DAILY SPOTLIGHT Full Edition 5 January 2009 (Monday) The Raw and the Cooked
Index Performance* (%) 5D 1M YTD HSI 6 9 5 The Cooked HSCEI 8 12 5 HSCCI 7 12 5 BYD Co – SELLª...... 2 MSCI HK 4 11 3 (1211.HK/HK$12.80; TP: HK11.00ª) Frank HE MSCI China 8 12 5 Rating Change — We are bullish about BYD’s long‐term growth prospects after MSCI Asia 4 13 1 its venture into the plug‐in hybrid vehicles in China. However, the rapid FTSE-Xinhua A50 (2) (2) 0 deterioration of end‐demand for its handsets‐related business will weigh on * BOCI indices are available on Reuters page BOCI BYD’s relatively resilient business model in the near term. We lower our EPS forecasts for BYD by 8.0% for 2008, 17.0% for 2009 and 17.9% for 2010. In view Leaders (%) 5D 1M YTD of the current unfavourable risk‐reward profile, we downgrade BYD from BUY SMIC (0981.HK) 31 89 (2) to SELL and cut our target price from HK$16.00 to HK$11.00. AviChina (2357.HK) 27 78 7 Wasion Meter (3393.HK) 26 60 14 Singamas (0716.HK) 25 20 39 Zijin Mining (2899.HK) 20 60 1 The Raw Greentown China issues FY08 profit warning...... 8 Laggards (%) 5D 1M YTD (3900.HK/HK$3.37, SELL) Vivien ZHANG SEEC Media (0205.HK) (13) (27) (5) Snippet — Greentown China issued a warning on Friday that its net profit for Minth Group (0425.HK) (12) (13) (9) 2008 might come in down from a year earlier. The full‐year results have not TCL Communication (2618.HK) (8) (4) 3 been finalised and will be disclosed late April. Times (1832.HK) (3) (3) (1) Bank of China (3988.HK) (1) (8) 2
US ADR Closings HK$ (%) Bank of East Asia (0023.HK) 16.35 (2) Cathay Pacific (0293.HK) 8.99 1 Chalco (2600.HK) 4.85 7 Cheung Kong (0001.HK) 78.59 2 China Life (2628.HK) 25.37 3 China Mobile (0941.HK) 83.29 3 China Southern (1055.HK) 1.36 3 China Telecom (0728.HK) 3.17 3 China Unicom (0762.HK) 10.48 4 CLP Holdings (0002.HK) 52.55 0 CNOOC Ltd (0883.HK) 7.85 3 Guangshen Railway (0525.HK) 3.02 4 Henderson Land (0012.HK) 29.92 (1) HK & China Gas (0003.HK) 12.40 3 HK Electric (0006.HK) 43.09 1 HSBC (0005.HK) 76.84 (0) Huaneng Power (0902.HK) 5.82 3 Hutchison (0013.HK) 40.71 2 Johnson Electric (0179.HK) 1.90 3 Lenovo (0992.HK) 2.24 2 PCCW (0008.HK) 3.64 (1) PetroChina (0857.HK) 7.41 3 SHK Properties (0016.HK) 69.76 4 Sinopec (0386.HK) 5.14 4 SMIC (0981.HK) 0.33 2 Swire Pacific (0019.HK) 54.88 (2) Techtronic (0669.HK) 1.94 (3) Tsingtao Brewery (0168.HK) 16.66 1 Yanzhou Coal (1171.HK) 6.22 4
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TECHNOLOGY — Components Rating Changes
05 January 2009
BYD Co
Rising difficulties in defying downturn
We are bullish about BYD’s long-term growth prospects after SELL (ªBUY) its venture into plug-in hybrid vehicles in China. However, the H rapid deterioration of end-demand for its handsets-related
1211.HK – HK$12.80 business will weigh on BYD’s relatively resilient business
(ª16.00) Target Price: HK$11.00 model in the near term. We lower our EPS forecasts for BYD
by 8.0% for 2008, 17.0% for 2009 and 17.9% for 2010. In view of the current unfavourable risk-reward profile, we downgrade
BYD from BUY to SELL and cut our target price from HK$16.00 to HK$11.00.
