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SOHO China (410) Initial Coverage

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SOHO China (410) Initial Coverage SOHO China (410) Initial coverage Buy May 13, 2008 Trendy Builder in Beijing Focus on central area in Beijing. We initiate the coverage for SOHO Samson Man, CFA China. SOHO is famous for its innovative property design and strong brand (852)-2532-1539 name. Innovative design attracts the customers and results in a higher profit [email protected] margin. Secondly, “SOHO” brand is built up as a dynamic lifestyle brand due to the contribution from its trend-setting founders. Lastly, SOHO is the major commercial property developer in CBD area in Beijing. We believe that SOHO should benefit from the booming economic activities in Beijing and is less affected by austerity measures. Industry China Properties Limited land band but ample of cash. SOHO is in strong financial position with RMB 15 bn cash on hand. However, the company lacks of Price HK$ 4.92 sufficient land bank for its coming 5 years development. SOHO is keen on land replenishment. At present, land bank of SOHO amounts to 838k sqm. Target price HK$ 7.27 The company is looking to enlarge its land bank through private negotiation and public auction. Furthermore, SOHO is working to acquire Qianmen (+47.8%) Project from its founder. Stock code 410 No factor in Qianmen Project acquisition. We believe that investors ignore Qianmen Project injection effect. We agree that there are a lot of uncertainties of this asset injection. But it will become share price Market cap. HK$25,743mn catalyst if asset injection materializes. We estimate that it will bring NAV accretion of RMB 2.06 per share. O/S shares 5,232mn 52wk high/low HK$ 11.98/3.9 Lock up 68% of 08 revenue. We forecast that GFA completion will be 142k sqm, 200k sqm and 266k sqm in 2008-10. Net profit is estimated to be NAV per share HK$7.74 RMB 1,716m, RMB 2,531m and RMB 3,782m in 2008-10, respectively. Using sum-of-the-parts valuation method, we project that end-08 NAV of SOHO is HK$7.74 based on 15.0% WACC and 6% cap rate. Our target price is HK$7.27 representing a 10% discount to GAV plus net cash position. Major shareholder Marita Pan Upside potential is 47.8%. BUY (63.5%) HK$1=RMB0.9 Earning Summary Price Performance HK$ Year-end 31 Dec FY06A FY07A FY08E FY09E FY10E 14 Turnover (RMB m) 1,740 6,954 5,561 6,400 9,299 12 Growth (%) (55) 300 (20) 15 45 10 Net Profit (RMB m) 342 1,966 1,716 2,531 3,782 8 Growth (%) (52) 476 (13) 48 49 6 EPS (RMB) 0.091 0.477 0.328 0.484 0.723 4 Growth (%) N.A. 424 (31) 48 49 2 PER (x) 48.6 9.3 13.5 9.2 6.1 0 DPS (RMB) 0.000 0.100 0.100 0.120 0.160 10/07 11/07 12/07 1/08 2/08 3/08 4/08 5/08 Yield (%) 0.0 2.3 2.3 2.7 3.6 Source: Company information, FSSL Source: Bloomberg First Shanghai Securities Limited www.mystockhk.com First Shanghai Securities Limited May 2008 Centre in Beijing Focus on commercial Pan Shiyi and Zhang Xin co-founded SOHO China (SOHO) in 1995. The company buildings focuses on the commercial property development in Beijing, especially in CBD area (Central Business District). Through the attractive outlook and innovative design, SOHO won many recognitions and awards in China and internationally. Furthermore, “SOHO” brand name is highly recognized in China because of innovative design of the buildings as well as high profile directors. Successful track record SOHO completed 4 commer cial projects with total GFA 1.48m sqm in Beijing CBD in 2001-07. Namely, SOHO Newtown, SOHO Shangdu, Jianwai SOHO, Chaowai SOHO. In addition, two hotels, Commune by the Great Wall in Beijing and Boao Kempinski in Hainan, are owned by SOHO. Currently, anot her 4 projects with total GFA of 788k sqm are under construction and will be delivered in 2008-11. IPO price at HK$8.3 In October 2007, SOHO successfully listed on the Stock Exchange of Hong Kong and received 169 times over-subscription in IPO. IPO pric e was HK$8.3 per share and the company raised about RMB 11.4 bn. Design & brand name are the keys In fact, success of SOHO mainly came from two factors. One is its innovative design and the other is the brand name. Avant-garde design SOHO works with internationally recognized avant-garde architects and is capable to convert innovative designs into trend-setting marketable products. The company closely monitors and participates in discussion on trends in architecture and real estate development. Furthermore, the architect will work closely with SOHO’s in-house design team to convert the overall design idea into concreted buildings. We know that location is the important factor for property investment. But we think that quality of the building or layout should be the second