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Sell Evergrande Deutsche Bank Markets Research Rating Company Date 16 November 2015 Sell Evergrande Company Update Asia Hong Kong Reuters Bloomberg Exchange Ticker Price at 13 Nov 2015 (HKD) 6.27 Property 3333.HK 3333 HK HSI 3333 Price target - 12mth (HKD) 2.40 Property 52-week range (HKD) 7.90 - 2.96 HANG SENG INDEX 22,396 Operational strategies unclear; high Jason Ching, CFA Tony Tsang leverage continues to hurt profitability Research Analyst Research Analyst (+852) 2203 6205 (+852) 2203 6256 Maintain Sell on lack of clear operational strategies and high leverage [email protected] [email protected] Given the aggressive share buyback, continued significant investment in non- core businesses and recent acquisition of off-shore assets, Evergrande has no clear operational strategies, in our view. In particular, while Evergrande raised Key changes a total of Rmb40bn from issuance of public and non-public domestic Rmb Price target 2.45 to 2.40 ↓ -2.0% corporate bonds at markedly lower coupons YTD, we believe there is marginal Source: Deutsche Bank benefit in reducing funding costs as the company has spent about Rmb36bn in additional acquisitions/share buy-backs YTD, implying little scope left for debt Price/price relative refinancing. Moreover, the aggressive share buy-back YTD could further 9 worsen its financial position, where excessive leverage is hurting profitability. 8 Non-core businesses highlight a lack of clear operational strategies 6 On top of an estimated Rmb29bn in land acquisitions in China in 10M15, 5 Evergrande has acquired projects in Chongqing/Chengdu/Hong Kong from CC 3 Land/Chinese Estates/Sino-Land for an aggregate value of Rmb27bn. 2 Moreover, the company has committed Rmb2bn in investment in non-core 11/13 5/14 11/14 5/15 businesses in FY15 (following Rmb6.4bn spent in FY13/14) and aggressive Evergrande HANG SENG INDEX (Rebased) share buy-back YTD amounted to HK$8.8bn (Rmb7.2bn). These additional items (amounting to Rmb36bn) are expected to result in a net cash outflow of Performance (%) 1m 3m 12m Rmb33bn in FY15 (versus guidance Rmb25bn inflow). Consequently, we Absolute 27.4 28.2 109.0 expect effective net gearing (adjusted for perpetual) to worsen to 286% (238% HANG SENG INDEX -0.9 -6.8 -6.8 as of mid-15) or 329% excluding MI (280% as of mid-15) by end-15. Source: Deutsche Bank Share buyback YTD amounted to HK$8.8bn; further mandate of 449m shares By referencing the new repurchase mandate dated July 28, wherein the company seeks (and recently approved by shareholders) additional mandate of 575m shares, Evergrande has total mandate to repurchase up to 2,140m shares until the next AGM in Jun-16. Since July 8, Evergrande has repurchased a total of 1.69bn shares (10.8% of issued capital) in the market for HK$8.8bn, at an average price of HK$5.2. In another words, Evergrande has mandate to repurchase a further 449m shares. In our view, the aggressive share buy-back is negative as: 1) it exhausts cash; 2) it increases net gearing on smaller equity base; 3) buy-backs above NAV represent value destruction to shareholders. Target price at a 40% discount to our NAV estimate of HK$4/share We base our target price on a 40% discount to our NAV estimate of HK$4/share, implying a 2015E PER of 6x. Our target discount reflects the higher risk profile associated with higher leverage, where net gearing stood at a high 280% by mid-15 (industry average of 80%). Key upside risks: loosening in government policy/financing. Forecasts And Ratios Year End Dec 31 2013A 2014A 2015E 2016E 2017E Sales (CNYm) 93,671.8 111,398.1 127,388.6 140,499.2 163,561.3 EBITDA(CNYm) 18,763.3 17,798.2 25,214.5 26,196.1 28,364.4 Reported NPAT(CNYm) 12,454.5 12,761.3 4,938.4 5,443.8 6,130.7 DB EPS FD (CNY) 0.53 0.06 0.35 0.39 0.44 PER (x) 5.1 42.0 14.9 13.3 11.8 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. 