Key Points For Rating
Growth in BYD’s battery and handset component orders has stalled since last November and major customers have kept on slashing guidance for 2009 shipments. We expect pressure on auto channel inventories for BYD to start mounting in 1Q09. In addition, we believe the pending auto purchase tax reform may also hamper consumer sentiment, Frank HE especially for mid‐ to low‐end products in the near term. +852 2905 2112 BYD trades at 14.8x P/E against our revised 2009 EPS estimate, [email protected] which, in our view, offers limited upside. In addition, it is not cheap in PEG terms relative to listed peers. Share Price vs Index HK$ Turnover (HK$ m) Key Risks to Rating 19 700 16 560 Sooner‐than‐expected demand recovery in the handsets 13 420 market.
10 280
7 140 Valuation
4 0 Based on 8x 2009 P/E for autos, 10x for handsets and 20x for batteries, we cut our target price from HK$16.00 to HK$11.00. 02/01/08 02/02/08 02/03/08 02/04/08 02/05/08 02/06/08 02/07/08 02/08/08 02/09/08 02/10/08 02/11/08 02/12/08 02/01/09 BYD Co HSMLCI Sources: Bloomberg, BOCI Research Investment Summary Year ended 31 Dec 2006 2007 2008E 2009E 2010E Share Price Performance Revenue (Rmb m) 12,939 21,211 28,881 36,472 48,107 YTD 1M 3M 12M Change (%) 99 64 36 26 32 Absolute (%) 1 14 (19) (6) Net profit (Rmb m) 1,117 1,612 1,377 1,677 2,204 Relative to HSCEI (%) (4) (2) (11) 39 Fully diluted EPS (Rmb) 0.55 0.79 0.67 0.76 0.97 Sources: Bloomberg, BOCI Research Change (%) 122.1 44.2 (14.6) 12.5 28.2 Previous EPS (Rmb) - - 0.73 0.91 1.18 Key Data Change (%) - - (8.0) (17.0) (17.9) Total issued shares (m) 2,050 Fully diluted P/E 20.5 14.2 16.7 14.8 11.5 Free float (%) 12 CFPS (Rmb) 0.46 (0.60) (0.68) 0.72 (0.60) Free float mkt. cap. (HK$ m) 3,178 P/CF (x) 24.1 (18.5) (16.4) 15.6 (18.5) 3M avg. daily turnover (HK$ m) 105 EV/EBITDA (x) 27.3 20.4 22.4 16.7 12.9 Net debt/equity (%) 21 DPS (Rmb) 0.00 0.11 0.34 0.22 0.26 Major shareholder (%) Yield (%) 0.0 0.9 3.1 1.9 2.3 Value Partners 10 Sources: Company data, BOCI Research estimates Sources: Company data, Bloomberg, BOCI Research estimates
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Sudden drop in handset orders
BYD has indicated that its handsets sales have stalled growth since last November because major customers, including Nokia, Motorola and Samsung, have all taken a more conservative approach in placing orders in a bid to clear inventory, even though the fourth quarter of each year has been the traditional peak season. Although we believe BYD is better positioned to deal with the current economic downturn due to its smaller scale, competitive cost structure in the handsets business, the recent sharp falls in end‐demand due to the weakening economy will weigh on the company in the near term.
Nokia accounts for around 80% of BYD’s sales of handsets components and 20% of assembly, and Motorola approximately 10% and 60%, respectively. Last month, Nokia has drastically slashed its forecast for 2009 global handset shipments forecast from growth of 15% YoY to a decline of 5% YoY or more. It also issued a profit warning for 4Q08. With a global market share of over 39%, we expect Nokia’s strong pricing power over suppliers to see electronic manufacturing service (EMS) providers suffer from margin squeezes in the coming quarters. In addition, Nokia has also claimed to favour profit over sales targets amid the current dismal environment and this will also hit EMS in terms of outsourcing volumes.
Moreover, we believe that pullback in spending is hampering the handset outsourcing trend as original equipment manufacturers (OEM) need to fulfil utilisation rates of their in‐house facilities, creating challenges for EMS like BYD. Of late, BYD has also been showing signs of lower utilisation. The company has restricted staff from over time in the face of slower growth in orders.
We lower our handset sales estimates for 2008‐2010 by 9.7‐11.1%, representing a CAGR of 19.7%, down from the previous 20.4%. In addition, we trim our operating margin assumptions from 6.2% to 6.0% for 2009 and from 5.6% to 5.5% for 2010, while maintaining our 2008 estimate.
Battery sales also negatively affected
Inevitably, the sudden drop in handset orders has affected BYD’s Li‐ion handsets battery segment. Management has indicated that sales of Li‐ion batteries grew just 5% YoY in 2008, as opposed to the jump of 20% YoY in 1H08. Coupled with the weaker demand for nickel batteries, we expect overall battery sales for 2008 to drop, a reversal from growth of 10.3% YoY in 1H08. BYD has started to supply notebook batteries to one of the leading PC original equipment manufacturer in Taiwan, but sales contribution is insignificant so far.
