Equity Research Property Yuexiu Property (123 HK) Buy (initiation) Target price: HK$1.70 Earnings to resume growth in 2017; initiate at Buy Major Guangzhou developer focused on residential property Previously a conglomerate listed in Hong Kong in 1992, the company span off its transportation business in 2012 to focus on residential property development, mainly in Guangzhou. Since then, it has expanded to 12 cities in China, with Hangzhou and Wuhan its other key markets. Dennis Yao SFC CE No. ALK994 dennisyao@gfgroup.com.hk +852 3719 1065 GF Securities (Hong Kong) Brokerage Limited 29-30/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong Stock performance 30,000 29,000 28,000 27,000 26,000 25,000 24,000 23,000 22,000 21,000 20,000 19,000 18,000 Jun-14 Oct-14 Feb-15 Jun-15 Oct-15 Feb-16 HSI Yuexiu Property Source: Bloomberg Key data June 1 close (HK$) 1.01 Shares in issue (bn) 12.4 Major shareholder Yuexiu Holdings (50%) Market cap (HK$ bn) 12 3M avg.vol. (m) 22.8 52w high/low (US$) 1.91/0.95 Source: Bloomberg HK$ 4.20 3.20 2.20 1.20 0.20 Property sales and investment its dual growth engine The company has a 37% stake in Yuexiu REIT (405 HK, Buy), which was the first Hong Kong-listed real estate investment trust (REIT) investing solely in property in mainland China. Yuexiu REIT owns and manages seven premium investment properties in Guangzhou and Shanghai, all located in the CBD. We expect Yuexiu REIT to contribute Rmb282m in 2016 and Rmb312m in 2017 to the company s pre-tax earnings. Bullish on Guangzhou s new property market According to Colliers, GFA sold of Guangzhou new property rose 33% YoY to 1.8m sqm in 1Q16, and ASP rose 9% YoY to Rmb18,175 sqm. Given strong local demand and the relatively low ASP compared with other first-tier cities, we expect GFA sold of new property in Guangzhou to rise at a CAGR of 25% in 2016-18. Low borrowing costs, limited liquidity risk and access to a premium land bank The company s parent, Guangzhou Yuexiu Holdings, is the largest SOE in Guangzhou, and holds a 50% stake in the company. Supported by the Guangzhou government, the company has low borrowing costs of 5%, diversified financing channels and access to a new premium land bank, which includes the Guangzhou Paper Group re-development project. We forecast net gearing of 109% in 2016 and 107% in 2017. Given the support from the Yuexiu Fund and other financial institutions under its parent, the company has limited liquidity risk, in our view. Poor 2015 results 2015 revenue rose 41% YoY to Rmb22.1bn, among which booked property sales revenue rose 44% YoY to Rmb21.4bn, booked GFA reached 1.99m sqm, with an ASP of Rmb10,700/sqm. Due to a declining gross margin, foreign currency losses and other losses, net profit dropped 59% YoY to Rmb1.0bn. We expect earnings to grow 7%/32% YoY in 2016/17 The company s new management team has been in place since Nov 2015. The company currently has sold but un-booked revenue of Rmb22.6bn. We expect it to book GFA of 2.1m sqm and 2.25m sqm in 2016 and 2017 respectively, with gross margins of 20% in 2016 and 22% in 2017; this will drive earnings growth of 7%/32% YoY in 2016/17. Undervalued asset play; initiate at Buy Leading developers COLI (688 HK, Buy) and Vanke (2202 HK, Buy) are trading at 1.0x 2015 NBV and 1.4x 2015 NBV respectively. Despite the company s lower ROE compared with leading developers, we believe a fair valuation should carry no more than a 40% discount to these companies given its premium land bank in Guangzhou and its stable recurring rental income. The stock is currently trading at 0.3x 2016E NBV, suggesting the company is an undervalued asset play, in our view. We initiate our coverage at Buy, with a target price of HK$1.70, equal to 0.6x 2016E NBV. Stock valuation Turnover (Rmb m) Net Profit (Rmb m) Sources: Company data, GF Securities (HK) EPS (Rmb) EPS YoY (% chg) P/E (x) DPS (Rmb) Yield (x) ROE (%) BPS (Rmb) 2014 15,702 2,471 0.233 (20) 3.5 0.059 7.1 8.5 2.7 0.3 2015 22,116 1,013 0.082 (65) 9.9 0.040 4.7 3.4 2.4 0.3 2016E 23,221 1,081 0.087 7 9.3 0.044 5.2 3.6 2.4 0.3 2017E 25,544 1,427 0.115 32 7.0 0.058 6.8 4.6 2.5 0.3 2018E 30,652 1,967 0.159 38 5.1 0.079 9.4 6.2 2.6 0.3 P/B (x)
