Thursday, September 17, 2015
China Merchants Securities (HK) Co., Ltd. Company Report Hong Kong Equity Research
Country Garden (2007 HK) John So Hayden Zhang +852 3189 6357 +852 3189 6354 Weak growth amid slow recovery in Tier-3 cities [email protected] [email protected] ■ We remain cautious on CG’s contracted sales pick-up in Tier-3 cities. Barring massive promotion incentives, we think CG could WHAT’S NEW miss its annual sales target by 5% TP/EPS revised ■ Factoring in slower price and sales volume recovery in Tier-3 cities, we estimate only 3% core EPS CAGR in FY14-17E NEUTRAL ■ Maintain NEUTRAL and trimmed TP to HK$2.7 (from HK$3.2) Previous NEUTRAL Expect little improvements in contracted sales We noted that CG’s sales progress remained weak in Jul/Aug with 8M15 Price HK$2.73 contracted sales at RMB71.4 bn or -2% YoY. We think it would either miss 12-month Target Price HK$2.7 (-1%) its annual sales target of RMB132 bn or CG has to offer massive (Potential downside) promotion incentives or direct price cut in order to boost contracted sales in the remaining 4 months of the year (implying RMB15 bn monthly sales Previous HKD3.2 in Sep-Dec/15, which appears challenging). CG’s recent decision to Price Performance actively add landbanks in Tier-1/2 cities also implies a weak prospect in Tier-3 city projects. We estimate FY15E contracted sales at RMB125 bn, CG 2007 MSCI China/real Estate 50% 5% lower than its own target. 40% 30% FY15/16E earnings forecasts revised by +1%/-7% 20% 10% For FY16E, we lower project completion GFA and ASP estimates 0% considering the below-expectation progress in contracted sales. We also -10% incorporate the negative impact of Malaysian Ringgit depreciation against -20% -30% RMB on Malaysia Danga Bay project. Overall, we revise FY15/16E Sep/14 Oct/14 Dec/14 Jan/15 Mar/15 Apr/15 May/15 Jul/15 Aug/15 earnings by +1%/-7% (FY15E up slightly 1% mainly due to lower selling Source: Capital IQ expense estimates under lower contracted sales). Despite continued % 1m 6m 12m 2007 HK (7.2) (7.8) (14.8) landbank expansion and increased borrowings, CG will only see 3% core MSCI China/real (9.4) (12.0) (10.1) EPS CAGR in FY14-17E, based on our forecast. Our FY15E/16E estate earnings are 5.7%/6.8% below Bloomberg consensus.
Lack of catalysts and weak growth prospects Industry: Property Hang Seng Index 21967 The stock looks unappealing on unexciting contracted sales and earnings HSCEI 9905 growth. We trimmed TP to HK$2.7, based on 46% (previous: 40%) Key Data discount to our lowered end-FY15 NAV of HK$5.0/share (previous: 52-week range (HK$) 2.38-4.55 HK$5.4/share), equivalent to 1SD below 6-year historical mean, a similar Market cap (HK$ mn) 61,665 level as the sector average. We think stock could see further downside if Avg. daily volume (mn) 42.28 the coming contracted sales continues to be disappointing. BVPS (HK$) at FY15 y.e. 3.6 Shareholdings Structure Financials Yang’s Family 53.6% RMB mn 2013 2014 2015E 2016E 2017E Ping An Insurance 9.9% Yang Erzhu 7.0% Revenue 