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China Evergrande Group ADD (No Change)

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China Evergrande Group ADD (No Change) Company Note Property Development │ Hong Kong │ August 29, 2019 Insert Insert Hong Kong China Evergrande Group ADD (no change) Consensus ratings*: Buy 15 Hold 4 Sell 0 A-share restructuring is still very likely Current price: HK$17.36 ■ Evergrande’s 1H19 core net profit fell 50% yoy, dragged by lower revenue Target price: HK$28.000 booked, higher expenses from SG&A and finance cost. Previous target: HK$38.10 ■ Management is still confident that its A-share restructuring should be Up/downside: 61.3% completed in the next few months. CGS-CIMB / Consensus: -9.8% ■ We cut our SOP TP by 26% to HK$28 but keep our Add rating due to its Reuters: 3333.HK cheap valuations – 6x FY19 P/E and 9% yield. Bloomberg: 3333 HK Market cap: US$29,045m 1H19 results were well below due to fewer projects booked HK$227,906m Evergrande’s 1H19 came in well below our expectations, with core profit declining 50% Average daily turnover: US$37.74m yoy to Rmb16bn, 40% lower than our estimate, dragged by lower-than-expected revenue, HK$295.5m higher-than-expected expenses from SG&A and finance cost. Current shares o/s: 13,070m To see faster sales growth in the next few months Free float: 22.2% *Source: Bloomberg In 1H19, Evergrande achieved contracted sales of Rmb282bn (-7% yoy), 47% of its sales target of Rmb600bn for FY19. Given saleable resources of Rmb800bn in 2H19, Key changes in this note management said the company should be able to achieve its sales target. We Cutting EPS by 33-34% over FY19-21F understand that it recently offered some price cuts to promote sales, which should help improve asset turn and enhance its relatively low cash collection ratio of ~70% in 1H19. Price Close Relative to HSI (RHS) Landbank is sufficient for 3-5 years development Evergrande spent Rmb76bn to replenish 44m sqm of land in 1H19 and increased its land 26.0 93.6 bank to 319m sqm - saleable value of about Rmb3tr and should be sufficient for 3-5 21.0 79.3 years. We think it has more than enough land bank which should speed up asset turn. 16.0 65.0 100 Net gearing target of 70% unchanged 50 Its net gearing remained high at 152% at end-Jun, stable hoh, as it incurred considerable Vol m Vol capex buying land and investment in the electric car business. Management stressed that Aug-18 Nov-18 Mar-19 Jun-19 its deleveraging strategy is unchanged and it still aims to bring down its net gearing to its Source: Bloomberg peers’ average level of about 70% over the next few years. Price performance 1M 3M 12M Management remains confident on A-share restructuring Absolute (%) -18.7 -15.7 -40.5 When asked about the progress of its A-share restructuring, management is still Relative (%) -8.9 -9.2 -30.8 confident that it will be completed in the next few months. Major shareholders % held New energy vehicle (NEV) segment Ka Yan Hui 77.8 Evergrande has invested about Rmb20bn in NEV since 2017 and management said that key capex has been spent, and the remainder will be around Rmb5bn per year. Insert Meanwhile, the investment in the NEV can help it to obtain land for property