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Sino Ocean Land [3377.HK] Summary

Core Content

Sino Ocean Land (SOL) is a Hong Kong-listed property developer that has been identified as a potential investment opportunity due to its improved financial position and the strong property market in Beijing. The report initiates coverage with a BUY recommendation, citing several key reasons for optimism.

Main Points

1. Positive Outlook on Beijing Market

• SOL is a major beneficiary of the strong property price growth in Beijing in 2013.
• Beijing accounts for approximately one-third of total contracted sales for SOL in 2013E to 2015E.
• The company has been affected by previous market downturns, including a 35% YoY decline in GFA sold in 2011 and 22% YoY decline in 2012 due to home purchase restrictions (HPR) and mortgage tightening.
• Despite the decline in Beijing's sales contribution over time, the recent 17% property price increase in the first eight months of 2013 has led to better-than-expected margins for SOL's projects.
• SOL's strategy in Beijing focuses on enhancing margins rather than increasing volume, which is supported by the current high gross margins for its key projects.

2. Financial Improvements

• SOL's core net profit is expected to grow from RMB2,878m in FY2013E to RMB4,152m in FY2015E, reflecting a steady increase in profitability.
• The Price to Earnings (PER) ratio has declined from 9.3 in FY2011 to 7.3 in FY2013E, indicating a discounted valuation.
• The current share price is at 7.3x FY13E PER, which is one standard deviation below its historical average, suggesting a re-rating is due.
• SOL's net gearing has decreased from 60% in FY2011 to 11.8% in FY2015E, showing improved financial leverage.

3. Redemption of Perpetual Subordinated Convertible Securities (PCS)

• SOL has initiated the early redemption of US$286m of PCS at 102.5% of face value, with over 90% of outstanding PCS redeemed by August 2013.
• The redemption is partially funded by a US$370m syndicated loan at a 6% interest rate, allowing SOL to reduce its funding cost by 4%.
• This move simplifies the capital structure and signals financial strength.

4. Land Acquisition Strategy

• SOL's long-term target is to focus on economically vibrant cities in Northern China, Southern China, and Yangtze River Delta.
• By the end of 2012, SOL had established a presence in 19 cities, as per its plan.
• The company's landbank is composed of 63% of land acquired between 2009 and 2011, suggesting a relatively "old" landbank.
• For 2013, SOL is expected to acquire RMB15-20bn worth of land, with no major acquisitions so far. This could be a positive catalyst for its share price.

5. Share Price Performance

• SOL has been the worst-performing China property developer in its market capitalization bracket since 2010.
• The current share price is HK$4.71, with a target price of HK$5.68 (+21%), based on a 40% discount to estimated NAV of HK$9.47.
• The 52-week price range is HK$3.46-6.34, indicating potential upside.

Key Financials

Key Risks

• Policy risks related to the overall property market.
• Macro economic risks.
• Risk of failing to acquire land at reasonable prices due to a heated land market.

Summary

SOL's performance has been under pressure due to the downturn in the property market, but the company is now positioned to benefit from the strong Beijing property market and improved financial structure. The early redemption of PCS has helped reduce funding costs and simplify capital structure, which is a positive sign. The target price of HK$5.68 is based on a 40% discount to estimated NAV of HK$9.47, implying a 8.8x FY13E PER. With a discounted valuation and potential for margin recovery, SOL is seen as a BUY candidate. The recovery in Beijing's property market and strategic land acquisitions are expected to drive positive share price performance.