62,724 84,549 107,021 108,598 108,261 Free float 29.5% Revenue growth (%) 50% 35% 27% 1% 0% Core net profit 8,001 9,081 9,460 10,673 11,695 Related Research Core profit growth (%) 18% 13% 4% 13% 10% Country Garden (2007 HK) - Continuous margin pressure in FY15E; d/g to NEUTRAL, March 12, 2015 Core EPS (HK$) 0.53 0.58 0.52 0.58 0.63 Country Garden (2007 HK) - Awaiting for re-rating catalysts, June Net gearing (%) 64% 62% 68% 59% 48% 25, 2015 P/E (core EPS) 5.1x 4.7x 5.2x 4.7x 4.3x Country Garden (2007 HK) - Lack positive earnings drivers in P/B 0.9x 0.8x 0.8x 0.7x 0.6x 2H15, Aug 20, 2015 Dividend yield 7.8% 6.8% 5.3% 6.3% 6.9% Sources: Company data, CMS (HK) estimates Please see penultimate page for additional important disclosures. China Merchants Securities (CMS) is a foreign broker-dealer unregistered in the USA. CMS research is prepared by research analysts who are not registered in the USA. CMS research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities, an SEC registered and FINRA-member broker-dealer. 1 Thursday, September 17, 2015
Focus Charts Figure 1: Large developers’ contracted sales in 8M15 Figure 2: CG’s Contracted sales (2012-2017E)
8M15 YoY growth RMB mn YoY chg 140,000 140% Company Ticker (RMB mn) (%) 120% CR Land 1109 HK 56,590 54% 120,000 100% Gemdale 600383 CH 32,500 38% 100,000 80% Evergrande 3333 HK 117,520 31% 80,000 Poly Real Estate 600048 CH 98,109 22% 60% 60,000 China Vanke 000002 CH 156,060 21% 40% 40,000 Greentown China 3900 HK 43,400 15% 20%
Longfor 960 HK 30,120 7% 20,000 0%
Agile 3383 HK 26,610 0% - -20% FY12 FY13 FY14 FY15E FY16E FY17E Country Garden 2007 HK 71,380 -2% Total YoY change Shimao 813 HK 39,789 -9% Sources: Bloomberg, CMS (HK) Sources: Company data, CMS (HK)
Figure 3: Revenue and core net profit growth Figure 4: Net gearing
60% Net gearing (%) 70% 50% 65% 40% 60%
30% 55%
20% 50%
10% 45%
0% 40% 2013 2014 2015E 2016E 2017E -10% 35%
30% Revenue Core net profit 2012 2013 2014 2015E 2016E 2017E
Sources: Company data, CMS (HK) Sources: Company data, CMS (HK)
Figure 5: Interest coverage Figure 6: Landbank (GFA) at 2014 year-end
(x) Malaysia, Tier-1 4.0 2% city, 2% Tier-2 3.5 city, 5%
3.0
2.5
2.0
1.5
Tier-3 1.0 2012 2013 2014 2015E 2016E 2017E city, 90%
Source: CMS (HK) Sources: Company data, CMS (HK) Note: Operating profit / total interest (including the capitalized portion)
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Contracted sales review Not seen any star projects from new launches It achieved 123% YoY contracted sales growth in year 2013 thanks to the successful launch of a series of new projects, including huge contribution from Malaysia Danga Bay (RMB6.8 bn), Huizhou Ten Miles Beach (RMB2.9 bn) and Shenyang Galaxy Palace (RMB5.1 bn). However, in 2015, we do not see CG successfully add any new star projects to make significant contributions to contracted sales. We believe CG should have just 3-4 projects (total new launches around 50 projects in 2015) probably reaching about RMB2 bn in 2015. The old projects sales in slowing