Thursday, August 20, 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 Lack positive earnings drivers in 2H15 [email protected] [email protected] ■ Flat 1H15 profit growth and margin squeeze were no surprise to the market, but the continuous increase in Property Under WHAT’S NEW Development (PUD), and limited improvement in net gearing are TP revised disappointing, in our view ■ For full-year, it may miss the 5%contracted sales target growth NEUTRAL and we expect only 3% YoY FY15E earnings growth. Previous NEUTRAL ■ Maintain NEUTRAL and downgraded TP to HK$3.2 (from HK$3.4) Price HK$2.91 12-month Target Price HK$3.2 (+10%) Flat 1H15 earnings; limited improvement in gearing (Potential upside) In 1H15, CG reported RMB47.3bn revenue, +23.5% YoY. Gross margin was down to 23.2% from 1H14 28.6% on price cut to clear inventories. Previous HKD3.4 The core net profit amounted to RMB4.66bn, or -1% YoY. The net gearing improved slightly to 60.7% from 62% at last year-end, mainly Price Performance driven by RMB5bn shares issuance to Ping An Insurance during 1H15. CG 2007 MSCI China/real Estate 40% Concerns on 2H15E contracted sales progress 30% Despite 5-10% ASP cut to clear old inventories in the past one year, CG’s 20% PUD and inventory balance kept increasing to RMB146.3bn (+13% HoH), 10% and 1H15 contracted sales declined 7% YoY. In 2H15E, CG claimed that 0% -10% it had RMB170-180bn saleable resources; however, we are concerned -20% that it is difficult to achieve its RMB77bn contracted sales target in 2H15E -30% considering its weak 35% sell-through rate in 1H15. We also think that Aug/14 Sep/14 Nov/14 Dec/14 Feb/15 Mar/15 Apr/15 Jun/15 Jul/15 Source: Capital IQ CG may have little room to raise ASP (thus improving profit margin) in % 1m 6m 12m most Tier-3 cities where there are still oversupplies. Our FY15E/16E 2007 HK (9.9) (5.8) (22.3) earnings are 7.9%/1.2% below consensus. MSCI China/real (11.5) (7.3) (8.8) estate Maintain Neutral rating, awaiting for positive catalyst Stock looks unappealing on the lack of contracted sales progress and Industry: Property earnings growth. Meanwhile, the potential hotel asset disposal and the Hang Seng Index 23168 domestic loan issuance shows little progress and may not materialize in HSCEI 10642 the next few months. Stock is on 46.5% discount to NAV. Our new TP Key Data HK$3.2 is based on 40% (Previous: 35%) discount to our end-FY15 NAV 52-week range (HK$) 2.38-4.55 of HKD5.4/share, equivalent to 0.5SD below 6-year historical mean. Market cap (HK$ mn) 65,279 Avg. daily volume (mn) 43.34 BVPS (HK$) at FY14 y.e. 3.4 Shareholdings Structure Financials Yang’s Family 53.6% RMB mn 2013 2014 2015E 2016E 2017E Ping An Insurance 9.9% Yang Erzhu 7.0% Revenue 62,724 84,549 106,767 110,789 112,624 Free float 29.5% Revenue growth (%) 50% 35% 26% 4% 2% Core net profit 8,001 9,081 9,366 11,462 12,498 Related Research Core profit growth (%) 18% 13% 3% 22% 9% Country Garden (2007 HK) - Awaiting positive changes, March 12, 2015 Core EPS (HK$) 0.54 0.59 0.53 0.63 0.69 Country Garden (2007 HK) - Awaiting for re-rating catalysts, June Net gearing (%) 64% 62% 66% 58% 49% 25, 2015 P/E (core EPS) 5.4x 4.9x 5.5x 4.6x 4.2x P/B 1.0x 0.8x 0.8x 0.7x 0.6x Dividend yield 7.3% 6.3% 5.7% 6.5% 7.1% Sources: Company data, CMS (HK) estimates To access our research reports on the Bloomberg terminal, type CMHK <GO> 1 Thursday, August 20, 2015 Focus Charts Figure 1: Discount to NAV Band Figure 2: Contracted sales RMB mn YoY chg 160,000 140% 5.0 +2SD = 15% discount 140,000 120% 120,000 +1SD = 26% discount 100% 4.0 100,000 Mean =36% discount 80% 80,000 3.0 -1SD = 47% discount 60% 60,000 -2SD = 57% discount 40% Share Price (HKD) 40,000 2.0 20,000 20% - 0% FY12 FY13 FY14 FY15E FY16E 1.0 Total YoY change 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: 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% 2013 