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Franshion Properties Summary

Core Content

Franshion Properties is a Hong Kong-listed property development company with a focus on China's real estate market. The report highlights the company's performance, outlook, and valuation in the context of the broader industry.

Main Points

Company Overview

• Stock Code: 817 HK / 0817.HK
• Industry: Financials (ICB Industry)
• Sector: Real Estate Holding & Development
• Principal Business: China property development
• Analysts: Ken HE, Carol WU, Danielle Wang, Andy YEE
• Valuation Highlights:
  • Price Target: HK$3.40 (12-month)
  • Current Price: HK$2.77
  • Recommendation: BUY
  • Discount to NAV: 51%
  • FY14F PE: 7.1x
  • P/BV: 1.0x

Outlook

• Asset Turn Focus: The company continues to focus on asset turnover and aims to launch presales within 10-12 months after land acquisition.
• Sales Prospects:
  • Expected to launch the Beijing Yizhuang and Suzhou projects in 2H13, adding around Rmb1.5bn to saleable resources.
  • Total saleable resources in 2H13 could reach Rmb11.5bn, with a sales-through rate of 50% (vs. 85% in 1H13).
  • Contracted sales in 7M13 reached Rmb8.6bn, locking in 67% of the full-year target of Rmb13bn.
• Leasing Income:
  • Leasing revenue grew by 11% y-o-y in 1H13, driven by higher rental rates.
  • Spot rental rates increased significantly at key properties.
• IP Portfolio Growth:
  • Management expects the IP portfolio to double by end-2016, which should drive growth in recurrent income.

Profit & Loss Highlights

• Reported Earnings: Increased by 39% y-o-y to HK$2.2bn.
• Core Earnings:
  • Core earnings before perpetual securities: HK$1.8bn (up 208% y-o-y).
  • Core earnings after perpetual securities: HK$1.7bn (up 285% y-o-y).
• Revenue Growth:
  • Total revenue in 1H13: HK$11.1bn (up 208% y-o-y).
  • Property sales: HK$9.185bn (up 424% y-o-y).
• Gross Profit:
  • Gross profit increased by 140% y-o-y to HK$4.837bn.
  • Gross margin decreased from 56% to 43% in 1H13.
• Operating Expenses:
  • SG&A as a % of presales: 8% (flat y-o-y).
  • Finance costs increased by 24% y-o-y due to higher loans and interest rates.
• Blended Interest Rate: Increased to 6.2% in 1H13 from 5.8% in 1H12.

Balance Sheet Highlights

• Net Gearing Ratio: Increased to 53% in 1H13 (from 42% in FY12), due to land acquisitions.
• Cash on Hand: Fell by 26% to HK$9.9bn.
• Total Funds Available: HK$28.0bn, including undrawn banking facilities.
• Debt Profile: Short-term debt made up 22% of total debt in 1H13.

Land Sales & Contracted Sales

• Land Sold in 2H13:
  • Total price: Rmb1.444bn.
  • Average price: Rmb3,369/sm.
• Land to be Contracted in Late-September:
  • Plot G-01/02: Site area 46,009sm, Asking price Rmb415m, Implied average price Rmb2,800/sm.
• Development Revenue Breakdown (1H13):
  • Shanghai Int'l Shipping Service Centre: Revenue HK$2,036m, Saleable area 19,779sm, ASP Rmb87,744/sm.
  • Beijing Jinmao Palace Guangqu: Revenue HK$2,197m, Saleable area 36,267sm, ASP Rmb51,592/sm.
  • Changsha Land: Revenue HK$4,707m, Saleable area 1,560sm, ASP Rmb2,347/sm.

Key Metrics

• EPS (HK$): 0.24 in 1H13 (up 39% y-o-y).
• Core EPS: 0.18 in 1H13 (up 285% y-o-y).
• DPS (HK$): 0.12 in 1H13 (up from 0.09 in 1H12).
• Net Dividend Yield: 4.2% in 1H13 (up from 3.3% in 1H12).
• BV Per Share (HK$): 3.19 in 2013F (up from 2.90 in 2012A).
• ROAE (%): 12.3% in 1H13 (up from 10.4% in 1H12).
• P/Book Value (X): 0.9 in 2013F (down from 1.0 in 2012A).

Key Information

• Sales Targets: The company has a full-year sales target of Rmb13bn, with 67% locked in as of 7M13.
• Potential Catalysts: Better-than-expected sales and landbanking performance.
• Valuation Comparison:
  • Franshion is among the "Buy" recommendations in the industry, with a lower valuation compared to peers.
  • The report highlights the company's attractive valuation and bright sales prospects as the main reasons for maintaining the "Buy" recommendation.

Conclusion

Franshion Properties is positioned for growth in the Chinese property market, with a strong focus on asset turnover and strategic land acquisitions. Despite a slight decrease in gross margin, the company is expected to benefit from higher rental rates and a growing IP portfolio. The "Buy" recommendation is supported by its attractive valuation, with a 12-month price target of HK$3.40.