China / Hong Kong Company Guide China Jinmao Holdings Version 9 | Bloomberg: 817 HK EQUITY | Reuters: 0817.HK Refer to important disclosures at the end of this report DBS Group Research . Equity 9 Aug 2017 HOLD Positives largely in the price Last Traded Price ( 8 Aug 2017):HK$3.48 (HSI : 27,855) Price Target 12-mth: HK$3.20 (8% downside) (Prev HK$2.40) Becoming a high beta stock. China Jinmao has raised its medium sales Analyst target; raised 2019 target from Rmb80bn to Rmb100bn. Parentco’s Ken HE CFA, +86 21 6888 3375 [email protected] support and more potential from its primary land business will diversify Carol WU +852 2863 8841 [email protected] its landbanking channels while co-investment scheme at project level Danielle WANG CFA, +852 2820 4915 [email protected] will drive property sales. Yet, we are also seeing rising risks for its Trista QIN +852 2863 8820 [email protected] residential business. The company is still chasing high turnover, despite What’s New the high-end positioning of its projects. In addition, its net gearing is high (108% if treating perpetual bonds as debt). Any slowdown in Fast landbanking coupled with co-investment property sales could put pressure on its cash flow and margins. The scheme has led to higher medium-term sales stock is trading at 8.8x FY18F PE and we believe potential positives are target largely in the price. More channels to access land, but further More landbanking channels and higher sales target. The company acquisitions could stretch balance sheet expects more synergies with parentco and has been granted an option Earnings largely from land sales, which is to acquire one project incubated by parentco. In addition, it expects unstable; also highly leveraged more primary land opportunities in cities like Fuzhou, Xiamen, Qingdao, Nanjing, Guangzhou, and Wenzhou, to extract synergies between HOLD with TP raised to HK$3.20, after rolling over primary land development and property development. The management is confident of achieving Rmb58bn sales in 2017 and to FY18F EPS expects to record Rmb80bn/Rmb100bn in 2018/2019 respectively. Blended gross margin is guided at 30-35% in the medium-term, vs. our Price Relative and consensus’ projection of 35%+ over FY17-19F. HK$ Relative Index 218 3.6 198 Strong 1H17 results and special dividends was well-anticipated. Core 178 3.1 158 earnings grew 121% y-o-y, mainly driven by primary land business. Yet, 138 2.6 gross margin for its residential projects remains low at 21%. Special 118 98 dividend of 8.17HK cents for its 10-year listing implies 2.3% yield, but 2.1 78 this was largely anticipated by the market. Net gearing went up to 1.6 58 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 108% if treating perpetual bonds as debt, and has not factored in China Jinmao Holdings (LHS) Relative HSI (RHS) unpaid land premium at end-1H17 (c.Rmb10.6bn) and leverage at JV Forecasts and Valuation levels. Profitability could be diluted due to higher finance costs (lower FY Dec (HK$ m) 2015A 2016A 2017F 2018F captalisation ratio due to more JV projects) and higher minority Turnover 22,110 30,796 36,769 47,723 EBITDA 6,816 9,278 9,289 12,543 interests (perpetual bonds). Pre-tax Profit 7,973 9,351 8,069 11,557 Net Profit 3,473 2,581 3,656 4,221 Valuation: Core Profit 2,557 2,383 3,656 4,221 We revised up our TP to HK$3.20, based on 8.0x FY18F PE, on par with Core Profit Gth (%) (22.3) (6.8) 53.4 15.4 its historical average since 2011. The share is currently trading at 8.8x EPS (HK$) 0.35 0.24 0.34 0.40 FY18F PE. EPS (HK$) 0.35 0.24 0.34 0.40 EPS Gth (%) (35.8) (30.8) 41.7 15.4 Key Risks to Our View: PE (X) 10.0 14.4 10.2 8.8 Better-than-expected sales/earnings growth could be a potential risk to P/Cash Flow (X) 5.8 nm nm 36.1 our HOLD rating. EV/EBITDA (X) 13.3 10.6 11.3 8.5 DPS (HK$) 0.08 0.09 0.14 0.16 Div Yield (%) 2.3 2.6 3.9 4.5 At A Glance Issued Capital (m shrs) 10,672 Net Gearing (%) 55.3 49.4 51.4 47.7 ROE (%) 9.8 7.9 10.3 11.1 Mkt. Cap (HK$m/US$m) 37,140 / 4,749 Book Value (HK$) 3.30 3.06 3.32 3.57 Major Shareholders P/Book Value (X) 1.1 1.1 1.0 1.0 Sinochem Corporation (%) 54.0 New China Life Insurance Company Ltd. (%) 9.9 Earnings Rev (%): Nil Nil GIC Private Limited (%) 5.9 Consensus EPS (HK$) 0.32 0.40 Free Float (%) 30.2 Other Broker Recs: B: 11 S: 1 H: 5 3m Avg. Daily Val. (US$m) 11.1 Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX ICB Industry : Financials / Real Estate ed-JS/ sa- DL Company Guide China Jinmao Holdings Results vs. expectations Value (growth) % of our estimate % of consensus forecast Below or above expectation Revenue 104.0% 48.4% 45.0% In line Core earning 121.3% 65.3% 58.9% In line 1H17 1H16 Up/Down Below or above expectation Gross margins 35.9% 40.0% Down Below SG&A as % of contracted sales 4.8% 5.6% Down In line 1H17 End-16 Up/Down Below or above expectation Cash level (HK$ bn) 21,561 20,374 Up In line Net debt ratio 69.6% 49.4% Up In line 1H17 1H16 Yield Below or above expectation DPS (HK$) 0.0817 nil 2.3% In line Source: Company, DBS Vickers Page 2 Company Guide China Jinmao Holdings Summary of 1H17 results FY Dec (Rmb mn) 1H17 1H16 y-o-y % 1H17 Comments (Restated) Revenue 17,837 8,739 104% Property sales 15,818 6,971 127% more booking from property/land sales Property leasing 679 642 6% Hotel operations 1,031 922 12% Others 461 365 26% Cost of goods sold (11,428) (5,243) 118% Gross profit 6,410 3,496 83% mainly driven by primary land Other income and gains (43) 294 n/m SG&A (1,401) (1,004) 39% Operating profit 4,966 2,785 78% Other non-core gains 109 5 2310% Fair value gains on IPs 438 404 9% Interest income 404 207 95% Finance costs (728) (221) 230% increase in total debt while lower interest capitalisation rate Share of loss of JCEs 15 (69) n/m Pretax profit 5,205 3,111 67% - Income Tax (1,666) (826) 102% - LAT (155) (368) -58% Tax (1,821) (1,194) 53% Minority interests (884) (432) 105% Reported profit 2,499 1,485 68% Reported core earning 2,216 1,034 114% DBS calculated core earning 2,121 959 121% Gross profit margin (%) 35.9% 40.0% ↓ 4 ppts Reported profit margin (%) 14.0% 17.0% ↓ 3 ppts Reported core profit margin (%) 12.4% 11.8% ↑ 1 ppts Core profit margin (%) 11.9% 11.0% ↑ 1 ppts SG&A as % of top line (%) 7.9% 11.5% ↓ 4 ppts SG&A as % of presales (%) 4.8% 3.9% ↑ 1 ppts Effective tax rate (%) 35.0% 38.4% ↓ 3 ppts EPS (RMB) 0.2342 0.1214 93% Core EPS (RMB) 0.2076 0.0969 114% DPS (HK$) 0.0817 - n/m special dividends for 10-year listing 1H17 End-FY16 Net debt ratio 69.6% 49.4% ↑ 20 ppts Net debt ratio (adjusted by perpetuals) 108.2% 56.8% ↑ 51 ppts Cash level 21,561 20,374 6% Source: Company, DBS Vickers Page 3 Company Guide China Jinmao Holdings Operating cash flow projection 1H17 2H17 FY17E Inflow 26.6 27.2 53.8 Property sales 24.7 25.3 50.0 Rental & hotel 1.9 1.9 3.8 Outflow 29.7 20.7 31.6 Committed land premium 3.0 10.6 10.2 New land acquisitions 15.4 Construction capex 4.2 6.8 11.0 SG&A 1.3 1.3 2.6 Tax 4.4 0.6 5.0 Interest 1.4 1.4 2.8 Net cash flow (3.1) 6.5 22.2 Source: Company, DBS Vickers Unbooked property sales (Rmb bn) As of end-1H17 Unbooked residential sales 49.6 - to be booked in 2H17 c.30% Source: Company, DBS Vickers Page 4 Company Guide China Jinmao Holdings CRITICAL FACTORS TO WATCH Contracted sales Critical Factors Rmb m % More access to landbanking. The company was granted an 60,000 90 80 option to acquire parentco’s project in Tianjin and expects more 50,000 70 such synergies to surface ahead, which could diversify its 40,000 60 landbanking channels, which is positive. In addition, 50 30,000 management expects more primary land projects to be signed in 40 20,000 30 2H17. However, its net gearing was already high as at end- 20 10,000 1H17 and further acquisitions could further stretch its balance 10 sheet. 0 0 FY11 FY12 FY13 FY14 FY15 FY16 Looking at higher sales target in the mid-term. The company is Gross margins now looking at sales of Rmb100bn in 2019 vs. previous target 60% of Rmb80bn. Management is confident of achieving its 2017 50% sales target despite a relatively low sales lock-in ratio of 41%, vs. 40% sector average of 56%. Management indicated that there will be more launches in 2H17, especially in tier 1 cities and more 30% lands for sale in Changsha and Nanjing.