progress Meanwhile, we are concerned about the slowing contracted sales progress of CG’s typical projects in Tier-3 cities. It experienced a decline in contracted sales contribution from RMB772 mn in 2013 to RMB511 mn in 2014 on a per project basis. We estimate it is further slowing down to about RMB400 mn/project in FY15E. Thus, it resulted in a faster growth in PUD and inventories than contracted sales. That implied a slower asset turnover and weaker cashflows. Figure 7: Country Garden contracted sales breakdown 2012 2013 2014 2015E No. of new projects launching 18 37 77 50 Contracted sales from new projects (RMB mn) 9,600 28,800 41,400 30,000
Average contracted sales per project (RMB mn) 533 778 538 600
No. of existing projects 90 100 171 238 Contracted sales from existing projects (RMB mn) 38,000 77,200 87,400 95,200
Average contracted sales per project (RMB mn) 422 772 511 400
Total 47,600 106,000 128,800 125,200
Sources: Company, CMS (HK)
Figure 7.1: Country Garden contracted sales vs PUD changes in 2011-2017E 2011 2012 2013 2014 2015E 2016E 2017E PUD and inventory growth (%) 38% 23% 52% 37% 16% 13% 17% Contracted sales growth (%) 24% 10% 123% 22% -3% 3% 3% Contracted sales YoY chg (Rmb mn) (1) 8,238 4,400 58,400 22,800 (3,800) 3,750 3,863 PUD & inventories YoY chg (Rmb mn) (2) 18,559 15,555 43,121 47,362 27,655 26,466 38,298
Net change (1) - (2) (10,321) (11,155) 15,279 (24,562) (31,455) (22,716) (34,436)
Sources: Company, CMS (HK)
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Figure 8: Changes in P&L estimates FY15E FY16E FY17E (RMB mn) Original New chg (%) Original New chg (%) Original New chg (%) Revenue 106,767 107,021 0% 110,789 108,598 -2% 112,624 108,261 -4% Cost of goods sold (82,643) (82,996) 0% (83,774) (83,663) 0% (82,879) (81,528) -2% Gross Profit 24,123 24,025 0% 27,015 24,935 -8% 29,745 26,733 -10% General & admin expense (3,245) (3,141) -3% (3,455) (3,193) -8% (3,558) (3,289) -8% Selling expense (4,549) (4,180) -8% (4,736) (4,378) -8% (4,878) (4,509) -8%
Interest Expense (435) (435) 0% (461) (461) 0% (482) (482) 0% Interest Income 214 214 0% 280 280 0% 280 280 0% JCE & Associate items (17) (17) 0% 0 0 n.a. 0 0 n.a. Others 183 (1,097) -699% 0 0 n.a. 0 0 n.a.
Pre-tax profit 16,274 15,369 -6% 18,643 17,183 -8% 21,106 18,733 -11% Income tax & LAT (6,393) (6,412) 0% (6,619) (6,018) -9% (8,162) (6,737) -17% Minority Interests (515) (506) -2% (562) (492) -12% (446) (301) -33% Reported net profit 9,366 8,451 -10% 11,462 10,673 -7% 12,498 11,695 -6%
Core net profit 9,366 9,460 1% 11,462 10,673 -7% 12,498 11,695 -6%
Gross profit margin (%) 22.6% 22.4% -0.1ppts 24.4% 23.0% -1.4ppts 26.4% 24.7% -1.7ppts Reported net profit margin (%) 8.8% 7.9% -0.9ppts 10.3% 9.8% -0.5ppts 11.1% 10.8% -0.3ppts Core net profit margin (%) 8.8% 8.8% 0.1ppts 10.3% 9.8% -0.5ppts 11.1% 10.8% -0.3ppts
Sources: Company, CMS (HK) Note: In FY15E, Others mainly represent our forecast on FX loss on US$/HK$ loans to translate into RMB, which we add back the loss to arrive at our core net profit.
