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Soho China 410 HK Summary

Core Content

Soho China is a leading Hong Kong-listed office landlord in Beijing and Shanghai, having undergone a significant strategic shift in 2012 from commercial property developer to office landlord. The company has a substantial portfolio of commercial properties, with a total of 1.8 million sq m of attributable GFA (gross floor area), comprising 0.84 million sq m completed and 0.96 million sq m under construction, expected to be completed by 2018.

In 2014, Soho China reported CNY424m in gross rental income, marking a 51.7% increase from 2013. The company has maintained a stable dividend per share (DPS) of CNY0.25 since 2011, resulting in a dividend yield of 6.1% at the current share price of HKD5.13. Its book value per share (BVPS) stood at CNY7.57, and the stock was trading at a PBR of 0.5x in 2014, significantly below the 5-year average of 0.9x.

Main Points

• Strategic Transformation:

  • In 2012, Soho China shifted from commercial property development to becoming a prime office landlord in Beijing and Shanghai.
  • The company has focused on rental income rather than property sales, with a long-term target of CNY4bn in gross rental income.

• Financial Performance in 2014:

  • Revenue declined by 58% YoY to CNY6bn, primarily due to a 61% reduction in property sales.
  • Rental income grew by 52% YoY to CNY424m, showing strong performance in the rental sector.
  • Gross profit dropped by 62% YoY to CNY3bn, and core net profit fell by 60% YoY to CNY1.8bn.
  • Gross profit margin was 50%, and net profit margin was 29%, both better than industry norms.

• Valuation Metrics:

  • The stock was trading at a 2015E PER of 5.4x, below the sector average of 7x.
  • The forward PER range for 2009-14 was 2.1-8.5x, with the current price in the middle of this range.

• Business Model Expansion:

  • Launched Soho 3Q, a new business model targeting cost-conscious small companies with a rental rate of CNY1,000/week/desk.
  • Plans to expand to 8,000 desks in 10 office buildings in Beijing and Shanghai by the end of 2015.
  • Each desk requires 10 sq m, with an all-in cost of CNY30,000/seat.
  • Soho 3Q allows for online payments via a mobile application.

• Management Outlook for 2015:

  • Revenue will primarily come from existing office rentals, with 0.8 million sq m of leasable GFA.
  • 4 projects completed in 2H14 will contribute to rental increases.
  • No properties are expected for sale in 2015, and there are no plans to dispose of any projects.
  • The company expects to have all investment properties completed by end-2018, with a total leasable GFA of 1.8 million sq m.
  • Focus will shift to domestic companies as main tenants, as they are the primary drivers of the office market in China.

• Cash and Financial Health:

  • Cash on hand exceeded CNY13bn, sufficient to fund CNY8bn in capex.
  • Net gearing ratio was 19.9% at end-2014, up from 17% in 2013.
  • Effective interest rate was 5.7%, and interest expenses capitalisation rate dropped from 91% in 2013 to 76% in 2014 due to reduced construction activity.

• Key Projects and Locations:

  • Several completed projects in Beijing and Shanghai, including Wangjing Soho, Soho Century Plaza, Sky Soho, and others.
  • Under development projects such as Bund Soho, Hongkou Soho, and Soho Tianshan Plaza are expected to be completed by 2015-2018.

• Market and Leasing Strategy:

  • Soho China believes in standardised online leasing contracts to ensure a 100% collection rate and reduce labor costs.
  • The company has no plans for block sales in 2015 and has not budgeted for new construction.
  • Leasing rates for Soho 3Q are based on the market spot rate, with an estimated net profit margin of 15-20%.

Key Information

• Dividend Policy: DPS has remained constant at CNY0.25/share since 2011.
• Valuation: The stock offers a dividend yield of 6.1%, and the PBR was 0.5x in 2014.
• Capital Expenditure: The company has sufficient cash to fund future capex without asset disposals.
• Tenant Strategy: Focus on domestic companies in the office market.
• Property Sales: No properties are expected for sale in 2015, and the company is not planning to dispose of any.
• Investment Strategy: No primary development plans; instead, the company is focusing on M&A of existing assets due to high land costs in Beijing and Shanghai.

Summary of Key Financial Indicators

Conclusion

Soho China has successfully transformed its business model to focus on office leasing in Beijing and Shanghai, becoming the largest Hong Kong-listed office landlord in these cities. Despite a decline in property sales and revenue, the company has seen strong rental income growth, and its dividend yield remains attractive. The company is well-positioned to fund its future capex and is exploring new leasing models to cater to small businesses. Its financial health and strategic focus on domestic tenants and existing assets suggest a stable and evolving business model in the context of the changing Chinese property market.