Major Guangzhou developer focused on residential property Previously a conglomerate listed in Hong Kong in 1992, the company span off its transportation business in 2012 to focus on residential property development, mainly in Guangzhou. Since then, it has expanded to 12 cities in China, with Hangzhou and Wuhan its other key markets. The company has an attributable land bank of 10.8m sqm, enough for development over the next three to four years. 80% of this land bank is in China s first and second-tier cities, with Guangzhou accounting for 40% of the total. Residential properties and commercial properties account for 77% and 23% of its total land bank respectively. In 2015, contract sales rose 13% YoY to Rmb25bn; GFA sold rose 21% YoY to 2.3m sqm. The Guangzhou region accounted for 46% of its contract sales revenue and 37% of GFA sold. Figure 1: Land bank breakdown by product type Figure 2: Land bank breakdown by region 23% 77% Residential Commercial 31% 15% 14% 40% Guangzhou Hangzhou Wuhan Other cities Sources: Company data In-house property design, sales and management teams The company relies on its in-house teams during property development and sales cycles in areas such as land acquisition, marketing and sales, financing, and property management services. It outsources property construction to external contractors, with strict supervision on quality. When acquiring land, management previously preferred to cooperate with Yuexiu Fund to acquire premium land banks in first/secondtier cities. However, given rising land prices, it now prefers urban redevelopment projects or to cooperate with local land owners. Low borrowing costs, limited liquidity risk and access to a premium land bank The company s parent, Guangzhou Yuexiu Holdings, is the largest SOE in Guangzhou, and holds a 50% stake in the company. Supported by the Guangzhou government, the company has low borrowing costs of 5%, diversified financing channels and access to a new premium land bank, which includes the Guangzhou Paper Group re-development project. We forecast net gearing of 109% in 2016 and 107% in 2017. Given the support from the Yuexiu Fund and other financial institutions under its parent, the company has limited liquidity risk, in our view. Besides, Guangzhou Yuexiu Holdings plans to double its operating KPIs and total assets in the next five years. As a major earnings driver for Yuexiu Holdings, the company s total assets and earnings should continue to grow to cope with its parent s plans. Property sales and investment its dual growth engine The company has a 37% stake in Yuexiu REIT (405 HK, Buy), which was the first Hong Kong-listed real estate investment trust (REIT) investing solely in property in mainland China. Yuexiu REIT owns and manages seven premium investment properties in Guangzhou and Shanghai, all located in the CBD. Its properties include White Horse Building, Fortune Plaza, City Development Plaza, Victory Plaza, Yuexiu Neo Metropolis, and Guangzhou International Finance Center (Guangzhou IFC) in Guangzhou, and Hongjia Tower in Shanghai, with a total rentable area of 487,324 sqm. Management plans to increase its stake in Yuexiu REIT to 50% and inject more investment property projects into Yuexiu REIT to increase its recurring rental revenue. We forecast earnings for Yuexiu REIT of Rmb762m in 2016 and Rmb843m in 2017, which would mean the company s earnings from associates come in at Rmb282m in 2016 and Rmb312m in 2017. 2