Accordingly, we have cut our battery sales projection by 9.9%‐26.4% for 2008‐10. We also lower our operating margin from 10.7% to 10.0% for 2009 and 11.0% to 10.2% for 2010. We believe BYD’s leading market share in the handset batteries business will serve more as a cash cow for the company to ramp up sales of both automobiles and handsets going forward.
5 January 2009 BYD Company 3 THIS DOCUMENT MAY NOT BE DISTRIBUTED IN OR INTO THE PRC.
Auto-related inventory risk emerging
BYD’s auto sales maintained their momentum and are still on track to gain market share. Management has indicated that auto shipments up to end‐November reached 148,000 units and we are comfortable that BYD will achieve our full‐year sales target of 170,000. According to the China Association of Automobile Manufacturers (CAAM), shipments of BYD’s major product, the F3, surged 114% YoY to 17,012 units, as the second best seller in China, behind FAW‐VW’s Jetta. Nevertheless, we are concerned that automakers normally ramp up shipments around year end, resulting in mounting inventory pressure at channels. Furthermore, the auto purchase tax reform is still under discussion. Our auto research team had previously estimated that the revised purchase tax, if implemented, would help consumers save up to 6.8% of the retail price. This may, in our view, give rise to a wait‐and‐see purchase sentiment, especially for entry‐level buyers. We believe this pending policy change will affect BYD’s sales in sight due to its specialisation in the mid‐ to low‐end products. Coupled with the ongoing macro headwind, we expect slower sales in 1Q09 for BYD.
Price cuts likely
Auto distributors are willing to undertake aggressive promotions at year end in order to gain annual sales rebates from manufacturers. Our channel checks indicate a rising divergence between guidance prices and real selling prices at 4S stores recently. We also note that F3 dealers offer discounts of up to Rmb5,000 each to customers. Historically, BYD officially reduces the selling price for the F3 model in February and August. The February 2008 price adjustments ranged from Rmb6,000 to Rmb10,000, mainly to pave the way for the launch of the F6 model last March, while the August 2008 price cut was in preparation for the September‐October peak season. Figure 1 shows the two moves effectively boosted sales. We expect stiffer price competition ahead, amid the declining price of steel.
Figure 1. F3 Monthly Shipments
18,000 200% 16,000 14,000 150% 12,000 100% 10,000 8,000 50% 6,000 4,000 0% 2,000 - -50% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov
2007 Shipment (LHS) 2008 Shipment (LHS) YoY Growth (RHS)
Sources: CAAM, BOCI Research estimates
5 January 2009 BYD Company 4 THIS DOCUMENT MAY NOT BE DISTRIBUTED IN OR INTO THE PRC.
We lower our average selling price (ASP) and shipment forecasts for the F3 and F6, but factor in a higher sales volume for the F0. As a result, we lift our auto sales forecast by 5.4% for 2009 and 8.8% for 2010, while maintaining our margin estimates.
Update on F3DM
BYD officially launched the F3DM model in mid‐December 2008 at a retail price set at Rmb149,800 each. Management has indicated that initial orders come from the government and state‐owned enterprises, in line with the Beijing authorities’ push to encourage energy‐efficient vehicles. According to CBNWeekly, BYD has reached agreement with the Shenzhen Government for the latter to subsidise 60% of the price difference between the F3DM and the F3, narrowing the price gap from approximately Rmb70,000 to Rmb40,000. BYD is also in talks with 13 other local governments regarding the subsidy details.
Due to a lack of charging infrastructure, we expect the F3DM will contribute just 4% of total auto sales in 2009. In addition, we believe BYD also needs to build an extensive after‐sales service network for F3DM. The sophisticated designs on plug‐in hybrids require higher capital expenditure for 4S stores to set up the service and also lead to higher maintenance costs for consumers.
China is on a steady phase to roll out new energy vehicles. We note that the State Grid has announced plans to spend Rmb7.8bn during 2007‐10 to build a trial electric vehicle system for its internal institutions across the nation. The outlay includes a budget to buy 2,000 electric cars and build charging stations.
