20180828-招商证券_香港_-中国恒大-03333.HK-Anti-cyclical_strategy_as_its_core_competency_7页_1mb

Evergrande (3333 HK) Summary

Core Competency and Financial Performance

Evergrande has demonstrated strong financial performance, with its core profit (excluding MI) rising by 50% YoY to RMB323bn in 1H18, likely making it the most profitable developer in the first half of 2018. The company's anti-cyclical strategy is considered its core competency, allowing it to gear up during market relaxation and de-leverage during tightening, which has contributed to its profitability and financial stability.

Key financial highlights include:

• Revenue in 1H18 reached RMB300,348bn, up 60% YoY
• Gross profit increased by 62% YoY to RMB108,859bn
• Core profit rose by 50% YoY to RMB32,280bn
• Core EPS was RMB2.48, up 53% YoY
• Net gearing improved significantly to 127%, faster than management's guidance, and is expected to drop to 100% by end 2018 and stay above 70% from 2019

Land Bank and Monetization Strategy

Evergrande's land bank is a significant asset, with 305 million square meters of land valued at RMB5tn. This provides a 6-8 year sales buffer, giving the company flexibility to monetize appreciated land value from its cheap land bank. This strategy enables Evergrande to maintain both scale and profitability despite price caps, with a gross margin of 30% and core margin of 15%.

Valuation and Investment Outlook

• The share price has recovered 75% of its correction since Oct 17, indicating strong market sentiment.
• The current valuation is at a 31% discount to NAV, with a 6x P/E ratio and an 8-10% dividend yield, which is considered attractive.
• The target price (TP) has been raised to HK$36, a 23% increase from the previous HK$29, based on higher earnings forecasts (2-8% for 2018-2020) and narrower discount to NAV (from 20% to 15%).
• The re-rating on Evergrande's anti-cyclical strategy is still in progress, and the company is reiterated as a Buy.

Peer Comparison

Evergrande's performance is compared with other major developers:

• Vanke (2202 HK): Buy, with a 33% discount to NAV
• Country Garden (2007 HK): Neutral, with a 19% discount to NAV
• COLI (688 HK): Buy, with a 43% discount to NAV
• Sunac (1918 HK): Buy, with a 40% discount to NAV
• Longfor (960 HK): Buy, with a 48% discount to NAV
• CR Land (1109 HK): NR, with a 36% discount to NAV
• Shimao Prop (813 HK): NR, with a 58% discount to NAV

Evergrande's P/E ratio for 2019E is 6.3x, which is lower than peers like Vanke (7.2x) and Longfor (8.7x), indicating a more attractive valuation.

Financial Ratios

• Gross margin remained stable at 36.2%
• Core margin was 10.7%
• ROE was 31% for 2018E
• Net debt to equity decreased from 432% in 2016 to 103% in 2018E
• Current debt to cash increased to 61% in 2018E
• Average borrowing cost rose slightly to 9.3%
• Asset turnover improved to 0.3
• Inventory turnover increased to 0.5
• AR turnover increased to 0.7

Dividend and Earnings Growth

• DPS for 2018E is RMB2.66, up 50% from the previous year
• Dividend yield is expected to be 10.5% for 2018E, 7.9% for 2019E, and 8.9% for 2020E
• Earnings growth is projected to be 44% for 2018E, 29% for 2019E, and 12% for 2020E

Investment Recommendations

• Industry Rating: OVERWEIGHT, indicating the property sector is expected to outperform the market
• Company Rating: BUY, indicating the stock is expected to generate 10%+ returns over the next 12 months

Analyst and Regulatory Information

• The report is prepared by China Merchants Securities (HK) Co., Ltd.
• The analysts certify that the views expressed reflect their personal views and are not influenced by compensation
• The report is for informational purposes only and should not be relied upon as investment advice
• CMS HK is not registered as a broker-dealer in the United States and its services are not available to U.S. persons without SEC Rule 15a-6 approval.