development, which could subsidise most of its capex for the NEV segment. Cutting EPS and TP, but maintain Add on cheap valuation We cut its EPS by around 30% p.a. over FY19-21F due to the weak results and management’s new guidance. Meanwhile, we also cut our SOP-based target price by 26% to HK$28.0 from HK$38.1. However, we keep our Add rating due to its cheap valuations of 6x FY19 P/E and 9% dividend yield. Key catalyst: stronger-than-expected Analyst(s) contracted sales. Key risks include an unsuccessful A-share restructuring. Financial Summary Dec-17A Dec-18A Dec-19F Dec-20F Dec-21F Total Net Revenues (Rmbm) 311,022 466,196 472,421 532,533 603,828 Operating EBITDA (Rmbm) 82,806 136,048 125,786 138,464 155,678 Net Profit (Rmbm) 28,643 46,984 39,196 44,843 49,798 Core EPS (Rmb) 2.07 3.71 2.94 3.35 3.71 Core EPS Growth 701% 80% (21%) 14% 11% Raymond CHENG, CFA FD Core P/E (x) 7.84 4.38 5.52 4.83 4.36 T (852) 2539 1324 DPS (Rmb) 0.00 1.11 1.43 1.34 1.68 E [email protected] Dividend Yield 0.0% 7.0% 9.1% 8.5% 10.6% EV/EBITDA (x) 9.47 6.27 6.64 6.21 5.62 Jeffrey MAK P/FCFE (x) NA 12.74 3.48 10.29 5.52 T (852) 2539 1328 Net Gearing 183% 152% 126% 108% 90% E [email protected] P/BV (x) 1.82 1.56 1.50 1.26 1.08 Will CHU ROE 34.9% 39.3% 28.3% 28.9% 27.2% T (852) 2539 1327 % Change In Core EPS Estimates (32.9%) (33.5%) (34.0%) CGS-CIMB/Consensus EPS (x) 0.77 0.79 0.74 E [email protected] SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. IF THIS REPORT IS DISTRIBUTED IN THE Powered by the UNITED STATES IT IS DISTRIBUTED BY CGS-CIMB SECURITIES (USA), INC. AND IS CONSIDERED THIRD-PARTY AFFILIATED RESEARCH. EFA Platform Property Development │ Hong Kong China Evergrande Group │ August 29, 2019 Figure 1: Evergrande 1H19 results summary Rmb m 1H18 1H19 YoY chg 1H19F Var (%) Turnover 300,348 226,976 -24% 285,331 -20% COGS (191,489) (149,720) -22% (185,465) -19% Gross profit 108,859 77,256 -29% 99,866 -23% Selling & marketing exp (9,334) (10,145) 9% (9,987) 2% Administrative exp. (6,593) (8,907) 35% (6,263) 42% Other income 2,635 1,514 -43% 1,318 15% Operating profit 95,567 59,718 -38% 84,933 -30% Net interest (expense)/income (4,509) (7,712) 71% (5,301) 45% Profit before taxation 91,058 52,006 -43% 79,632 -35% Profit tax (36,637) (23,751) -35% (31,853) -25% Minority interests (22,221) (12,142) -45% (20,545) -41% Core Profit 32,200 16,113 -50% 27,234 -41% One-off items 1,395 1,198 Reported attributable profit 30,805 14,915 Ratios % pt chg % pt chg Gross margin 36.2% 34.0% -2.2% 35.0% -1.0% Selling & marketing exp 3.1% 4.5% 1.4% 3.5% 1.0% Administrative exp. 2.2% 3.9% 1.7% 2.2% 1.7% Operating margin 31.8% 26.3% -5.5% 29.8% -3.5% Core margin 10.7% 7.1% -3.6% 9.5% -2.4% Net gearing 127% 152% 24.8% 145% 7.1% SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS Figure 2: NAV breakdown Rmb m Rmb/share Development properties 617,464 47.2 Investment properties 101,492 7.8 Est. net debt (273,235) (20.9) 445,721 34.1 Property NAV/share (HK$) 36.7 Financial assets (HK$) 61,359 4.7 41.4 SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS Figure 3: Summary of NAV and target price changes HK$ Old New Chg Property NAV/share 38.3 36.7 -4% Discount to NAV (%) 10% 30% 20% pts 34.5 25.7 -26% Financial assets/share 7.2 4.7 -35% Discount