Figure 9: Key Financials (RMB mn) Revenue and GFA sales details FY13 FY14 FY15E FY16E FY17E Total GFA delivered (k sqm) (1) 9,240 12,180 16,524 15,746 15,392 Average selling price booked (RMB psm) (2) 6,498 6,724 6,257 6,644 6,749 Property sales Revenue (1) x (2) 60,043 81,898 103,396 104,610 103,875 Others 2,681 2,651 3,625 3,988 4,386 Total Revenue 62,724 84,549 107,021 108,598 108,261 Gross profit 19,011 22,055 24,025 24,935 26,733 Reported net profit 8,514 10,230 8,451 10,673 11,695 Core net profit 8,001 9,081 9,460 10,673 11,695
Total contracted sales 106,000 128,800 125,000 128,750 132,613
Property development cost (RMB psm) (4,486) (4,935) (4,705) (5,035) (4,983) Core profit per GFA delivered (RMB psm) 866 746 573 678 760
YoY changes (In %) GFA delivered 50.0% 31.8% 35.7% -4.7% -2.2% Average selling price 0.0% 3.5% -6.9% 6.2% 1.6% Revenue 49.7% 34.8% 26.6% 1.5% -0.3% Gross profit 23.9% 16.0% 8.9% 3.8% 7.2% Reported net profit 24.2% 20.2% -17.4% 26.3% 9.6% Core net profit 18.0% 13.5% 4.2% 12.8% 9.6% Contracted sales 122.7% 21.5% -3.0% 3.0% 3.0%
Margin ratios (In %) Gross margin 30.3% 26.1% 22.4% 23.0% 24.7% Reported net profit margin 13.6% 12.1% 7.9% 9.8% 10.8% Core net profit margin 12.8% 10.7% 8.8% 9.8% 10.8%
Sources: Company, CMS (HK)
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Valuation Figure 10: Peer comparison (based on closing prices on 16 Sep 2015) Mkt 3-mth Discount FY15 FY16 FY14 FY15 FY14 FY15 Net Net Price cap avg t/o NAV to NAV P/E P/E yield yield P/B P/B gearing gearing Company Ticker (HK$) (US$m) (US$m) (HK$) (%) (x) (x) (%) (%) (x) (x) FY14(%) FY15(%) Large peer average 36.5 7.1 6.4 4.9 4.0 1.1 1.0 70.4 73.0 China Overseas 688 HK 23.40 29,771 81.0 34.0 31.2 6.7 6.1 2.4 2.8 1.4 1.2 27.1 22.4 CR Land 1109 HK 18.80 16,812 47.4 33.0 43.0 8.8 7.1 2.6 2.6 1.2 1.1 40.5 44.2 Country Garden 2007 HK 2.73 7,956 10.0 5.0 45.4 5.2 4.7 6.8 5.3 0.8 0.8 62.2 68.0 Evergrande 3333 HK 4.75 8,893 58.0 5.3 10.4 8.7 8.8 11.3 2.8 1.1 1.1 251.0 288.2 Longfor 960 HK 9.68 7,277 5.1 14.6 33.7 5.0 5.7 3.7 3.8 0.9 0.8 57.1 59.4 Shimao Property 813 HK 11.42 5,117 14.9 31.6 63.9 4.1 3.5 7.9 7.9 0.7 0.6 58.6 57.4 Wanda Comm-H 3699 HK 47.15 27,542 48.0 n.a. n.a. 9.7 7.8 1.3 3.0 1.1 1.0 60.4 34.9 China Vanke-H 2202 HK 16.70 23,353 26.5 22.0 24.1 8.5 7.3 3.7 4.1 1.7 1.5 6.3 9.3
Mid-and-small peer average 63.5 7.2 6.2 4.6 5.0 0.5 0.5 72.6 71.5 Agile Property 3383 HK 3.87 1,956 6.6 13.6 71.5 3.8 3.1 10.2 4.7 0.4 0.3 96.6 76.5 CM Land 978 HK 1.23 778 2.1 3.1 60.3 10.7 4.4 0.8 0.9 1.1 0.9 49.4 59.3 COGO 81 HK 2.47 727 1.2 8.2 69.9 4.4 2.7 2.0 2.3 0.5 0.4 77.0 64.7 CIFI Holdings 884 HK 1.40 1,222 2.4 4.0 65.0 3.4 3.0 7.9 7.4 0.7 0.6 66.6 69.0 Franshion Ppt 817 HK 1.90 2,616 5.4 4.5 57.8 5.5 4.9 6.1 5.6 0.5 0.4 60.9 53.4 Greentown China 3900 HK 5.93 1,654 5.4 13.7 56.7 3.7 3.7 0.0 5.3 0.4 0.4 93.4 72.0 KWG Property 