February 3, 2017 China: Real Estate Developers Equity Research Poly H: Assessing asset value crystallization from possible M&A; up to Buy Consolidation intensifying; SOE reform Poly H up to Buy with 35% potential upside SUMMARY OF OUR ACTIONABLE STOCK IDEAS accelerating; valuation has diverged We upgrade Poly H to Buy from Neutral as we Potential End-17E Rating LCY 12-m TP upside/ NAV As the industry is facing another policy-driven now view it as the most likely M&A target in our downside downturn in 2017, we expect consolidation to coverage given potential restructuring with Poly Offshore listed COGO Buy* (HK$) 7.36 3.70 39% intensify with: (1) leading developers’ market A. Though we take no view on the likelihood of a Sino Ocean Buy (HK$) 10.52 4.70 39% deal taking place, we believe a restructuring Yanlord Buy (S$) 3.46 1.90 38% share gains accelerating via significant COLI Buy* (HK$) 34.44 31.00 38% consolidation in the land acquisition market since would likely drive a re-rating of the stock given Agile Buy (HK$) 12.51 5.60 36% Poly Property (H) Buy (HK$) 9.13 4.20 35% 2015; (2) more M&A opportunities among SOEs Poly H’s low valuation (0.5X 2017E P/B vs. 1.8X for CRL Buy (HK$) 33.51 25.10 34% R&F Buy (HK$) 18.17 12.70 30% amid pick-up in SOE reform. However, the M&As). With 70% of its land bank located in tier- Longfor Buy (HK$) 27.95 14.00 29% 1/2 cities and acquired before 2013, we estimate Evergrande Sell (HK$) 8.28 3.30 -37% valuation divergence between primary market Onshore listed M&A and developers’ stocks has grown in the its land bank value would be 50% higher if it were CFLD Buy (Rmb) n.m. 30.10 26% Poly (A) Buy* (Rmb) 12.94 11.60 25% past six months. While developers under our marked to market; we note that the shares are at a CMSK Buy (Rmb) 28.09 20.00 20% OCT Buy (Rmb) 16.00 8.30 19% coverage trade at an average 2017E P/B of 1.0X, deep 73% discount to the reappraised value. Gemdale Sell (Rmb) 14.98 11.20 -10% the P/B implied by recent M&A deals is 1.8X (1.0X Vanke (A) Sell (Rmb) 25.17 17.60 -15% * denotes the stock is on our regional Conviction List. Priced as when we set our M&A framework in June). We Prefer leaders with low valuations, small- of Feb 2, 2017 market close. believe the rise in this implied P/B is mainly driven caps with re-rating opportunities Source: Datastream, Gao Hua Securities Research. by surging land prices, especially in higher-tier We expect leaders (COLI/Poly A; both CL-Buy) to RELATED RESEARCH cities on the back of a rapid ASP rise since 2H2015 strengthen their market leadership and see their Introducing China property M&A framework: Wanda, COGO, Greentown, Poly HK best placed, June 13, 2016 and intense competition at public land auctions. valuations recover from their lows on the back of accelerated industry consolidation and SOE Refreshing M&A valuation for three stocks reform. We also expect the valuations of small- After factoring in a new M&A multiple of 1.8X and caps (COGO, CL-Buy; Poly H, Buy) to re-rate from revisiting M&A potential for our coverage, we their deep discounts to M&A-implied multiples on raise Poly H/GT’s TPs by 45%/9% to HK$4.2/7.6 either rising visibility of operational turnaround or and keep COGO’s TP at HK$3.7 (see Ex. 18 inside). value crystallization from potential M&A. Yi Wang, CFA +86(21)2401-8930 [email protected] Beijing Gao Hua Securities Company Limited Goldman Sachs does and seeks to do business with companies Vicky Li covered in its research reports. As a result, investors should be aware +86(21)2401-8926 [email protected] Beijing Gao Hua Securities Company Limited that the firm may have a conflict of interest that could affect the Scofield Chi objectivity of this report. Investors should consider this report as only a +65-6654-5188 [email protected] Goldman Sachs (Singapore) Pte single factor in making their investment decision. For Reg AC Doris Chen +65-6654-5182 [email protected] Goldman Sachs (Singapore) Pte certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S. The Goldman Sachs Group, Inc. Global Investment Research February 