Deutsche Bank Markets Research Rating Company Date 20 May 2015 Buy Joy City Property Initiation of Coverage Asia Hong Kong Reuters Bloomberg Exchange Ticker Price at 19 May 2015 (HKD) 2.08 Property 0207.HK 0207 HK HKG 0207 Price target - 12mth (HKD) 4.50 Property 52-week range (HKD) 2.09 - 1.33 HANG SENG INDEX 27,591 Strong recurrent income, upsides Tony Tsang Jason Ching, CFA from SOE reform; initiating with Buy Research Analyst Research Analyst (+852) 2203 6256 (+852) 2203 6205 A fast-growing state-owned landlord; TP HK$4.50; implied upside 116% [email protected] [email protected] Joy City is a 66.8%-owned property flagship of COFCO. Our positive call on Joy City is based on its quality recurrent income base, strong state-owned background (well below-peer interest cost), strong balance sheet, strong Price/price relative organic growth (we expect core net profit growth of 39-66% p.a. in 2015-17 on 5.0 strong revenue growth with improving margins), and strong additional NAV 4.0 and earnings upsides from expected further asset injections from COFCO. 3.0 High-quality IP portfolio providing solid recurrent income with solid growth 2.0 In contrast to most listed Chinese developers (which focus on property sales), 1.0 Joy City focuses primarily on prime-location investment properties that 5/13 11/13 5/14 11/14 generate recurrent income, which in our view should command higher Joy City Property valuation multiples. We see the following unique characteristics: 1) recurrent HANG SENG INDEX (Rebased) income makes up a high % of Joy City’s total revenue; 2) the IPs of Joy City Performance (%) 1m 3m 12m are all located in Tier-1 and major Tier-2 cities, where consumption power is relatively strong, consumers are more mature and oversupply of new Absolute 33.3 41.5 9.5 properties is less serious; and 3) it has a clear IP focus and positioning – Joy HANG SENG INDEX -0.2 11.1 21.5 City Shopping Malls makes up the bulk of Joy City’s IP portfolio (ex hotels). Source: Deutsche Bank SOE reform: strong upsides from potential further asset injections from COFCO Given the central government's advocacy of more SOE reforms and the big scale and diverse businesses of COFCO, we see significant NAV and earnings- accretive restructuring potential within COFCO, which should benefit Joy City via further asset injections. According to COFCO, in the next five years Joy City will maintain its strategy of focusing on Tier-1 cities and expanding into Yangtze River Delta, Bohai Rim and other key areas; it will continue to develop Joy Cities in Chengdu, Tianjin Liuwei Road, Beijing Andingmen, Shenzhen and other cities, with a total of 30 Joy City urban complexes. In our view, this implies more asset injections and we expect Tianjin Luiwei Road and Shenzhen Joy City to be the next candidates. Also, we see good potential for Joy City to realize its NAV and recycle capital by spinning off its hotel portfolio. Attractive valuations at 68% NAV discount and 0.9x P/B Our TP of HK$4.50 is based on a 30% discount to our est. NAV of HK$6.43. Our target discount is higher than that for other big state-owned developers like COLI, CR Land and Poly (given the relatively new listing status of Joy City when compared to these big SOE names), but at a premium to other privately owned peers, which we believe is appropriate given Joy City’s state-owned background and stronger financial position and financing capabilities. We adopt NAV as our primary valuation metric, in line with peers under coverage. Key risks: competition in retail market, unexpected policy/economic volatilities. Forecasts And Ratios Year End Dec 31 2013A 2014A 2015E 2016E 2017E Sales (CNYm) 6,809.1 5,712.8 5,883.0 8,693.7 9,488.5 DB EPS FD (CNY) 0.19 0.08 0.10 0.13 0.20 PER (x) 13.8 18.1 16.2 13.1 8.4 Yield (net) (%) 0.0 0.7 0.6 0.9 1.5 Source: Deutsche Bank estimates, company data ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015. 