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Shimao Property 8 March 2017 Asia Pacific/China Equity Research Real Estate Management & Development Shimao Property (0813.HK / 813 HK) Rating (from NEUTRAL) OUTPERFORM Price (08-Mar-17, HK$) 12.56 UPGRADE RATING Target price (HK$) (from 10.60) 15.00 Upside/downside (%) 19.4 Mkt cap (HK$/US$ mn) 42,541 / 5,478 The forgotten quality company Enterprise value (Rmb mn) 88,189 Number of shares (mn) 3,387 ■ Business turnaround from FY17 onwards. We expect Shimao to deliver Free float (%) 32.0 strong contracted sales growth of 17.8% YoY to Rmb80.3 bn in FY17, with 52-wk price range (HK$) 12.56-9.32 gross margin returning to >30% level. Such significant improvement is mainly ADTO-6M (US$ mn) 5.9 driven by its on-track inventory destocking activities over FY15-16 which has Target price is for 12 months. Research Analysts removed most of its low-margin projects. Having been low-profile in the market for 2-3 years, Shimao is well-prepared for a strong return in 2017. Kelvin Tam, CFA 852 2101 6582 This, in our view, should re-stimulate investors' interests. [email protected] ■ Strong EPS CAGR of 15.5% over FY16-19E. With expectations of better Alvin Wong contracted sales performance with improving margin, Shimao should finally 852 2101 6486 [email protected] resume its earnings growth FY17E onwards. We forecast an EPS CAGR of Jizhou Dong, CFA 15.5% over FY16-19E, with FY19E core EPS of Rmb2.1 exceeding its 852 2101 6538 historical peak level of Rmb2.0 in FY14. We believe our FY16 core profit [email protected] estimate of Rmb4.7 bn (flat YoY) is well-expected in the market, with no significant impact on the share price performance. ■ Credit goes to its prudent cashflow management. In addition to maintaining a cashflow breakeven, Shimao has optimised its debt structure so as to lower its funding costs. The early redemption of US$800 mn senior notes should reduce its offshore debt exposure to about 25% (of its total debt) from 34% at end-FY16E. Its average funding cost is also likely to see continuous improvement, from the current 5.8% to below 5.5% by end-FY17E. ■ Upgrade to OUTPEFORM with a new TP of HK$15.0. Shimao's upcoming business turnaround should remind investors of its good quality. This will likely be a strong catalyst to its share price, which has lagged its peers in the recent rally. Factoring in better sales and margin, we revise our FY17E/18E EPS by +3.4%/+8.2% and raise our end-FY17E NAV by 17.9% to HK$25.0. We upgrade Shimao to OUTPERFORM (from Neutral) with a new TP of HK$15.0 (from HK$10.6), after narrowing the targeted NAV discount to 40% (from 50%) to reflect its all-round improvement. Downside risks: (1) slower- than-expected sales and margin recovery; and (2) irrational landbanking. Share price performance Financial and valuation metrics Year 12/15A 12/16E 12/17E 12/18E Revenue (Rmb mn) 57,733.0 58,610.5 62,514.9 69,609.8 EBITDA (Rmb mn) 11,937.7 11,737.2 13,945.0 16,067.0 EBIT (Rmb mn) 11,507.7 11,284.2 13,488.2 15,582.7 Net attributable profit (Rmb mn) 4,644.9 4,664.8 5,356.4 6,101.6 EPS (CS adj.) (Rmb) 1.34 1.35 1.58 1.79 Change from previous EPS (%) n.a. 0.0 3.4 8.2 Consensus EPS (Rmb) n.a. 1.76 1.95 2.16 EPS growth (%) (34.5) 0.5 16.9 13.9 The price relative chart measures performance against the P/E (x) 8.3 8.3 7.1 6.2 MSCI CHINA F IDX which closed at 6,672.43 on 08/03/17. Dividend yield (%) 5.1 5.5 6.4 7.2 On 08/03/17 the spot exchange rate was HK$7.77/US$1 EV/EBITDA (x) 7.1 7.5 6.3 5.6 Performance 1M 3M 12M ROE (%) 9.6 9.0 9.6 10.1 Absolute (%) 20.3 19.4 6.4 Net debt/equity (%) 63.2 62.3 56.9 53.8 Relative (%) 16.7 12.3 -14.9 NAV per share (Rmb) - 22.57 23.13 - Disc./(prem.) to NAV (%) - 50.6 51.7 - Source: Company data, Thomson Reuters, Credit Suisse estimates DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 8 March 2017 Focus charts and tables Figure 1: Contracted sales—we expect strong Figure 2: Gross margin—margins should also contracted sales momentum starting FY17E recover to the level of 30% from FY17E onwards 120 36% 35.3% FY16-19E CAGR: 13% 98.3 100 33.5% 89.1 34% FY13-16 CAGR: 1% 80.3 32.5% 80 70.2 67.1 