect this HK$6,860m to be compensated in the form of a shared appreciation gain. So we expect this HK$6,860m in compensation to allow SZI to book an after-tax gain of HK$4,900m in the long run, but the booking schedule will depend on the decision of the Qianhai Authority and the progress of the Qianhai project. We also lower our estimate of the value of the remaining phases of the Qianhai Project (total size: 341,200 sqm) because: (1) there is a lower ASP expectation, as the market is under stricter control, (2) there is a higher proportion of the non-salable portion, which is the norm in the Shenzhen property market, and (3) there is a higher proportion of self-held properties to cope with the development of Qianhai. Again, we are less optimistic, as we expect the Shenzhen government to require more rental apartments (not for sale) to be built, which is less favourable to the overall project IRR & payback period. Figure 2: Analysis on Qianhai Project # Items Valuation (RMB m) Valuation (HKD m) HK$/share 1 First Phase: Residential HKD First Phase: Commercial + Office HKD Share of Appreciation Gain 4, ,900.5 HKD Remaining Phases 3, ,909.0 HKD , ,371.9 HKD 5.03 Sources: Company, CGIS Research estimates 4

5 Shenzhen Airlines Visible Profits Although we are less upbeat on the property projects held by SZI, we are more positive on the performance of Shenzhen Airlines (SZA). We think its profit contribution to SZI is likely to beat market expectations, as it is likely to record a huge FX gain for the full year for The appreciation of the RMB against the USD has been positive for SZA s earnings, which had substantial USD debt exposure, even though rising oil price has been a drag on its operating profit. Going forward, SZA, as a subsidiary of Air China, is likely to benefit from the airfare liberalization. In addition to higher ticket prices, the recent policy allows an increase in adjustable routes per flight season. Under this policy tailwind, we expect SZA to continue to grow thanks to its competitive position in routes between Shenzhen and other major cities in China. Currently, we forecast that SZA will contribute HK$1,126m in profit to SZI in 2017, up 35.0% YoY. The profit contribution from SZA is equivalent to 23.7% of SZI s core net profit. We expect SZA s profit contribution in 2018E to reach HK$1,231m, up 9.3% YoY, as the profit growth will no longer be supported by an FX gain. Figure 3: Financials of SZA RMB million FY2012 FY2013 FY2014 FY2015 FY2016 9M FY2017 Revenue 22,009 21,757 22,891 24,244 26,321 20,822 YoY 1.2% -1.1% 5.2% 5.9% 8.6% 5.9% Operating Profit 4,945 4,064 3,424 5,134 6,274 4,225 YoY -5.3% -17.8% -15.7% 49.9% 22.2% -15.3% Net Profit 1, ,573 1,867 YoY 116.1% -37.9% -13.4% -6.0% 114.6% 17.6% OPM 22.5% 18.7% 15.0% 21.2% 23.8% 20.3% NPM 6.6% 4.1% 3.4% 3.0% 6.0% 9.0% Sources: Company, Wind Information, CGIS Research Figure 4: Analysis on SZA RMB million FY2014 FY2015 FY2016 9M FY2017 Finance Cost (reported) 882 1,895 1,911 7 YoY 132.8% 114.8% 0.8% -99.4% Of which: Actual Interest Cost FX Loss, Net 47 1,146 1,104 Other (47) (12) (20) Sources: Company, CGIS Research estimates 5

6 Valuation We updated our SOTP valuation as we roll forward our forecast base year to We slightly raise our target price to HK$19.72 accordingly. In summary, we are more positive about the contribution of Shenzhen Airlines, but we have lowered our estimated value of the two Shenzhen property projects, as we have more concerns about the Shenzhen property market. Figure 5: SOTP Valuation Items Methodology Attribut value Per share % of GAV HK$m (HK$/sh) Qianhai site- Phase I 1, Qianhai site- Under negotiations 8, Meilin Checkpoint (51% direct interest) Assume ASP is RMB ~61,500 / sqm 3, China Property Sub-total 14, % Net asset value of SZE (50.89% interest) 9, Longda Expressway DCF 2, Toll Road Sub-total 11, % Shenzhen Airlines 9x 2018E PE 11, % Logistics Business 10x 2018E PE 2, % Other Holdings Holdings of CSG-A [ CH] % GAV % Minus Net Debt (145) (0.07) SOTP Valuation Source: Bloomberg, CGIS Research estimates Other than SOTP, we believe SZI is attractive for two reasons: (1) Thanks to the HK$2,840m pre-tax gain, we expect the DPS for 2017 to be lifted to HK$0.91, providing a 5.83% dividend yield. (2) If we don t consider ad-hoc items, SZI is now trading at 11x 2018E PER. We think this is undemanding when the 26.7% CAGR of core profit between FY E is considered. 6

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Explanation on Equity Ratings BUY SELL HOLD : : share price will increase by >20% within 12 months in absolute terms share price will decrease by >20% within 12 months in absolute terms : no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL Copyright Reserved No part of this material may be reproduced or redistributed without the prior written consent of China Galaxy International Securities (Hong Kong) Co., Limited. China Galaxy International Securities (Hong Kong) Co. Limited, CE No.AXM459 20/F, Wing On Centre, 111 Connaught Road Central, Sheung Wan, Hong Kong. General line: