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Financial Analysis CFA Institute Research Challenge hosted by The Chinese University of Hong Kong CUHK Business School LEE, Chun Ho Angus [email protected] November 7, 2013 Financials (GICS) | Real Estate NG, Sheung Yiu Boris [email protected] Top Spring International (3688 HK) TSE, Pui Kei Peggy [email protected] Buy YIP, Tsz Chung Alan [email protected] Small-cap dark horse in real estate with solid growth engine We initiate coverage with a Buy rating and HK$4.29 target price, Key Data which offers a 34% potential upside. We believe Top Spring is a solid small-cap pick with a visible high-growth path over the next Bloomberg: 3688 HK Reuters: 3688.HK few years and a pragmatic management team. We see multiple China Real Estate positives including the strategic focus in project selection, fast Price target HK$4.29 asset turnover and low land cost. We forecast a 20.4% earnings Up/downside to price target (%) 34% CAGR over FY12-15E, and a strong 40.8% yoy contracted sales Share price, close (Nov 6, 2013) HK$3.20 growth that is highly achievable in FY13E. 52-Week Range HK$3.03 - 6.72 Share outstanding, diluted, current (m) 1,155.30 Strategic edges in location and land cost Market capitalization, current (m) HK$3,697 EV, current (m) HK$15,975 Specialized in the development of urban mixed-use communities Average daily trading value (m) 1.13 and highlighting the proximity to high speed railway network, Top Spring’s strategic focus brings strong appreciation potential and Price Performance convenience premium for pricing. Anti-cyclical land banking Price Adjusted Price strategy also allows the Group to sustain low land cost at 6-8% 7 of sales, compared to 19-33% of the industry peers. These grant 6 Top Spring high potential in outcompeting its peers. 5 4 Protection from downside 3 2 We see two factors protecting the downside to valuation from 1 macro headwinds: 1) high lock-in ratio of contract sales target 0 achieved YTD (92.6% in first 3Q) which will enable Top Spring to meet its full-year guidance of HK$8.0bn without much pressure; 2) secured land reserves with relatively low cost averaging at *Price adjusted for 2-for-5 bonus issue on 20 May 2013 HK$3,340/sqm, at strategic locations along the high speed Source: Bloomberg railway; 3) anti-cyclical and prudent land banking strategy, avoiding over-expansion under overheated market conditions. Forecasts and Valuation FY (HK$m) 2012 2013E 2014E 2015E Catalysts ahead with visibility Revenue 6,064 6,667 8,160 12,303 EBITDA 2,525 2,881 3,440 5,044 Given the recent sales figures, we are confident in the remaining Net Profit 1,193 1,167 1,370 2,084 phases of the successful projects such as Nanchang Fashion EPS (HK$) 1.03 1.01 1.19 1.80 Mark, with saleable GFA of 730,000 sqm, which is expected to P/E (X) 3.1 3.2 2.7 1.8 P/BV (X) 0.81 0.68 0.57 0.45 be completed by 2016. Besides, Shenzhen Fashion Mark is a ROE (%) 29.5 23.3 22.9 28.2 highlighted old town redevelopment program with EV/EBITDA (X) 6.3 5.5 4.6 3.2 saleable/leasable GFA of over 1.2 million sqm. Despite Div yld (%) 8.1 7.9 9.3 14.1 uncertainties on government approval, this large-scale project is Assets/Equity (X) 5.4 5.0 4.9 4.7 expected to bring in significant amount of sales and drive the EPS growth. Downside risks Refer to important disclosures at the end of Lower-than-expected presales and profitability, slower-than- this report expected delivery, NAV dilutive injection, and general slowdown in the market November 7, 2013 Top Spring International (3688 HK) Business Description Incorporated in Hong Kong in 1993 and entering the real estate market in 2001, Top Spring International Holdings Limited (“Top Spring”) is a real estate property developer in the PRC, specializing in the development and operation of urban mixed-use communities and the development and sale of residential properties. Top Spring was listed on the Hong Kong Stock Exchange (3688) on 23 March 2011. Sources of revenue include sale of properties, rental income, hotel operations and property management and related services income, while sale of properties contribute over 90% of the total revenue. The revenue is fluctuating across reporting periods, depending on the booking schedule of property sales, thus contracted sales is an appropriate forecast of the company’s recognized revenue. Top Spring is a small-sized developer focusing on brand recognition, profitability and high asset turnover. As of 30 June 2013, it has a total of 18 property projects over 10 cities at various stages of development in