20180831-招商证券_香港_-融创中国-01918.HK-Well-positioned_for_a_tough_market_7页_1mb

Sunac China (1918 HK) Summary

Core Content

Sunac China (1918 HK) has shown strong financial performance in the first half of 2018 (1H18), with its core profit increasing by 292% year-over-year (YoY) to RMB6.6 billion, surpassing market expectations. This growth was driven by a significant 215% increase in revenue and a 6.7 percentage point expansion in gross margin. The company's net gearing improved to 232%, which is considered moderate given its ample liquidity, including a 1.2x ST debt coverage ratio and a 1.5x sales/debt ratio. Despite the high gearing, the management believes the company is well-positioned for the current market conditions due to its conservative approach and lower land banking costs.

Key Financial Highlights

• Revenue Growth:

  • 1H17: RMB14,775 million
  • 1H18: RMB46,583 million (215% YoY growth)
  • 2018E: RMB154,461 million
  • 2019E: RMB219,740 million (42% growth)
  • 2020E: RMB272,717 million (24% growth)

• Core Profit:

  • 1H17: RMB1,685 million
  • 1H18: RMB6,609 million (292% YoY growth)
  • 2018E: RMB11,536 million
  • 2019E: RMB19,635 million (70% growth)
  • 2020E: RMB25,551 million (30% growth)

• Core EPS:

  • 2016: RMB0.53
  • 2017: RMB1.03
  • 2018E: RMB2.62
  • 2019E: RMB4.46
  • 2020E: RMB5.80

• Dividend Yield:

  • 2018: 5-7%
  • 2019E: 5-7%
  • 2020E: 5-7%

• P/E Ratio:

  • 2016: 42.0x
  • 2017: 21.5x
  • 2018E: 8.4x
  • 2019E: 5.0x
  • 2020E: 3.8x

• NAV and Discount:

  • 1H18: Net Asset Value (NAV) at HK$45.0 per share
  • Discount to NAV: 43%
  • Target Price (TP): HK$36.0, representing a 20% discount to NAV

Key Information

• Liquidity:

  • ST debt coverage: 1.2x
  • Sales/debt ratio: 1.5x
  • Management believes liquidity is ample despite the high net gearing.

• Land Banking Strategy:

  • Sunac has adopted a more conservative approach since October 2016.
  • Land bank cost: RMB4,470 per square meter, significantly lower than its average selling price (ASP) of RMB16,000 per square meter.
  • Adjusted land banking thresholds to 50% IRR and 15% net margin.

• Market Position:

  • Sunac is considered one of the most bearish developers in the property market during 2018-2019E due to tightened policies and slowed growth in lower-tier cities.
  • However, the company is well-positioned to navigate these challenges.

Valuation and Investment Recommendation

• Valuation:

  • Discount to NAV: 43%
  • P/E ratio: 5x for 2019E
  • Dividend yield: 5-7%
  • Current valuation is deemed attractive.

• Investment Rating:

  • Reiterated Buy rating
  • Target Price (TP): HK$36.0, with a potential upside of 40% from the previous price of HK$25.7

• Peer Comparison:

  • Compared to peers like Vanke, Country Garden, Evergrande, and others, Sunac's valuation and performance metrics suggest it is undervalued, with a higher discount to NAV and lower P/E and P/B ratios.

Financial Ratios

• Gross Margin:

  • 2016: 13.7%
  • 2017: 20.7%
  • 2018E: 22.7%
  • 2019E: 24.3%
  • 2020E: 25.9%

• Net Debt to Equity:

  • 2016: 76%
  • 2017: 208%
  • 2018E: 257%
  • 2019E: 186%
  • 2020E: 121%

• ROE:

  • 2016: 9%
  • 2017: 12%
  • 2018E: 24%
  • 2019E: 31%
  • 2020E: 31%

Key Figures

• Market Cap: HK$113,156 million
• 52-week Range: HK$21.55 to HK$43.55
• Average Daily Volume: 28.02 million shares
• BVPS: HK$12.06
• Shareholding Structure:
  • SUN HONGBIN: 47.83%
  • Free Float: 52.17%
  • Shares Outstanding: 4,402 million

Summary of Performance

Sunac's 1H18 results show a strong performance with core profit growth of 292%, revenue growth of 215%, and a gross margin improvement. Despite the high net gearing, the company's liquidity and conservative approach make it resilient in a tough market. The current valuation is considered attractive, with a significant discount to NAV and a strong dividend yield. The management's strategic adjustments and the company's financial health support the reiteration of the Buy rating with a target price of HK$36.0.