20130829-Maybank_KERPL-China_Resources_Land_Upgrade_to_BUY__Margin_Miss_Priced_In_11页_393kb

China Resources Land (CRL) Summary

Core Content

China Resources Land (CRL), a state-owned enterprise (SOE)-backed national property developer, has a significant investment property portfolio encompassing hotels, offices, and commercial malls such as "MIXc" and "Rainbow City". The company has been listed in Hong Kong since 1996 and is majority-owned by China Resources Holdings. CRL operates in 46 cities and targets high-end to mid-end residential projects.

Key Financial Highlights

• Share Price: HKD20.70
• Target Price: HKD23.40 (unchanged)
• Shares Issued (m): 5,829
• Market Cap (USD): 15.6
• 3-mth Avg Daily Turnover (USDm): 29.1
• Free Float (%): 32.0
• Major Shareholder: China Resources Holdings (68.0%)

Performance Overview

• 52-week High/Low: HKD24.70 / HKD14.86
• 1-mth Return (%): -1%
• 3-mth Return (%): -14%
• 6-mth Return (%): -9%
• 1-yr Return (%): 37%
• YTD Return (%): -2%

Stock Upgrade

• The stock was upgraded from Hold to Buy due to the belief that the margin miss has been fully priced in.
• The target price (HKD23.40) implies a 13% upside from the current share price.
• The company is expected to exceed its 2013 contract sales target of CNY57b by at least 10%.
• CNY39.9b in contract sales have already been locked in as of 18 August 2013, representing 70% of the target.
• CRL has ample saleable resources of ~CNY95b in 2013, with ~CNY60b in 1H13 and ~CNY61.2b in 2H13.

Project Development

• New Starts Target (2013): 8.5m sq m
• 1H13 Completion: 5.5m sq m (59% of full-year target)
• Commercial Assets:
  • MIXc: 13 projects, 5 already open, with Qingdao, Zhengzhou, Wuxi, and Hangzhou planned for 2014
  • Rainbow Cities: 14 projects, only Beijing is open, with Ningbo and Zibo to open in 2014
• Qianhai Project:
  • A planned project partner will take an equity stake and buy back the hotel portion, expected to be the least profitable part
  • The land cost is high at CNY21.7k/sq m, but the project is seen as beneficial for CRL's relationship with the Shenzhen government
  • The average land cost of lands acquired in 2013 YTD (excluding Qianhai and Guangzhou Finance Center) is CNY1,400–2,500/sq m, which is ~12–21% of the 1H13 contracted sales blended ASP of CNY11,748/sq m

Financial Projections

Contract Sales and Growth

• CRL is expected to exceed its 2013 contract sales target of CNY57b by at least 10%
• Full-year 2013 Contract Sales: CNY39.9b (as of 18 Aug), ~70% of the target
• 1H13 Saleable Resources: ~CNY60b
• 2H13 Saleable Resources: ~CNY61.2b
• 2015 Contract Sales Target: CNY100b, with the new chairman emphasizing the goal without revealing full strategic details

Asset Injection and Valuation

• CRL has a transparent and annual asset injection process typically occurring in the second half of the year
• The company has ~5.2m sq m of attributable GFA in parent projects, with Jinan Xinglong Project possibly being injected in 2013
• CRL's valuation is seen as attractive, with a 20% discount to NAV of HKD26.0
• The target price (HKD23.40) is 10% below NAV, indicating a potential upside

Risks and Outlook

• Downside Risks:
  • Slower-than-expected recovery in developer margins
  • Macroeconomic shocks
  • Unexpected tightening in property regulations
• GPM Outlook: Expected to tough in 2013, but improve in 2014 and 2015 due to strong volume growth and cost control
• Net Profit Growth: Over 20% from 2013 to 2015
• Key Differentiator: Strong execution in commercial properties, including MIXc and Rainbow Cities, which provide mass-market positioning and buffer luxury sales slowdowns

Summary Table: China Property Valuation

Income Statement Highlights

• Property Development Revenue: Increased from HKD35,795m (2011) to HKD93,337m (2015F)
• Net Income Attributable to SH: Rose from HKD8,070m (2013F) to HKD13,449m (2015F)
• Underlying Net Profit: Increased from HKD5,613m (2011) to HKD13,449m (2015F)
• Gross Profit: Rose from HKD14,182m (2011) to HKD31,624m (2015F)
• EBIT: Increased from HKD11,740m (2011) to HKD25,459m (2015F)
• Net Interest Income: Decreased from HKD-699m (2011) to HKD-383m (2015F)
• Income Taxes: Increased from HKD-2,308m (2011) to HKD-6,372m (2015F)
• LAT (Loss on Assets Transferred): Increased from HKD-3,096m (2011) to HKD-3,820m (2015F)
• Net Income: Rose from HKD8,070m (2013F) to HKD14,278m (2015F)

Cash Flow Highlights

• CFO (Cash Flow from Operations): Increased from HKD-5,077m (2011) to HKD15,639m (2015F)
• CFI (Cash Flow from Investing Activities): Decreased from HKD-9,794m (2011) to HKD-4,924m (2015F)
• CFF (Cash Flow from Financing Activities): Increased from HKD17,167m (2011) to HKD-5,376m (2015F)
• Cash & Bank Balance: Increased from HKD12,751m (2011) to HKD15,339m (2015F)

Conclusion

China Resources Land is viewed as a strong player in the property development sector with a solid execution record in commercial properties. Despite a recent margin miss, the company's growth profile remains intact, supported by strong volume growth, cost control, and a robust land bank. The upgrade to BUY is based on the belief that the stock is now undervalued, with a target price that implies a 13% upside. The company is expected to exceed its 2013 contract sales target, and its 2015 contract sales goal of CNY100b is seen as achievable. The management's leadership and the competitive advantage in commercial properties are key drivers of future growth.