to NAV (%) 50% 50% 0 3.6 2.3 -35% SOP-based target price 38.1 28.0 -26% SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS Figure 4: Earnings revisions Rmb m 2019F 2020F 2021F Old New % chg Old New % chg Old New % chg Revenue 559,339 472,421 -16% 642,619 532,533 -17% 704,531 603,828 -14% Net profit 58,017 39,196 -32% 66,875 44,843 -33% 74,751 49,798 -33% EPS (Rmb) 4.38 2.94 -33% 5.03 3.35 -34% 5.62 3.71 -34% SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS 2 Property Development │ Hong Kong China Evergrande Group │ August 29, 2019 Figure 5: Evergrande cashflow for 1H19 and 2H19F Rmb bn 1H19 2H19F Property business 165 205 Others 32 NA Total inflow 196 205 Land premium 55 25 Construction cost 91 70 Interest expense 34 35 SG&A 23 27 Taxation 18 27 Others 18 56 Total outflow 238 240 Net operating cashflow (42) (35) SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS Figure 6: China property valuations summary Share Disc. to Bloomberg price TP Mkt cap NAV/sh NAV Upside P/E (x) P/BV(x) Yield (%) Net Gearing (%) Company Ticker (HK$) (HK$) Rating (US$ m) (HK$) (%) (%) 2018 2019 2020F 2021F 2018 2019F 2020F 2018 2019F 2020F 2018 2019F 2020F COLI 688 HK 24.90 33.80 ADD 34,768 37.6 34 36 7.4 6.4 5.7 5.2 1.0 0.9 0.8 3.6 4.1 4.6 32 24 18 CR Land 1109 HK 32.05 40.50 ADD 29,200 45.0 29 26 9.7 7.7 6.6 5.8 1.5 1.3 1.3 3.6 4.5 5.3 34 43 42 China Vanke - H 2202 HK 27.60 36.00 ADD 41,587 40.0 31 30 7.9 7.0 6.1 5.5 1.8 1.5 1.3 4.2 4.8 5.5 31 37 37 CIFI 884 HK 4.30 7.00 ADD 4,321 14.0 69 63 5.4 4.2 3.7 3.1 1.0 0.8 0.7 6.7 8.5 10.0 67 58 57 Country Garden 2007 HK 9.89 9.00 REDUCE 27,301 13.8 28 (9) 5.9 5.2 4.5 4.1 1.6 1.3 1.1 5.4 6.7 7.7 50 51 48 Evergrande 3333 HK 17.36 28.0 ADD 29,045 41.4 58 61 4.3 5.4 4.7 4.3 1.6 1.5 1.3 7.1 9.1 8.5 152 126 108 Greentown 3900 HK 7.06 5.60 REDUCE 1,953 13.9 49 (21) 6.7 5.8 5.5 5.1 0.5 0.5 0.4 3.6 4.0 4.3 105 103 101 Guangzhou R&F 2777 HK 12.82 21.00 ADD 5,265 35.0 63 64 4.3 3.3 2.6 2.2 0.6 0.5 0.4 10.5 11.7 13.3 184 189 168 KWG 1813 HK 6.35 9.60 ADD 2,569 19.2 67 51 5.5 3.8 3.1 2.7 0.6 0.6 0.5 9.7 11.0 13.1 65 59 49 Longfor 960 HK 28.25 40.00 ADD 21,460 40.0 29 42 11.9 9.4 7.6 6.3 1.9 1.7 1.5 3.8 4.8 5.9 53 51 53 Shimao Prop 813 HK 22.25 30.80 ADD 9,362 44.0 49 38 7.9 6.3 5.0 4.1 1.0 0.9 0.8 4.8 6.6 7.9 57 56 49 Sino-Ocean 3377 HK 2.80 3.00 HOLD 2,718 7.5 63 7 10.5 7.4 5.5 5.2 0.4 0.4 0.4 7.4 5.8 7.7 73 66 60 SOHO China 410 HK 2.38 2.60 REDUCE 1,577 5.2 54 9 30.9 26.1 20.3 18.2 0.3 0.3 0.3 1.4 1.6 2.0 42 42 42 Sunac 1918 HK 33.00 37.80 HOLD 18,677 54.0 39 15 7.8 5.4 3.9 3.2 2.3 1.9 1.5 2.7 4.6 6.3 170 176 124 Yuzhou 1628 HK 3.36 5.60 ADD 2,155 11.2 70 67 3.9 3.5 2.9 2.6 0.7 0.6 0.5 9.1 13.4 12.9 67 69 68 Greater Bay Area (GBA) plays Agile 3383 HK 10.06 15.30 ADD 5,022 25.5 61 52 5.1 4.5 4.1 3.7 0.7 0.7 0.6 9.5 9.9 10.4 79 78 68 China Aoyuan 3883 HK 9.60 14.20 ADD 3,292 17.8 46 48 10.0 5.5 3.7 3.0 2.0 1.4 1.0 4.1 8.2 13.0 59 61 46 Logan Property 3380 HK 11.26 16.00 ADD 7,868 22.8 51 42 8.0 5.6 4.7 4.2 2.1 1.3 1.1 5.2 8.7 10.5 54 56 55 SZ Investment 604 HK 2.92 3.06 HOLD 3,229 6.8 57 5 7.6 7.5 7.4 7.2 0.6 0.6 0.5 6.1 6.2 6.5 41 39 37 Times China 1233 HK 12.38 21.00 ADD 3,064 30.0 59 70 4.9 3.9 3.1 2.5 1.2 0.8 0.6 6.1
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