2014 2015E 2016E 2017E 40% Revenue Core net profit 2012 2013 2014 2015E 2016E 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 city, 90% Source: CMS (HK) Sources: Company data, CMS (HK) Note: Operating profit / total interest (including the capitalized portion) To access our research reports on the Bloomberg terminal, type CMHK <GO> 2 Thursday, August 20, 2015 Figure 7: Half-year P&L details 1H FY (RMB mn) 1H14 1H15 YoY chg FY14 FY15E YoY chg Total Revenue 38,323 47,328 23.5% 84,549 106,767 26.3% Cost of goods sold (27,372) (36,353) 32.8% (62,494) (82,643) 32.2% Gross Profit 10,951 10,975 0.2% 22,055 24,123 9.4% Gross margin (%) 28.6% 23.2% -5.4ppts 26.1% 22.6% -3.5ppts General & admin expense (1,523) (1,307) -14.2% (3,160) (3,245) 2.7% Selling expense (1,788) (1,641) -8.2% (4,356) (4,549) 4.4% Finance cost (35) (167) 377.1% (396) (435) 9.9% Others 1,124 240 -78.6% 2,020 380 -81.2% Net profit before tax and MI 8,729 8,100 -7.2% 16,163 16,274 0.7% Tax (3,165) (2,895) -8.5% (5,757) (6,393) 11.0% Minority Interests (141) (276) 95.7% (176) (515) 192.8% Reported net profit 5,423 4,929 -9.1% 10,230 9,366 -8.4% Core net profit 4,710 4,658 -1.1% 9,081 9,366 3.1% Core net profit margin (%) 12.3% 9.8% -2.45ppts 10.7% 8.8% -1.97ppts GFA delivered (k sqm) 5,351 7,250 35.5% 12,180 16,470 35.2% Booked ASP (RMB psm) 6,916 6,276 -9.2% 6,724 6,262 -6.9% Net debts (RMB mn) 36,175 40,280 11.3% 36,945 46,716 26.4% Net gearing (%) 70.0% 60.7% -9.2ppts 62.2% 65.8% 3.5ppts Presales deposits received (RMB mn) 83,430 96,737 15.9% 91,792 103,650 12.9% Dividend (HKD/share) - 0.081 n.a. 0.184 0.237 28.3% Sources: Company, CMS (HK) Figure 8: Key Financials (RMB mn) Revenue and GFA sales details FY13 FY14 FY15E FY16E FY17E Total GFA delivered (k sqm) (1) 9,240 12,180 16,470 15,598 15,542 Average selling price booked (RMB psm) (2) 6,498 6,724 6,262 6,847 6,964 Property sales Revenue (1) x (2) 60,043 81,898 103,142 106,802 108,238 Others 2,681 2,651 3,625 3,988 4,386 Total Revenue 62,724 84,549 106,767 110,789 112,624 Gross profit 19,011 22,055 24,123 27,015 29,745 Reported net profit 8,514 10,230 9,366 11,462 12,498 Core net profit 8,001 9,081 9,366 11,462 12,498 Total contracted sales 106,000 128,800 135,240 139,297 143,476 Property development cost (RMB psm) (4,486) (4,935) (4,706) (5,090) (5,022) Core profit per GFA delivered (RMB psm) 866 746 569 735 804 YoY changes (In %) GFA delivered 50.0% 31.8% 35.2% -5.3% -0.4% Average selling price 0.0% 3.5% -6.9% 9.3% 1.7% Revenue 49.7% 34.8% 26.3% 3.8% 1.7% Gross profit 23.9% 16.0% 9.4% 12.0% 10.1% Reported net profit 24.2% 20.2% -8.4% 22.4% 9.0% Core net profit 18.0% 13.5% 3.1% 22.4% 9.0% Contracted sales 122.7% 21.5% 5.0% 3.0% 3.0% Margin ratios (In %) Gross margin 30.3% 26.1% 22.6% 24.4% 26.4% Reported net profit margin 13.6% 12.1% 8.8% 10.3% 11.1% Core net profit margin 12.8% 10.7% 8.8% 10.3% 11.1% Sources: Company, CMS (HK) To access our research reports on the Bloomberg terminal, type CMHK <GO> 3 Thursday, August 20, 2015 Valuation Figure 9: Peer comparison (based on closing prices on 12:00pm, 20 Aug 2015) Mkt 3-mth Discount FY15 FY16 FY14 FY15 FY14 FY15 Net Net cap avg t/o NAV to NAV P/E P/E yield yield P/B P/B gearing gearing Company Ticker Price (USDm) (USDm) (HKD) (%) (x) (x) (%) (%) (x) (x) FY14(%) FY15(%) Large peer average 33.7 7.5 6.6 4.7 4.2 1.2 1.0 70.7 72.4 China Overseas 688 HK 23.90 30,405 75.9 34.0 29.7 6.8 6.2 2.3 2.7 1.5 1.2 27.1 22.4 CR Land 1109 HK 19.64 17,562 49.5 33.0 40.5 9.4 7.4 2.5 2.1 1.4 1.0 42.7 38.0 Country Garden 2007 HK 2.89 8,422 12.8 5.4 46.5 5.5 4.6 6.4 5.7 0.8 0.8 62.2 65.8 Evergrande 3333 HK 4.80 8,986 91.9 5.3 9.4 8.8 8.9 11.2 2.8 1.1 1.1 251.0 288.2 Longfor 960 HK 10.26 7,713 6.0 14.6 29.7 5.3 5.8 3.5 3.6 0.9 0.9 57.1 59.4 Shimao Property 813 HK 12.34 5,529 14.7 31.6 60.9 4.4 3.8 7.3 7.3 0.7 0.6 58.6 57.4 Wanda Comm-H 3699 HK 53.10 31,016 63.1 n.a.