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China Jinmao (817 HK) China Jinmao China Financials 26 July 2016 China Jinmao (817 HK) China Jinmao Target price: HKD2.97 Share price (25 Jul): HKD2.26 | Up/downside: +31.4% Initiation: access to prime assets Cynthia Chan (852) 2773 8243 One of the few to have exposure to primary development in tier-2 cities [email protected] A proven brand in high-end housing; growing rentals in tier-1 cities Jonas Kan, CFA (852) 2848 4439 [email protected] Initiating with Buy (1) rating and 12-month target price of HKD2.97 Investment case: We initiate coverage of China Jinmao, the real estate Share price performance flagship of stated-owned Sinochem Corporation, with a Buy (1) call. We (HKD) (%) see China Jinmao as one of the few China developers with a differentiated 2.7 120 2.5 110 and sustainable business model, proven expertise in the primary land 2.2 100 development business in major tier-2 cities (Nanjing and Changsha), and a 2.0 90 sound reputation for high-end residential projects in upper-tier cities 1.7 80 (especially Beijing and Shanghai). Moreover, earnings should be backed by Jul-15 Oct-15 Jan-16 Apr-16 solid and growing recurrent income from several prime rental properties Franshion (LHS) Relative to HSI (RHS) and hotels, many of which are located in core areas of tier-1 cities. 12-month range 1.74-2.66 We believe China Jinmao’s primary development business differentiates it Market cap (USDbn) 3.10 3m avg daily turnover (USDm) 1.49 from other developers, especially at a time when property development Shares outstanding (m) 10,672 margins are shrinking and profitability is becoming harder to maintain. With Major shareholder Sinochem Group (54.0%) the recent hot land market in upper-tier cities, rising land costs and potentially lucrative margins brought about by its Changsha and Nanjing Financial summary (HKD) primary development projects, we see China Jinmao as well placed to Year to 31 Dec 16E 17E 18E benefit through its differentiated approach to primary development, which Revenue (m) 32,789 40,947 49,044 Operating profit (m) 9,443 12,129 14,036 we believe presents high entry barriers. Hence, we forecast 311% YoY Net profit (m) 3,831 4,466 5,176 growth in primary development revenue in 2016 to HKD6.5bn. Core EPS (fully-diluted) 0.337 0.403 0.468 EPS change (%) 53.6 19.6 15.9 Daiwa vs Cons. EPS (%) 0.4 (0.2) 10.3 The company has built up its own brand, which we think will continue to PER (x) 6.7 5.6 4.8 support premium ASPs for its housing projects in tier-1 cities – we forecast Dividend yield (%) 4.8 5.6 6.4 it to sustain its 20%-plus contract sales growth in 2016-18, along with a DPS 0.108 0.126 0.146 property development gross margin of 30%-plus. We expect its prime and PBR (x) 0.5 0.5 0.5 EV/EBITDA (x) 8.7 7.1 6.5 growing investment property and hotel portfolio to provide it with rental ROE (%) 9.0 9.6 10.3 income and hotel revenue of HKD3.8-5.0bn in 2016-18. Source: FactSet, Daiwa forecasts Catalysts: We highlight the following potential share-price catalysts: 1) increased market recognition that China Jinmao has a differentiated business model that can drive sustained profitability (we look for a 50% rebound in underlying profit in 2016 after disappointing earnings in 2015); 2) greater visibility on the company’s ambitions, given that chairman Ning Gaoning joined the company in early 2016; and 3) robust sales for forthcoming major launches in Shanghai, Guangzhou and Hangzhou. Valuation: Our 12-month TP of HKD2.97 is set at a 40% discount to our end-2016E NAV of HKD4.96, of which some 47% is from tier-1 cities. Our TP translates into PERs of 8.8x for 2016E and 7.4x for 2017E. The stock offers a current dividend yield of 4.8% in 2016E, rising to 6.4% in 2018E. Risks: The key risks to our call include: 1) a major contraction in demand for land in tier-2 cities, 2) inability to sell tier-1 city projects at premium ASPs, and 3) a major deterioration in China’s economy. See important disclosures, including any required research certifications, beginning on page 36 China Jinmao (817 HK): 26 July 2016 Table of contents Differentiated primary land development business .............................................. 6 Why we believe China Jinmao stands out ..........................................................................6 A niche player specialising in high-end residential .............................................. 9 High property development margins due to strategic locations and high-end focus ...........9 Annual contract sales growth of 20%-plus in 2016-18E ...................................................11 Steady recurring income to lead to high margins ................................................14 1.18m sq m of investment properties ...............................................................................14 Stable earnings growth ...........................................................................................18 Earnings outlook ..............................................................................................................18 Steady gearing and declining borrowing costs ................................................................. 