67.0 68.1 32% 31.0% 60 30.5% 30.0% 46.1 30% 40 28.5% 27.7% 28% 20 0 26% FY12A FY13A FY14A FY15A FY16A FY17E FY18E FY19E FY12A FY13A FY14A FY15A FY16E FY17E FY18E FY19E Contracted sales (Rmb bn) Gross margin Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Figure 3: Core profit / EPS—FY19E should see full Figure 4: Net gearing—disciplined cash flow earnings recovery back to FY14’s peak level management suggests room for more improvement 8 3 7.0 7.1 7.1 EPS CAGR (FY16-19E ): 15.5% 6.1 6 2.0 2.1 2.0 5.4 1.8 2 4.6 4.7 1.6 4.1 4 1.3 1.3 1.2 1 2 0 0 FY12A FY13A FY14A FY15A FY16E FY17E FY18E FY19E Core profit (Rmb bn) (LHS) Core EPS (Rmb) (RHS) Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Figure 5: Share performance YTD—Shimao has Figure 6: Valuation—it is now trading at an lagged behind most other mid cap developers attractive NAV discount of 50% (vs. historical 39%) 30% Jinmao 17% Average: 28% Sino-Ocean 22% Greentown 22% 0% Shimao 24% Average -39% Evergrande 26% -30% Yuexiu Prop 27% R&F 29% -60% CIFI 30% Longfor 31% Sunac 31% -90% Agile 49% Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% Shimao NAV Discount + 1 S.D. - 1 S.D. Average Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse research Source: the BLOOMBERG PROFESSIONAL™ service, Company data, Credit Suisse research Shimao Property (0813.HK / 813 HK) 2 8 March 2017 Shimao Property (0813.HK / 813 HK) Price (08 Mar 2017): HK$12.56; Rating: (from NEUTRAL) OUTPERFORM; Target Price: (from HK$10.60) HK$15.00; Analyst: Kelvin Tam Earnings Drivers 12/15A 12/16E 12/17E 12/18E Per share 12/15A 12/16E 12/17E 12/18E Contracted sales (Rmbm) 67,039 68,120 80,270 89,075 Shares (wtd avg.) (mn) 3,465 3,462 3,399 3,399 Cont. GFA (th sqm) 5,540 4,918 6,167 6,449 EPS (Credit Suisse) 1.34 1.35 1.58 1.79 Cont. ASP (Rmb/sqm) 12,101 13,850 13,016 13,812 (Rmb)DPS (Rmb) 0.57 0.61 0.71 0.81 GFA delivered (th sqm) 5,372 5,152 5,145 5,719 BVPS (Rmb) 14.45 15.85 17.09 18.47 Booking ASP (Rmb/sqm) 10,163 10,708 11,421 11,464 NAV per share (Rmb) n.a. 22.57 23.13 n.a. Income Statement (Rmb mn) 12/15A 12/16E 12/17E 12/18E Valuation (x) 12/15A 12/16E 12/17E 12/18E Sales revenue 57,733 58,610 62,515 69,610 P/E 8.3 8.3 7.1 6.2 Cost of goods sold 41,285 42,351 43,760 48,398 P/B 0.77 0.70 0.65 0.60 SG & A 4,894 4,976 5,267 5,629 Dividend yield (%) 5.1 5.5 6.4 7.2 Other operating exp./(inc.) (383) (453) (457) (484) EV/Sales 1.5 1.5 1.4 1.3 EBITDA 11,938 11,737 13,945 16,067 EV/EBITDA 7.1 7.5 6.3 5.6 Depreciation & amortisation 430 453 457 484 EV/EBIT 7.4 7.8 6.5 5.7 EBIT 11,508 11,284 13,488 15,583 Earnings 12/15A 12/16E 12/17E 12/18E Net interest expense/(inc.) 220 268 271 268 Growth (%) Non-operating inc./(exp.) 0 0 0 0 Sales reveue 2.9 1.5 6.7 11.3 Associates/JV (483) 262 258 270 EBIT (18.2) (1.9) 19.5 15.5 Recurring PBT 10,805 11,279 13,475 15,585 Net profit (34.5) 0.4 14.8 13.9 Exceptionals/extraordinaries 141 212 0 0 EPS (34.5) 0.5 16.9 13.9 Taxes 4,117 4,110 5,284 6,650 Margins (%) Profit after tax 6,829 7,381 8,190 8,935 EBITDA 20.7 20.0 22.3 23.1 Other after tax income 0 0 0 0 EBIT 19.9 19.3 21.6 22.4 Revaluations 1,330 0 0 0 Pre-tax profit 18.7 19.2 21.6 22.4 Minority interests 2,043 2,504 2,834 2,833 Net profit 8.0 8.0 8.6 8.8 Preferred dividends 0 0 0 0 Reported net profit 6,116 4,877 5,356 6,102 ROE analysis (%) 12/15A 12/16E 12/17E 12/18E Analyst adjustments (1,471) (212) 0 0 ROE 9.6 9.0 9.6 10.1 Net profit (Credit Suisse) 4,645 4,665 5,356 6,102 ROIC 7.8 6.9 7.7 8.2 Asset turnover (x) 0.2 0.2 0.2 0.2 Balance Sheet (Rmb mn) 12/15A 12/16E 12/17E 12/18E Interest burden (x) 0.9 1.0 1.0 1.0 Cash & cash equivalents 22,592 22,428 22,412 22,028 Tax burden (x) 0.6 0.6 0.6 0.6 Current receivables 14,787 14,787 14,787 14,787 Financial leverage (x) 3.3 3.3 3.3 3.5 Inventories 18,140 18,570 19,564 21,943 Credit ratios 12/15A 12/16E 12/17E 12/18E Properties under development 100,727 124,274 143,471 177,536 Other current assets 18,691 18,691 18,691 18,691 Net debt/equity (%) 63.2 62.3 56.9 53.8 Current Assets 174,937 198,749 218,925 254,984 Net Debt/EBITDA (x) 3.96 4.30 3.59 3.20 Property, plant & equip.
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