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Shimao Property Summary

Core Content

Shimao Property (813 HK) is a real estate holding and development company that has been evaluated by DBS Group Research. The report highlights the company's performance and outlook for the second half of 2014 (2H14), with a price target of HK$21.00, up from the previous target of HK$19.06. The report also provides detailed financial forecasts and comparisons with other companies in the industry.

Main Points

• Sales and Performance: Shimao achieved a 42% year-over-year (y-o-y) increase in sales for 1H14, reaching Rmb23,675 million. The company is optimistic about achieving Rmb9 billion in sales for the next four months of FY14, with a target of Rmb40.8 billion for the full year. Sales performance is expected to be driven by improved sales force and higher commission rates.

• Cash Collection: The cash collection rate for 1H14 was 85.3%, slightly above the target of 85%. However, the 2H14 cash collection target is considered challenging due to back-loaded saleable resources. Shimao plans to establish cash collection centers in Nanjing and Fujian to improve performance.

• Inventory and Sales Mix: The company has a significant amount of unsold inventory, with Rmb1.25 million square meters (sm) completed but unsold by mid-2014. The 2H14 saleable resources are heavily weighted toward basic small units and upgrader units, accounting for 78% of the total. Shimao has also been working to sell aged inventory, realizing Rmb4.5 billion in cash collection.

• Gearing and Profitability: Shimao's net gearing decreased from 57.4% in 1H13 to 58.4% in 1H14. The company has cut its land acquisition budget by 20% to strengthen its financials and guide for mild medium-term sales growth of 10-20% to better manage margins.

• Dividend Policy: The company declared an interim dividend of HK$0.30 per share, which is a positive surprise and above the previous expectations. The full-year dividend payout ratio is maintained at 30% of net profit.

• Valuation and Price Target: Shimao's valuation is attractive, with a 5.7x FY14F PE, 42% discount to net asset value (NAV), and 1.1x P/BV, compared to the average of large caps at 7.2x/34%/1.2x. The price target of HK$21.00 is based on a 6.5x FY15F PE and is higher than the previous target.

Key Information

• Financial Highlights:

  • Revenue Growth: 42% in 1H14.
  • Core Earnings Growth: 21% in 1H14.
  • Gross Margin: Dropped by 1.4 percentage points to 34.1%.
  • Core Net Margin: Dropped by 3 percentage points to 15%.
  • SG&A as % of Contracted Sales: Increased by 2 percentage points to 6.4%.
  • Net Debt Ratio: Increased slightly to 58.4%.
  • Cash Level: Increased by 8% to Rmb21,132 million.

• Sales and Cash Collection Goals:

  • Sales targets for 2H14 are Rmb9 billion per month.
  • Cash collection target for 2H14 is Rmb40.8 billion, which is considered more achievable.
  • Aged inventory sales have contributed Rmb2.5 billion to the company's performance.

• Land and Development:

  • Land acquisition target for 2014 was reduced from Rmb27 billion to Rmb20 billion.
  • Land reserves as of mid-2014 were Rmb36.9 million sm in 42 cities and 112 projects.
  • Average land cost was Rmb2,246 per sm.

• Project Challenges:

  • Certain projects, such as the Shihu project in Suzhou, Fangshan project in Beijing, and Huajichi project in Hangzhou, may face challenges in sales.
  • The company may consider price adjustments for around 30% of its saleable resources, with an average of 10% price cuts and up to 15% for some units.

• Valuation Comparison:

  • Shimao's valuation is favorable compared to other large-cap real estate companies.
  • The company is trading at a 42% discount to NAV and a 1.1x P/BV, which is below the industry average.

• Analyst Recommendations:

  • The report recommends maintaining a "BUY" rating with a revised price target of HK$21.00.
  • The company's performance and risk management strategies have been in line with expectations.

Summary Table

Valuation Metrics

Analysts

• Carol WU: +852 2863 8841, carol_wu@hk.dbsvickers.com
• Danielle WANG CFA: +852 2820 4915, danielle_wang@hk.dbsvickers.com
• Ken HE CFA: +86 21 6888 3375, ken_he@hk.dbsvickers.com
• Andy YEE: +852 2971 1773, andy_yee@hk.dbsvickers.com

Conclusion

Shimao Property is showing strong performance in the first half of 2014, with improved sales and cash collection, and a positive surprise in the interim dividend. The company has taken steps to improve its risk management, including reducing its land acquisition budget and focusing on better sales performance. The valuation is considered attractive, with a price target of HK$21.00, and the analysts recommend maintaining a "BUY" rating.