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Summary of CMSK Investment Analysis

Core Content

This document presents an investment analysis of China Merchants Shekou (CMSK), highlighting its strong position in the real estate sector, particularly in Shenzhen, and recommending a "Buy" rating with a 12-month target price of Rmb18. The analysis emphasizes the company's potential for earnings growth and its undervalued status relative to peers.

Main Points

• Investment Recommendation: Buy with a 12-month target price of Rmb18, implying a 17% potential upside from the current price of Rmb15.37.
• Valuation: CMSK is trading at a 39% discount to its end-2016E NAV, which is significantly lower than the average 28% discount in the onshore coverage universe.
• Earnings Growth: The company is expected to deliver a 20% EPS CAGR from 2016E to 2018E, outperforming the onshore average of 8%.
• Land Bank: CMSK has a best-in-class land bank in Shenzhen, with 70% of its end-2016E NAV and 40%–45% of its earnings and presales in 2016E–2018E. This land bank is of high quality and low cost.
• Synergies: The company benefits from synergies with its parent, China Merchants Group (CMG), which provides access to diverse land sourcing capabilities through urban renewal, SOE asset consolidation, and cruise town development.
• Strategic Focus: CMSK is focused on property, industrial parks, and cruise business, contributing on average 85% / 14% / 1% to its topline in 2016E–2018E.
• Dividend Yield: The dividend yield is expected to increase from 1.2% in 2015 to 3.0% in 2018E, with a consistent payout ratio of 30%.
• Valuation Metrics:
  • P/E ratio: Drops from 27.6 in 2015 to 9.9 in 2018E.
  • P/B ratio: Falls from 3.7 in 2015 to 1.7 in 2018E.
  • EV/EBITDA ratio: Decreases from 16.9 in 2015 to 6.6 in 2018E.
• ROE: Expected to increase from 17.6% in 2015 to 18.8% in 2018E, outperforming peers.
• Key Catalysts:
  • Strong growth in SZ property prices (up 30% year-to-date).
  • Improved clarity on profit sharing between CMG and Qianhai government.
• Key Risks:
  • Significant unexpected decline in SZ property prices.
  • Execution slippage.

Financial Highlights

Profit Model (Rmb mn)

Growth and Margins (%)

Cash Flow Statement (Rmb mn)

Balance Sheet (Rmb mn)

Key Takeaways

• CMSK has a strong land bank in Shenzhen, contributing significantly to its earnings and NAV.
• Its strategic position and synergies with CMG provide a competitive advantage.
• The company is expected to deliver strong EPS growth and ROE over the next three years.
• The current valuation is seen as undervalued compared to peers, offering a compelling risk-return profile.
• The target price is based on a 30% discount to end-2016E NAV, suggesting potential for value appreciation.
• The main risks include a potential decline in property prices and execution challenges.

Conclusion

CMSK is positioned to benefit from Shenzhen's growth and its synergies with CMG, making it an attractive investment opportunity with strong potential for long-term value creation. The current valuation is considered too low to reflect its long-term growth prospects and unique land sourcing capabilities.