Valuations
We lower our EPS forecasts for BYD by 8.0% for 2008, 17.0% for 2009 and 17.9% for 2010, based on the aforementioned adjustments. We use the sum‐of‐parts approach to value BYD. BYD shares trade at P/E multiples of 16.7x for 2008E and 14.8x for 2009E, which, in our view, offers limited upside. We expect the company to achieve an EPS CAGR of 20.1%, translating into 0.8x PEG. We believe the near‐term catalyst for the share price may be favourable future government policies for electric vehicles and sooner‐than‐expected recovery in demand from the global handsets market. Given the lower visibility in the handsets segment, we advice investors to SELL the stock for now and wait for a more attractive entry point.
5 January 2009 BYD Company 5 THIS DOCUMENT MAY NOT BE DISTRIBUTED IN OR INTO THE PRC.
Figure 2. Earnings Revisions Handsets 2008E 2009E 2010E CAGR (%) Previous estimate (Rmb m) 14,298 17,553 20,713 20.4 Current estimate (Rmb m) 12,916 15,596 18,510 19.7 Change (%) (9.7) (11.1) (10.6) Batteries Previous estimate (Rmb m) 7,550 9,150 10,887 20.1 Current estimate (Rmb m) 6,800 7,327 8,008 8.5 Change (%) (9.9) (19.9) (26.4) Automobiles Previous estimate (Rmb m) 9,165 12,860 19,841 47.1 Current estimate (Rmb m) 9,165 13,549 21,590 53.5 Change (%) - 5.4 8.8 Source: Company data, BOCI Research estimates
Figure 3. Sum-of-parts Valuations 2009 EPS 2009 P/E Fair value (Rmb) (x) (HK$) Batteries 0.17 20.0 4.4 Handsets 0.21 10.0 2.7 Automobiles 0.37 8.0 3.8 Fair value 0.76 - 11.00 Source: Company data, BOCI Research estimates
Figure 4. Peer Comparisons Name Stock Market 2008E 2007 2008E 2009E 2008-2010E 2008E 2008E 2008E 2008E code cap Sales Net profit P/E EPS CAGR PEG P/B ROE Yield Handsets (HK$ m) (HK$ m) (%) (%) (%) BYD Co 1211.HK 26,241 28,881 1,377 14.3 16.8 14.9 20.1 0.8 1.8 10.5 2.1 FIH 2038.HK 21,396 84,717 3,155 3.8 6.7 6.7 8.3 0.8 0.7 11.4 0.0 BYD Electronic 0285.HK 6,514 9,534 1,148 5.7 5.7 4.7 15.8 0.4 1.0 19.4 2.9 AAC Acoustic 2018.HK 4,273 2,455 685 7.8 6.3 6.1 7.1 0.9 1.3 23.6 0.0 Flextronics Intl FLEX.US 16,063 259,587 6,370 3.0 2.6 2.8 n.a. n.a. 0.3 7.9 0.0 Jabil Circuit JBL.US 11,016 95,218 1,346 18.8 6.2 8.4 n.a. n.a. 0.5 4.1 4.2 Silitech 3311.TT 1,583 2,049 261 5.1 6.0 6.2 n.a. n.a. 1.4 24.8 9.0 Average 8.3 7.2 7.1 12.8 0.7 1.0 14.5 2.6 Batteries Sanyo Electric 6764.JP 26,404 163,630 3,014 35.5 31.8 119.4 n.a. n.a. 1.9 9.2 0.0 Sony 6758.JP 164,018 728,716 2,937 5.2 65.2 58.3 n.a. n.a. 0.6 1.4 2.3 Panasonic 6752.JP 231,939 718,373 994 8.4 166.6 19.0 n.a. n.a. 0.6 1.6 3.8 Hitachi 6501.JP 98,714 913,648 4,010 n.a. 70.1 23.1 n.a. n.a. 0.5 0.8 2.1 GS Yuasa 6674.JP 16,706 24,895 552 73.6 30.2 26.4 67.1 n.a. 2.4 10.2 1.1 Samsung SDI 006400.KS 15,146 29,469 9,919 44.6 38.9 16.9 n.a. n.a. 0.5 2.3 1.0 Average 33.5 67.1 43.9 67.1 n.a. 1.1 4.2 1.7 Automobiles Brilliance China 1114.HK 1,560 15,155 263 16.3 5.5 5.6 0.6 25.3 0.3 3.3 0.9 Dongfeng Motor 0489.HK 22,143 78,343 883 5.9 5.9 5.9 4.8 1.2 1.0 16.2 2.3 Denway Motors 0203.HK 18,872 958 2,568 8.7 7.3 6.9 6.2 1.4 1.3 19.6 5.4 Great Wall Motor 2333.HK 2,957 8,612 887 3.0 3.9 4.2 n.a. n.a. 0.4 11.2 5.7 Geely Automobile 0175.HK 4,024 8,323 619 9.7 6.3 4.2 20.2 0.5 1.3 21.5 3.1 Average 8.7 5.8 5.4 8.0 7.1 0.9 14.4 3.5 Sources: Company data, Bloomberg, BOCI Research estimates