21 Valuation ..................................................................................................................23 Initiating with a Buy (1) call and TP of HKD2.97 ............................................................... 23 Risks .........................................................................................................................27 Appendix I: company background .........................................................................28 Mid-range to high-end property developer .......................................................................28 Appendix II: primary land development projects ..................................................31 Changsha Meixi Lake International New City Phase I, II and Land Block A ...................... 31 2 China Jinmao (817 HK): 26 July 2016 How do we justify our view? Growth outlook Valuation Earnings revisions Growth outlook China Jinmao: property & primary land contract sales We think that China Jinmao’s sales CAGR of 23.4% for (CNY m) 2010-15 is sustainable, given its ample saleable resources 60,000 55,280 strategically located in upper-tier cities, and its strong sales 45,586 execution ability as proven by its track record. Based on 40,000 36,802 the company’s current landbank, we forecast property and 30,102 primary land sales growth of 22.3% YoY to CNY36.8bn in 20,994 21,503 20,000 16,100 2016, 23.9% YoY to CNY45.6bn in 2017 and 21.3% YoY to 13,000 CNY55.3bn in 2018. We think there is upside to our forecasts depending on how aggressively the company 0 acquires new projects in coming years. 2011 2012 2013 2014 2015 2016E 2017E 2018E Property sales Land sales Source: Company, Daiwa forecasts Valuation China Jinmao: discount to NAV China Jinmao is currently trading at a 54.4% discount to (%) our end-2016E NAV forecast of HKD4.96, more than 1SD (10) below its 2010-15 mean discount of 33.0%. Compared with (20) its peers’ 55.5% NAV discount, China Jinmao’s NAV +1SD -19.0% valuation does not look appealing. Nonetheless, we believe (30) Mean -33.0% China Jinmao merits a premium valuation, especially to its (40) mid-cap peers, given its SOE status, differentiated primary development business, its reputable brand and premium (50) -1SD -46.9% products, sales execution ability, as well as expectations of (60) growing recurring income. (70) 2010 2011 2012 2013 2014 2015 2016 Source: Bloomberg, Daiwa Earnings revisions China Jinmao: revisions to Bloomberg consensus EPS forecasts Our 2016 and 2017 earnings forecasts are largely in line (HKD) with those of the Bloomberg consensus, but our 2018 1.0 earnings forecast is around 10% above consensus due to 0.8 our higher forecast of revenue booking for that year. We believe that China Jinmao will see revenue growth of 0.6 19.8% YoY in 2018 on 20%-plus contract sales growth in 0.4 2016-17, a large proportion of which should be booked in 2018. 0.2 0.0 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 2016E consensus EPS 2017E consensus EPS Source: Bloomberg, Daiwa forecasts 3 China Jinmao (817 HK): 26 July 2016 Financial summary Key assumptions Year to 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E Recognized GFA ('000 sqm) n.a. 186 220 689 646 1,497 1,575 1,829 Recognized ASP (CNY/sqm) n.a. 50,822 37,018 25,660 22,219 17,053 20,499 21,284 Contract property sales (CNY m) 10,300 10,900 14,591 18,545 27,807 27,757 36,337 45,770 Contract land sales (CNY m) 2,700 5,100 6,404 2,959 2,295 9,045 9,249 9,510 Profit and loss (HKDm) Year to 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E Property development 2,996 13,445 16,868 25,545 17,897 28,459 35,996 43,397 Property investment & hotel operations 3,122 3,117 3,310 3,525 3,749 3,819 4,388 5,028 Other Revenue 474 614 541 478 465 512 563 619 Total Revenue 6,592 17,176 20,719 29,548 22,110 32,789 40,947 49,044 Other income 2 29 75 181 509 587 646 711 COGS (3,017) (9,977) (11,519) (17,989) (13,561) (20,130) (24,673) (29,784) SG&A (1,158) (1,407) (1,785) (2,593) (2,517) (3,804) (4,791) (5,934) Other op.expenses 0 0 0 0 0 0 0 0 Operating profit 2,419 5,820 7,490 9,146 6,541 9,443 12,129 14,036 Net-interest inc./(exp.) (664) (817) (1,137) (854) (44) 87 123 158 Assoc/forex/extraord./others 2,343 1,720 2,075 2,247 1,477 (208) (238) (269) Pre-tax profit 4,097 6,723 8,428 10,540 7,973 9,322 12,013 13,925 Tax (1,187) (2,783) (3,393) (3,884) (2,871) (3,640) (5,279) (6,050) Min.
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