Shenzhen, Nanjing, Nanchang, Chengdu, Huizhou, Hangzhou, Dongguan, Tianjin and Changzhou with a net saleable and leasable GFA of approximately 4.77 million square meters. Exhibit 1: Revenue highly depends on booking Exhibit 2: Diversified landbank with 16 current and schedule of projects, mainly attributable to the sale upcoming property development projects along High of properties speed railway Revenue (HKD billion) Sale of properties Rental income Others 4,500 3,869 4,000 3,500 3,103 HKD mn 3,000 2,758 2,500 2,195 2,000 1,500 1,219 1,000 500 0 1H11 2H11 1H12 2H12 1H13 Source: Interim and annual reports Source: Company data Industry Overview and Competitive Positioning Overview: Resume buoyance in property market, fanning bubble concerns Hitting GDP targets and retaining growth is of utmost priority in Chinese government’s agenda. Given the 15% major GDP contribution and strong spillover effect in 1/3 of the country’s economy, real estate developers are less likely to receive tough property curbs in near future for ensuring the stable and progressive economic growth. (1) Active land sales will take place to ease high debt levels of local governments and supply shortage in 1H National auditing report in 10 June showed 16 out of 24 regional governments’ debt levels exceeded 100% of income last year. It also highlighted the decreasing income from land sales in 2012 on a regional and provincial level. Thus, local governments are tempted to boost land sales to bring income and ease their debt burdens. We expect more frequent land auctions will take place in near term, targeting property developers for residential purposes. We are confident that land sales will resume from its depressed levels in 1H2012. And that, in turn, will result in a rising trend of inventory supply to support this year’s pricing stability on the supply side. CUBA Research 2 November 7, 2013 Top Spring International (3688 HK) Exhibit 3: Debt levels of Chinese local governments Exhibit 4: Land sales volume, yoy change and accumulated at startling pace, inducing urgency for inventory in major cities show steady improvements land auctions to increase income of supply Debt levels (RMB billion) Land sales, total sellable GFA (million sqm) and yoy Debt levels of 36 local governments growth (%) 25 Debt estimates of all local governments 8 cities land sales 8 city total sellable GFA 60 2.5 19.70 8 cities land sales yoy growth rate 20 50 2 14.1 1.5 15 40 10.72 1 30 10 0.5 20 0 5 3.85 3.63 3.41 10 -0.5 0 -1 0 2012 2011 2010 Source: National Auditing Report & CNN Source: Soufun/CIA, CUBA Research estimates (2) Urgency of stabilizing Chinese economy overrides interventions to cool property market Other than the widely anticipated property taxes, little progress is expected in the discussion of China’s property market at the Third Plenary Session of 18th CPC Central Committee held this November. The central government is not likely to introduce major tightening measures in the foreseeable term. Market-based measures such as curtailing bank lending to property speculators do not cause any threats to the property sector, as the maintaining of stable growth is still the key priority for Chinese economic growth in general. Demand for residential housing would resume from 1H as investors take advantage from the looser regulation, compared to March when the new central government first announced the 3-year plan to cool down housing market. Exhibit 5: Sales outlook expects to recover from Exhibit 6: Property sales volume growth lags behind previously tightening credit and home supply China quarterly GDP, showing high correlation conditions National GFA sold mom change (%) and China GDP qoq GFA sold (million sqm) change (%) 70 2012 2013 150% National GFA sold mom change 3.0% 60 China GDP qoq change 2.5% 100% 50 40 2.0% 50% 30 1.5% 20 0% 10 1.0% 0 3/1/11 5/1/11 7/1/11 9/1/11 1/1/12 3/1/12 5/1/12 7/1/12 9/1/12 1/1/13 3/1/13 5/1/13 7/1/13 9/1/13 -50% 1/1/11 11/1/12 11/1/11 0.5% 1H Jul 2H Jul 1H Apr 2H Apr 1H Oct 2H Oct 1H Jan 2H Jan 1H Jun 2H Jun 1H Feb 2H Feb 1H Mar 2H Mar 1H Aug 2H Aug 1H Sep 2H Sep 1H Nov 2H Nov 1H Dec 2H Dec 2H May 1H May -100% 0.0% Source: National Bureau of Statistics Source: National Bureau of Statistics (3) Developers benefit from cheap liquidity and now sit on cash for delayed CAPEX plans $16 billion was raised through offshore bonds and domestic loans to property companies increased by 50% in 1H13, allowing real estate developers to resume CAPEX plans that halted earlier this year due to US tapering and credit tightening in China.
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