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Greentown China Deutsche Bank Markets Research Rating Company Date 14 October 2015 Buy Greentown China Forecast Change Asia China Reuters Bloomberg Exchange Ticker Price at 14 Oct 2015 (HKD) 6.35 Property 3900.HK 3900 HK HKG 3900 Price target - 12mth (HKD) 14.20 Property 52-week range (HKD) 11.56 - 5.17 HANG SENG INDEX 22,600 Property development management Jason Ching, CFA Tony Tsang initiative a new growth driver; Buy Research Analyst Research Analyst (+852) 2203 6205 (+852) 2203 6256 Reiterating Buy on asset-light business initiative; target price raised to HK$14.2 [email protected] [email protected] We reiterate our positive stance on Greentown on the back of its asset-light initiative in property development management. Specifically, we see this initiative as in line with the company’s strategy and an effective way to expand Key changes its operation with minimal capital requirement. Moreover, this platform may Price target 13.00 to 14.20 ↑ 9.2% serve as an effective means for CCCG to utilize Greentown’s expertise and Sales (FYE) 32,003 to 32,253 ↑ 0.8% brand for developing its landbank. We estimate a HK$1.99/shr NAV accretion Op prof 16.3 to 16.9 ↑ 3.6% from this initiative. Meanwhile, the valuation is attractive post the market-wide margin(FYE) sell-off in the past quarter, trading at a 69% discount to NAV, 4x 2015 PER and Net 3,848.6 to ↓ -15.6% 45% below CCCG’s average price for its 29% stake in Greentown. Buy. profit(FYE) 3,248.9 Source: Deutsche Bank Property development management a new growth driver Greentown has identified building a leading property development Price/price relative management franchise, by leveraging on its reputation and expertise, as one of the key growth drivers ahead. We see this asset-light business model as 20 positive for Greentown and an effective way to expand its operation with 16 minimal capital requirement. Following the acquisition of Greentown Dingyi 12 and Greentown Shidai (both are property development management companies offering one-stop services in planning, design, project development 8 and construction management) in early August, Greentown has reached an 4 important milestone in property development management, in our view. 10/13 4/14 10/14 4/15 Greentown China We see HK$1.99/share NAV accretion from asset-light business initiative HANG SENG INDEX (Rebased) According to management, Greentown first engaged in property development Performance (%) 1m 3m 12m management for the private housing sector as early as 2010, and has Absolute 9.5 -25.7 -18.3 cumulatively been involved in 52 projects, with total GFA exceeding 17mn sqm. By assuming the number of projects under management reaches 80 by HANG SENG INDEX 4.8 -10.0 -1.9 2018, we estimate the fee income to reach Rmb1bn (based on 3.5% over sales Source: Deutsche Bank of Rmb30bn). Furthermore, by assuming a net profit margin of 40%, we estimate contribution from property development management to reach 3%, 5% and 7% of core net profit in 2015-17, respectively. Target price based upon 30% discount to our NAV estimate of HK$20.29/shr Our target price is based on a 30% discount to our revised NAV estimate of HK$20.29/shr (HK$18.58/shr) by including the accretion from the property development initiative, which implies a 2015e PER of 8x. Our target discount is markedly higher than industry leaders like COLI/Vanke (both at 10%), which we believe is appropriate, given its business scale, operating history and leverage. Risks include economic fluctuations and housing demand. Forecasts And Ratios Year End Dec 31 2013A 2014A 2015E 2016E 2017E Sales (CNYm) 28,990.6 32,049.0 32,253.4 32,482.3 32,173.3 EBITDA(CNYm) 6,669.7 5,604.2 5,446.2 6,163.2 7,369.2 Reported NPAT(CNYm) 4,885.5 2,071.7 3,248.9 3,924.0 4,538.8 DB EPS FD (CNY) 2.45 1.56 1.50 1.81 2.09 PER (x) 4.6 4.4 3.5 2.9 2.5 DPS (net) (CNY) 0.43 0.00 0.24 0.28 0.32 Source: Deutsche Bank estimates, company data ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, 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. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015. 