Figure 3: Yuexiu REIT s investment property portfolio Property Type Location Sources: Company data Area of Year of ownership completion (sqm) Total rentable Occupancy area (sqm) rate Monthly rental rate (Rmb/sqm) White Horse Building Wholesale shopping center Yuexiu district 1990 50,199 50,129 100.0% 636.7 Fortune Plaza Grade-A office Tianhe district 2003 41,355 41,355 99.6% 149.1 City Development Plaza Grade-A office Tianhe district 1997 42,397 42,397 97.7% 127.1 Victory Plaza Retail shopping center Tianhe district 2003 27,698 27,262 100.0% 242.8 Neo Metropolis Commercial complex Yuexiu district 2007 61,964 49,887 99.7% (2) 108.1 The Guangzhou International Finance Center (GZIFC) Commercial complex Tianhe district 2010 457,357 230,267 95.2% 211.3 Including: Grade A Office 267,804 183,540 97.3% 235.3 Retail shopping mall 46,989 46,727 86.8% 105.4 Hotel 91,461 N/A N/A N/A Serviced apartments 51,102 N/A N/A N/A Hongjia Tower Commercial complex Pudong, Shanghai 2010 62,139 46,026 98.9% 242.8 Sum 743,106 487,324 97.3% 237.5 Office 475,656 363,206 98.1% 196.0 Retail 74,687 73,990 91.7% 160.6 Whosale 50,199 50,129 100% 636.7 Poor 2015 results 2015 revenue rose 41% YoY to Rmb22.1bn, among which booked revenue rose 44% YoY to Rmb21.4bn, booked GFA reached 1.99m sqm, with an ASP of Rmb10,700/sqm. Gross margin dropped 530bps YoY to 21% due to product mix changes in different geographic markets. Given the impact of Rmb depreciation, un-capitalized foreign exchange losses reached Rmb1.0bn in 2015. Due to a declining gross margin, foreign exchange losses and a drop in other gains, 2015 net profit dropped 59% YoY to Rmb1.0bn. New management may bring positive changes The company s new management team has been in place since Nov 2015. For 2016, its main targets are to improve operating efficiency and ROE, as well as developing its employee share-based incentive scheme. For 2016, management expects single-digit sales growth. They aim for new starts with a GFA of 1.96m sqm, with 3.19m sqm of GFA to be completed in 2016, among which 1.9m sqm will be delivered during the year. New management has stated that the company s earnings may return to decent growth in 2017 and 2018, supported by an improving gross margin and an increase in GFA booked in Guangzhou. 44% of 2016 sales target achieved For 2016, the company has total GFA available for sale of around Rmb47bn, of which the Guangzhou area accounts for Rmb22.3bn. As of Apr 2016, the company had achieved contract sales revenue of Rmb11bn, up 100% YoY; GFA sold had reached 1.09m sqm, up 107% YoY, meaning the company had completed 44% of its 2016 full year sales target of Rmb25.8bn. It will launch the sale of the Guangzhou Yuexiu Starry Haizhu Bay and Guanghzou Starry Sky City projects in 2H16. More investment properties to be injected into Yuexiu REIT to cut its net gearing ratio In 2015, the company owned investment properties totaling around 789,000 sqm, of which offices, commercial properties and others accounted for 33%, 45% and 22% respectively. Investment properties under construction amounted to 112,000 sqm, most of which were the commercial portions of Nanhai Starry Winking. In 2015, the company booked rental revenue of Rmb277m, up 14% YoY. It also booked fair value gains of Rmb440m, mainly from Guangzhou Yuexiu Financial Tower. Based on our discussion with management, we expect revenue from investment properties to be Rmb300m in 2016 and Rmb330m in 2017. Going forward, we expect the company to inject the following projects into Yuexiu REIT through Yuexiu REIT s new share issuance, which will increase its cash inflows and cut its net gearing ratio. 1) Guangzhou Fortune World Plaza (GFA: 180,000 sqm); 2) Nanhai Starry Winking (GFA: 112,100 sqm); 3) Zhongshan Macalline (GFA: 90,400). 3