1813 HK 4.98 1,925 6.3 16.3 69.4 3.9 3.3 8.3 8.9 0.6 0.5 66.8 62.8 Poly Property 119 HK 2.16 1,020 7.9 8.1 73.3 17.0 14.2 3.5 2.0 0.3 0.3 97.0 123.0 Shenzhen Investment 604 HK 2.85 2,715 11.6 6.0 52.5 6.1 5.5 5.6 6.5 0.6 0.5 77.8 N/A Sino Ocean 3377 HK 4.23 4,109 5.6 8.0 47.1 6.6 5.8 5.7 5.9 0.6 0.6 76.0 58.8 SOHO China 410 HK 3.02 2,026 4.6 8.6 64.9 21.6 16.8 5.4 5.1 0.3 0.3 20.3 27.6 Sunac 1918 HK 4.24 1,859 12.6 12.4 65.8 1.9 2.6 5.6 10.5 0.7 0.5 44.5 67.4 Gemdale 535 HK 0.37 713 1.1 n.a. n.a. 5.8 4.3 N/A 4.7 0.6 0.7 1.4 N/A BJ North Star 588 HK 2.19 2,129 2.1 n.a. n.a. 6.5 5.7 3.4 3.8 0.4 0.4 74.6 67.0 Yuexiu Property 123 HK 1.25 2,000 5.3 3.5 64.3 6.6 6.1 5.9 5.7 0.4 0.4 63.0 71.0
Average 54.9 7.2 6.2 4.7 4.7 0.7 0.6 71.9 72.0 Sources: CMS (HK), Bloomberg
Figure 11: Discount to NAV Band (Year 2009 onwards)
5.0 +2SD = 15% discount
4.0 +1SD = 26% discount
Mean =36% discount
3.0 -1SD = 46% discount
SharePrice (HKD) -2SD = 57% discount 2.0
1.0 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15
Sources: Company, CMS (HK)
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Financial Summary Balance Sheet Profit & Loss Statement RMB mn 2013 2014 2015E 2016E 2017E RMB mn 2013 2014 2015E 2016E 2017E Current Assets 146,214 192,616 194,263 214,288 243,481 Total revenue 62,724 84,549 107,021 108,598 108,261 Cash 18,910 18,761 17,796 23,052 31,227 Cost of goods sold (43,713) (62,494) (82,996) (83,663) (81,528) Restricted cash 7,770 8,453 10,054 10,054 10,054 Gross profit 19,011 22,055 24,025 24,935 26,733 Current receivables 26,378 25,370 28,822 28,822 28,822 Admin exp. (2,033) (3,160) (3,141) (3,193) (3,289) Properties held for sale 18,920 23,203 32,106 32,579 32,478 Selling exp (4,304) (4,356) (4,180) (4,378) (4,509) Properties under development 67,474 105,994 93,162 107,458 128,577 Finance cost 0 (396) (435) (461) (482) Other current assets 6,762 10,835 12,323 12,323 12,323 JCE & associates (26) (40) (17) 0 0 Non-current Assets 60,026 75,416 109,349 123,091 142,336 Others 825 2,060 (883) 280 280 Fixed assets 17,848 27,743 29,792 31,838 33,802 Pre-tax profit 13,473 16,163 15,369 17,183 18,733 Properties under development 40,080 44,639 76,223 87,920 105,200 Income tax (4,625) (5,757) (6,412) (6,018) (6,737) Other non-current assets 2,098 3,034 3,334 3,334 3,334 MI (334) (176) (506) (492) (301) Total Assets 206,240 268,032 303,613 337,380 385,817 Reported net profit 8,514 10,230 8,451 10,673 11,695 Current Liabilities 114,904 156,623 174,515 195,814 231,458 Bank and other loans 12,434 14,930 19,369 19,369 19,369 Core profit 8,001 9,081 9,460 10,673 11,695
