20131028-Maybank_KERPL-Share_Price_Has_Factored_In_Negatives_11页_640kb

Summary of Sunac China Company Visit (28 October 2013)

Core Information

• Company: Sunac China, a fast-growing property company in China.
• Listing: Listed in Hong Kong in October 2010.
• Ownership: Majority owned by Chairman Sun Hongbin, with stakes from Bain Capital and CDH.
• Operations: Active in major cities such as Beijing, Hangzhou, Suzhou, Chongqing, Tianjin, and Yixing.
• Current Share Price: HKD5.07
• Target Price: HKD6.53 (unchanged)
• Valuation: Trading at a 50% discount to NAV (HKD10.05), 3.1x 2014 PER, and 0.7x 2014 P/B.

Key Takeaways from the Visit

• Valuation Adjustments: The share price has factored in most of the negatives, including low GPM for the year and expensive landbanking in Yizhuang.
• Contract Sales Momentum: Sales momentum is picking up, with expected contract sales of over CNY6b in October, compared to CNY5.07b in September.
• Management Outlook: Management expects to acquire at most one more project for the rest of the year and has ~CNY17b in cash at end-2013.
• Financing: Financing for the new Tianjin project is secured at ~10.5%, which is considered favorable.

Performance and Financials

• GPM: Expected to improve from 23.6% in 2013 to 27.6% in 2014 and 31.0% in 2015.
• Underlying Net Profit: Expected to grow by 29% YoY in 2014 to CNY4.23b and by 26% YoY in 2015 to CNY5.34b.
• Underlying Net Margin: Expected to increase from 10.9% in 2013 to 13.1% in 2014 and 15.5% in 2015.
• Sales ASP: Jan-Sep 2013 sales ASP was CNY20,510/sqm, up 24% YoY.
• Sales Targets: Full-year 2013 contract sales target is ~CNY50b, with ~CNY35b estimated attributable sales.

Key Projects

Management Insights

• Beijing Property Measures: Not considered harsh, aimed at meeting demand rather than controlling luxury prices.
• Supply Targets: Government's 70,000 units supply target in 2013 and 2014 is seen as rushed, with only 70-80% expected to be realized.
• Project Performance: Some legacy Greentown projects are showing margin improvements, such as Suzhou Taohuayuan with GPM in the teens.

Valuation and Investment Outlook

• Discount to NAV: The stock is trading at a 50% discount to NAV.
• Target Price: HKD6.53, implying a 29% upside from current levels.
• Buy Rating: Reiterated as BUY, based on a 35% discount to NAV estimate.
• Valuation Ratios:
  • 4.0x 2013F earnings
  • 3.1x 2014F earnings
  • 0.7x 2014F book value
  • 4.1x 2014F PER
  • 1.0x 2014F book value

Risks

• Stricter Austerity Measures: Potential implementation could impact performance.
• Macroeconomic Changes: Rate hikes or shocks could affect the market.
• Expensive Landbanking: May continue to be a concern.
• Share Disposals: Bain Capital and CDH may dispose of shares in the short term.

Financial Highlights

Income Statement

• Turnover: Expected to grow from CNY30,259m in 2013 to CNY34,468m in 2015.
• Gross Profit: Expected to increase from CNY7,129m in 2013 to CNY10,701m in 2015.
• Net Income: Expected to grow from CNY3,292m in 2014 to CNY5,340m in 2015.
• Underlying Net Profit: Expected to increase from CNY3,292m in 2014 to CNY5,340m in 2015.

Cash Flow

• CFO: Expected to be negative in 2013 but positive in 2014 and 2015.
• CFI: Negative in 2011 and 2012, turning positive in 2013.
• CFF: Positive in 2011 and 2012, but expected to be positive in 2013.

Balance Sheet

• Total Assets: Expected to grow from CNY90,464m in 2013 to CNY113,974m in 2015.
• Total Liabilities: Expected to increase from CNY73,389m in 2013 to CNY85,804m in 2015.
• Shareholders' Equity: Expected to grow from CNY17,075m in 2013 to CNY28,170m in 2015.

Financial Ratios

• Gross Margin: Expected to improve from 23.6% in 2013 to 31.0% in 2015.
• EBIT Margin: Expected to increase from 19.3% in 2013 to 26.0% in 2015.
• Net Margin: Expected to increase from 10.9% in 2013 to 15.5% in 2015.
• ROE: Expected to decline from 27.9% in 2013 to 26.3% in 2015.
• Net Debt to Attributable Equity: Expected to decrease from 97.8% in 2013 to 71.2% in 2015.

Conclusion

Sunac China's valuation appears attractive, with a 50% discount to NAV and improving financial performance. The company is expected to benefit from rising sales momentum and margin improvements in its projects. Despite some risks, the investment outlook remains positive, supporting the BUY rating and the unchanged target price of HKD6.53.