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Accelerated Scale Expansion to Further Stretch Balance Sheet September 20, 2016 COMMENT Sunac China Holdings (1918.HK) HK$5.87 Equity Research Accelerated scale expansion to further stretch balance sheet News On Sept 18, Sunac announced a potential transaction with Legend (3396.HK, Sept 19 close HK$20; Neutral; covered by Simon Cheung) to acquire 42 property projects in 16 cities with total unsold GFA of 7.3mn sqm for consideration of Rmb13.8bn, pending approval from shareholders of the companies. The consideration is comprised of Rmb3.6bn equity interest in companies that hold interests in the properties and assumption of Rm10.2bn of external debt, shareholders’ loan and accrued but unpaid interest. It will be paid in cash including Rmb5.5bn in 2016 and the rest in 2017 if the deal completes in early 2017 according to mgmt. Analysis As we highlighted in "Sunac China: Downgrade to Neutral on weak profitability and rising leverage" (Aug 31, 2016), we expect Sunac to continue its aggressive scale expansion at the expense of lower margins and higher leverage, and the proposed transaction comes at an even more accelerated pace than we anticipated. Based on the disclosed details, we note: 1) If completed, Sunac’s attributable landbank size will increase by 18% to GFA36.5mn sqm from 1H16 and geographic coverage will expand by 8 new cities to a total of 35 cities while the share of its attributable land bank in tier- 1/2/3 cities will change to 9%/67%/24% from 10%/75%/15% as of 1H16 (Ex. 1). 2) Stripping out one-off gains, the assets generated c.Rmb0.2bn net profit in 2015 (equivalent to 6% of Sunac's 2015 core profit) due to a deceleration in sales and margin slippage as per Simon Cheung. This implies 2% NM vs. 6% in 2016-17E for Sunac's existing portfolio. 3) Based on the payment terms, pro forma, Sunac's net gearing (treating PCS as debt) would jump to 180% at end- 16E from 149% at 1H16, only second to Evergrande in our coverage. Implications We do not incorporate the transaction into our estimates pending completion; on current GHe, Sunac trades at 47% disc. to end-16E NAV, 9.8X/0.9X 2016E P/E / P/B vs. offshore coverage avg. of 46%, 8.1X/1.1X. We maintain Neutral with HK$5.0 end-16E NAV-based 12m TP. Risks: Sales/margin miss or beat; misstep in expansion deteriorates balance sheet. INVESTMENT LIST MEMBERSHIP Neutral Coverage View: Neutral Vicky Li +86(21)2401-8926 [email protected] Beijing Gao Hua Securities Company Limited Goldman Sachs does and seeks to do business with Jill Guan, CFA companies covered in its research reports. As a result, +86(21)2401-8921 [email protected] Beijing Gao Hua Securities Company Limited investors should be aware that the firm may have a conflict of Scofield Chi interest that could affect the objectivity of this report. Investors +65-6654-5188 [email protected] Goldman Sachs (Singapore) Pte should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non- US affiliates are not registered/qualified as research analysts with FINRA in the U.S. The Goldman Sachs Group, Inc. Global Investment Research September 20, 2016 Sunac China Holdings (1918.HK) HK$5.87 Exhibit 1: Breakdown of potential projects to be acquired by city Sunac Raycom+EnsenCare Sunac+Raycom+EnsenCare Attr. land Attr. Attr. land Attr. No.of Attr.Land No.of Unsold No.of Unsold Attr. land bank City LandBank bank % of Unsold bank % of Unsold Projects Bank Projects GFA Projects GFA % of total total GFA total GFA mn sqm mn sqm % mn sqm mn sqm % mn sqm mn sqm % Beijing 11 2.0 1.0 3% 6 0.1 0.1 1% 17 2.0 1.1 3% Jinan 6 2.6 1.4 4% - - - - 6 2.6 1.4 4% Beijing