Presales receipts in advance 63,418 91,792 103,396 125,285 160,561 Accounts payables & other payables 30,915 40,925 42,899 42,899 42,899 Core EPS (RMB) 0.44 0.47 0.43 0.47 0.52 Other current liabilities 8,137 8,976 8,852 8,261 8,629 DPS (RMB) 0.17 0.15 0.12 0.14 0.16 Non-current Liabilities 45,324 52,057 59,010 63,010 67,010 Note: We deduct property revaluations and other exceptional items to arrive at core net profit Bank and other loans 43,815 49,229 56,129 60,129 64,129 Others 1,509 2,828 2,881 2,881 2,881 Total Liabilities 160,228 208,680 233,525 258,824 298,468 Ratios Shareholders’ equity 43,954 56,686 66,769 74,746 83,239 % 2013 2014 2015E 2016E 2017E Minority interests 2,058 2,666 3,318 3,810 4,111 Growth (%) Total equity & Liabilities 206,240 268,032 303,613 337,380 385,817 Revenue 50% 35% 27% 1% 0% Note: Total cash includes both cash and restricted cash Gross profit 24% 16% 9% 4% 7% Core net profit 18% 13% 4% 13% 10% Cashflow Statement PUD and inventory 52% 37% 16% 13% 17% RMB mn 2013 2014 2015E 2016E 2017E Contracted sales 123% 22% -3% 3% 3% Operating cashflow 18,990 15,486 3,924 26,673 35,097 Profit before tax 13,473 16,163 15,369 17,183 18,733 Profitability (%) Working capital chg 14,320 10,805 716 21,555 28,387 Gross margin 30% 26% 22% 23% 25% Tax paid (4,817) (5,998) (7,455) (6,609) (6,369) Core net profit margin 13% 11% 9% 10% 11% Interest paid (3,814) (5,059) (5,842) (6,593) (6,893) Effective tax rate 34% 36% 42% 35% 36% Other operating cashflow (172) (425) 1,136 1,136 1,238 ROE 20% 18% 15% 15% 15% Investing cashflow (29,793) (24,687) (17,375) (22,720) (27,720) ROA 5% 4% 3% 3% 3% Fixed assets additions (5,347) (5,117) (2,812) (3,000) (3,000) Dividend pay-out 36% 28% 31% 30% 30% Land purchases (24,800) (20,000) (14,158) (20,000) (25,000) JCE & associates 0 0 (5) 0 0 Liquidity Other investing cashflow 354 430 62 280 280 Free cash flow (RMB mn) (11,157) (9,631) (13,046) 3,673 7,097 Financing cashflow 17,985 9,095 12,544 1,303 798 Total debt/equity 122% 108% 108% 101% 96% Dividend paid (1,710) (1,507) (3,333) (2,697) (3,202) Net debt/equity 64% 62% 68% 59% 48% Redemption of CB (957) 0 0 0 0 Interest coverage (x) 3.1 2.9 2.7 2.6 2.7
Shares issuance 0 2,501 4,950 0 0 Increase/decrease in loans 20,419 4,580 11,528 4,000 4,000 Financing to/from fellow companies 0 0 149 0 0 Other financing cashflow 233 3,521 (750) 0 0
Cashflows for the year 7,182 (106) (907) 5,256 8,175 Cash at the beginning 11,809 18,910 18,761 17,796 23,052 Exchange difference (81) (43) (58) 0 0 Cash at the end 18,910 18,761 17,796 23,052 31,227
Note: we reclassify land capex from operating cashflows into investing cashflows, which is different from the company’s financial statements. Source: Company data, CMS (HK) estimates
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Investment Ratings
Company Rating Definition BUY Expect stock to generate 10%+ return over the next 12 months NEUTRAL Expect stock to generate +10% to -10% over the next 12 months SELL Expect stock to generate loss of 10%+ over the next 12 months
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