20 May 2015 Property Joy City Property Model updated:19 May 2015 Fiscal year end 31-Dec 2013 2014 2015E 2016E 2017E Running the numbers Financial Summary Asia DB EPS (CNY) 0.19 0.08 0.10 0.13 0.20 Reported EPS (CNY) 0.51 0.17 0.11 0.13 0.20 Hong Kong DPS (CNY) 0.00 0.01 0.01 0.02 0.03 BVPS (CNY) 4.4 2.1 1.8 1.9 2.1 Property Weighted average shares (m) 6,083 9,947 12,650 14,231 14,231 Joy City Property Average market cap (CNYm) 15,591 14,256 15,793 15,793 15,793 Enterprise value (CNYm) 24,011 34,498 32,625 26,410 20,396 Reuters: 0207.HK Bloomberg: 0207 HK Valuation Metrics P/E (DB) (x) 13.8 18.1 16.2 13.1 8.4 Buy P/E (Reported) (x) 5.0 8.3 15.6 12.8 8.3 Price (19 May 15) HKD 2.08 P/BV (x) 0.35 0.57 0.91 0.86 0.79 Target Price HKD 4.50 FCF Yield (%) nm nm nm 25.5 20.6 Dividend Yield (%) 0.0 0.7 0.6 0.9 1.5 52 Week range HKD 1.33 - 2.09 EV/Sales (x) 3.5 6.0 5.5 3.0 2.1 Market Cap (m) HKDm 19,734 EV/EBITDA (x) 8.7 14.8 12.5 6.8 4.8 EV/EBIT (x) 9.5 17.1 14.4 7.5 5.3 USDm 2,546 Income Statement (CNYm) Company Profile Sales revenue 6,809 5,713 5,883 8,694 9,488 COFCO Land Holdings Ltd, is engaged in the development, Gross profit 3,465 3,032 3,274 4,534 4,839 operation, sale, leasing and management of mixed-use EBITDA 2,772 2,332 2,605 3,899 4,241 complexes and commercial properties such as shopping Depreciation 256 310 341 375 412 malls, hotels, offices, serviced apartments and resort and Amortisation 0 0 0 0 0 tourist properties. EBIT 2,517 2,022 2,264 3,525 3,829 Net interest income(expense) -835 -854 -789 -507 -434 Associates/affiliates 4 -10 860 369 1,434 Exceptionals/extraordinaries 3,914 2,027 0 0 0 Other pre-tax income/(expense) 0 0 0 0 0 Profit before tax 5,599 3,186 2,335 3,386 4,830 Price Performance Income tax expense 2,055 1,239 941 1,488 1,912 Minorities 425 229 45 47 52 5.0 Other post-tax income/(expense) 0 0 0 0 0 Net profit 3,118 1,719 1,349 1,851 2,866 4.0 DB adjustments (including dilution) -1,986 -931 -45 -45 -45 3.0 DB Net profit 1,131 788 1,304 1,806 2,820 2.0 Cash Flow (CNYm) 1.0 Cash flow from operations 1,141 -895 298 6,252 5,156 May 13Aug 13Nov 13Feb 14May 14Aug 14Nov 14Feb 15 Net Capex -1,954 -2,268 -2,678 -205 -273 Joy City Property Free cash flow -812 -3,163 -2,380 6,047 4,883 HANG SENG INDEX (Rebased) Equity raised/(bought back) 3,016 0 5,090 0 0 Margin Trends Dividends paid -206 -168 -142 -213 -356 Net inc/(dec) in borrowings 420 6,419 -900 -1,100 -600 46 Other investing/financing cash flows 2,851 -6,041 27 60 105 44 Net cash flow 5,268 -2,953 1,695 4,794 4,032 42 Change in working capital -867 -1,986 -822 3,493 2,742 40 38 Balance Sheet (CNYm) 36 Cash and other liquid assets 9,042 6,456 8,151 12,944 16,976 34 Tangible fixed assets 42,509 46,662 49,000 48,830 48,692 13 14 15E 16E 17E Goodwill/intangible assets 961 1,057 1,057 1,057 1,057 EBITDA Margin EBIT Margin Associates/investments 157 137 997 1,366 2,800 Other assets 9,103 10,769 10,716 8,914 6,240 Growth & Profitability Total assets 61,772 65,081 69,920 73,111 75,765 Interest bearing debt 13,665 23,365 22,465 21,365 20,765 60 14 Other liabilities 18,564 18,530 17,972 20,624 21,361 12 Total liabilities 32,229 41,895 40,437 41,989 42,126 40 10 Shareholders' equity 25,589 19,717 25,968 27,560 30,025 8 20 Minorities 3,954 3,469 3,515 3,562 3,614 6 Total shareholders' equity 29,543 23,186 29,483 31,122 33,639 0 4 2 Net debt 4,622 16,909 14,314 8,420 3,789 -20 0 13 14 15E 16E 17E Key Company Metrics Sales growth (%) nm -16.1 3.0 47.8 9.1 Sales growth (LHS) ROE (RHS) DB EPS growth (%) na -57.4 30.1 23.1 56.2 Solvency EBITDA Margin (%) 40.7 40.8 44.3 44.9 44.7 EBIT Margin (%) 37.0 35.4 38.5 40.5 40.4 80 10 Payout ratio (%) 0.0 5.8 9.4 11.5 12.4 ROE (%) 12.2 7.6 5.9 6.9 10.0 8 60 Capex/sales (%) 32.2 42.5 45.5 2.4 2.9 6 Capex/depreciation (x) 8.6 7.8 7.9 0.5 0.7 40 4 Net debt/equity (%) 15.6 72.9 48.6 27.1 11.3 20 2 Net interest cover (x) 3.0 2.4 2.9 6.9 8.8 0 0 Source: Company data, Deutsche Bank estimates 13 14 15E 16E 17E Net debt/equity (LHS) Net interest cover (RHS) Tony Tsang +852 2203 6256 [email protected] Page 2 Deutsche Bank AG/Hong Kong 20 May 2015 Property Joy City Property Investment thesis Outlook We initiate coverage of Joy City Property (Joy City) with a Buy rating and a target price of HK$4.50.