5 January 2009 BYD Company 6 THIS DOCUMENT MAY NOT BE DISTRIBUTED IN OR INTO THE PRC.
Income Statement (Rmb m) Cash-flow Statement (Rmb m) Year ended 31 Dec 2006 2007 2008E 2009E 2010E Year ended 31 Dec 2006 2007 2008E 2009E 2010E Revenue 12,939 21,211 28,881 36,472 48,107 Pre-tax profit 1,181 1,743 1,785 2,254 2,948 Cost of sales (10,201) (16,964) (23,349) (29,858) (39,633) Net interest expenses 233 360 447 464 436 Operating expenses (1,324) (2,145) (3,299) (3,897) (5,091) Change in working capital 479 (1,407) 379 (279) (1,619) Operating profit (EBIT) 1,414 2,103 2,232 2,718 3,383 Tax paid (73) (49) (220) (364) (504) Other operating cash flows 677 1,265 1,333 1,490 1,594 Depreciation & amortisation (420) (769) (968) (1,054) (1,097) Cash flow from operations 2,498 1,911 3,725 3,565 2,854 EBITDA 994 1,334 1,265 1,664 2,287 Net purchase of fixed assets (2,744) (4,061) (5,000) (3,000) (2,500) Net interest income/(expenses) (233) (360) (447) (464) (436) Decrease/(increase) in invest. 0 0 0 0 0 Other gains/(losses) 0 0 0 0 0 Other investing cash flows (281) (1,117) (390) 1,378 (330) Pre-tax profit 1,181 1,743 1,785 2,254 2,948 Cash flow from investing (3,025) (5,177) (5,390) (1,622) (2,830) Tax on profit (53) (41) (232) (383) (531) Net increase in equity 0 5,411 0 1,585 0 Minority interests (11) (91) (176) (194) (214) Net increase in debt 1,712 2,387 712 109 (964) Net profit 1,117 1,612 1,377 1,677 2,204 Dividends paid 0 (216) (701) (482) (587) Core net profit 1,117 1,612 1,377 1,677 2,204 Other financing cash flows (249) (393) (492) (516) (491) EPS (Rmb) 0.55 0.79 0.67 0.76 0.97 Cash flow from financing 1,463 7,189 (481) 697 (2,041) Core EPS (Rmb) 0.55 0.79 0.67 0.76 0.97 Change in cash 935 3,922 (2,146) 2,640 (2,018) DPS (Rmb) 0.00 0.11 0.34 0.22 0.26 Cash at beginning of year 682 1,617 5,540 3,394 6,034 Free cash flow to firm (514) (3,238) (1,621) 1,995 79 Revenue growth (%) n.a. 64 36 26 32 Free cash flow to equity 952 (1,240) (1,400) 1,588 (1,376) EBIT growth (%) n.a. 49 6 22 24 EBITDA growth (%) n.a. 34 (5) 32 37 Sources: Company data, BOCI Research estimates EPS growth (%) n.a. 44 (15) 13 28 Core EPS growth (%) n.a. 44 (15) 13 28 Key Ratios Sources: Company data, BOCI Research estimates Year ended 31 Dec 2006 2007 2008E 2009E 2010E Profitability EBITDA margin (%) 7.7 6.3 4.4 4.6 4.8 Balance Sheet (Rmb m) EBIT margin (%) 10.9 9.9 7.7 7.5 7.0 Year ended 31 Dec 2006 2007 2008E 2009E 2010E Pre-tax margin (%) 9.1 8.2 6.2 6.2 6.1 Cash & cash equivalents 1,617 5,540 3,394 6,034 4,016 Net profit margin (%) 8.6 7.6 4.8 4.6 4.6 Receivables 1,551 4,032 4,672 6,320 8,178 Liquidity Inventories 3,157 4,549 5,687 7,075 9,864 Current ratio (x) 0.9 1.0 0.9 1.1 1.1 Other current assets 1,790 2,180 1,678 2,034 2,565 Interest coverage (x) 5.7 5.4 4.5 5.3 6.9 Total current assets 8,114 16,300 15,430 21,462 24,624 Net debt to equity (%) 76.7 20.8 41.6 16.3 20.2 Fixed assets 7,483 10,342 13,913 15,367 16,250 Quick ratio (x) 0.5 0.8 0.6 0.7 0.6 Valuation Intangible assets 471 645 733 810 879 P/E (x) 20.5 14.2 16.7 14.8 11.5 Other long-term assets 377 2,061 2,542 2,989 3,427 Core P/E (x) 20.5 14.2 16.7 14.8 11.5 Total long-term assets 8,272 12,989 17,125 19,103 20,493 Core P/E @ target price (x) 17.6 12.2 14.3 12.7 9.9 Total assets 16,387 29,288 32,555 40,565 45,116 P/B (x) 4.3 2.1 1.8 1.4 1.3 Creditors 3,322 5,715 