3, 2017 China: Real Estate Developers Poly H: We expect re-rating on asset value crystallization from potential M&A; up to Buy Source of opportunity Investment Profile Since the start of this year, following the announcement of Poly H’s potential asset restructuring with sister Low High company Poly A, Poly H’s share price has rebounded from its trough valuation level (70% discount to end-17E Growth Growth Returns * Returns * NAV and 0.4E 17E P/B). We believe investors that were previously hesitant about Poly H, mainly due to its weak Multiple Multiple fundamentals on slower execution turnaround, will likely revisit the shares because of the deep valuation gap Volatility Volatility between the shares and Poly H’s land bank value (given the potential for M&A on the back of accelerated SOE Percentile 20th 40th 60th 80th 100th reform). However, we note that the potential transaction has been put on hold pending further discussions and Poly Property Group (0119.HK) we take no view on the likelihood of a deal taking place. Asia Pacific Property Peer Group Average * Returns = Return on Capital For a complete description of the investment profile measures please refer to the For Poly H, we raise our 12-month blended target price 45% to HK$4.20 after factoring in the higher M&A multiple disclosure section of this document. we now use in our M&A framework for the sector: (1) our fundamental value of HK$2.7 is unchanged (still a 70% discount to end-2017E NAV of HK$9.13) but now has a 70% weight (prior 85%) while (2) the M&A value Key data Current component of our target price rises to HK$7.7 (from HK$3.5 on a 1.3X M&A multiple from 0.5X) and now has a Price (HK$) 3.12 12 month price target (HK$) 4.20 30% weight (prior 15%). Our new target price implies a 2017E P/B of 0.7X, at a discount to our offshore coverage Market cap (HK$ mn / US$ mn) 11,424.0 / 1,472.8 Foreign ownership (%) 0.0 average of 1.0X, reflecting Poly H’s lower return profile and higher leverage. With our new 12-month target price of HK$4.20 offering 35% potential upside, we upgrade Poly H to Buy from Neutral. 12/15 12/16E 12/17E 12/18E EPS (HK$) (0.90) (0.01) 0.08 0.11 EPS growth (%) (1,727.2) 99.1 993.1 46.2 Catalyst EPS (diluted) (HK$) (0.77) (0.01) 0.08 0.11 EPS (basic pre-ex) (HK$) (0.77) (0.01) 0.08 0.11 1. Operations finally bottoming out: Riding the market recovery, Poly H posted Rmb35 bn of presales in 2016, P/E (X) NM NM 41.0 28.1 beating its target by 16%, mainly due to management’s continued efforts on destocking and the strong sales P/B (X) 0.5 0.4 0.4 0.4 EV/EBITDA (X) 68.3 23.2 15.4 12.7 performance from projects in more resilient markets in the Yangtze River Delta and the Pearl River Delta. Though Dividend yield (%) 0.0 0.0 0.0 0.0 ROE (%) (10.2) (0.1) 1.1 1.6 we do not expect Poly H to deliver strong sales growth in the next two years given relatively limited land banking CROCI (%) (1.3) 0.1 1.1 1.4 in the past two years, we expect its profitability to bottom in 2016E and go on a gradually recovery trend from 2017E amid its more disciplined expansion and cost control (lower SG&A and interest expenses). 2. Potential asset restructuring with Poly A: We think positive news on potential M&A with Poly A would be a Price performance chart strong catalyst to drive substantial upside given Poly H’s low valuation (0.5X 17E P/B vs. M&A deals implied avg 4.0 10,500 1.8X P/B). As c.70% of its end-16E unsold land bank is in tier-1/2 cities and 70% was acquired before 2013 3.5 10,000 (previous upturn in land market), we estimate its total land bank value, marked to market at the average rise over 3.0 9,500 the period held, is Rmb52bn (up 50% rise from Rmb35bn cost). Its share price is at a deep discount to its asset 2.5 9,000 value in all cases (55%/66%/73% discount to its end-16E BV, end-2017E NAV and mark-to-market land bank value). 2.0 8,500 1.5 8,000 Valuation 1.0 7,500 Jan-16 Apr-16 Aug-16 Nov-16 We expect rising visibility of the potential M&A with Poly A on the back of accelerated SOE reform will help drive Poly Property Group (L) Hang Seng China Ent.