14 October 2015 Property Greentown China Model updated:14 October 2015 Fiscal year end 31-Dec 2013 2014 2015E 2016E 2017E Running the numbers Financial Summary Asia DB EPS (CNY) 2.45 1.56 1.50 1.81 2.09 Reported EPS (CNY) 1.94 0.80 1.50 1.81 2.09 China DPS (CNY) 0.43 0.00 0.24 0.28 0.32 BVPS (CNY) 11.6 12.3 13.8 15.4 17.2 Property Weighted average shares (m) 2,155 2,159 2,167 2,167 2,167 Greentown China Average market cap (CNYm) 24,485 14,767 11,056 11,056 11,056 Enterprise value (CNYm) 38,538 38,767 30,381 28,242 27,548 Reuters: 3900.HK Bloomberg: 3900 HK Valuation Metrics P/E (DB) (x) 4.6 4.4 3.5 2.9 2.5 Buy P/E (Reported) (x) 5.9 8.5 3.5 2.9 2.5 Price (14 Oct 15) HKD 6.35 P/BV (x) 0.81 0.50 0.38 0.34 0.30 Target Price HKD 14.20 FCF Yield (%) nm nm 43.1 24.2 12.0 Dividend Yield (%) 3.8 0.0 4.6 5.4 6.2 52 Week range HKD 5.17 - 11.56 EV/Sales (x) 1.3 1.2 0.9 0.9 0.9 Market Cap (m) HKDm 13,525 EV/EBITDA (x) 5.8 6.9 5.6 4.6 3.7 EV/EBIT (x) 5.8 6.9 5.6 4.6 3.7 USDm 1,745 Income Statement (CNYm) Company Profile Sales revenue 28,991 32,049 32,253 32,482 32,173 Greentown China Holdings Limited is engaged principally Gross profit 8,775 8,133 7,760 9,112 10,287 in the property development business in Zhejiang Province EBITDA 6,670 5,604 5,446 6,163 7,369 and also around the Bohai Rim Region in China. Depreciation 0 0 0 0 0 Amortisation 0 0 0 0 0 EBIT 6,670 5,604 5,446 6,163 7,369 Net interest income(expense) -13 -14 -44 6 89 Associates/affiliates 1,570 408 655 412 786 Exceptionals/extraordinaries 919 -69 0 0 0 Other pre-tax income/(expense) 0 0 100 192 322 Profit before tax 9,146 5,928 6,157 6,773 8,566 Price Performance Income tax expense 3,156 2,719 2,085 2,369 3,187 Minorities 1,105 1,138 824 480 840 20 Other post-tax income/(expense) 0 0 0 0 0 Net profit 4,886 2,072 3,249 3,924 4,539 16 DB adjustments (including dilution) 393 1,307 0 0 0 12 DB Net profit 5,279 3,379 3,249 3,924 4,539 8 Cash Flow (CNYm) 4 Cash flow from operations -765 -2,700 4,845 2,727 1,353 Oct 13Jan 14Apr 14 Jul 14 Oct 14Jan 15Apr 15 Jul 15 Net Capex -1,382 -1,432 0 0 0 Greentown China Free cash flow -2,147 -4,132 4,845 2,727 1,353 HANG SENG INDEX (Rebased) Equity raised/(bought back) -64 -421 0 0 0 Margin Trends Dividends paid -1,596 -1,465 0 -520 -604 Net inc/(dec) in borrowings 8,791 4,863 705 -62 -250 24 Other investing/financing cash flows -463 -1,797 0 0 0 23 Net cash flow 4,522 -2,952 5,550 2,145 499 21 Change in working capital -2,290 -2,962 2,771 92 -2,297 20 Balance Sheet (CNYm) 18 Cash and other liquid assets 11,281 9,084 14,634 16,779 17,278 17 Tangible fixed assets 6,696 8,108 7,879 7,650 7,421 13 14 15E 16E 17E Goodwill/intangible assets 665 662 662 662 662 EBITDA Margin EBIT Margin Associates/investments 12,241 10,921 11,576 11,988 12,774 Other assets 91,453 98,369 99,310 102,128 102,805 Growth & Profitability Total assets 122,336 127,144 134,062 139,208 140,941 Interest bearing debt 30,512 35,815 36,521 36,459 36,209 12 25 Other liabilities 59,813 56,483 58,623 59,946 57,154 10 20 Total liabilities 90,325 92,299 95,144 96,405 93,363 8 Shareholders' equity 24,947 26,655 29,903 33,308 37,242 15 6 Minorities 7,064 8,191 9,014 9,495 10,335 4 10 Total shareholders' equity 32,011 34,845 38,918 42,803 47,577 2 0 5 Net debt 19,230 26,731 21,886 19,680 18,931 -2 0 13 14 15E 16E 17E Key Company Metrics Sales growth (%) nm 10.5 0.6 0.7 -1.0 Sales growth (LHS) ROE (RHS) DB EPS growth (%) na -36.1 -4.2 20.8 15.7 Solvency EBITDA Margin (%) 23.0 17.5 16.9 19.0 22.9 EBIT Margin (%) 23.0 17.5 16.9 19.0 22.9 100 600 Payout ratio (%) 19.7 0.0 16.0 15.4 15.4 ROE (%) 21.2 8.0 11.5 12.4 12.9 80 500 Capex/sales (%) 4.8 4.5 0.0 0.0 0.0 400 60 Capex/depreciation (x) nm nm nm nm nm 300 40 Net debt/equity (%) 60.1 76.7 56.2 46.0 39.8 200 Net interest cover (x) 508.3 387.0 124.7 nm nm 20 100 0 0 Source: Company data, Deutsche Bank estimates 13 14 15E 16E 17E Net debt/equity (LHS) Net interest cover (RHS) Jason Ching, CFA +852 2203 6205 [email protected] Page 2 Deutsche Bank AG/Hong Kong 14 October 2015 Property Greentown China Investment thesis Outlook We maintain our Buy rating on Greentown with a target price of HK$14.2.
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