6,695 9,175 11,890 P/CF (x) 24.1 (18.5) (16.4) 15.6 (18.5) Short-term debt 4,224 6,829 5,891 5,964 5,321 EV/EBITDA (x) 27.3 20.4 22.4 16.7 12.9 Other current liabilities 1,957 3,039 3,954 4,610 5,580 Activity ratios Total current liabilities 9,502 15,583 16,539 19,749 22,791 Inventory days 89.1 66.3 64.7 63.9 64.3 Long-term borrowings 1,513 1,295 2,945 2,982 2,661 Accounts receivables days 43.8 48.0 55.0 55.0 55.0 Other long-term liabilities 4 0 0 0 0 Accounts payables days 93.7 77.8 78.4 79.4 79.9 Share capital 540 540 2,050 2,275 2,275 Returns Dividend payout ratio (%) 0.0 13.4 50.9 28.7 26.6 Reserves 4,753 10,169 11,020 15,559 17,390 Return on equity (%) 21.1 20.1 11.6 10.9 11.8 Shareholder's equity 5,292 10,708 13,071 17,835 19,665 Return on assets (%) 8.2 9.0 6.3 6.2 6.5 Minority interest 75 1,702 0 0 0 Return on capital employed (%) 12.9 13.5 10.7 11.4 12.6 Total liabilities & equity 16,387 29,288 32,555 40,565 45,116 Book value/share (Rmb) 2.58 5.22 6.38 8.04 8.64 Sources: Company data, BOCI Research estimates Tangible assets/share/(Rmb) 2.35 4.91 6.02 7.67 8.26 Net debt/(cash)/share (Rmb) 2.01 1.26 2.65 1.31 1.74 Sources: Company data, BOCI Research estimates
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HONG KONG & CHINA — Raw Snippets
Greentown China issues 2008 profit warning Vivien ZHANG
Greentown China (3900.HK/HK$3.37, SELL) issued a warning on Friday that its net profit for 2008 might come in down from a year earlier. The full‐year results have not been finalized and will be disclosed late April.
We think the anticipated decrease in 2008 earnings is mainly due to weaker‐than‐expected sales. As of 30 November 2008, Greentown had generated total sales proceeds of Rmb14.6bn and the interest attributable to the company amounted to Rmb10.2bn, up 4.3% YoY. As for its 2008 contract pre‐sales sales target of Rmb17bn, only 60% had been locked in. As a result of the less‐than‐expected cash inflow, Greentown has had to delay from 2008 to 1H09 the completions of seven property development projects, with an aggregate gross floor area (GFA) of approximately 270,000sqm (see table). The figure is 11.5% lower than the GFA completion target set in mid‐2008 and 1.4% of total gross land bank as at 31 August 2008). As such, the company has revised its total GFA completion target for 2008 to about 2.07m sqm.
Greentown is also under pressure from rising financing costs as a result of the increase in bank borrowings. As at 30 June3 2008, the company’s net gearing ratio stood at a high 116.7%, up further from 88.2% as at end‐2007. If we include the Rmb2.1bn in convertible bonds due in 2011, Greentown’s net debt amounts to Rmb11.6bn, or 144% of its equity.
We reaffirm our SELL rating on Greentown and will revise our estimates when the company releases further information.
Details of Delayed Projects Entire projects: Hang Zhou Taohuayuan South - Phase II Shanghai Rose Garden - Phase II Hangzhou Majestic Mansion - Phase I Part of: Beijing Majestic Garden - Phase I Qingdao Ideal City - Phase I Hangzhou Jiuxi Rose Garden Resort Village Changsha Green Bamboo Garden - North Phase II Total GFA: 0.27m sqm; 11.5% lower than original completion target Sources: Company data, BOCI Research estimates
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DISCLOSURE
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