Taiyuan 3 1.0 0.8 3% - - - - 3 1.0 0.8 2% Region Qingdao 1 1.6 1.4 5% - - - - 1 1.6 1.4 4% Yantai - - - - 1 n.a. n.a. n.a. 1 n.a. n.a. n.a. Tangshan - - - - 1 0.0 0.0 0% 1 0.0 0.0 0% Northeast Dalian - - - - 1 0.1 0.1 1% 1 0.1 0.1 0% Region Daqing - - - - 1 1.4 1.4 25% 1 1.4 1.4 4% Tianjin 21 6.2 4.1 13% 4 0.3 0.3 5% 25 6.6 4.4 12% Tianjin Xi'an 7 1.4 0.6 2% - - - - 7 1.4 0.6 2% Region Zhengzhou 6 2.1 1.4 5% - - - - 6 2.1 1.4 4% Shanghai 16 2.9 1.9 6% - - - - 16 2.9 1.9 5% Suzhou 7 1.5 1.2 4% - - - - 7 1.5 1.2 3% Shanghai Nanjing 5 0.6 0.4 1% - - - - 5 0.6 0.4 1% Region Wuxi 8 1.9 1.5 5% 5 0.4 0.3 6% 13 2.2 1.9 5% Changzhou 1 0.7 0.7 2% 1 * n.a. n.a. n.a. 1 n.a. n.a. n.a. Chongqing 13 7.2 4.7 15% 3 1.1 1.1 19% 16 8.3 5.7 16% Cheng-Yu Chengdu 14 2.6 2.2 7% - - - - 14 2.6 2.2 6% Region Nanning 1 0.3 0.3 1% - - - - 1 0.3 0.3 1% Kunming - - - - 1 1.1 0.6 11% 1 1.1 0.6 2% Hangzhou 14 1.9 1.5 5% 3 0.4 0.4 7% 17 2.3 1.9 5% Southeast Xiamen 1 0.1 0.1 0% - - - - 1 0.1 0.1 0% Region Hefei 2 0.6 0.4 1% 3 1.1 0.5 9% 5 1.6 0.9 2% Ningbo 3 0.6 0.5 1% - - - - 3 0.6 0.5 1% Shenzhen 1 0.1 0.1 0% - - - - 1 0.1 0.1 0% Guangzhou 1 0.8 0.4 1% - - - - 1 0.8 0.4 1% Guang-Shen Region Foshan 5 1.3 0.7 2% - - - - 5 1.3 0.7 2% Dongguan 2 0.2 0.2 0% - - - - 2 0.2 0.2 0% Huizhou 1 0.5 0.5 1% - - - - 1 0.5 0.5 1% Wuhan 4 3.3 2.0 6% 5 0.5 0.3 5% 9 3.8 2.3 6% Central Changsha - - - - 4 0.2 0.2 4% 4 0.2 0.2 1% Region Jingdezhen - - - - 1 0.2 0.2 3% 1 0.2 0.2 1% Wanning 1 0.6 0.3 1% - - - - 1 0.6 0.3 1% Hainan Qionghai 1 1.6 0.8 3% - - - - 1 1.6 0.8 2% Region Sanya - - - - 2 0.2 0.1 2% 2 0.2 0.1 0% Total 35 156 46 31 100% 42 7.3 5.5 100% 198 53 36.5 100% Note: * denotes the project of EnsenCare. Source: Company data. Exhibit 2: Sunac is now trading at a NAV discount above Exhibit 3: ...and its forward P/E multiple is at one its long-term cycle mean level… standard deviation above the historical trading range Historical trading discount to current NAV Historical 12-m forward P/E Share price discount to NAV Average Avg+1std Avg-1std 12mth forward P/E(x) Average Avg+1std Avg-1std 10% 12 0% 10 -10% -20% 8 -30% -40% 6 -50% 4 -60% -70% 2 -80% 0 -90% Source: Datastream, Gao Hua Securities Research. Source: Datastream, Gao Hua Securities Research. Goldman Sachs Global Investment Research 2 September 20, 2016 Sunac China Holdings (1918.HK) HK$5.87 Disclosure Appendix Reg AC I, Vicky Li, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. Investment Profile The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group and market. The four key attributes depicted are: growth, returns, multiple and volatility. Growth, returns and multiple are indexed based on composites of several methodologies to determine the stocks percentile ranking within the region's coverage universe. The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows: Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate of various return on capital measures, e.g. CROCI, ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month volatility adjusted for dividends. Quantum Quantum is Goldman Sachs' proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for in-depth analysis of a single company, or to make comparisons between companies in different sectors and markets. GS SUSTAIN GS SUSTAIN is a global investment strategy aimed at long-term, long-only performance with a low turnover of ideas. The GS SUSTAIN focus list includes leaders our analysis shows to be well positioned to deliver long term outperformance through sustained competitive advantage and superior returns on capital relative to their global industry peers.
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