16 November 2015 Property Evergrande Model updated:15 November 2015 Fiscal year end 31-Dec 2013 2014 2015E 2016E 2017E Running the numbers Financial Summary Asia DB EPS (CNY) 0.53 0.06 0.35 0.39 0.44 Reported EPS (CNY) 0.87 0.91 0.35 0.39 0.44 Hong Kong DPS (CNY) 0.54 0.53 0.12 0.13 0.15 BVPS (CNY) 3.5 3.7 4.7 5.0 5.3 Property Weighted average shares (m) 14,241 13,956 14,241 13,956 13,956 Evergrande Average market cap (CNYm) 38,022 35,982 76,777 76,777 76,777 Enterprise value (CNYm) 137,474 223,458 289,908 313,116 342,582 Reuters: 3333.HK Bloomberg: 3333 HK Valuation Metrics P/E (DB) (x) 5.1 42.0 14.9 13.3 11.8 Sell P/E (Reported) (x) 3.1 2.8 14.9 13.3 11.8 Price (13 Nov 15) HKD 6.27 P/BV (x) 0.67 0.68 1.10 1.04 0.98 Target Price HKD 2.40 FCF Yield (%) nm nm nm nm nm Dividend Yield (%) 20.2 20.6 2.3 2.6 2.9 52 Week range HKD 2.96 - 7.90 EV/Sales (x) 1.5 2.0 2.3 2.2 2.1 Market Cap (m) HKDm 93,356 EV/EBITDA (x) 7.3 12.6 11.5 12.0 12.1 EV/EBIT (x) 7.3 12.6 11.5 12.0 12.1 USDm 12,045 Income Statement (CNYm) Company Profile Sales revenue 93,672 111,398 127,389 140,499 163,561 Evergrande is a Guangzhou-based developer established in Gross profit 27,649 31,784 35,915 38,700 43,248 1996. It focuses on mass residential property EBITDA 18,763 17,798 25,214 26,196 28,364 developments in tier-2 and tier-3 cities. As of June 15, the Depreciation 0 0 0 0 0 company has a total landbank of 144m sqm GFA, and 335 Amortisation 0 0 0 0 0 projects with a presence in 154 cities. EBIT 18,763 17,798 25,214 26,196 28,364 Net interest income(expense) 89 -703 201 206 220 Associates/affiliates 0 0 0 0 0 Exceptionals/extraordinaries 0 0 0 0 0 Other pre-tax income/(expense) 6,387 14,253 0 0 0 Profit before tax 25,239 31,348 25,415 26,402 28,584 Price Performance Income tax expense 11,687 13,175 13,744 13,762 14,976 Minorities 1,097 5,412 6,733 7,196 7,478 9 Other post-tax income/(expense) 0 0 0 0 0 8 Net profit 12,455 12,761 4,938 5,444 6,131 6 DB adjustments (including dilution) -4,933 -11,905 0 0 0 5 DB Net profit 7,521 856 4,938 5,444 6,131 3 Cash Flow (CNYm) 2 Nov 13Feb 14May 14Aug 14Nov 14Feb 15May 15Aug 15 Cash flow from operations -38,871 -38,345 -158,794 -6,830 -12,384 Net Capex -8,895 0 -734 0 0 Evergrande HANG SENG INDEX (Rebased) Free cash flow -47,766 -38,345 -159,528 -6,830 -12,384 Equity raised/(bought back) 0 0 -528 0 0 Margin Trends Dividends paid 0 0 -1,160 -2,170 -1,718 Net inc/(dec) in borrowings 0 0 0 0 0 21.0 Other investing/financing cash flows 21,419 -22,729 128,072 323 -8,186 20.0 Net cash flow -26,347 -61,074 -33,144 -8,677 -22,288 19.0 Change in working capital -45,178 -41,764 -183,403 -28,989 -34,019 18.0 17.0 Balance Sheet (CNYm) 16.0 Cash and other liquid assets 40,118 29,847 30,857 34,963 36,919 15.0 Tangible fixed assets 11,378 15,504 15,504 15,504 15,504 13 14 15E 16E 17E Goodwill/intangible assets 0 0 0 0 0 EBITDA Margin EBIT Margin Associates/investments 0 0 0 0 0 Other assets 296,652 429,111 481,227 529,957 584,010 Growth & Profitability Total assets 348,148 474,462 527,588 580,424 636,433 Interest bearing debt 108,817 156,065 175,997 196,116 220,060 20 35 Other liabilities 159,988 206,019 218,080 239,791 260,087 30 Total liabilities 268,806 362,084 394,077 435,907 480,147 15 25 Shareholders' equity 48,590 51,120 65,520 69,331 73,622 20 10 15 Minorities 30,753 61,258 67,991 75,187 82,665 5 10 Total shareholders' equity 79,343 112,378 133,511 144,517 156,287 5 Net debt 68,699 126,218 145,141 161,153 183,141 0 0 13 14 15E 16E 17E Key Company Metrics Sales growth (%) nm 18.9 14.4 10.3 16.4 Sales growth (LHS) ROE (RHS) DB EPS growth (%) na -88.4 464.2 11.8 12.6 Solvency EBITDA Margin (%) 20.0 16.0 19.8 18.6 17.3 EBIT Margin (%) 20.0 16.0 19.8 18.6 17.3 140 30 Payout ratio (%) 61.5 58.1 33.9 33.9 33.9 120 25 ROE (%) 28.7 25.6 8.5 8.1 8.6 100 20 Capex/sales (%) 13.1 0.0 0.6 0.0 0.0 80 15 Capex/depreciation (x) nm nm nm nm nm 60 40 10 Net debt/equity (%) 86.6 112.3 108.7 111.5 117.2 20 5 Net interest cover (x) nm 25.3 nm nm nm 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 16 November 2015 Property Evergrande Investment thesis Outlook We have a Sell rating on Evergrande due to the relatively high risk profile associated with its high leverage.
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