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China Overseas Grand Oceans Group (COGO) Summary

Core Content and Company Overview

• Company Name: China Overseas Grand Oceans Group
• Stock Code: 81 HK
• Industry: Real Estate Holding & Development
• Principal Business: China property development
• Source of Data: Company, DBS Vickers, Thomson Reuters, HKEX

Key Financial Highlights

1H14 Performance

• Revenue: HK$7,894m, down 1% y-o-y
• Core Earnings: HK$1,052m, down 22% y-o-y
• Net Profit: HK$1,074m, down 31% y-o-y
• Core Net Profit: HK$1,052m, down 22% y-o-y
• Gross Profit Margin: 29%, down 4ppts from 33% in 1H13
• SG&A as % of Contracted Sales: 4.6%, slightly up from 4.4%
• Interim DPS: HK$0.04, down 20% from HK$0.05 in 1H13
• Unbooked Sales: HK$7.65bn as of end-June

Financial Adjustments

• Sales Target: Revised down to HK$18bn (5% growth from FY13)
• Completion Target: Reduced by 20% to 2m sm
• GFA Completed: 1.4m sm in 1H14
• Net Debt to Equity Ratio: Increased to 67% from 44%
• Cash Level: Increased by 9% to HK$10.095bn

Valuation and Outlook

Valuation Metrics

• PE (15F): 4.8x
• P/Book Value: 1.3x
• NAV: HK$11.5bn
• Discount to NAV: 45%
• Price Target: HK$7.90 (down from HK$8.40)
• Recommendation: BUY

Management Strategy

• Focus Shift: Management is adjusting geographical distribution, improving product mix, and implementing a flexible marketing strategy
• Chairman's Involvement: Increased focus on COGO to improve execution, spending more than 10% of time on the company
• Cash Flow Goals: Aiming for positive operating cash inflow in 2H14 to reduce net gearing to <65% by year-end
• Capital Expenditure: Targeted to cut full year capex by 20% to HK$16bn

Market Context and Comparison

Market Performance

• Mkt Cap (HK$bn): 14.4bn
• 3-Month Daily Trading Value (US$ million): 3.7m
• Dividend Yield: 1.7%
• ROE (14F): 20.8%
• ROE (15F): 19.8%

Comparison with Other Players

• Tier 1 Players:
  • China Overseas: Buy, 12-Month Target HK$25.60
  • Country Garden: Buy, 12-Month Target HK$5.08
  • CR Land: Buy, 12-Month Target HK$20.36
  • Evergrande: Buy, 12-Month Target HK$4.00
• Tier 2 Players:
  • COGO: Buy, 12-Month Target HK$7.90
  • Agile Property: Buy, 12-Month Target HK$6.98
  • Franshion: Buy, 12-Month Target HK$3.30
  • Shui On Land: Hold, 12-Month Target HK$1.90
  • Sino-Ocean Land: Hold, 12-Month Target HK$4.27
• Tier 3 Players:
  • Central China: Buy, 12-Month Target HK$2.44
  • Yuzhou Properties: NR, 12-Month Target n.a.
  • Ying Li: NR, 12-Month Target n.a.

Key Points

• Sales and Earnings Guidance: Management has revised down sales and earnings guidance due to slower-than-expected sales in Hohhot and eastern China
• Valuation: COGO is considered undemanding with a 4.8x FY15F PE and 45% discount to NAV
• Outlook: Continued policy loosening and improving demand/supply dynamics in tier 3 cities are expected to benefit the company in the mid-term
• Earnings Growth: Our EPS estimates are lower than the consensus, with a 18% and 17% cut for FY14 and FY15, respectively

Summary

• COGO's 1H14 results showed a decline in revenue and core earnings due to slower sales in certain regions.
• The company has revised its sales and completions targets to be more conservative, aiming to reduce inventory and improve execution.
• Despite the lower guidance, COGO is still recommended as a "BUY" due to its inexpensive valuation and improving outlook in tier 3 cities.
• Valuation metrics such as PE and P/BV indicate the stock is undervalued, with a significant discount to NAV.
• The company is focusing on improving its operational performance and reducing net gearing through better cash flow management.
• Compared to other players in the real estate sector, COGO's valuation and guidance suggest a more conservative approach but still holds potential for long-term growth.