Bullish on Guangzhou s new property market According to Colliers, GFA sold of Guangzhou new property rose 33% YoY to 1.8m sqm in 1Q16, and ASP rose 9% YoY to Rmb18,175 sqm. Given strong local demand and the relatively low ASP compared with other first-tier cities, we expect GFA sold of new property in Guangzhou to rise at a CAGR of 25% in 2016-18. We also forecast the company s ASP in Guangzhou will grow at a CAGR of 8% in 2016-18. Figure 4: Sensitivity analysis on the company s earnings Sources: GF Securities (HK) We expect earnings to grow 7%/32% YoY in 2016/17 The company currently has sold but unbooked revenue of Rmb22.6bn. Based on our discussion with management, we expect the company to book GFA of 2.1m sqm and 2.25m sqm in 2016 and 2017 respectively, with gross margins of 20% in 2016 and 22% in 2017; this will drive earnings growth of 7%/32% YoY in 2016/17 respectively. Figure 5: Our revenue projections Sources: Company data, GF Securities (HK) Figure 6: Major project sales forecasts for 2016 Sources: GF Securities (HK) Change in ASP (2016) Change in our 2016 (Base case: Rmb10,500/sqm) earnings forecast -6% -9% -4% -6% -2% -3% 0% (base case) 0% 2% 3% 4% 6% 6% 9% 2014 2015 2016E 2017E 2018E Booked GFA (sqm m) 1.2 2.0 2.1 2.3 2.6 Booked ASP (Rmb per sqm) 12,600 10,700 10,500 10,800 11,500 Booked revenue (Rmb m) 14,811 21,074 22,050 24,300 29,325 Property management revenue (Rmb m) 478 452 498 547 602 Investment property revenue (Rmb m) 250 280 313 351 393 Others (Rmb m) 162 310 361 345 332 Total (Rmb m) 15,702 22,116 23,221 25,544 30,652 Project name GFA Revenue ASP (sqm) (Rmb m) (Rmb/sqm) Nansha Southern Le Sand ( 南沙滨海花园 ) 226,700 2,672 11,800 Guangzhou Lingnan Wood ( 广州岭南林语 ) 206,500 2,707 13,100 Wuhan Starry Winking ( 武汉星汇云锦 ) 89,100 1,705 19,100 Wuhan Starry Emperor ( 武汉星汇君泊 ) 131,800 1,493 11,300 Wuhan IFC ( 武汉国际金融汇 ) 68,900 1,347 19,600 Others 1,377,000 12,126 8,806 Total 2,100,000 22,050 10,500 Undervalued asset play; initiate at Buy Leading developers COLI (688 HK, Buy) and Vanke (2202 HK, Buy) are trading at 1.0x 2015 NBV and 1.4x 2015 NBV respectively. Despite the company s lower ROE compared with leading developers, we believe a fair valuation should carry no more than a 40% discount to these companies given its premium land bank in Guangzhou and its stable recurring rental income. The stock is currently trading at 0.3x 2016E NBV, suggesting the company is an undervalued asset play, in our view. We initiate our coverage at Buy, with a target price of HK$1.70, equal to 0.6x 2016E NBV. 4
Figure 7: Valuation comparison Company name Stock Price 2015 P/B 2015 P/E 2016E 2015 ROE 2015 net code P/E gearing COLI 688 23.35 1.0x 6.5x 6.9x 20% 9% CR Land 1109 18.38 1.1x 7.2x 7.5x 16% 37% Vanke 2202 18.52 1.4x 9.3x 8.3x 21% 26% Guangzhou R&F 2777 10.32 0.6x 4.9x 4.5x 13% 139% KWG Property 1813 4.88 0.6x 3.6x 3.7x 16% 74% Shenzhen Investment 604 3.14 0.7x 7.7x 7.6x 9% 49% Average 0.9x 6.5x 6.4x 16% 56% Sources: Company data Figure 8: Guangzhou Lingnan Wood project Figure 9: Guangzhou Yuexiu Poly Aite City Sources: yuexiureit.com Figure 10: Financial statements Income Statement Balance Sheet Year-end Dec (Rmb m) 2014 2015 2016E 2017E 2018E Year-end Dec (Rmb m) 2014 2015 2016E 2017E 2018E Revenue 15,702 22,116 23,221 25,544 30,652 Operating expenses (11,564) (17,457) (18,577) (19,975) (23,602) Cash and Cash Equivalents 7,883 9,546 12,139 20,489 21,967 Gross profit 4,138 4,659 4,644 5,569 7,050 Properties under development 34,135 40,171 42,180 40,071 38,067 Fair value gains 1,405 440 0 0 0 Properties held for sales 11,330 12,755 13,393 14,732 17,678 Financial expenses (514) (1,128) (1,297) (1,492) (1,716) Prepayment for land use rights 9,325 11,889 12,483 13,732 16,478 Profit from associates 360 323 282 312 343 Others 7,156 8,373 8,786 9,655 11,564 Income taxes (1,786) (1,841) (824) (1,066) (1,438) Total Current Assets 69,828 82,734 88,981 98,678 105,755 Net profit 2,471 1,013 1,081 1,427 1,967 EPS (Rmb) 0.233 0.082 0.087 0.115 0.159 Property, Plant and Equipment 1,286 1,463 1,682 1,935 2,225 DPS (Rmb) 0.059 0.040 0.044 0.058 0.079 Investment Properties 12,614 14,169 16,294 18,738 21,549 Interest in JV 1,288 5,135 5,905 6,791 7,809 Cash Flow Statement Interest in Associates 6,721 7,083 8,146 9,368 10,773 Year-end Dec (Rmb m) 2014 2015 2016E 2017E 2018E Others 1,337 1,442 1,658 1,907 2,193 Total Non Current Assets 23,247 29,291 33,685 38,737 44,548 Cash Flow from Operating Activities (5,505) (9) 2,787 8,434 10,205 Cash Flow from Investing Activities (1,505) (6,384) (7,000) (8,500) (10,000) Borrowings 8,415 5,512 5,787 6,366 7,639 Cash Flow from Financing Activities 9,830 8,040 6,806 8,415 1,273 Other payables 12,046 13,915 14,611 16,072 19,287 Net change 2,828 1,663 2,593 8,349 1,479 Land premium payables 10,950 20,375 21,393 23,533 28,239 CF at end 7,883 9,546 12,139 20,488 21,967 Others 2,548 2,732 2,869 3,156 3,787 Total Current Liabilities 33,959 42,534 44,661 49,127 58,952 Borrowings 23,644 32,653 39,184 47,021 47,021 Financial Ratios Deferred Tax Liabilities 5,040 5,276 6,331 7,597 9,116 Year-end Dec 2014 2015 2016E 2017E 2018E Minority Interest 1,149 1,848 2,218 2,661 3,193 Ohters 179 96 115 138 165 Revenue growth rate (YoY) 11% 41% 5% 10% 20% Total Non Current Liabilities 30,012 39,872 47,847 57,416 59,495 Gross margin 26% 21% 20% 22% 23% Total Shareholders Equity 29,104 29,618 30,158 30,872 31,856 Net profit margin (incl fair value gains) 16% 5% 5% 6% 6% Net gearing 83% 97% 109% 107% 103% ROE 8% 3% 4% 5% 6% Sources: Company data, GF Securities (HK) 5
Rating definitions Benchmark: Hong Kong Hang Seng Index Time horizon: 12 months Company ratings Buy Stock expected to outperform benchmark by more than 15% Accumulate Stock expected to outperform benchmark by more than 5% but not more than 15% Hold Expected stock relative performance ranges between -5% and 5% Underperform Stock expected to underperform benchmark by more than 5% Sector ratings Positive Sector expected to outperform benchmark by more than 10% Neutral Expected sector relative performance ranges between -10% and 10% Cautious Sector expected to underperform benchmark by more than 10% Analyst Certification The research analyst(s) primarily responsible for the content of this research report, in whole or in part, certifies that with respect to the company or relevant securities that the analyst(s) covered in this report: (1) all of the views expressed accurately reflect his or her personal views on the company or relevant securities mentioned herein; and (2) no part of his or her remuneration was, is, or will be, directly or indirectly, in connection with his or her specific recommendations or views expressed in this research report. Disclosure of Interests (1) The proprietary trading division of GF Securities (Hong Kong) Brokerage Limited ( GF Securities (Hong Kong) ) and/or its affiliated or associated companies do not hold any shares of the securities mentioned in this research report. (2) GF Securities (Hong Kong) and/or its affiliated or associated companies do not have any investment banking relationship with the companies mentioned in this research report in the past 12 months. (3) Neither the analyst(s) preparing this report nor his/her associate(s) serves as an officer of the company mentioned in this report and has any financial interests or hold any shares of the securities mentioned in this report. Disclaimer This report is prepared by GF Securities (Hong Kong). It is published solely for information purpose and does not constitute an offer to buy or sell any securities or a solicitation of an offer to buy, or recommendation for investment in, any securities. The research report is intended solely for use of the clients of GF Securities (Hong Kong). The securities mentioned in the research report may not be allowed to be sold in certain jurisdictions. No action has been taken to permit the distribution of the research reports to any person in any jurisdiction that the circulation or distribution of such research report is unlawful. No representation or warranty, either express or implied, is made by GF Securities (Hong Kong) as to their accuracy and completeness of the information contained in the research report. GF Securities (Hong Kong) accepts no liability for all loss arising from the use of the materials presented in the research report, unless is excluded by applicable laws or regulations. Please be aware of the fact that investments involve risks and the price of securities may be fluctuated and therefore return may be varied, past results do not guarantee future performance. Any recommendation contained in the research report does not have regard to the specific investment objectives, financial situation and the particular needs of any individuals. The report is not to be taken in substitution for the exercise of judgment by respective recipients of the report, where necessary, recipients should obtain professional advice before making investment decisions. GF Securities (Hong Kong) may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in the research report. The points of view, opinions and analytical methods adopted in the research report are solely expressed by the analysts but not that of GF Securities (Hong Kong) or its affiliates. The information, opinions and forecasts presented in the research report are the current opinions of the analysts as of the date appearing on this material only which may subject to change at any time without notice. The salesperson, dealer or other professionals of GF Securities (Hong Kong) may deliver opposite points of view to their clients and the proprietary trading division with respect to market commentary or dealing strategy either in writing or verbally. The proprietary trading division of GF Securities (Hong Kong) may have different investment decision which may be contrary to the opinions expressed in the research report. GF Securities (Hong Kong) or its affiliates or respective directors, officers, analysts and employees may have rights and interests in securities mentioned in the research report. Recipients should be aware of relevant disclosure of interest (if any) when reading the report. Copyright GF Securities (Hong Kong) Brokerage Limited. Without the prior written consent obtained from GF Securities (Hong Kong) Brokerage Limited, any part of the materials contained herein should not (i) in any forms be copied or reproduced or (ii) be re-disseminated. GF Securities (Hong Kong) Brokerage Limited. All rights reserved. 29-30/F, Li Po Chun Chambers, 189 Des Voeux Road Central, Hong Kong Tel: +852 3719 1111 Fax: +852 2907 6176 Website: http://www.gfgroup.com.hk 6