most important factor for property investment. Figure 1: Chaowai SOHO Figure 2: SOHO Shangdu Source: Company Source: Company - 2 - This report is not to be distributed to the US, Canada, Japan or to any US person First Shanghai Securities Limited May 2008 One of the “Most On the other hand, a good and reliance brand name can give customers confidence to Admired Companies” in the products. Two founders have worked hard to build up themselves with the image of China trendsetters. Then, “SOHO” brand is easily became a dynamic lifestyle brand and the company is famous for developing commercial properties with innovative designs. Furthermore, SOHO was named as one of the “Most Admired Companies” in China by Fortune Magazine (Chinese edition) in 2006. So a well-known brand name not only assures the company attracti ng a nationwide and loyal customer base, but also increasing opportunity to secure prime land site in Beijing as well as enjoying a premium selling price of its properties. The company actively promotes the brand of “SOHO” by leverage the personal profile s of two founders. Being an active commentator on China real estate industry, Pan Shiyi has created a blog on sina.com.cn with a hit rate of more than 33 million times. Higher margin amongst Beijing developers Gross margin at 52% Due to the premium pricing, SOHO enjoys a higher margin than its peers. Average and net margin at 22% gross margin and average net margin of SOHO were 52% and 22% respectively. In addition, they were 17-28% and 2-11% higher than other three developers in Beijing respectively. Since SOHO focuses on the commercial properties in CBD, we believe the advantage in margin can be sustainable in the future. Figure 3: Gross Margin of Beijing Developers Figure 4: Net Margin of Beijing Developers 60% 35% 50% 30% 25% 40% 20% 30% 15% 20% 10% 10% 5% 0% 0% SOHO Sino-Ocean BJ Capital BJ North SOHO Sino-Ocean BJ Capital BJ North Land Land Star Land Land Star 05 06 07 Average 05 06 07 Average Source: FSSL Source: FSSL Offices are less affected by austerity measures Less affected by Chinese Government implemented austerity measures in order to cool down the austerity measures booming property market. We see that its major target should be residential properties and pay less a ttention to commercial ones. Since SOHO mainly focuses on the commercial properties development, this translates that the effect of austerity measures on SOHO is less serious compared with other developers, especially the ones focus on residential projects. Based on the existing land bank, only SOHO Beijing Residences and part of Sanlitun SOHO belong to residential usage and other projects belong to commercial properties. Therefore, SOHO is partly immune to austerity measures. - 3 - This report is not to be distributed to the US, Canada, Japan or to any US person First Shanghai Securities Limited May 2008 Thin land bank Land bank amounts to By the end-07, land bank of SOHO amounted to 850,588 sqm, of which 787,779 sqm 851k sqm were the properties under development and 62,809 sqm were investment properties. Obviously, SOHO owns the least land bank amongst Chinese property companies but this would not hurt the company short-term profitability. As SOHO concentrates on the prime location commercial property development, its margin is huge. The company enjoyed gross margin of 48-55% and net margin of 18-28% in last three years. We expect its gross margin and net margin will reach 46-60% and 33-41% in next three years respectively. Therefore, strong margin can support SOHO’s profitability in the future. Apart from small size, SOHO’s land bank concentrates in Beijing City. Except the proj ect of Boao Kempinski, all the projects are located in Beijing, especially in CBD area. Thus, the company will suffer if Beijing property market collapses. Besides the existing land bank, SOHO has RMB 15 bn cash on hand. Strong financial position can secu re the company having the edge for land acquisition. SOHO is planning to purchase the Tiananmen South (Qianmen) Project from Pan Shiyi. Furthermore, the company also plans to enlarge its land bank by the way of private negotiation and public auction. Table 1: Land Bank Properties under development Project Interest Total GFA (sqm) Guanghualu SOHO 95% 75,766 Beijing SOHO Residences 95% 66,333 Sanlitun SOHO 95% 465,680 Guanghualu SOHO II 95% 180,000 Sub-total 787,779 Investment Properties Project Interest Total GFA (sqm) Commune by Great Wall 95% 30,544 Boao Kempinski 90% 20,316 Chaowai SOHO (Self-used office) 100% 11,949 Sub-total 62,809 Total 850,588 Source: Company, FSSL Guanghualu SOHO All units in Guanghualu Guanghualu SOHO is situate d in Beijing CBD.
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