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Franshion Properties (817 HK) Summary

Core Content

Franshion Properties (817 HK) is a Chinese real estate company that is expected to experience strong growth in both property development and investment property (IP) segments. The company's current share price is HKD2.37, with a market capitalization of HKD21.7B. The target price is HKD3.32, representing a 40% increase from the current price.

Main Points

• Sales Growth: Franshion has demonstrated a strong sales growth trajectory, with a 35% YoY increase in 2013. The company is expected to achieve a 33% YoY sales growth in 2014, pushing total sales to around CNY28b, which is above the sector average of 20-25%.
• Core Profit Growth: The core net profit is forecasted to grow by 27% CAGR from 2013 to 2015, with an estimated increase of 48.1% in 2013 to HKD3.1b.
• Spin-off Potential: The potential spin-off of the IP portfolio is a major catalyst, as it could unlock significant intrinsic value. Based on gross rental income estimates of HKD3.5b, net distributable income margin of 35%, and a required yield of 6.5%, the market cap of the new entity could reach HKD19b, which is nearly 90% of Franshion's current market cap.
• Brand and Assets: Franshion is known for its reputable "Jinmao" brand, particularly associated with the Shanghai Jinmao Tower. It owns 4 completed office/retail buildings and 7 five-star hotels, with total leaseable area of 350,000 sq m and 3,106 rooms respectively.
• Recurring Income: The company has a robust recurring income stream from its IPs and hotels, with gross rental income expected to rise to HKD1.65b in 2015.
• Financial Health: Franshion has a low gearing ratio and a strong credit rating. It has issued USD500m and USD300m senior notes with coupon rates of 4.7% and 5.375%, respectively, which are significantly lower than its peers.

Key Information

Financial Highlights

• Market Cap: HKD21.7B
• Share Price: HKD2.37
• Target Price: HKD3.32 (+40%)
• Free Float: 37.1%
• Issued Shares: 9,161m
• Major Shareholders:
  • Sinochem Hong Kong (Group) Co. Ltd: 63%
  • GIC Pte Ltd.: 5%
  • Warburg Pincus LLC: 2%

Revenue and Profit Forecasts

Growth Metrics

• Core FDEPS Growth: 10.7% (FY11A), 54.9% (FY12A), 48.1% (FY13E), 23.6% (FY14E), 30.1% (FY15E)
• Net DPS: 0.04 (FY11A), 0.07 (FY12A), 0.09 (FY13E), 0.11 (FY14E), 0.14 (FY15E)
• Core FD P/E: 19.1 (FY11A), 12.3 (FY12A), 8.3 (FY13E), 6.7 (FY14E), 5.2 (FY15E)
• P/BV: 1.0 (FY11A), 0.9 (FY12A), 0.7 (FY13E), 0.6 (FY14E), 0.6 (FY15E)
• Net Dividend Yield: 1.7%, 2.9%, 3.6%, 4.5%, 5.8%
• ROAE: 5.1%, 6.4%, 8.5%, 9.4%, 10.9%
• ROAA: 2.2%, 2.7%, 3.6%, 4.1%, 5.0%
• EV/EBITDA: 11.7, 7.5, 6.3, 5.2, 4.4
• Net Debt/Equity: 48.2%, 51.3%, 59.6%, 60.2%, 50.9%

Project Launches and Sales

• 2014 Project Launches:
  • Changsha Meixi Lake International Plaza
  • Changsha Jinmao Residence
  • Beijing Yizhuang Project
  • Suzhou Jinmen Road Project
  • Lijiang Noble Manor
• 2014 Sales Forecast:
  • Residential and Commercial: ~CNY20.5b
  • Primary Land Sales: ~CNY7.5b
  • Total: ~CNY28b

Spin-off Impact

• Spin-off Potential:
  • Current completed IP portfolio could generate HKD3.5b in gross rental income.
  • Market cap of the new entity could reach HKD18.8b to HKD23.3b, depending on yield and margin assumptions.
  • Spin-off could provide additional funding for construction and landbank replenishment.

Investment Portfolio

• Completed IPs and Hotels:
  • Total GFA: 350,741 sq m
  • Total rooms: 3,106
  • Gross rental income: ~HKD3.5b
  • Expected net distributable income margin: 35-40%
  • Required yield: 6-7%

Financial Strategy

• Low Gearing: Net debt to equity ratio of 59.6% (FY13E), slightly lower than the sector average of 67%.
• Funding Sources: The company has raised USD500m and USD300m through senior notes with low coupon rates.
• Cash Position: HKD11.5b (~CNY9b) cash on hand by end-2013, with an outstanding land premium of CNY10b.

Conclusion

Franshion Properties is positioned for strong growth due to its robust sales performance, potential spin-off of its IP portfolio, and strong recurring income from its existing assets. The company is expected to trade at a premium to its peers, driven by its two-fold re-rating story. The target price of HKD3.32 represents a 40% discount to NAV, which is significantly lower than the sector average of 54%. With the potential for the spin-off to unlock substantial value, the company is a strong buy candidate.