20150827-DBS_Group-世茂房地产-00813.HK-Slower_growth_for_a_stronger_balance_sheet_15页_419kb

Shimao Property Holdings Limited (813 HK) Summary

Core Content

• Company Overview: Shimao Property Holdings Limited is a property developer primarily focused on residential development in the Yangtze River Delta region. As of the end of 2014, it owns a land bank of 36 million square meters, mainly located in Shanghai and Fujian province. The company also generates revenue from commercial properties and hotels, which contribute approximately 4% of total revenue.
• Industry Classification: ICB Industry: Financials; ICB Sector: Real Estate Holding & Development.

Investment Recommendation

• Recommendation: BUY
• Price Target: HK$13.50 (39% upside from the last traded price of HK$9.71)
• Potential Catalyst: Sales pick-up, particularly in the second half of 2015, and potential earnings surprises from the disposal of commercial assets in Beijing and Shanghai.

Key Financials

Investment Thesis

• Profile: Shimao is a residential developer with a strong land bank and diversified revenue streams.

• Rationale:

  • Expect stable earnings in the next few years.
  • Core profit is projected to grow at a single-digit rate from 2015 to 2017.
  • Gross margins are expected to maintain at around 30% with cost control and selective acquisitions.
  • Product quality is improving.
  • The balance sheet is strengthening with positive operating cash flow and a plan to increase onshore debt exposure to 70% by 2018.

• Valuation: Based on a 20% discount to its average PE level since 2011.

• Risks:

  • Macroeconomic risks: If China's economy slows faster than expected, the property sector could be significantly affected.
  • Policy risks: Unexpected tightening or loosening of sector policies may lead to a sector-wide re-rating or de-rating, making bottom-up research less relevant.

Sales Outlook

• Full Year Saleable Resources: Cut to Rmb115.4bn, implying a 62% sell-through rate for 2015.
• Sales Performance:
  • Sales will remain lacklustre in August (Rmb4-5bn) due to limited new supply.
  • Strong pick-up is expected in September to November due to new launches.
  • Mid-term focus is on margin and risk control rather than sales scale.

P&L Outlook

• Gross Margin: Likely to remain over 30% in the mid-term due to destocking, ASP increases, and cost savings.
• Interest Cost: Expected to be below 4% with domestic bond issuance.
• Unbooked Sales: Rmb56.0bn.
• Expected Margin Trend: >30%.

Construction Progress

1H15 Results Summary

Valuation Comparison

Discount to NAV

• The current price of Shimao is at a discount to its NAV, suggesting potential value.
• The company's management may resume share buybacks to support its share price.

Key Insights

• Shimao's valuations are at a historical trough, implying limited downside risk.
• The company is expected to maintain its gross margin at around 30% through cost control and selective acquisitions.
• The management is shifting focus from sales scale to margin and risk control in the mid-term.
• The balance sheet is expected to strengthen with positive operating cash flow and increased onshore debt exposure.
• The price target has been revised to HK$13.50, reflecting a 20% discount to its average PE level since 2011.